Gyroscopic Investing

A poll about PP has been added on Bogleheads forum. I cast my vote in the first bucket  .
http://www.bogleheads.org/forum/viewtopic.php?t=61663

As expected, majority of participants shun PP. But what amused me is the conversation about gold that follows the poll results. As with other PP assets, non-PP folks keep making the same mistake - they assess gold as a separate asset forgetting that the only way one should view PP is how all 4 asset classes work together.

Glad to be on the side of minority.

I also saw that post on the BH forum.  Very amusing.  Rick Ferri just keeps on beating the drum that "gold should be priced at $450" and "gold is not an investment since it pays no interest or dividends".  I understand his theoretical arguments, but in the real world, I've made a killing off of gold.  Wake up man!  So far Ferri has cost his clients some serious profits...hopefully he's making up for it with his stock picks.

Austen Heller wrote: I also saw that post on the BH forum.  Very amusing.  Rick Ferri just keeps on beating the drum that "gold should be priced at $450" and "gold is not an investment since it pays no interest or dividends".  I understand his theoretical arguments, but in the real world, I've made a killing off of gold.  Wake up man! So far Ferri has cost his clients some serious profits...hopefully he's making up for it with his stock picks.

Precisely. Although let's be honest - Rick Ferri is not a stock-picker: I actually enjoyed his book "All about index funds". He's one of the good guys at BH. It's just he dislikes commodities overall, but I think it's a mistake to treat the gold in the same manner. Gold is both a commodity AND money (real money). I think the fact that even smart people like Rick don't really "get" PP tells a lot about how controversial and hard to comprehend simple and genuine ideas can be.

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BTW, no need to add that 'of' after 'off'. I was puzzled for a long time seeing and hearing people use "off of" and then after some serious reading I learned this is one of those language traps - like affect/effect, etc. It's hard to be a perfectionist in this world - I always notice all those stupid "mens" signs in the department stores.
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It's very interesting watching Rick Ferri (IMO a very smart guy) more or less fumble around trying to understand the basics of the PP concept (again, IMO.)  Like foglifer said, the Permanent Portfolio isn't just gold or just stocks or just long-term treasuries (none of which I'd stake my retirement on by themselves!)  It is a package.  You must consider all of the pieces in the aggregate.

What's important to remember (and the thing that Ferri misses) is what the gold price really means and how it relates to the other investments.  Yes, absolutely, gold will at some point suffer a large loss of value.  But its price may first go to the moon.  On the other hand, it might crash tomorrow.  We just don't know.  If order, peace, prudence, and fiscal sanity take hold, gold will be in the toilet.  If so, great!  The world will be a happier place and I'll happily accept the stock and long-term bond gains that prosperity and a solid dollar will bring.  Rick Ferri's portfolio will gain more than mine, but I will do just fine.

Ferri is under the impression that the PP holds gold because we think it has a great historical rate of return.  He keeps attempting to debunk this "belief", but nobody in the PP really holds it.  Gold is included because of how it performs in situations that devastate the rest of a conventional portfolio.

Lone Wolf wrote: It's very interesting watching Rick Ferri (IMO a very smart guy) more or less fumble around trying to understand the basics of the PP concept (again, IMO.)  Like foglifer said, the Permanent Portfolio isn't just gold or just stocks or just long-term treasuries (none of which I'd stake my retirement on by themselves!)  It is a package.  You must consider all of the pieces in the aggregate.

Ferri is under the impression that the PP holds gold because we think it has a great historical rate of return.  He keeps attempting to debunk this "belief", but nobody in the PP really holds it.  Gold is included because of how it performs in situations that devastate the rest of a conventional portfolio.

Yeah, I gave up with him.  It is sad that he does not understand what many have repeatedly pointed out to him about assets in isolation vs. a whole, or that anyone should have to point out a fundamental like that to an author, expert, advisor.  That point is about every portfolio type, not just the PP.  (And that is actually the bigger point in that thread, not Gold alone.)  Yet it is an error made by so many "experts".  He seems a nice guy but for all his stated expertise and scholarship, his lack of certain basics is surprising. 

