Gyroscopic Investing

buddtholomew wrote: Today's response to GLD and TLT underperformance was completely irrational and I apologize for starting this thread in frustration. Fear of loss plays an instrumental role in my psyche and I begin to second guess my decisions under these circumstances. 5-digit daily declines have prompted me to sell in the past, but luckily I have not acted on these drawdowns.

You might want to consider moving to a PP with a VP of short term treasuries. That will have less volatility than even the PP, and dilutes returns less than you might think.

Budd, you may find it helpful to take a look at your comments the last time you got nervous...

See: Sep 26, 2011: Weather the Storm...
...and: Sep 28, 2011: Hey Look...
...and: Aug 11, 2011: Nauseous

We all remember what happened after August, last year. The PP turned out to be the one of the best portfolios in the market right after you posted that.

It all comes down to the fear/elation factor...

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Lucky for you budd that you were coaxed back from the edge of the building. I ended up jumping about 9 months ago out of LT treasuries on the same fears that plague you and I paid dearly for it. I should have come to the forum for counseling before pulling a bonehead move like that.....live and learn I guess.

Here are ten rules that I like to keep in mind when looking at the market. In fact they highlight why the PP in fact has so much going for it in terms of a strategy.

Bob Farrell's Ten Rules for Investing

Wall Street “gurus”? come and go, but in the case of Bob Farrell legendary status was achieved. He spent several decades as chief stock market analyst at Merrill Lynch & Co. and had a front-row seat at the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear mar ket of 1973–74, and October 1987 crash.
Farrell retired in 1992, but his famous “10 Market Rules to Remember”? have lived on and are summarized below, courtesy of The Big Picture and Market Watch (June 2008). The words of wisdom are time less and are especially appropriate at the start of a new year as investors grapple with the difficult juncture at which stock markets find themselves at this stage.

1. Markets tend to return to the mean over time
When stocks go too far in one direc tion, they come back. Euphoria and pessimism can cloud people’s heads. It’s easy to get caught up in the heat of the moment and lose perspective.

2. Excesses in one direction will lead to an excess in the opposite direction
Think of the market baseline as attached to a rubber string. Any action too far in one direction not only brings you back to the base line, but leads to an overshoot in the opposite direction.

3. There are no new eras – excesses are never permanent
What ever the latest hot sector is, it eventually over heats, mean reverts, and then overshoots.
As the fever builds, a chorus of “this time it’s different”? will be heard, even if those exact words are never used. And of course, it – human nature – is never different.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
Regard less of how hot a sector is, don’t expect a plateau to work off the excesses. Profits are locked in by selling, and that invariably leads to a significant correction eventually.

5. The public buys the most at the top and the least at the bottom
That’s why contrarian-minded investors can make good money if they follow the sen ti ment indicators and have good timing. Watch Investors Intelligence (measuring the mood of more than 100 invest ment newslet ter writers) and the American Association of Individual Investors Survey.

6. Fear and greed are stronger than long-term resolve
Investors can be their own worst enemy, particularly when emotions take hold. Gains “make us exuberant; they enhance well-being and pro mote optimism”?, says Santa Clara University finance professor Meir Statman. His studies of investor behavior show that “losses bring sadness, disgust, fear, regret. Fear increases the sense of risk and some react by shunning stocks.”?

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
This is why breadth and vol ume are so important. Think of it as strength in numbers. Broad momentum is hard to stop, Farrell observes. Watch for when momentum channels into a small number of stocks.

8. Bear markets have three stages – sharp down, reflexive rebound and a drawn-out fundamental downtrend

9. When all the experts and forecasts agree – something else is going to happen
As Sam Stovall, the S&P invest ment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”? Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets
Especially if you are long only or mandated to be fully invested. Those with more flexible charters might squeak out a smile or two here and there.

Since '99 PRPFX is up 220 per cent, Vanguard Wellington 190 per cent.  Think long-term.

Not sure it will make you feel better, but it bothers me too when my PP gets smaller.

Alanw wrote:

Roy wrote:

buddtholomew wrote: Today's response to GLD and TLT underperformance was completely irrational and I apologize for starting this thread in frustration.

Budd,

I find nothing wrong with any of this.

