Turning The World's Most Successful Investment Strategy On Its Head

[jediclampet]

The author says, "all of the assets on Brown's portfolio are prohibitively expensive today" and he proposes a much more complex strategy.  I thought this article might stimulate some good discussion:

http://seekingalpha.com/article/762731- ... urce=yahoo

[Pointedstick]

His own graph shows that only gold and bonds are more expensive than the historical PP average, while stocks and cash are cheap. I will agree that gold looks very expensive, but it's expensive for a good reason: confidence in governments and financial markets are at record low levels. Given that this looks unlikely to abate anytime soon, gold may very well go even higher. I don't like his mix; it looks needlessly complicated, full of financial jargon, insider-ese, and a stock-picking attitude ("Japan still is home to hundreds of companies that the world economy cannot run without"). Were this a fund, I imagine you would pay a high ER for the privilege that they "may often weight each category according to our best judgment, but we never alter the basic structure of the portfolio by very much."

No thanks. 

[craigr]

Actively managed strategies don't work. I have been investing for almost 20 years now and have never once in my entire investing career seen any of them work as advertised. Also the asset classes they are recommending in that mix can be very expensive behind the scenes. Big turnover, hidden costs, hidden risks, etc. all add up to affect performance.

High yield bonds and emerging market bonds are bad bets. IMO. They have equity like risk with the relatively lousy performance of bonds if the stock equivalent is doing well. For instance, if you want to own junk bonds, just go long on the same set of value stocks. If you think emerging markets are going to be hot [I don't] then buy the stocks and leave the bonds alone so you don't get jerked around by the corrupt government issuer.

Of the assets in the portfolio there is always one that is "too high" and always one that is "too low". Problem is that something that is too high can get more expensive (witness long term bonds going on 30 years now of being "too high"). Something that is "too low" can always go lower as well (witness Japan which still continues to lag 20 years after their bust). The only way to logically deal with this is with hard rebalancing bands to make it an unemotional decision.

[Ad Orientem]

I was just about to post the link to this and saw it already was up. This was a singularly unfortunate article which I thought demonstrated a total lack of comprehension as to what the PP is all about. What he is proposing is just more speculation.

[WildAboutHarry]

Harry did change the mix in his permanent portfolio over time, although the latest incarnation was the most stable and consistent.

Gold is still below the inflation-adjusted 1981 high.

Long-term treasuries, though, are at ridiculously low yields/high prices, and I suspect that Harry would have had something significant to say about that.  I know that rates can still fall, but I would guess that almost all of the deflationary goodness has been wrung out of them. 

Of course it is pure speculation, but I suspect that the action of the Fed might - might- have caused Harry to reconsider the LTT component.  Perhaps an intermediate-term treasury component in lieu of cash and LTTs?

[Ad Orientem]

Harry did change the mix in his permanent portfolio over time, although the latest incarnation was the most stable and consistent.

Gold is still below the inflation-adjusted 1981 high.

Long-term treasuries, though, are at ridiculously low yields/high prices, and I suspect that Harry would have had something significant to say about that.  I know that rates can still fall, but I would guess that almost all of the deflationary goodness has been wrung out of them. 

Of course it is pure speculation, but I suspect that the action of the Fed might - might- have caused Harry to reconsider the LTT component.  Perhaps an intermediate-term treasury component in lieu of cash and LTTs?

I can see where you are coming from and while I don't dismiss the possibility, I really doubt that HB would change the PP to fit the present situation. As crazy as current Treasury yields are, it is in fact quite possible that they could go lower. Maybe significantly lower, if one considers the yields on Japanese and German bonds. Harry always assumed that in any given environment one of the asset classes would likely be taking a hit. Treasuries have been good performers for almost three decades now. So their time in the penalty box maybe approaching. And even if the rates do continue to fall the one certainty is that there is a floor... somewhere. One day yields will rise.

And when they do the other components will be ready to lead the way.

[WildAboutHarry]

I can see where you are coming from and while I don't dismiss the possibility, I really doubt that HB would change the PP to fit the present situation.

I suspect you are right, but it is always fun to speculate.  Like any iterative process, Harry's development of his PP went through stages, and he was definitely not afraid to make adjustments.  But he did seem settled on the 4x25 mix.

He did not add LTTs until 1981, after LTTs had experienced a long tumble, and he dropped silver after 1981 stating (and I paraphrase) that silver had had its run and did not offer attractive future prospects.

I know Clive has done some analysis on alternatives to the LTT-Cash mix and those seem to offer similar past performance to the 4x25 HBPP with lower downward potential should interest rates rise.

[MachineGhost]

The author says, "all of the assets on Brown's portfolio are prohibitively expensive today" and he proposes a much more complex strategy.  I thought this article might stimulate some good discussion:

http://seekingalpha.com/article/762731- ... urce=yahoo

I think his conclusion is sound, but his application is more theoretical than practical, such as shorting equity to act as a hedge for shorting bonds in prosperity.  That's more complicated than it needs to be.

While it is true that commodities tend to go up in periods of negative real interest rates, I don't think substituting natural gas or uranium is in the same category of real asset wealth preservation as gold, rare stamps, diamonds, etc..  Jeeze.

