Gyroscopic Investing

The PP is based on the premise that economic conditions are not predictable.  Therefore, the PP is structured for various economic conditions.  However, if assets class returns are predictable for period of 3-5 years, then isn't the PP now irrelevant because one may simply look at the asset class predictions and invest to one's risk tolerance level in the asset that is likely to outperform?

If we assume that the 3-5 prediction may be made with a degree of certainty (I have not seen any information on the reliability of the predictions) then the only PP asset class that may remain relevant would be gold, simply for an unpredicted "black swan" events.

http://www.nobelprize.org/nobel_prizes/ ... es2013.pdf

If economic conditions are predictable, it's not just the PP that's dead, basically the entire investing world is turned on its head. Ask yourself why the biggest, richest players aren't using this predictive model if it's correct.

Problem is when this research hits the market there will be a lot of people trying to take advantage of it. So inefficiencies like this tend to be arbitraged away almost immediately. In a way, the portfolio already takes advantage of momentum because of the rebalancing bands as well. Often you aren't rebalancing except every couple-few years anyway and this can mop up a lot of asset price increases. So not having read their research in depth, I'm thinking it won't change things for most passive investors. It just shows, once again, that market timing and short-term trading is a bad idea.

Then there are the unknown-unknowns of the world as you mention. U.S. market data is great to looking at past trends, but the U.S. is a clear outlier in history. So I'm very leery of trending U.S. stock performance forward into the far distant future as a repeatable event. Sure it may happen and that's great, but the cynic in me says the world just doesn't work that way and the future gets in the way of all sorts of models/predictions. I will want to remain widely diversified still, and that also includes holding gold.

BP wrote: The PP is based on the premise that economic conditions are not predictable.  Therefore, the PP is structured for various economic conditions.  However, if assets class returns are predictable for period of 3-5 years, then isn't the PP now irrelevant because one may simply look at the asset class predictions and invest to one's risk tolerance level in the asset that is likely to outperform?

If we assume that the 3-5 prediction may be made with a degree of certainty (I have not seen any information on the reliability of the predictions) then the only PP asset class that may remain relevant would be gold, simply for an unpredicted "black swan" events.

http://www.nobelprize.org/nobel_prizes/ ... es2013.pdf

Most humans are unable to stomach the weekly or monthly volatility that comes from weighting towards a predictable outcome. Personally, I'd rather have the low volatility of the PP than try to have high volatility coupled with faith that an intermediate-term prediction was accurate. But, that's just me.

I have no doubt that a computer, which lacks emotions, could do a better job of investing than I could. Unfortunately, most of us are emotional beings that are pre-programmed to sell low and buy high — and then continually stress about it.

dragoncar wrote:You have doubt or don't doubt?

Whoops... I have no doubt that a computer could do a better job than me. (I'll correct the original post. Thx.)

Pointedstick wrote: If economic conditions are predictable, it's not just the PP that's dead, basically the entire investing world is turned on its head. Ask yourself why the biggest, richest players aren't using this predictive model if it's correct.

They don`t? Show me one big player which is currently in gold or long term US bonds?

The beauty of a mid-term prediction is it's close enough to possibly come true soon enough to make you famous but is far enough away to avoid exposing your pet theory tomorrow.

In any case, there's a big difference between predicting how something will generally do 3-5 years out and recommending immediate steps to get in and out to turn a maximum profit. 

And that's even before contemplating whether a widely-publicized prediction by a guy like Shiller will actually itself influence the market in ways not accounted for in the predictive model.  The "observer effect" in practice.  http://en.wikipedia.org/wiki/Observer_e ... physics%29

Economic conditions are predictable most of the time, just not always. And that is the problem. When the society is not close to a boundary the conditions will be predictable to a large degree. When we are close to a boundary unpredictability occurs.
We are currently close to the 0% interest rate boundary, and possibly an energy boundary.

frommi wrote:

Pointedstick wrote: If economic conditions are predictable, it's not just the PP that's dead, basically the entire investing world is turned on its head. Ask yourself why the biggest, richest players aren't using this predictive model if it's correct.

They don`t? Show me one big player which is currently in gold or long term US bonds?

Depends on your definition of "big player", but Jim Rogers is worth about $10 billion and holds a lot of of gold. I doubt he would go anywhere near a US long term bend however.

Rien wrote: Economic conditions are predictable most of the time, just not always. And that is the problem. When the society is not close to a boundary the conditions will be predictable to a large degree. When we are close to a boundary unpredictability occurs.
We are currently close to the 0% interest rate boundary, and possibly an energy boundary.

