PP investors--stay the course

[Pointedstick]

I tested that on longtermreturns.com, but the site is down since some days .

If I recall correctly, the author admits that his pre-1972 gold data is cash +1% or something like that. You can tell it's not real data because using his tool to plot gold on its own reveals suspiciously smooth movement before 1972. So as Xan said, using those data to imaging what a pre-1972 PP is like gives you false readings since you're really looking at a very different portfolio.

[Gumby]

I tested that on longtermreturns.com, but the site is down since some days .

If I recall correctly, the author admits that his pre-1972 gold data is cash +1% or something like that. You can tell it's not real data because using his tool to plot gold on its own reveals suspiciously smooth movement before 1972. So as Xan said, using those data to imaging what a pre-1972 PP is like gives you false readings since you're really looking at a very different portfolio.

Agreed. A PP is designed for a free-floating fiat currency — i.e. not pegged to anything. There wouldn't have been any perceived investment in owning dollar-denominated gold pre-1972. And when your currency is tied to gold, the peg alone has an effect on the relative value of everything — including every investment, asset and salary. And those different valuations made every alternative investment option totally incomparable. It's a completely different world and a completely different monetary system. It would be like measuring nuclear fallout before the first nuclear weapon was ever detonated. Or like trying to measure a car's gas mileage without any tires on the rims.

[frommi]

Good post, Frommi, but is it possible you're suffering from recency bias? It seems like you read the book at the same time that stocks started to pick up and gold stopped its steady rise, breaking the spell it had on everyone for the past 10+ years. I admit, if I had just stayed stock-heavy near the end of the last decade before I discovered the pp I'd be far richer now, but I honestly have no regrets.

Seems like just yesterday I was telling myself, next time the stock market surges and gold and bonds tank, I will buy the latter and make the pp a larger portion of my total (vp+pp). Of course, it wasn't yesterday. It was when gold was at 1800.

Since reading the book i have problems with holding gold at all, because what does it do for me? It only costs me money and 1kg of it are 1kg of it in 100 years. Good stocks produce a flow of money through dividends and stock buybacks currently at a 6-9% earnings yield. And for me as a german, US and GB stocks are protecting me against €-problems much better than gold can. And the 2.5% i get when i buy 30-year german t-bonds are not compensating me enough for the risk they have. Did you know that new bonds from any €-state have CAC-clauses and can default? In germany it seems to be the easy way to get rid of debt as was demonstrated in greece and cyprus. I can no longer assume that this will not happen in the next 20 years in germany, because guess why that CAC-clause was introduced if not for that case?

As i started the PP i had the golden shiny myth of rebalancing and how it gives you extra-dollars in your pocket, because you allways buy low. But how can you know if you buy low, when you don`t even know what is expensive and what not? 1200$ for gold was very expensive 5 years ago, and now it should be cheap? There is NO way to know if gold is cheap, because you can not calculate intrinsic value for it. For stocks and bonds you can, simply look at the cash the asset puts to your pocket.
Rebalancing in the PP worked in history, but how can you be sure that it works in the future? In the extreme case when gold falls to 0, you will lose ALL your wealth, because you will have to always rebalance to it, till nothing is left. This sounds drastic and its unrealistic, but it gave me food for thought.

[frommi]

I tested that on longtermreturns.com, but the site is down since some days .

If I recall correctly, the author admits that his pre-1972 gold data is cash +1% or something like that. You can tell it's not real data because using his tool to plot gold on its own reveals suspiciously smooth movement before 1972. So as Xan said, using those data to imaging what a pre-1972 PP is like gives you false readings since you're really looking at a very different portfolio.

Ok, but the time from 1940->1960 was the only time when interest rates where as low as they are currently. We don`t know how the PP operates with long periods of rising interest rates, because in the last 40 years there was no such period.

[Gumby]

We don`t know how the PP operates with long periods of rising interest rates, because in the last 40 years there was no such period.

See the 1970s.

[frommi]

We don`t know how the PP operates with long periods of rising interest rates, because in the last 40 years there was no such period.

See the 1970s.

Ok i correct myself, there was no period where cash yielded 0% and long term rates where rising, while still having inflation.

[Pointedstick]

Ok i correct myself, there was no period where cash yielded 0% and long term rates where rising, while still having inflation.

So cash yields 0%, long bonds yield, oh, 4% and rising, and inflation is, let's say, 6%. Since the Fed controls short-term rates and not long-term rates, this implies that the Fed is attempting to create inflation. This is the condition when gold should do very well. The reason that's not happening right now is that inflation is not 6% but 1%.