My guess is that many just don't "like" Gold or the PP or Cash or LT Treasuries or anything else.  Maybe someone told them so, or they read it by some expert, or that is their feeling.  Now, they can learn about something and alter opinions but say they don't. Know what?  I have more respect for someone who can't stand behind a strategy or asset class for emotional reasons than for faulty fundamentals.  Why?  Because emotions so often matter in whether one will commit to a plan, and it is better to choose something you can sleep with than face capitulation risk.  But when I hear faulty authority based on lack of fundamental scholarship, I'm less forgiving.

I'll start by saying it seems Rick Ferri is a nice enough guy and means well.  I have nothing against him personally.  But I do think a novice investor who takes his advice on gold is akin to the blind leading the blind.  Rick is a stock/bond guy and as he will tell you ad nauseum, he has "X" number of books and "X" number of advanced degrees to prove he's an expert. 

Problem is, Rick understands almost nothing about what gold is and why it works both in isolation and as part of a portfolio.  To make matters worse, his ego gets in the way of making rational decisions.  He's been wrong repeatedly and has been trounced in debates with numerous bogleheads contributors (most recently craig).  The truth is that there are long stretches of time when stock/bond portfolios underperform badly relative to portfolios holding gold such as the permanent portfolio.  1966-1980 and 2000-2010+ are two excellent examples.  But hey, as craig said, why let evidence get in the way of a good theory?

To all the permanent portfolio investors on this board, give thanks to Rick Ferri.  During times like these when someone's purchasing power needs to be plundered, thank your lucky stars it's Rick and his followers and not you.

For me, the proof is simply in the pudding.  When I first heard about the PP concept, it sounded crazy.  Then, I looked at the performance data and didn't believe it.  So, I re-created the entire 1972 to 2009 data and ran the numbers myself.  EUREKA!

I am thankful for the critics of any idea.  I listen to their arguments and study their data and see if they have a better way.  So far, for my circumstances anyway, I haven't seen anything that makes me want to change my core portfolio from PP.  I keep looking and I keep listening and I keep studying and I keep analyzing (sometimes to my spouse's chagrin) and if the day comes that I believe I have found something better, you all will be the second to know.

Personally, I am glad there are so many PP skeptics.  If there weren't it most likely would stop working.

Peace!

The main problem with Rick's argument is he's looking at the asset in isolation. He also argues about bubbles in the gold market as if they are unique to the gold market and not also stocks and other assets. If you are rebalancing the portfolio as you are supposed to then gold can be used to reduce volatility and even boost returns during certain periods. The evidence of this is plain as day. I was a skeptic at one time as well thinking that stocks and bonds are all that is needed. But any cursory review of history shows this to be absolutely false. All portfolios should hold stocks, bonds, cash and some kind of hard asset. IMO. A portfolio will not grow from holding hard assets alone, but the hard assets can provide protection in some markets where stocks and bonds are doing really lousy. Gold also provides the strongest protection against severe currency problems which can happen in any country.

Paul Boyer went to the Diehard's meeting and brought up the idea of holding gold in a portfolio. But not as a speculative gold bubble play. Rather, he mentioned the idea that it improves the risk adjusted returns of a diversified portfolio. But again the experts at the conference just kept focusing on the current gold prices and not in how it works in a diversified portfolio. However the current price of gold is a separate issue from what Paul really asked. What he was asking is whether gold plays any roll in a portfolio to add to diversification against stocks and bonds. He was not asking about whether gold is a good buy today which is a different topic for speculators.

Here is the audio:

http://MadMoneyMachine.com/2010/10/16/m ... boglehead/

I can't help but think that if someone stood up and commented on how high stock prices are that the response from the experts would be how you shouldn't try to time the market and stick to your asset allocation plan, etc. Pretty much the same thing Browne and I have always stated about holding gold in a portfolio.

The disconnect in the reasoning reflects the bias that these advisors have towards stocks and bonds regardless of the evidence. Moreover, this bias shows up in some of their other recommendations in asset allocations as well. For instance, Rick Ferri advises people diversify their bond holdings into corporate bonds, govt. bonds, junk bonds, mortgages, and even emerging market debt. This strategy completely blew up in 2008 and offered no diversification benefits during the market crash. I can't possibly see how owning bonds from emerging market countries like Brazil is less risky than owning gold in a portfolio. Nor can I see how owning bonds from shaky companies is any better. At least gold will never default and become worthless.

