Gyroscopic Investing

I have seen a couple of return comparisons between PRPFX and the HB 4x25 PP, but am unable to locate one at the moment. I would like to analyze why one approach either under/outperformed the other over a period of time. For example, PRPFX underperformed HB PP in 20XX because LTT rallied X%.

I don't have an analysis here. The basic takeaway is this:

1) PRPFX overweights inflation fighting assets like gold, silver and Swiss Francs. So during inflation it will outperform the 4x25 split.

2) The 4x25 split holds more stocks and less inflation fighting assets. So during a good stock market it will outperform PRPFX.

3) PRPFX holds less in LT bonds so during a deflation it will underperform the 4x25 and probably underperform in prosperity as well because bond interest is not contributing as much.

4) PRPFX has a much higher expense ratio than the DIY 4x25 portfolio. So expect, on average, around a +0.50% advantage to the 4x25 split over time simply because it's cheaper to run.

5) PRPFX has manager risk as they are actively picking stocks for their fund. The 4x25 split is just using passive funds so there is no worry about manager screw-ups, change of managers, etc.

PRPFX is fine if you don't want to manage your own money or don't have any options to do so due to the retirement plan you use, etc.. But if you can learn the basics of managing the 4x25 split version I think that's the optimal solution. There are just less moving parts involved and has a more neutral view towards each economic situation.

craigr wrote: I don't have an analysis here. The basic takeaway is this:

1) PRPFX overweights inflation fighting assets like gold, silver and Swiss Francs. So during inflation it will outperform the 4x25 split.

2) The 4x25 split holds more stocks and less inflation fighting assets. So during a good stock market it will outperform PRPFX.

3) PRPFX holds less in LT bonds so during a deflation it will underperform the 4x25 and probably underperform in prosperity as well because bond interest is not contributing as much.

4) PRPFX has a much higher expense ratio than the DIY 4x25 portfolio. So expect, on average, around a +0.50% advantage to the 4x25 split over time simply because it's cheaper to run.

5) PRPFX has manager risk as they are actively picking stocks for their fund. The 4x25 split is just using passive funds so there is no worry about manager screw-ups, change of managers, etc.

PRPFX is fine if you don't want to manage your own money or don't have any options to do so due to the retirement plan you use, etc.. But if you can learn the basics of managing the 4x25 split version I think that's the optimal solution. There are just less moving parts involved and has a more neutral view towards each economic situation.

Thanks Craigr. Points 2 and 5 concern me the most, along with having a substantial investment in a single mutual fund. I control for #3 by complementing PRPFX with additional LTT exposure. I was aware of the lower stock allocation, but did not expect the fund to lag in times of prosperity given holdings in natural resource, growth stocks as well as REITs. Number 5 is always of consideration with any actively managed investment.

craigr pretty much nailed it, I just want to throw in the current correct asset weight numbers:

1. PRPFX overweights stocks and bonds (both at ~30%). The higher share of stocks demonstrated itself in a deeper than HBPP dip in 2008. The bonds bucket is actually quite a beast: my quick analysis showed that only 60% of the bonds are Treasuries (i.e. 18% of the fund), the rest is split among 6% US agency debt, 8% corporates and a whooping 26% in foreign bonds (i think this is where those Swiss francs come to play - the prospectus actually mentions "Swiss Confederation bonds").

2. PRPFX spices up (or waters down  ;)) the gold bucket with 5% of silver - so the gold bullion only accounts for 20% of the fund.

3. PRPFX underweights cash down to ~15%.

All of the above tells you quite a lot about anticipated performance of PRPFX and explains its historical zigs and zags. I could go deeper and actually check the details of those Treasury bonds (I doubt they all are LTTs), but even without such a closer look one can tell that PRPFX is different from the classic PP. And while stocks, gold, silver and cash portions are more or less obvious, the bonds portion in my opinion is the most "screwed" - you got all kinds of additional risks (recall risk, currency risk). I don't know if one could rely on the PRPFX's bond bucket to perform in a way similar to the classic PP's bonds.

MediumTex brilliantly suggested to use 10% of EDV as a "purifier" for the 90% in PRPFX for those willing to use PRPFX as their PP. Not only you improve your LTTs ratio, you also reduce the equity part a bit closer to 25%.