Being concerned with your portfolio on a day like today is only natural.  But really, what are we supposed to do?  Move in and out of the various allocations as we see fit.  Wouldn't this all just be market timing that we are trying to avoid?  Small draw downs are not a real concern.  If/when we are faced with a larger draw down (10 - 15%), will we be able to stay the course.  At this point, I'm not even sure that I can.  But what are the alternatives?  Cash in the mattress, 60/40, 80/20.  I don't have the answer.  I just hope as  PPer's that we will not have to face this situation.  Most of us having gone through 2008 will have a good reference point to use as a guide.

Hi, Alan,
I don't have the answer either.  I think the best anyone can do is to discover what kind of investor one is;  much good can follow.  After making the best guess, ex ante, I believe the experience must be lived through to discover this;  I can't wargame it.  Budd is living through it and talking about it.  Speaking for myself, I benefit from hearing his views, which are real and fresh, compared with the arrogance and certitude I so often hear on other boards but rarely believe.

Alanw wrote:

Roy wrote:

buddtholomew wrote: Today's response to GLD and TLT underperformance was completely irrational and I apologize for starting this thread in frustration.

Budd,

I find nothing wrong with any of this.

Being concerned with your portfolio on a day like today is only natural.  But really, what are we supposed to do?  Move in and out of the various allocations as we see fit.  Wouldn't this all just be market timing that we are trying to avoid?  Small draw downs are not a real concern.  If/when we are faced with a larger draw down (10 - 15%), will we be able to stay the course.  At this point, I'm not even sure that I can.  But what are the alternatives?  Cash in the mattress, 60/40, 80/20.  I don't have the answer.  I just hope as  PPer's that we will not have to face this situation.  Most of us having gone through 2008 will have a good reference point to use as a guide.

This is the rub. I look at alternatives and if I thought one worked better I'd be using it. All strategies have their own unique risks and each time is going to have those risks show up. The only thing investors can do is diversify as best they can. Market timing, concentrating risks, etc. all have much bigger issues.

I'm sorry Budd feels this way, but if he continues to feel nervous about the swings he might want to consider holding a bigger cash allocation to dampen the movements. But moving more into stocks certainly won't make the volatility less.

It bothers me me, too, when I look at today's results. I also wonder what my tolerance for loss would be and question my strategy if this trend were to continue. However, when I looked at at all Vanguard funds and etfs, it seems that everything had a bad day. Where does the money go on a day like this?  

Roy wrote: Hi, Alan,
I don't have the answer either.  I think the best anyone can do is to discover what kind of investor one is;  much good can follow.  After making the best guess, ex ante, I believe the experience must be lived through to discover this;  I can't wargame it.   Budd is living through it and talking about it.  Speaking for myself, I benefit from hearing his views, which are real and fresh, compared with the arrogance and certitude I so often hear on other boards but rarely believe.

As I said above, there is an immense amount to be learned about yourself and investing from studying what rattles you and why.  Once you understand what turns off your rationality you can begin thinking about how to avoid those things.

This kind of perspective is almost never talked about in investing discussions.  What is more common is acting like risk tolerance is somehow a function of age or amount of assets, when the truth is that risk tolerance is slightly different for everyone, and everyone needs a little something different from their portfolios to be content.

Today budd was rattled, but tomorrow it might be me or any of you.  Investors who are not humble about these things are usually either inexperienced or dishonest.

In some ways the PP is sort of like a car that you can feel totally in control of and enjoy driving most of the time, but if you happen to black out while behind the wheel it will still drive you home safely (as long as you don't pull the keys out of the ignition).  After "driving" such a car for a while, one day you might take your hands off the wheel deliberately and be amazed that it will still take you wherever you want to go.

lazyboy wrote: Where does the money go on a day like this?  

The same place the laughter goes when you are sad. 

In 2008 the market was declining and I think my portfolio was down something like 10+% in November?? Anyway, diversified investing is like a rudder on a ship. It won't turn suddenly. But a little later in the month and into December the long term bonds kicked in and took off so fast that the stock losses were wiped out for the most part. For me it was a moment of faith that the economic forces of deflation would take over and the market would have to move to LT bonds. Economic theory prevailed and it worked out fine.

If the same repeats it may be tempting to bail out, but when the economic forces take effect the correction can be rapid and sharp even if they don't happen immediately.

MediumTex wrote:

lazyboy wrote: Where does the money go on a day like this?  

The same place the laughter goes when you are sad. 