But, his bias is to hold stocks and bonds above all else so no other assets are ever considered. This colors his conclusions and makes him ignore very clear evidence that sometimes assets like gold can be a real life saver in a portfolio. This is true even though it doesn't produce interest and dividends like stocks and bonds.

craigr wrote: I can't possibly see how owning bonds from emerging market countries like Brazil is less risky than owning gold in a portfolio. Nor can I see how owning bonds from shaky companies is any better.

The whole thing is amusing and best understood by analyzing cults.

Their views on Gold are very much the same as when Taylor comments on Small/Value:  recency.  So Gold, Small and Value (outside of TSM approaches) are all devils, even as Small and Value are just lesser demons since they are included in TSM—but demons all.  Yet curiously, Rick recommends "shaky company" holdings of various kinds (that enjoyed nice recency), the absurdity of HY Bonds (that got pounded in 2008), and then says commodities don't work because they declined in 2008 (never understanding what negative correlation actually means).  But Rick mouths enough cult-speak and attends the ritualistic gatherings, so he can be seen as one of the high priests.  Rick's getting hammered in the poll, for good fundamental reasons, and the PP Thread getting shut down is an interesting bit of timing.  The fact that Rick, who is a self proclaimed researcher, author, etc. does not understand an investing fundamental that derive from Markowitz (who was given the Nobel Prize for it), matters not to the cult.  Again, I think he's a nice guy who means well, but still.

Then Taylor quotes the cult leader's works showing value and growth to be a wash—which papers have repeatedly been shown to be greatly flawed because he compares funds not stocks, or cites some other Total Markets, non-academic propaganda, or talking points torn from context from experts who in no way actually invest as many of the "commandments" say they should.  If anyone actually examines some of these quotes, and realizes what is omitted when comparing the quotes to the people who said them, it is really quite funny.

Now, I love Bogle and think he has done so much in many ways that now enable many strategies.  Yet even Bogle sometimes deviates differently from the commandments (as when analyzing stock valuations or the potential problems in Total Bond Market), and when that happens, they all proceed as if nothing ever happened.  And the mantratic talking points continue.

That all said, it's good they let the PP thread run long as it did.  Their board, after all...

Roy wrote: Rick's getting hammered in the poll, for good fundamental reasons, and the PP Thread getting shut down is an interesting bit of timing.

....snip....

That all said, it's good they let the PP thread run long as it did.  Their board, after all...

Oh boy... and it happened exactly today. Well, I hope we will see more like-minded or perhaps initially curious people on this board. As probably everybody else I do feel like an alien at BH because they are so tuned into their buy-and-hold religion and oppose any alternatives.

Good to be home.

Well, they can mock gold investing all they would like, but I'd like to see the real returns from their proposed portfolios from 1972-1980 - A period during which even international stocks only gained 2.69% annualized in terms of real gains.

Bonds and US stocks underperformed inflation over that period - 8 years!

The worst 8 year performance in Real returns for the PP was 2.64% from 1974-1981

A portfolio of 1/2 TSM and 1/2 Int'l gave a loss of 1.56% annualized from 1972-1979.  Adding bonds just makes it worse.

I'm open to criticism, but we haven't been introduced to any ideas which promote stability...  my only conclusion is that they don't have any.

Res Ipsa Loquitur...

I understand the conventional thinking about gold, even Fama and French subscribe to it http://www.dimensional.com/famafrench/2 ... folio.html.  Basically they argue that due to the consumption element (jewelry) it doesn't make sense to own it as an investment.  I disagree with that, but who am I to argue with Fama and French?  There are some academic studies that find otherwise, and I linked to one in a prior post somewhere or another. 

But I think that most people, like Fama and French, and Ferri, ignore the insurance aspect of gold.  This was stated nicely by Lone Wolf: "Gold is included because of how it performs in situations that devastate the rest of a conventional portfolio".