Gyroscopic Investing

Hi all,

there is a webpage written by Marc de Mesel, where he gathered PP performance not only for US (1972-2011), but also for Japan (1972-2009), UK (1972-2008), and EuroZone (1999-2011):

http://www.marcdemesel.be/p/permanente- ... uille.html

There is an interesting result about the performance of this 4 PP's from 2000 to 2010:

USA : 6,6% (inflation 2,5%)
JAPAN : 3,2 % (inflation 0%)
UK Avg : 6,1% (inflation 2.7%)
EURO : 6,5%

If we look back at 90's, the PP performance is similar at US and UK. Euro was still not created, and Japan started the 'lost decade' (that should had been named the 'two lost decades').

Main considerations:

1. Is it relevant/related that at 2000's, US,UK and EU were performing similar?

2. Is it relevant/related that PP performance has been similar in UK and US almost in all decades?

3. Japan, from 1972 to 1990, was having a performance of 12% aprox (excelent), but since enters the 'liquidity trap' in the 90's, its two decades (20 years) that PP was performing very bad (20 years with an average of 1.85%). Could happen the same in US, UK or EU? <B>Why in Japan the PP didn't perform positive last 20 years, when PP is supposed to work in the 4 possible stages of the economy?</B> Has anybody ever made an analysis about this kind of crisis, how it would be catalogued between the 4 states, and why PP didn't peformed as it should?

https://en.wikipedia.org/wiki/Lost_Decade_%28Japan%29


regards

Arturo, I don't know whether this is true but my guess is that if you were to convert the Japanese PP into USD (or GBP or Euro) then the apparent "low" performance of the Japanese PP would disappear. Basically the Yen has got stronger versus the USD, GBP and Euro so a Japanese person who held a US PP would be no better off after they converted their US PP back into Yen.

If we were certain that the US or UK economies were going to turn Japanese, then the thing to do would be to be greatly overweight for LTT. The thing is that no one knows the future.

IIRC the Japanese PP only had 10 year bonds for the LLT, and used money market funds for the cash.  So when looking at the Japanese PP in the above link you could eliminate the cash portion and assume the bond section accounts for 50% of returns (ie get rid of the bar-bell since 30 year bonds were not available).  In addition, if the Japanese investor held half of their stock allocation in the S&P 500, then that would have boosted returns as well.

The available longest JGB have been getting longer and longer. They have had 30year bonds for quite a while now I think.

stone wrote: Arturo, I don't know whether this is true but my guess is that if you were to convert the Japanese PP into USD (or GBP or Euro) then the apparent "low" performance of the Japanese PP would disappear. Basically the Yen has got stronger versus the USD, GBP and Euro so a Japanese person who held a US PP would be no better off after they converted their US PP back into Yen.

If we were certain that the US or UK economies were going to turn Japanese, then the thing to do would be to be greatly overweight for LTT. The thing is that no one knows the future.

Hi Stone,

i am just saying that for a person living in Japan and investing on japanese PP, would only obtain an annual gain of 3,2% before inflation, that i really do not believe it was 0%.

PP should work in every part of the world where you can invest in our 4 floating assets (gold, cash, bonds,stocks).

Europe is giving, after almost 15 years after Europe Comunity creation, a CAGR of 6,5% before inflation. Here everybody agrees that we have had almost 3% of inflation since 1999 (others says than even more), so if we apply a tax correction variable of 0,5% (capital gains, interest, dividends taxes), we can agree that Europe is also giving a real annual return of 3%.

In USA, as in another forum has been noted to me, the period that goes from 1972 to 80's, because gold was ilegal to be purchased before that time, it was a period were it just got revalanced to its 'real' market price. If we see the real PP gains since the 80's to 2011, USA PP perform similar to Europe PP, it means, around 7,5% (from Craig's charts). There are people that really thinks that the real inflation in USA has been above of 5% for sure, since FED always print more money than ECB (and we have had almost 3%), so it gives us a 'real' gain, after inflation, of 3% more or less.

So my main question now: is really PP a system to obtain "10% annual gains", protection against inflation, and security against bankruptcy for the long run, or just a system to protect the money against inflation, since from my perspective its "just" giving a real gain around 3% ?

I would be very greatful if Craig could also clear my doubts here.

thanks.

Arturo wrote: So my main question now: is really PP a system to obtain "10% annual gains", protection against inflation, and security against bankruptcy for the long run, or just a system to protect the money against inflation, since from my perspective its "just" giving a real gain around 3% ?

I do not believe there is any investment in the world that will give you a consistent, bankruptcy protected, 10% real return. You will probably never find such a thing. What are you currently invested in? The PP is not perfect, but I'm willing to bet it's safer and more consistent than anything you could already own (except for cash, which it will beat in terms of its returns).

Pointedstick wrote:

Arturo wrote: So my main question now: is really PP a system to obtain "10% annual gains", protection against inflation, and security against bankruptcy for the long run, or just a system to protect the money against inflation, since from my perspective its "just" giving a real gain around 3% ?

I do not believe there is any investment in the world that will give you a consistent, bankruptcy protected, 10% real return. You will probably never find such a thing. What are you currently invested in? The PP is not perfect, but I'm willing to bet it's safer and more consistent than anything you could already own (except for cash, which it will beat in terms of its returns).

What's the line about not letting the perfect be the enemy of the good?

The PP is a solid approach to investing that should provide a consistently positive inflation-adjusted return. 

The PP is what it is.  If it meets a person's investment objectives he should consider using it.  If it's too conservative, then an investor should seek something riskier that may provide higher returns in return for the increased risk.

Sometimes people react to the PP by saying that it's too good to be true.  I would say that the PP is just good enough to be true, but no better.