Really good answer, brought a smile to my face.

craigr wrote: In 2008 the market was declining and I think my portfolio was down something like 10+% in November?? Anyway, diversified investing is like a rudder on a ship. It won't turn suddenly. But a little later in the month and into December the long term bonds kicked in and took off so fast that the stock losses were wiped out for the most part. For me it was a moment of faith that the economic forces of deflation would take over and the market would have to move to LT bonds. Economic theory prevailed and it worked out fine.

If the same repeats it may be tempting to bail out, but when the economic forces take effect the correction can be rapid and sharp even if they don't happen immediately.

Ah yes, the reason I was attracted to the PP was how it behaved during the 2008 meltdown. Now, just when I think it's time to jettison LTT, I'm getting curious as to how this year's market drama will unfold. So thank you, craigr and MT, I think I'll stick around for the show.

Lazyboy,

LTT's have done their best at what appear to be horrible times to own these instruments.  July 2008 and April 2011 were both times where inflation fears were heating up, and LTT's proved their value in very short order.

Relax.  Let everything play out.  If you need some cash, draw on your TBills.  Don't be surprised if we see some more pretty big movements in gold, or LTTB or maybe stocks, for all I know.  You have a better strategy than the (money, bond, stock, commodity) markets.

Therefore I say unto you, Take no thought for your life, what ye shall eat, or what ye shall drink; nor yet for your body, what ye shall put on. Is not the life more than meat, and the body than raiment?

Behold the fowls of the air: for they sow not, neither do they reap, nor gather into barns; yet your heavenly Father feedeth them. Are ye not much better than they?

Which of you by taking thought can add one cubit unto his stature?

http://www.youtube.com/watch?v=d-diB65scQU

All glibness aside, this is why mental accounting is actually very important.  Mental accounting gets a bad rap.

I have a system.  If I anticipate an expense within say 1 or sometimes even 2 years, it generally stays in cash.  Even if I know it's within 5 years it stays in cash, but probably tied up in a CD or something.  I do not count this money toward the PP or VP.  If there's a bad day or month or couple of months, I can shrug it off, the immediate future is taken care of and that's good enough.

Anything in the portfolio is an indeterminate gift to future shoestring from past shoestring.

Where it gets tricky are times where you just don't know when you'll be spending the money.  I tend to keep that invested and just hope for the best if I think it'll be more than 2 years.  I also tend to accumulate cash for months on end and invest in chunks to help mitigate the need to sell securities when they're down, but I'm an accumulator and not actually living on the portfolio so I can get away with that.

I'd think if I was in the withdrawal phase though I'd probably keep a 6 month or 1 year "bucket" o' cash somewhere outside the porfolio and actually draw from that to avoid looking at the portfolio very often.

I don't know what else to say other than playing stupid head games against myself helps me tremendously.

One very good reason why it makes no sense to look at the daily swings of the PP is that it's very difficult to put those swings into perspective in terms of the value of the Dollar (and Cash). While the US PP appears to have gone down over the past few days, the reality is that the dollar just got stronger.

In fact, if we take a look at the Dollar Index (DXY) — which is widely used as a measure of the relative value of the Dollar, versus other currencies — we see that the short-term swings of PRPFX is inversely correlated with the value of the Dollar. In other words, if the PP is falling in value, it may just be that the value of your dollar-based PP and your Cash is getting stronger and you just can't see it.


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MediumTex wrote: Today budd was rattled, but tomorrow it might be me or any of you.  Investors who are not humble about these things are usually either inexperienced or dishonest.

That's right.  All I have to do is remember my experiences in 2008 (pre-Permanent Portfolio).  I recall exactly what it feels like to get knocked on my ass.  Losing serious amounts of money sucks so bad.  Not interested in doing that again.

Still, I continue to believe that the PP will shed the greatest number of adherents during another 80s\90s-style long-term bull market.  It will be hard for people to stay with it for years of merely "fine" returns everybody else is enjoying enormous gains.  This is the scenario I try to think through the most because a slow drip of envy seems very likely to induce some form of investing error.

MediumTex wrote: In some ways the PP is sort of like a car that you can feel totally in control of and enjoy driving most of the time, but if you happen to black out while behind the wheel it will still drive you home safely (as long as you don't pull the keys out of the ignition).  After "driving" such a car for a while, one day you might take your hands off the wheel deliberately and be amazed that it will still take you wherever you want to go.

I love that -- an investment strategy that even hedges against the consequences of the leather chaps and magic mushrooms raves that are so popular on this forum. 