When you go back and look at economic forecasts with the benefit of hindsight, even in the middle of long term trends it is surprising how often they are totally wrong.

notsheigetz wrote:

frommi wrote:

Pointedstick wrote: If economic conditions are predictable, it's not just the PP that's dead, basically the entire investing world is turned on its head. Ask yourself why the biggest, richest players aren't using this predictive model if it's correct.

They don`t? Show me one big player which is currently in gold or long term US bonds?

Depends on your definition of "big player", but Jim Rogers is worth about $10 billion and holds a lot of of gold. I doubt he would go anywhere near a US long term bend however.

$10 billion?

Are you sure?

Rogers has made a lot of really really bad calls in recent years in his television appearances, especially around the topic of rising interest rates.  I hope he wasn't actually investing his own money acting on any of those predictions.

RyeWhiskey wrote:

BP wrote: The PP is based on the premise that economic conditions are not predictable.  Therefore, the PP is structured for various economic conditions.  However, if assets class returns are predictable for period of 3-5 years, then isn't the PP now irrelevant because one may simply look at the asset class predictions and invest to one's risk tolerance level in the asset that is likely to outperform?

If we assume that the 3-5 prediction may be made with a degree of certainty (I have not seen any information on the reliability of the predictions) then the only PP asset class that may remain relevant would be gold, simply for an unpredicted "black swan" events.

http://www.nobelprize.org/nobel_prizes/ ... es2013.pdf

Perhaps, but what happens when that one asset which was "likely to outperform" does no such thing? In short, what happens when the predictions are wrong? Most investors will panic and sell and hence the premise fails. The goal of investing, as I learned from HB and others, isn't to outperform but to secure one's future wealth. As Benjamin Graham said: "an investment operation is one which, upon thorough analysis, promises safety of principle and a satisfactory return."

Seems to me like the only people concerned with "outperforming" are taking your money in some way or another.

Then there is no such thing as an investment operation, because nothing can honestly promise those results.

notsheigetz wrote: Depends on your definition of "big player", but Jim Rogers is worth about $10 billion and holds a lot of of gold. I doubt he would go anywhere near a US long term bend however.

JR is not really my hero, but even he said that gold could drop to 900$. He is longterm bullish, but i really don`t want to be in gold when it drops below 1000$. 

source: http://finance.yahoo.com/blogs/daily-ti ... 54059.html

frommi wrote: i really don`t want to be in gold when it drops below 1000$.

That sounds like a good time to buy gold.  Shouldn't the idea be to buy low and sell high?  That's what the PP is based on.

I think folks may have misread the original post.  The work is not claiming that economic conditions (inflation, deflation, etc.) are predictable for a 3-5 year time frame, but that asset classes (stocks bonds, etc.) are predictable.

Therefore, if we assume that the 3-5 predictions are accurate (a fact that I have yet to find) then one would not need to worry so much about economic conditions.  For example, if one had a reliable predictions that gold would be negative, stocks positive, and long bonds negative, then the rational PP investor would consider dumping at least long bonds and perhaps adding cash or stocks depending on his risk tolerance.  To benefit from this information, one would continue to diversify per Markowitz and use the lowest cost index to reap the returns for the assets chosen for the portfolio, e.g., 25% stocks (TSM), 25% gold, 50% cash.

frommi wrote:

JR is not really my hero, but even he said that gold could drop to 900$. He is longterm bullish, but i really don`t want to be in gold when it drops below 1000$. 

Why $1000? 

MediumTex wrote: $10 billion?

Are you sure?

Sorry, my mistake.

George Soros was the one with 10 Billion in the article I read. JR, his ex-partner is at a measly 300 milion.

RyeWhiskey wrote: Sounds like an argument for market timing, if one can even make such an argument, doesn't it?

A friend of mine who is a financial adviser (translation annuity salesman), tells me that the PP (after I introduced him to it), is like having one foot on the gas and one foot on the brake.

So his point is that he knows how to take his foot off the brake and apply it to the gas to get better returns.

Next time we get together I'll ask him if he has ever heard of these Nobel prize winners. My guess is he won't have a clue (and neither will I). We'll just get drunk and sing Karaoke with our Filipino wives.

notsheigetz wrote:

RyeWhiskey wrote: Sounds like an argument for market timing, if one can even make such an argument, doesn't it?

Next time we get together I'll ask him if he has ever heard of these Nobel prize winners. My guess is he won't have a clue (and neither will I). We'll just get drunk and sing Karaoke with our Filipino wives.