MediumTex wrote:

Pointedstick wrote:

Arturo wrote: So my main question now: is really PP a system to obtain "10% annual gains", protection against inflation, and security against bankruptcy for the long run, or just a system to protect the money against inflation, since from my perspective its "just" giving a real gain around 3% ?

I do not believe there is any investment in the world that will give you a consistent, bankruptcy protected, 10% real return. You will probably never find such a thing. What are you currently invested in? The PP is not perfect, but I'm willing to bet it's safer and more consistent than anything you could already own (except for cash, which it will beat in terms of its returns).

What's the line about not letting the perfect be the enemy of the good?

The PP is a solid approach to investing that should provide a consistently positive inflation-adjusted return. 

The PP is what it is.  If it meets a person's investment objectives he should consider using it.  If it's too conservative, then an investor should seek something riskier that may provide higher returns in return for the increased risk.

Sometimes people react to the PP by saying that it's too good to be true.  I would say that the PP is just good enough to be true, but no better.

Hi Pointedstick,

I am not talking nothing against HBPP. In reverse, because its obvious that PP, as a long run investment strategy, is quite good. Its offering low volatility, constante returns, security against the 4 possible states of the economy, letting you work on it in passive mode, or the assets low risk/volatility properties, so you don't need years to recover from a lost year, as often happen with stocks. Its awesome. Just for this characteristics, deserves an award compared to traditional active investment, where only 5% of investors can beat the market.

What i am just saying is that the famous "10% of return investment objective", from my point of view, is a little bit overrated. There are some minor variables that are never covered or critized on books when analyzing PP, as for instance, that the 70's period was inusual for gold once the market was adjusting to its real price (before 1972 was ilegal to adquiere it), real US inflation (the average of 4,5% looks not real at all), CAGR of 9,8% only achieved after 40 years (absolutely long run investment), or tax impact on CAGR (capital, dividends and interest gains).

just saying :-)

Arturo wrote: What i am just saying is that the famous "10% of return investment objective", from my point of view, is a little bit overrated. There are some minor variables that are never covered or critized on books when analyzing PP, as for instance, that the 70's period was inusual for gold once the market was adjusting to its real price (before 1972 was ilegal to adquiere it), real US inflation (the average of 4,5% looks not real at all), CAGR of 9,8% only achieved after 40 years (absolutely long run investment), or tax impact on CAGR (capital, dividends and interest gains).

just saying :-)

Everything you said could be applied to any other investment approach too. For example, how many other investment strategies take into account inflation and reduce the stated CAGR by 4.5% to compensate? That would give U.S. stocks a CAGR of about 4.5%. Oops, now stocks don't look so great anymore.

Speaking of stocks, when people talk about how they're are the best long-run investment, how many of them mention that most of the gains come from secular bull markets and that you need the willpower and lifespan to wait out possible multi-decade bear markets that destroy your gains through capital losses AND inflation? Or that if you start investing in stocks at the top of a bull market, your long-term gains may be practically nonexistent for decades?

How many other investment strategies talk about the impact of taxes and commissions? Pretty much zero. In fact, the more complicated the approach, the less likely I've found people are to talk about taxes and commission fees because active trading gets absolutely destroyed by those costs.

You should not compare the PP to some mythical perfection. You should compare it to the alternative investment strategies that you are considering implementing or have already implemented. Again, do your current investments give you a better, more consistent CAGR than a PP? Would you be willing to share the inflation-adjusted CAGR of your current investments?

Pointedstick wrote: You should not compare the PP to some mythical perfection. You should compare it to the alternative investment strategies that you are considering implementing or have already implemented. Again, do your current investments give you a better, more consistent CAGR than a PP? Would you be willing to share the inflation-adjusted CAGR of your current investments?

Hi Pointdstick,

Maybe you are right. I was just feeling the lack of this kind of information in books and blogs about PP. Just giving down to earth expectations that, maybe yes, maybe not, after 30 years of passive investment, you are going to have an average of 10% (or not) of return.

Clive wrote:
But the USD reference point for the US PP is not a stable reference point but is continually being devalued. Ditto the others.

Since 1980 to 2011 inclusive, the USD had devalued at a yearly average 4.8% rate whilst Japanese Yen has devalued at 0.9%. Add that 3.9% lower devaluation rate (strengthening Yen) on top of the above 3.2% figure for Japan = 7.1% in terms of US products/services purchase power (I haven't looked at the figures for 2000 onwards so there's likely some difference).

Hi Clive,

i don't get the point of your commentary. It means that PP would work poorly for a japanese investing in Japan (3,2%), but from the perspective of an american investing in Japan, would work at a rate of 7,1% applying the exchange rate?

Arturo wrote:

Clive wrote: But the USD reference point for the US PP is not a stable reference point but is continually being devalued. Ditto the others.
Since 1980 to 2011 inclusive, the USD had devalued at a yearly average 4.8% rate whilst Japanese Yen has devalued at 0.9%. Add that 3.9% lower devaluation rate (strengthening Yen) on top of the above 3.2% figure for Japan = 7.1% in terms of US products/services purchase power (I haven't looked at the figures for 2000 onwards so there's likely some difference).

Hi Clive,

i don't get the point of your commentary. It means that PP would work poorly for a japanese investing in Japan (3,2%), but from the perspective of an american investing in Japan, would work at a rate of 7,1% applying the exchange rate?

Arturo, my understanding is also exactly what you are saying. The long term performance of the Japanese or US HBPP look similar when both are either converted into USD or when both are converted into Yen. However there is less volatility (as viewed in your own currency) if you hold the HBPP of your own currency.