Gyroscopic Investing

As I was contemplating the real lesson of the PP is two fold:
1) at different times, different investment classes will do well
2) mechanical rebalancing takes the thinking and thus emotional factor out of investing

Put both of them together and you end up with an automatic profit.

Then I looked at the different investment classes and compared it to the time of writing and the events that took place during HB's life which presumably could have an impact on his book (1953-2001):

A) Stocks: stocks will in general keep trend with economic growth (or decline)

B) Cash: cash (fiat) does not do well over longer times, it tends to lose purchasing power. However the 20 years preceding the book, the USD did very well as it was the main export product of the US. In other parts of the world cash did very poorly because the absorption of the USD cash drove the local inflation up. To a certain extend the same was valid for other currencies of major economies. I thus think that HB's view of cash may have been too rosy. I wonder if HB ever addressed this topic in his broadcasts or interviews?

C) Bonds: the period from 1980 to 2001 was an exceptionally long stretch where bonds performed extremely well. Here there was imo another factor at work: technological progress coupled with cheap energy provided an exceptional period in which production could ramp up very fast indeed. This rapid growth in output was able to mask the detrimental effects of govt spending. This will only last as long as technological progress keeps translating into output growth. I personally think that technological progress has a long time to go, but the cheap energy to fuel the output growth may be at its peak. Hence I am less than sanguine at the prospects for a long term bull market in bonds.

D) Gold: HB lived in a time where the gold standard was exited. The 70s must have had an impact on his thinking. Gold was then the asset class to own, as long as you did not fall in love with it. Rebalancing was the key. (Just as it had been with stocks in the 50-60's)

All in all, I think it is not that difficult to see why HB choose the investment classes he did. The question for us is to find out if these are still the best classes going forward.

I have read on this board about broadcasts of HB. Is there someplace where I can find these?

Rien wrote: I have read on this board about broadcasts of HB. Is there someplace where I can find these?

Look here:
https://web.archive.org/web/20160324133 ... -archives/

The radio archives are great, you can listen to them while sitting in your easy chair!

Austen Heller wrote:
Look here:
https://web.archive.org/web/20160324133 ... -archives/

The radio archives are great, you can listen to them while sitting in your easy chair!

Unfortunately that website is down. Maybe it will come back later? I'll give it a try later

Rien wrote:
Unfortunately that website is down. Maybe it will come back later? I'll give it a try later

Ah, its working again. Thanks!

In essence, it seems you're saying that bonds, cash, and gold have all experienced one-time bubbles that made them dramatically overperform their historical averages. I don't think that's true, because I think you're missing the assets' strong connection to interest rates and overemphasizing political factors, which are omnipresent in one form or other, since the government is always messing something up.

When interest rates fall, bonds gain, cash loses, and gold gains if inflation is higher than the interest rate.

And interest rates have had strong movements in the past:


So as we should expect, since 1980 bonds did fantastically well, cash steadily lost its return as the interest rate fell, and gold exploded the moment the interest rate fell below the level of inflation. Looks like things are still working.

In response, the market-timer might say, "obviously bonds are in the shithouse; we should swap them out for cash to take advantage of rising rates!"

And such a person would have been right over the past 5 months. But how long will it continue to be correct for? Will bonds get destroyed as rates rise to the double digits due to rampant dollar devaluation and enormous government deficits? Will the rally falter when rates fall again as we succumb to the demographic forces that have impacted Japan? Will rates bounce between 4.5% and 2.5% for the next decade for unknown reasons that drive bond traders crazy?

None of us knows. We can make predictions based on our knowledge of economics and politics, but it's all guesswork.

As for gold, I think you're forgetting the most recent explosion in gold's value, which was clearly not caused by a country coming off the gold standard. IMHO, the 2000-2012 gold explosion was caused by falling real interest rates. And the reason for the pullback has been the recent rise in interest rates absent any meaningful rise in inflation.

Now, you might say, "well now I'm despondent! Interest rates are controlled by the Fed! three quarters of the portfolio is manipulated by a politically-driven gang of liars and counterfeiters!"

And you would be right. That's why we need such wide diversification. We need assets that gain when the Fed forces the interest rate down (bonds), assets that gain when they force it up (cash) and assets that gain when the rate of return is not a real rate (gold).

Great chart. It visualizes the 30-year cycle, one can assume that we can talk about sinking rates in 2033-2043 again  . 75% equities i`m coming. 

Rien wrote: Then I looked at the different investment classes and compared it to the time of writing and the events that took place during HB's life which presumably could have an impact on his book (1953-2001):

Your time span is not quite right.  Most of Browne's ideas about the permanent portfolio were published in his 1989 book "Why the Best-Laid Investment Plans Usually Go Wrong: And How You Can Find Safety and Profit in an Uncertain World".  So events that could have had an impact are those prior to 1989 - which in a narrow sense includes Nixon's closing of the gold window (and the resultant explosion of the gold price), the rampant inflation of the late 70s (during relatively constrained federal spending under Carter), and the reigning in of inflation in the 80s (during Reagan's massive deficit spending).  However, all of prior history was available to him as well, and he almost certainly studied it.

Pointedstick wrote: In essence, it seems you're saying that bonds, cash, and gold have all experienced one-time bubbles that made them dramatically overperform their historical averages.

No that is not what I intended to say.
I made the point that the factors in the time frame that influenced HB in writing what he did give a good explanation of what he wrote.
I also wrote that it is up to us to determine whether these factors are still favourable.

Btw thanks for the excellent chart, it illustrates perfectly that there are indeed long term trends. In fact, the trends are so long that they take up a significant portion of a normal investment career (say 50-70 years). Thinking in terms longer than, say, 100 years, can be good if you have to protect a family treasure, but it can be devastating if you want to save for retirement.

Also, keep in mind that this chart is for US citizens only. Other countries, other charts. Investing in bonds of another country introduces currency risk.

rickb wrote:

Rien wrote: Then I looked at the different investment classes and compared it to the time of writing and the events that took place during HB's life which presumably could have an impact on his book (1953-2001):

Your time span is not quite right.  Most of Browne's ideas about the permanent portfolio were published in his 1989 book "Why the Best-Laid Investment Plans Usually Go Wrong: And How You Can Find Safety and Profit in an Uncertain World".

I do not think that this matters, the same conclusions can be reached from that time-span.
If something had happened that would have invalidated these conclusions between 1989 and 2001, then presumably the book would not have been written.

Pointedstick wrote:Now, you might say, "well now I'm despondent! Interest rates are controlled by the Fed! three quarters of the portfolio is manipulated by a politically-driven gang of liars and counterfeiters!"

And you would be right.

Personally I do not believe that the fed controls the interest rates. The fed follows the rates as dictated by the market.

Maybe the market discounts the Fed's signals that it is going to change rates ?

annieB wrote: Maybe the market discounts the Fed's signals that it is going to change rates ?

The lag time is not always the same, so that seems unlikely. I would rather assume that both are generated by the same underlying cause. That cause is most likely the economy which forces the FFR as well as the market rates. Its just that the market can react quicker than the fed. If this is the case, then the fed is reacting not controlling.

Austen Heller wrote: The radio archives are great, you can listen to them while sitting in your easy chair!

I have been listening to the first few of them. They rank among the best podcasts I have heard on investing.
Thanks again.