Gumby wrote: Budd, you may find it helpful to take a look at your comments the last time you got nervous...

See: Sep 26, 2011: Weather the Storm...
...and: Sep 28, 2011: Hey Look...
...and: Aug 11, 2011: Nauseous

We all remember what happened after August, last year. The PP turned out to be the one of the best portfolios in the market right after you posted that.

It all comes down to the fear/elation factor...

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I really hope you're right. Maybe Budd's bad day is calling a top in the stock market and a bottom for treasuries and gold. I haven't looked today, but after about a week of not looking I made the mistake of checking in yesterday.

In case anyone is wondering, EDV is MUCH more volatile than TLT. Between that and the gold on a flat day for stocks I felt ready to through in the towel. I know myself well enough to not give in at that point, but found myself thinking of Frank Herbert's writing:

    I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when it has gone past I will turn the inner eye to see its path. Where the fear has gone there will be nothing. Only I will remain.
        Bene Gesserit Litany Against Fear.

Seeing what was happening and letting myself feel fear, but then not DOING anything with investments and focusing on being productive was very liberating.

alvinroast wrote: In case anyone is wondering, EDV is MUCH more volatile than TLT. Between that and the gold on a flat day for stocks I felt ready to through in the towel. I know myself well enough to not give in at that point, but found myself thinking of Frank Herbert's writing:

    I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me. And when it has gone past I will turn the inner eye to see its path. Where the fear has gone there will be nothing. Only I will remain.
        Bene Gesserit Litany Against Fear.

Seeing what was happening and letting myself feel fear, but then not DOING anything with investments and focusing on being productive was very liberating.

I recognize that from "Dune."

Today was a much better day for the PP.

Lone Wolf wrote: I love that -- an investment strategy that even hedges against the consequences of the leather chaps and magic mushrooms raves that are so popular on this forum. 

SShhhhhhhh...you're giving away the secret initiation ceremony to get into the Permanent Portfolio Club.

Before:


After:

shoestring wrote:

Therefore I say unto you, Take no thought for your life, what ye shall eat, or what ye shall drink; nor yet for your body, what ye shall put on. Is not the life more than meat, and the body than raiment?

Behold the fowls of the air: for they sow not, neither do they reap, nor gather into barns; yet your heavenly Father feedeth them. Are ye not much better than they?

Which of you by taking thought can add one cubit unto his stature?

http://www.youtube.com/watch?v=d-diB65scQU

All glibness aside, this is why mental accounting is actually very important.  Mental accounting gets a bad rap.

I have a system.  If I anticipate an expense within say 1 or sometimes even 2 years, it generally stays in cash.  Even if I know it's within 5 years it stays in cash, but probably tied up in a CD or something.  I do not count this money toward the PP or VP.  If there's a bad day or month or couple of months, I can shrug it off, the immediate future is taken care of and that's good enough.

Anything in the portfolio is an indeterminate gift to future shoestring from past shoestring.

Where it gets tricky are times where you just don't know when you'll be spending the money.  I tend to keep that invested and just hope for the best if I think it'll be more than 2 years.  I also tend to accumulate cash for months on end and invest in chunks to help mitigate the need to sell securities when they're down, but I'm an accumulator and not actually living on the portfolio so I can get away with that.

I'd think if I was in the withdrawal phase though I'd probably keep a 6 month or 1 year "bucket" o' cash somewhere outside the porfolio and actually draw from that to avoid looking at the portfolio very often.

I don't know what else to say other than playing stupid head games against myself helps me tremendously.

Thanks, shoestring, a retiree in withdrawal phase, it makes much sense for me to have cash outside of the PP for 6 -12 months planned expenses. I'm going to start to implement that. Also, love the Bobby McFerrin "Don't Worry Be Happy" song.

moda0306 wrote: Lazyboy,

LTT's have done their best at what appear to be horrible times to own these instruments.  July 2008 and April 2011 were both times where inflation fears were heating up, and LTT's proved their value in very short order.

Thanks, moda, I'm incrementally increasing my understanding on how these damn things work.

Human emotion is the greatest obstacle to success. It’s easier to scare the crap out of people than inform them. In fact, fear is the greatest single motivator. Not lust, hunger or greed. We’re most driven to take action when we’re scared.

This thread is a great example of why I really enjoy this forum: no escalation, triggering or flaming. Just a lot of patience, understanding, good humour and unwaveringly clear thinking.