Gyroscopic Investing

I always think it is a bit unfair to compare returns following the peak of a bubble to the peak of the bubble.  People have been doing this for years with gold (i.e., comparing it to the blow off top in 1980, rather than a rolling average or some other metric).  NASDAQ 5,000 is another example of an unfair starting point to compare subsequent NASDAQ returns.

The 1989 Nikkei peak around 40,000 was about 400% higher than current levels, which makes for about a 75% loss for the 22 years period that followed the peak for someone who bought the Nikkei in December of 1989.

What is surprising, though, is that someone who bought the Nikkei in 1984 and held on would have a 0% return for this 27 year period, which is a bit more sobering to me (because you aren't picking a market peak as a starting point).

I don't know what kind of dividends the Nikkei would have paid during this period, and that might have softened the blow a bit, but I would say that 27 years is a long time to wait for stocks to provide the superior risk-adjusted returns they are supposed to provide.

Maybe this is an argument for international diversification in stocks?

Among other things, it's definitely an argument for paying attention to demographics when investing in stock markets.

The basic demographic truth seems to be that economies are rarely dynamic or healthy when they have shrinking populations of peak earning years people (normally ages 45-55).

I believe that the age 45-55 band in Japan began shrinking relative to the rest of the population in 1990 and has been shrinking ever since.

There is a link between credit expansion and expected future returns, and once the demographics turn sour I think it affects credit markets in subtle ways and bad demographics can act as a credit contraction accelerant if a deleveraging process following an asset bubble is already underway.  This theory would explain, in part, some of the headwinds Japan has been encountering since 1989 and the headwinds the U.S. has been facing more recently (the U.S. age 45-55 demographic band peaked around 2009).

IMO it's an argument that you can't depend on stock-heavy allocations.  Imagine if a Japanese worker started investing at age 35 in 1984 following "age in bonds - 10."  They would now be 62, with negligible returns in the majority of their portfolio over their entire investing career, and 3 years left before the nominal retirement age.

As usual MediumTex got it.

The problem is that every market that isn't completely corrupt is facing the same demographic issue. Western Europe, Australia, Japan are all aging. So are we. Does that mean reduced returns for the foreseeable future for all of us? Can the Permanent Portfolio overcome this issue?

With a stock heavy portfolio you are basically hoping that stocks go up over your working life. They might not.

MediumTex wrote: I always think it is a bit unfair to compare returns following the peak of a bubble to the peak of the bubble.  People have been doing this for years with gold (i.e., comparing it to the blow off top in 1980, rather than a rolling average or some other metric).  NASDAQ 5,000 is another example of an unfair starting point to compare subsequent NASDAQ returns.

The 1989 Nikkei peak around 40,000 was about 400% higher than current levels, which makes for about a 75% loss for the 22 years period that followed the peak for someone who bought the Nikkei in December of 1989.

What is surprising, though, is that someone who bought the Nikkei in 1984 and held on would have a 0% return for this 27 year period, which is a bit more sobering to me (because you aren't picking a market peak as a starting point).

I don't know what kind of dividends the Nikkei would have paid during this period, and that might have softened the blow a bit, but I would say that 27 years is a long time to wait for stocks to provide the superior risk-adjusted returns they are supposed to provide.

All of that makes me think it might be about time to buy the Nikkei.

27 years is a long time.  Reversion to mean?

Adam1226 wrote: All of that makes me think it might be about time to buy the Nikkei.

27 years is a long time.  Reversion to mean?

It probably looked like a buy 10 years ago as well.

Indices wrote: Can the Permanent Portfolio overcome this issue?

Sure, that's what the long term bonds are for. 

An economy experiencing a structural contraction as a result, in part, of demographic forces is fundamentally deflationary, which is not so good for stocks, but is great for bonds (this should help clear up some of the mystery about how Japan's LT bond rates got to 2%).

If the Fed succeeds in countering these large deflationary forces through monetary policy, then the gold and perhaps the stocks should take care of you.