And yet...

According to Paul Boyer last year PRPFX outgained HBPP by four per cent, 18.5 to 14.5.

longeyes wrote: And yet...

According to Paul Boyer last year PRPFX outgained HBPP by four per cent, 18.5 to 14.5.

That shouldn't be surprising.

Last year gold, silver and stocks all did very well.  PRPFX had all the right assets for a great year.

True enough.  Has anyone asked the founders of PRPFX (or Cuggino) what the rationale is for the way they've deviated from HB's 4x25 allocation?

longeyes wrote: True enough.  Has anyone asked the founders of PRPFX (or Cuggino) what the rationale is for the way they've deviated from HB's 4x25 allocation?

Harry Browne and Terry Coxon were the founders of PRPFX.  The current PRPFX mix was one of the model portfolios HB and Coxon outlined in their earlier writings (I believe it was "Inflation Proofing Your Investments" from 1981).  I believe HB also touched on the PRPFX allocation in "Why The Best Laid Investment Plans Usually Go Wrong."

In his later years, HB came to realize that the neutral 25% x 4 approach probably provide more safety than PRPFX and provided about the same returns.

As for Cuggino, he is a highly skilled bus driver.  I wouldn't direct any questions to him about the engineering of the vehicle he operates. 

MediumTex wrote:

longeyes wrote: True enough.  Has anyone asked the founders of PRPFX (or Cuggino) what the rationale is for the way they've deviated from HB's 4x25 allocation?

Harry Browne and Terry Coxon were the founders of PRPFX.  The current PRPFX mix was one of the model portfolios HB and Coxon outlined in their earlier writings (I believe it was "Inflation Proofing Your Investments" from 1981).  I believe HB also touched on the PRPFX allocation in "Why The Best Laid Investment Plans Usually Go Wrong."

In his later years, HB came to realize that the neutral 25% x 4 approach probably provide more safety than PRPFX and provided about the same returns.

As for Cuggino, he is a highly skilled bus driver.  I wouldn't direct any questions to him about the engineering of the vehicle he operates.  

HB talked about this on one of his investment radio shows. He said that there was some talk in the late 80's about PRPFX switching to HB's new and improved 4x25 approach, but it would've required a shareholder vote and most shareholders were happy with PRPFX's performance — the vote wouldn't have passed.

Plus, changing course would have made the "Permanent" in PRPFX seem, well... not that Permanent. You can almost imagine what the snarky headlines would have been: "The 'Permanent' Portfolio Changes Its Strategy"

Good bus drivers are hard to find. 

MT is correct. 

HB developed a general PP strategy between about 1978 and 1982, but it was not the strict 4x25 approach.  From his early books and newsletter (to which I began subscribing in 1980), my impression was that the original goal of the PP strategy was more to find a safe and hedged way to invest in gold, silver and Swiss francs -- investments he had strongly advocated in the 1970s -- than to come up with a comprehensive balanced portfolio.

In his pre-1981 books, he had occaisonally suggested specific ways to hedge hard asset portfolios against possible stock or bond market counter-rallies, but no overall strategy.  The 1981 book was the first one to seriously discuss possible deflationary outcomes and it presented several comprehensive models to be used based on one's general inflation/deflation expectations.  The combination used by PRPFX when it came out in 1982 was one of those models.

Throughout the early 1980's his thinking seemed to continually evolve toward more balance and simplicity and his writings increasingly stressed the unpredictability of the investment world and the importance of avoiding dogma.  His writings were a rather remarkable display of mental flexibility and intellectual honesty as he moved away from the 1970's "hard money" stance (which had originally brought him considerable fame) toward a more balanced approach.  Most of his 1970's contemporaries -- some of whom are still around -- could never seem to stop chanting the "runaway inflation is inevitable" mantra.  It was amazing and a little disconcerting to see him continuing to be disparaged as a rigid "gold bug" well into the late 1990's by people in the financial press who obviously had not read his work.     

HB Reader,

I hope you hang around a while.

These insights from a longtime follower of Harry Browne are priceless.

Thanks for posting.

I'm glad to see his work is appreciated. 