*thumbs up*

On topic: Fama and Shiller are obviously (much) smarter than I am, but how is this any different than countless other models that worked until they didn't?

MediumTex wrote:

Rien wrote: Economic conditions are predictable most of the time, just not always. And that is the problem. When the society is not close to a boundary the conditions will be predictable to a large degree. When we are close to a boundary unpredictability occurs.
We are currently close to the 0% interest rate boundary, and possibly an energy boundary.

When you go back and look at economic forecasts with the benefit of hindsight, even in the middle of long term trends it is surprising how often they are totally wrong.

True, but then you are talking about mainstream economists. They work for either government or WS, so they have an agenda.

RyeWhiskey wrote:

Libertarian666 wrote:

RyeWhiskey wrote: Perhaps, but what happens when that one asset which was "likely to outperform" does no such thing? In short, what happens when the predictions are wrong? Most investors will panic and sell and hence the premise fails. The goal of investing, as I learned from HB and others, isn't to outperform but to secure one's future wealth. As Benjamin Graham said: "an investment operation is one which, upon thorough analysis, promises safety of principle and a satisfactory return."

Seems to me like the only people concerned with "outperforming" are taking your money in some way or another.

Then there is no such thing as an investment operation, because nothing can honestly promise those results.

I believe that both CDs and bonds promise those results, assuming that their return is 'satisfactory' to you... no? And many would argue that, in the long run, stocks can make that promise as well.

No, they cannot promise those results, because the currency in which they are denominated may be destroyed in the meantime.

i always enjoy listening to Shiller because his message usually seems to be that we don't know as much as we think we do and should adopt a more humble outlook about what markets are likely to do next.

I think its best to ignore macro (top-down) and just focus on micro (bottom-up), because that is what you have under your control. 

RyeWhiskey wrote:

Libertarian666 wrote:

RyeWhiskey wrote: I believe that both CDs and bonds promise those results, assuming that their return is 'satisfactory' to you... no? And many would argue that, in the long run, stocks can make that promise as well.

No, they cannot promise those results, because the currency in which they are denominated may be destroyed in the meantime.

That's not really an argument, though. Obviously the whole thing could come crashing down in which case the terms "investments" and "currency" are useless shells. I think it was quite clear what Graham was saying, and without abstracting out into the fact that all economies and societies are based upon shared meaning structures which could erode or explode at any time, he makes a fairly good and clean point.

Yes, if we could assume that currencies never become worthless, then investing would be a lot easier.

And if we could assume that we would never die, we wouldn't need life insurance.

Unfortunately, neither of these is true, so we have to deal with more uncertainty than would be true in a world where they were true.

The Permanent Portfololio is dead! Long Live the Permanent Portfolio!

(just kidding)  I think we probably need to wait a while before we bury the PP.  It has done well over the last 40 years, and even though this year has not been spectacular by any measure (down 3.4% so far), this is certainly not without precedent given there have been 8 previous drawdowns greater than 10% since 1972.  And it could still end the year in positive territory - no one really knows.

I'm not sure the prize actually drives an actionable market strategy beyond what is already common knowledge.  The work attempts to merge classical stock value theory (the CCAPM model) which looks at a rational stock value in terms of the present value of its dividend stream with the often irrational and newer "behavioral finance" - where stocks are often discounted or overvalued based on psychological mechanisms (aka the Dutch tulip bulb craze being one good example).

The classical stock value model (aka "value strategies") says stocks should not be as volatile as they actually are, but in the real world we see a lot of volatility - some driven by individual events, some by broader market events (like the government shutdown), some by money following short term price trends.  In fact this "market momentum" is the basis for most "technical trading" strategies which play upon trends in price moves.  Technical trading cares nothing for the underlying value of the stock, but instead exploits market psychology (momentum).

Both market strategies (value and technical investing) are very well developed already.

So what are some of their conclusions?  Markets are not entirely rational, nor are they perfect.  Prices reflect a combination of value and and an every varying "discount" factor that is often driven by behavioral psychology.  More reward is usually tied to more risk and more short term volatility.  Active fund managers can't really beat the market in the long term.  Index funds outperform most active funds.  Stocks and bonds generally provide good returns in the long term, but are unpredictable in the short term.

If any of those conclusions are a huge surprise to you - then read a few good books like "A random walk down wall street".  I don't find them all that earth shattering.  Any reasonably broad stock or bond portfolio will do well in the long term but be unpredictable in the short term.

The attraction of the PP is that it has provided returns similar to a classic stock-bond portfolio, but with a lot less volatility.  I really don't think the Nobel changes that a bit.