[Gumby]

Ok i correct myself, there was no period where cash yielded 0% and long term rates where rising, while still having inflation.

So cash yields 0%, long bonds yield, oh, 4% and rising, and inflation is, let's say, 6%. Since the Fed controls short-term rates and not long-term rates, this implies that the Fed is attempting to create inflation. This is the condition when gold should do very well. The reason that's not happening right now is that inflation is not 6% but 1%.

Agreed.

Furthermore, no portfolio has ever been tested in those conditions (for the reasons stated above).

[Kevin K.]

So, Clive makes a single negative prediction on the PP — a few years ago, mind you — and now we are supposing he's "right" simply because 'cash is king' at the moment and the PP goes down a little bit?

Please...

Clive is just a guy with a computer who spends every day obsessing about thousands of different portfolio permutations. He makes countless predictions and recommended thousands of different portfolios to perfect strangers and then deletes every single one of his musings so that we forget all of the whimsical and contradictory statements he makes.

If all asset classes go down for an 18 month period, that doesn't make Clive, or anybody, "right". It just makes them masters of the obvious. Even Harry Browne and John Chandler made it crystal clear that all asset classes could dive for 18 straight months. That's just the nature of markets.

Here's a quote from Harry Browne's Investment Radio Show where Harry Browne and John Chandler explain further...

HARRY BROWNE: Bob — out in cyberspace asks — what combination of events were in effect when the Permanent Portfolio produced a loss? Well, over the last 35 years, the Permanent Portfolio has had only four losing years. And it has averaged a [annual] gain of 9% for all of the 35 years. Now, the worst year that it had was in 1981, when it lost 6%. And the reason it lost 6% was because that year everything went down. Gold went down, stocks went down, bonds went down, commodities, currencies — everything went down. But, of course, that's a situation that cannot sustain itself. It's a recessionary situation. And the following year, 1982, everything went up, and really sprang up. Gold had big gains, stocks had a big gain. Bonds even moved up a bit. And the result was that the portfolio gained something like 22%. I don't have the figures in front of me, but it was over 20%. And that was as unusual as the 6% loss was the year before. So, given the two years, there was a net gain — quite a big net gain — bigger than we should expect in an average year for the Permanent Portfolio. But that's the only time that I know when you really had an inundation of losses in all of the investments. And otherwise, we always have at least one winning investment that's strong enough to pull the portfolio upward. And so, I hope that answers the question.

JOHN CHANDLER: It does, Harry. I would like to add one thing and that is that the world doesn't really work according to the calendar. The calendar is there for I think maybe the benefit of accountants.

HARRY BROWNE: And to remember our birthdays.

JOHN CHANDLER: Well, something of that nature. A lot, a lot of harm has been done because of the calendar. And one of the harms is trying to make everything fit neatly into a 12 month, or four week, or seven day pattern. The idea of the Permanent Portfolio is is that it invests in asset classes, which respond differently in different economic conditions. The economic conditions that makes one thing goes down, is the same condition that makes another asset go up. But, here is the key and that is that it does not happen overnight. It does take time for these economic forces to take hold. And I rememember back in the seventies, early eighties when we were doing research on the Permanent Portfolio, we found periods as long as 18 months where the portfolio could lose money. But, now that was about the longest we found. Now bear in mind that this is not a promise. It's not a guarantee without — saying that with only 18 months it can work. I can simply say, during the periods when it was being tested. The prices... doing tests on the Permanent Portfolio and what would happen in the different situations over long, long, long periods of time — about 18 months is the maximum we found where the portfolio could lose money before the economic forces took hold and balanced the portfolio out.

HARRY BROWNE: Yes, if you were to invest on day one, you did run the risk that maybe you would not show a gain for 18 months. But, as you say that's a unique situation. An unusual situation. But, it was a possibility, and it must be recognized. But, in any event, we know that the portfolio does right itself, and it doesn't take very long. That's the value of the stability. You look at the chart of the stock market, and you see these rollercoaster swings. But, you don't see that in a chart of the Permanent Portfolio, and you can see that at my website. You can get to a chart of the Permanent Portfolio and you just see the slow steady growth. Stability is very important, because if it's not stable, you'r going to be tempted to abandon the whole approach, and probably at the worst time.

Actually according to Craig R's table of historical PP returns the worst-ever PP loss (1981) was -4.1%, not 6%.