The situation I am describing is part of what makes me like the permanent portfolio so much.  Things could break either way, and you are protected in both cases.

MediumTex wrote:

Adam1226 wrote: All of that makes me think it might be about time to buy the Nikkei.

27 years is a long time.  Reversion to mean?

It probably looked like a buy 10 years ago as well.

Touche.

Adam1226 wrote:

MediumTex wrote:

Adam1226 wrote: All of that makes me think it might be about time to buy the Nikkei.

27 years is a long time.  Reversion to mean?

It probably looked like a buy 10 years ago as well.

Touche.

It will probably be a buy some day, I just don't know when it will be.  In Japan, things seem to have gone from bad, to worse, to really awful.

It's ironic, too, because by some measures Japan has been doing fine--unemployment is not high and it is still the world's #2 or #3 economy. 

When you look a little deeper, though, you see some very serious challenges, including zombie banks, the lack of the same employment opportunities that have been available historically, the enormous debt that will have to be repaid one way or another, and the Godzilla petri dish that Fukushima is starting to resemble.

Since demographics can play a very large role in shaping world economies, here is some interesting data to consider:









Source: The World in 2030: Super-cycle or Grey Age?

Both Stop-losses and relative-strength weightings assume a certain amount of "momentum" in pricing... that while something may be dropping, whether it's stocks in the outset of a recession or bonds in the outset of a dollar collapse, that it's not truly gauging the severity of the problem as it's happening day by day, and that maybe some self-fulfilling forces are at work as well.

I don't know how much weight to give these argument, though as Clive will point out, they've worked quite well, historically.  To me, though, they seem like too much of a "technical indicator."

I prefer working on macroeconomic fundamentals that not only have shown to work in the past, but "should" continue to work due to much more sound, fundamental macroeconomic forces than relative-strength "technical indicators."

That said, I could see working it into part of one's portfolio.  Even if you do it to your existing PP (probably not recommended by most here, but still could work relatively well), as opposed to viewing it separately, if you give relative-strength weighting preferences and/or stop-losses a chance, you probably could see some benefits.  I say probably, because I only have so much trust of techinical indicators, and using relative strength or stop losses is exactly that, IMO.

MediumTex wrote:

Adam1226 wrote: All of that makes me think it might be about time to buy the Nikkei.

27 years is a long time.  Reversion to mean?

It probably looked like a buy 10 years ago as well.

Hmm, I'll have to check Pince-nez quarterly and see what they say about it.

Clive wrote:So EZA and INDY then

Yeah. In terms of demographics and technological prowess, India has a lot of potential:

A Closer Look at India As An Outsider

Unfortunately, I don't have the guts to invest in India. Sometimes it seems like a black swan Indo-Pakistani event could show up in India at any time.

Clive,

Thinking that something will continue to go down just because it went down some seems to me to use the same technical indicators as something continuing to go up because it recently went up.  This could very well have to do with 1) markets only wanting to move so much in 1 day (if an event happens that should crush the stock market in one day, maybe it takes a week to do so), and 2) macro psychological effects causing self-fulfilling downturns such as hyperinflation or a demand-based recession.

I'm not saying these are completely unreliable, but they seem to stem from the same seed if you ask me.

I agree that buy/hold looks a lot scarier in a non-pp or improperly diversified portfolio, but I think the idea that you need stop-losses assumes a certain amount of market inefficiency or delay in properly pricing an asset... this may be somewhat common (as history would definitely show), but it hardly works on the same macroeconomic fundamentals as the choice of PP assets.  I just see RS & Stop loss as two sides of the same coin... a coin that says momentum does take hold of markets, and/or markets are somewhat delayed in their proper pricing-in of certain events.

Clive wrote: In Kenny Rogers immortal words

And somewhere in the darkness the gambler, he broke even.
But in his final words I found an ace that I could keep.

You got to know when to hold 'em, know when to fold 'em,
Know when to walk away and know when to run.

Clive,

Is this you?

MT,

Does that guy look like he can put together a trend chard dating back to 1900?