If gold is really close to its 1981 adjusted high as he claims, then the present situation is hardly comparable.  There is no mania in gold, gold stock and gold coins yet.  However, there is a real risk of a return to prosperity 1981-style if the politicians in the Eurozone and USA finally deal with their insolvency.  It won't forestall higher inflation from coming down the line, but the interim years could be bearish for gold and bonds.  Can low-yielding cash and overvalued stock take up the slack?

[WildAboutHarry]

However, there is a real risk of a return to prosperity 1981-style if the politicians in the Eurozone and USA finally deal with their insolvency.

I like the concept of the "...risk of a return to prosperity..."

Unlike 1981, though, LTTs are starting out from the bottom of the yield range.  No bull market in bonds if the economy is "fixed".

[Coearth]

The author said "inverse Index ETFs make it just as safe and easy to sell almost any of them short". Inverse ETF are OK for day trading but dangerous for investment portfolio due to widespread misunderstanding about how they work in reality.

Inverse ETF works as intended if bought and sold within a day. However, holding inverse ETF for more than a day causes it to lose value even if there is zero change in price of underlying securities, due to the way inverse ETF are realanced daily. Holding Inverse ETF in portfolio for some period of time can therefore kill the value of the portfolio. Similarly, leveraged ETF should not be in a portfolio where asset protection is a priority.

Warnings about inverse and leveraged ETF are explained here: http://seekingalpha.com/article/35789-t ... raged-etfs

There are wide spread misconception, even among supposed experts, about how inverse ETF and leveraged ETF really works.

[Lone Wolf]

Inverse ETF works as intended if bought and sold within a day. However, holding inverse ETF for more than a day causes it to lose value even if there is zero change in price of underlying securities, due to the way inverse ETF is created. Holding Inverse ETF in portfolio for some period of time can therefore kill the value of the portfolio. Similarly, leveraged ETF should not be in a portfolio where asset protection is a priority.

Definitely.  These things could have a role to play in a fancy-schmancy Variable Portfolio move but recommending them as part of a strategy that's supposed to supplant the Permanent Portfolio... there's just no way.  Not for "the money you can't afford to lose".

It's yet another reason that leveraged ETFs were so popular in the Suicide Portfolio contest, a point that MT brings up as the contest is starting.

[MachineGhost]

The author said "inverse Index ETFs make it just as safe and easy to sell almost any of them short". Inverse ETF are OK for day trading but dangerous for investment portfolio due to widespread misunderstanding about how they work in reality.

No kidding!  I thought inverse commodity futures ETFs and futures VIX ETF's were one thing, but inverse equity ETFs would be another.  I've been finding out otherwise over the past few months with SH (inverse S&P 500) that I've used to hedge my equity positions.  I read the annual prospectus that came out last week and was displeased to find out it is daily rebalanced.  While it may not be as much of an anal rape as the original natural gas ETF was (downtred + contago + tracking error), I've got to once again find a better way to hedge in an tax-deffered account.  Last year, I only broke even on the VIX ETF near the bottom of the tank.

They're all useless pieces of shit at this point.

[AgAuMoney]

The author said "inverse Index ETFs make it just as safe and easy to sell almost any of them short". Inverse ETF are OK for day trading but dangerous for investment portfolio due to widespread misunderstanding about how they work in reality.

No kidding!  I thought inverse commodity futures ETFs and futures VIX ETF's were one thing, but inverse equity ETFs would be another. 

They're all useless pieces of shit at this point.

Yup.

I don't think it is possible to take the tools used to implement a complex and closely monitored strategy, and turn them into fund that anyone can use while monitoring on evenings and weekends.

For more damning evidence, look at the professionals running hedge funds.  These tools work for them some of the time, sometimes for a long time.  Then suddenly everything goes tits up and they shut down the fund, sometimes before the investors lose everything.

I cannot believe the SEC and FINRA allow these funds out there for anyone to invest, when it is almost certain to profit nobody but the administrator and custodian.

[Alanw]

Looking at the prospectus of various inverse and leveraged ETF's really makes the PP look more and more attractive.  It would be very interesting to look at the average day traders annual ROI for the past several years or decades to see if they surpassed the returns of the PP. This would not be taking into account the sleepless nights and anxious days of continually watching the markets.  A few day trader acquaintences I've had over the years all seemed to be so consumed with instantaneous market movements that you couldn't carry on a long conversation with them.  To each his own.  After having done it both ways, I much prefer the peace and tranquility of a passive investment strategy like the PP.

[Coearth]

I can now have a split investor/trader personality, thanks to Permanent Portfolio. I invest with Permanent Portfolio with money I cannot afford to lose, and day trade with Variable Portfolio with money I can afford to lose. This allows me to carry out investment with one  peaceful investor mindset, and do trading with a trader mindset, as I view both portfolio as clearly separate and their results do not affect each other on a daily basis.

About day trading, I aim to enter and exit on the same trading day. This way i can then sleep well at night. I find that market timing and analysis works more predictably within one trading day for my purpose, since day to day news are having bigger impacts now. The counters I select to trade need to have big volatility to make day trade worth the time.