I don't feel like the sky is falling given what's happened so far this year, but will freely admit to being among those who converted to the PP during the '08 market meltdown. I was (and am) a quasi-forced early retiree (corporate shenanigans) living 100% off of assets and looking for a modest positive real return with as little downside risk as possible.

It's been interesting to me to see people on this forum talking about needing to be comfortable with the possibility of 20% drawdowns in order to be in the PP, when there's never been a drawdown more than a quarter that large since the early 70's- until now. To be clear, I do understand the PP strategy and did not base my decison to switch from a complex slice-and-dice portfolio to the PP on the historical PP returns, but I'm honest enough to admit I did look at them and take them into account, as is surely the case with many others who lived through the '08 meltdown and saw their "low-risk, non-correlated asset" portfolios tank across the board.

That said, other than MAYBE putting the entire bond allocation into shorter-term Treasuries, I don't see any strategy out there that is likely to yield the ~2-4% real return I am hoping for.

[KevinW]

That said, other than MAYBE putting the entire bond allocation into shorter-term Treasuries, I don't see any strategy out there that is likely to yield the ~2-4% real return I am hoping for.

In principle the "Swedroe Minimize Fat Tails" portfolio should do that, but IMO that portfolio is riskier than the PP.

[Tortoise]

It's been interesting to me to see people on this forum talking about needing to be comfortable with the possibility of 20% drawdowns in order to be in the PP, when there's never been a drawdown more than a quarter that large since the early 70's- until now.

The worst-case 20% drawdown refers to an intra-year drawdown, meaning it might happen in, say, May or August or October--you won't see it if you're only comparing the portfolio value at the end of each year like the data in Craig's table of historical PP returns.

[Kevin K.]

It's been interesting to me to see people on this forum talking about needing to be comfortable with the possibility of 20% drawdowns in order to be in the PP, when there's never been a drawdown more than a quarter that large since the early 70's- until now.

The worst-case 20% drawdown refers to an intra-year drawdown, meaning it might happen in, say, May or August or October--you won't see it if you're only comparing the portfolio value at the end of each year like the data in Craig's table of historical PP returns.

Thanks Tortoise for clearing this up...makes complete sense.

[frugal]

It's been interesting to me to see people on this forum talking about needing to be comfortable with the possibility of 20% drawdowns in order to be in the PP, when there's never been a drawdown more than a quarter that large since the early 70's- until now.

The worst-case 20% drawdown refers to an intra-year drawdown, meaning it might happen in, say, May or August or October--you won't see it if you're only comparing the portfolio value at the end of each year like the data in Craig's table of historical PP returns.

Thanks Tortoise for clearing this up...makes complete sense.

we should only look to PP once a year

but with internet available everywhere is quite impossible!

[frugal]

in a few months we will be  like this:

[dualstow]

...

Since reading the book i have problems with holding gold at all, because what does it do for me? It only costs me money and 1kg of it are 1kg of it in 100 years. Good stocks produce a flow of money through dividends and stock buybacks currently at a 6-9% earnings yield. And for me as a german, US and GB stocks are protecting me against €-problems much better than gold can.
...

Sounds like you might be a Rick Ferri fan. He only invests in cash flows. One could do worse.

EDITED: Once could do worse. --> One could do worse.

[Pointedstick]

Holding gold without a solid rebalancing plan is a recipe for sadness. But with one, gold's volatility can be very profitably harvested, which is what the PP does.

[frugal]

Let's go PP!

great recover

[buddtholomew]

Aah...the familiar stench of a substantial decline. I'm wearing red today to match my portfolio screen.

[KevinW]

Did you wear green during the last couple weeks when the portfolio was consistently going up?

[buddtholomew]

Did you wear green during the last couple weeks when the portfolio was consistently going up?

Oh, you mean when the portfolio was working its way back to even. I'll start wearing green when the PP is positive YTD.

[KevinW]

Dude, sometimes you slay me. 

[Pointedstick]

T-bills, man. T-bills.

[buddtholomew]

Dude, sometimes you slay me. 

Just messing around fellas. These ups and downs don't really phase me as much as they used to. 

[Libertarian666]

They laughed when I said I was going to be a stand-up comic.
They're not laughing now.

[buddtholomew]

Ooh, are we doing ambiguous posts again?

Here's one:
===============================

I "hate" the PP.  And buddtholoMEW. 

P.S. Just "kidding". 

Tell me you didn't expect a negative post from me after today's decline? I tried not to disappoint, but have learned not to "freak out" when the PP declines.