Somehow I doubt he owns a computer.

moda0306 wrote: MT,

Does that guy look like he can put together a trend chard dating back to 1900?

Somehow I doubt he owns a computer.

Moda,

That is Peter Serafinowicz, an English actor.

From wiki:

...an English actor, comedian, writer, composer, voice artist and occasional director.

Serafinowicz was born in Liverpool, England. He attended Our Lady of the Assumption Roman Catholic Primary School and St Francis Xavier Secondary School.  He lived in the Gateacre area of Liverpool until his early 20s, before moving to London.

The picture above is from his role in "Couples Retreat". 

One of his great lines from the movie was when he told the visitors to the resort that an item in the room was "complementary" and informed them of its cost.  When someone asked him how it could be "complimentary" when there was a charge for it, he said that the item was "complementary" in that it completed the room, not that it was "complimentary", as in free.

Here is his stuffy version:



The fact that he was a closet Kenny Rogers fan and Guitar Hero player came later in the movie.

Wow.

Touche!

I can't think of any other explanation for Clive having Kenny Rogers lyrics at top of mind than the explanation above.

As for me, growing up in Texas we spent a solid week in public school studying Kenny Rogers, and I had a clock radio that played "Lucille" instead of a buzzer to wake you up.

LINK

That's a heck of a way to start the morning, but the rest of every day always seemed easy after listening to that.

MediumTex wrote: I can't think of any other explanation for Clive having Kenny Rogers lyrics at top of mind than the explanation above.

As for me, growing up in Texas we spent a solid week in public school studying Kenny Rogers, and I had a clock radio that played "Lucille" instead of a buzzer to wake you up.

LINK

That's a heck of a way to start the morning, but the rest of every day always seemed easy after listening to that.

That reminds me of the Sam Houston quote that I heard from HB's radio show.  It was something like "if the first thing you do in the morning is eat a bullfrog, you'll know that the toughest part of your day is behind you".

Clive wrote: The conventional PP therefore might be considered as taking a technical view that in having reached a certain point in a current trend that a reversal is more likely to occur than is the trend likely to continue.

I don't think that the rebalancing is designed to catch or anticipate trends.  All that the PP assumes is that the relationship between the 4 assets will behave in a certain way.  It's simply a matter of returning them to levels at which they will still behave "gyroscopically", if you will.

You are simply resetting, assuming nothing about the future.

Clive,

I see what you're saying now about limiting your losses to 10% as a principal of sound investing.  I guess maybe I was picking up more on the fact that you back-tested this strategy and proved it has worked better than buy & hold in terms of performance... I was looking at it more as a "making money strategy" based on limiting losses than the principal of limiting losses being valuable in-and-of itself.

I see now what you're saying.

Regarding the PP portion of your portfolio, if the PP were to take a 10%+ loss, would you stop-loss it?  Or would you view it as more fundamentally sound as-is and hope/plan for a quick rebound?

Just curious.

Clive wrote:To me the healthier place to be looks to be Africa, Asia for stocks (based on those demographic charts that Gumby linked to).

Watch out for China long term. China will have an (enormous) aging population in the coming decades due to their one child policy that started in '79.

Clive wrote: I'd classify both stop loss and PP rebalancing as being just pure appropriate money management - not to let the risk of any one asset become excessive.

Aha, I see where you're coming from.  I guess in this sense stop-loss is sort of like how a bank roll management strategy in could complement counting cards in blackjack.  People often confuse a bank-roll strategy in blackjack or other types of gambling as being related to "catching streaks", but that's not it (at least for the non-superstitious gamblers.)

The idea is that even if luck turns sharply against you it's still possible to "live to fight another day".

Gumby wrote: Watch out for China long term. China will have an (enormous) aging population in the coming decades due to their one child policy that started in '79.

Agreed, China's demographics suck long-term.  Apart from the most obvious effects of the one-child policy, it greatly exacerbates the phenomenon of "the missing women of Asia", which is culturally and demographically unhealthy in more ways than I can even begin to list.