His first two investment books and "How I Found Freedom in an Unfree World" had a huge impact on me when I first read them in 1974 as a 22 year-old history major in Denton, Texas.  They initiated a series of changes in my life, all for the better.  I owe him far more than I ever paid for his books and newsletter. 

HB Reader wrote:His writings were a rather remarkable display of mental flexibility and intellectual honesty as he moved away from the 1970's "hard money" stance (which had originally brought him considerable fame) toward a more balanced approach.  Most of his 1970's contemporaries -- some of whom are still around -- could never seem to stop chanting the "runaway inflation is inevitable" mantra.   It was amazing and a little disconcerting to see him continuing to be disparaged as a rigid "gold bug" well into the late 1990's by people in the financial press who obviously had not read his work.

One of the most important reasons why I took Browne seriously on investing is that he had the maturity to evaluate his positions constantly and correct them if he found an error. This a remarkably rare trait in the investing world. As you point out, the same gold bugs in the 1970s talking about runaway inflation are, literally, saying the same exact things almost 40 years later. When people call Harry Browne a gold bug I just shrug my shoulders. If anything, he is probably one of the very few people that really understood how gold can work in a diversified portfolio in a realistic way. He was dogmatic when he needed to be but also pragmatic when needed as well.

HB Reader wrote: I'm glad to see his work is appreciated. 

His first two investment books and "How I Found Freedom in an Unfree World" had a huge impact on me when I first read them in 1974 as a 22 year-old history major in Denton, Texas.  They initiated a series of changes in my life, all for the better.  I owe him far more than I ever paid for his books and newsletter.   

I'll also add that his first investing book "How to Profit from the Coming Devaluation" still has one of the best descriptions on how the modern monetary system works along with basic Austrian economic theory. If you can find a used copy it is worth it just for that. In fact, his widow Pamela put out an e-book updated version he was working on that is basically the first half of his original book:

http://www.trendsaction.com/product.php ... 1299261922

craigr wrote: One of the most important reasons why I took Browne seriously on investing is that he had the maturity to evaluate his positions constantly and correct them if he found an error.

I think one of the hardest things about holding the PP in the future will be the feeling that there are things about the PP that may need to be corrected.  I suspect that most of the paranoid tweaking one might engage in will do little to help the performance of the portfolio (and will likely be harmful), but do wonder from time to time if there are things that may need to be eventually modified (although I can't really think of what). 

Anyone have any thoughts?

Adam1226 wrote: I think one of the hardest things about holding the PP in the future will be the feeling that there are things about the PP that may need to be corrected.   I suspect that most of the paranoid tweaking one might engage in will do little to help the performance of the portfolio (and will likely be harmful), but do wonder from time to time if there are things that may need to be eventually modified (although I can't really think of what). 

Anyone have any thoughts?

Yeah, this is always an interesting issue to speculate on.  I can think of two situations in which I'd definitely want to retrace through Browne's reasoning on the Permanent Portfolio and make sure that nothing fundamental had changed.  (I'd be doing that here with you good people.)

The first circumstance is a true return to a gold standard.  I'd want to think this through and consider what it'd mean for the Permanent Portfolio.

The second circumstance is the dollar losing its status as the world's reserve currency.

In either situation, I might find myself doing very little differently but I'd at least want to do the mental math required to be sure.

Major changes in tax treatment could affect the PP, as could confiscation of bullion.  Both seem far fetched today, but if the USA enters a period of major economic hardship (ala the Great Depression or worse) then nearly anything is possible.

The PP is designed for a world in which there is some semblance of a structured and orderly investment market--in other words, a still civilized world in which despite wide swings in volatility we are all playing by predictable rules.  When the markets dissolve and the rules are ignored, you will need more than non-correlated assets; the best portfolio will be (physical) gold, gardens, guns, and God.

Adam1226 wrote:

craigr wrote: One of the most important reasons why I took Browne seriously on investing is that he had the maturity to evaluate his positions constantly and correct them if he found an error.

I think one of the hardest things about holding the PP in the future will be the feeling that there are things about the PP that may need to be corrected.   I suspect that most of the paranoid tweaking one might engage in will do little to help the performance of the portfolio (and will likely be harmful), but do wonder from time to time if there are things that may need to be eventually modified (although I can't really think of what).  

Anyone have any thoughts?

You can waste an awful lot of time worrying about an infinite number of hypotheticals that will likely never happen.

To give you an idea, a Bogleheads thread was started with a similar question. And after thousands of comments and years of discussion, it was finally closed because nobody was able to successfully modify the Permanent Portfolio for the uncertain future. It's not worth worrying about those sorts of things. If something drastic ever happens, you'll be in better shape than 99% of the population.

I agree with Gumby that the PP isn't likely to need any "immediate tweaking".

I do think that it's useful to ponder on what might make the formula require adjusting.  A striking thing you find is that it takes big changes (like a return to a gold standard or complete breakdown of civil society) to necessitate a change to the PP allocation.

What I also find impressive is that even under the most stressful circumstances, the PP offers a great transition into whatever the "next step" might be in an ever-changing world.  For example, if there was a complete societal breakdown (extremely unlikely, but a useful example), the hefty 25% gold allocation would provide that individual the ability to transition to a PP-like allocation in a more stable political environment elsewhere.

Assuming you could access it and transport it.

There's survivalism and there's survivalism.

For me the questionable component of the HBPP is LT Treasuries in this environment.  I'm tempted, I admit, to use a timing model (moving averages) with the components because I find it hard to believe in LTTs with our current fiscal and monetary scenarios.

longeyes wrote: For me the questionable component of the HBPP is LT Treasuries in this environment.  I'm tempted, I admit, to use a timing model (moving averages) with the components because I find it hard to believe in LTTs with our current fiscal and monetary scenarios.

Note, however, that the premise behind the PP is that it isn't necessary to believe in any one of the PP assets.  You buy the package because you don't know which one is going to take care of you going forward.

Note, too, that the sentiment you express above would have been just as true in 1982, 1992, 2002 and 2009, but interest rates fell over that entire period in spite of the well-reasoned arguments that interest should have been rising, not falling, during much of that period.

As far as the belief that treasury rates can only go up from here, take a look at the U.K., German and Japanese 30 year bond markets and then take a look at those countries' unfunded liabilities and other fiscal challenges they will face going forward and ask yourself which yields look more out of whack--is it Japan at 2.20%, Germany at 3.70%, the U.K. at 4.40% or the U.S. at 4.58%?

Normally this much negative sentiment comes right before a move in the opposite direction of what everyone is expecting.

longeyes wrote:For me the questionable component of the HBPP is LT Treasuries in this environment.  I'm tempted, I admit, to use a timing model (moving averages) with the components because I find it hard to believe in LTTs with our current fiscal and monetary scenarios.

When I was first started my PP, someone posted a link to this quote by Peter L. Bernstein. It was invaluable to me:

Many years ago an associate said to me [that] you’re not really diversified unless you own something you’re uncomfortable with. It was a wise statement. Because if you’re comfortable with all your holdings, they probably have the same flavor and are going to respond to the same set of forces.

Bernstein also said the following in a completely different article:

We can speculate or calculate or estimate, but we can never be certain. Something very simple but very penetrating stems from this observation. If we never know what the future holds, we can never be right all the time. Being wrong on occasion is inescapable. As the great English economist John Maynard Keynes expressed it some 80 years ago, “A proposition is not probable because we think it so.”? The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes...

Investment management provides only one dependable way to survive through the uncertainty of the future: diversification. Diversification means owning assets that do not move up and down together—a portfolio designed to subdue volatility rather than to maximize returns, while still exposing you to the widest possible range of positive opportunities. (A colleague once suggested you are never adequately diversified unless you have some holdings that make you uncomfortable.) Placing large bets on an unknown future is worse than gambling, because at least in gambling you know the odds.

In other words, you should take comfort in the fact that one or more of your assets make you feel like vomiting — thats when you know you're diversified. You'll be covered whether you're right or wrong.

Gumby,

That first quote from Bernstein is as heavy as it is short.  I love quotes with that kind of density.

If gold suddenly came alive and crawled out of your safe, then proceeded to either fart interest payments or go out and manage a company better than Steve jobs ever could, with you reaping the dividends, the initial price explosion would be nice, but it would probably be time to sell it out of your PP and buy silver.