No video this week.
Well the fascination continues. We have dissected many aspects of the permanent portfolio and compared it to a few things including work done by Larry Swedroe (I found that comparison to be very interesting). Then late yesterday one reader commented that "Swedroe's port feels like Taleb has influenced his thinking."
Interesting. I have no idea whether the comment is true or not and I won't try to guess whether it is true but it makes for an interesting talking point. An accomplished and renowned thinker being influenced by another accomplished and renowned thinker.
I've written many posts about Taleb. I believe he has influenced my thinking some. I had long been aware of the concept of a few holdings doing a lot of heavy lifting for the entire portfolio (this is merely a different way of expressing put 90% in t-bills and go for broke with the other 10%). As this decade has been truly awful in terms of equity market returns Taleb's thoughts have garnered more attention.
All of these ideas about constructing a portfolio to go down less but still protect against inflation somehow are very intellectually appealing to people, hence the incredible amount of reader comments on the subject over the last week, but this idea does not complete the discussion.
If you are looking for a different way to do things then you must explore the possibility that you have been influenced by whatever amount you dropped during this bear market. Big changes that involve owning far fewer equities while the S&P 500 is still down 40% from its peak stands to be problematic.
At some point the market will roar again (maybe it is doing so now) and peoples apprehensions will fall by the wayside and just as people will have too little equity exposure at SPX 900 they will have too much exposure at SPX 2000 or SPX 3000 or wherever the next excess takes us. Hopefully people recognize this in themselves and others and can learn from it.
I tried to convey how while the details causing the decline may have been unique that the market dropped a lot was not unprecedented and will happen again in another episode. A lot of the writing here has been focused on trying to be more proactive (get defensive when the market goes below its 200 DMA, which occurred in December 2007) than reactive. One thing I have observed in too many places as the bear market was starting in 2007 and then all the way through is the general reactive nature of how people navigate these events.
A comment I made many times is how waking up one day, realizing you're down 40% and then asking now what do I do is a very bad place to be.
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11 comments:
I did notice that craigr from crawlingroad did refer to the "Taleb/Swedroe model" in his comment yesterday. He seems to imply some commonality of thinking or approach between the two, though the "wild crazy speculative risks" of Swedroe aren't quite so, compared to what Taleb might do.
All of this makes me wonder (borrow process) how I might merge Mebane Faber's five asset class model with the PP approach. One thought is simply to apply the 200 dma decision rule to the PP asset classes. Another might be to add a position in gold to Mebane's asset classes.
Thanks, Roger. Lotsa fun to explore.
Anon from the other thread, I found the following posted by "T" at his blog back in December:
"Some Permanent Portfolio holdings:
Bank of Nova Scotia (BNS)...one of the best of breed bank plays in the world
British Petroleum (BP)......gold plate energy giant
Chesapeake Energy (CHK).....exceptionally well managed large natural gas producer
iShares Switzerland (EWL)...look at the portfolio in this iShare for the long term
Goodrich (GR)...............management is first rate, now huge in "the air"
MDU Resources (MDU).........diversified energy, basic materials and utilities
Power Shares Water Resource ETF (PHO)..the world needs fresh water
Verizon (VZ)................the best run communications company
United Technologies (UTX)...super conglomerate worldwide
Encana (ECA)................the huge Canadian energy company, good Alberta exposure
Teppco (TPP)................MLP gas transmission now diversifying, bought more."
See the attached link for further comments:
http://investingfromtheright.blogspot.com/search?q=harry+browne
I thought I’d check on Harry Brown’s performance with his permanent portfolio. I’ve got a copy of the book “The Hulbert Guide To Financial Newsletters” from 1992. Hulbert tracked Brown’s permanent portfolio from late 1989 to 6/30/92.
This is about the same mix of assets people here are talking about,
and the time period includes the recession of 1990 plus a
few years of recovery.
He gained 31.8% over this time period. The Wilshire 5000 gained 89% over the same period. The Lehman Brothers Treasury index gained 56.6%. The portfolio had 41% of
the market risk.
With one third the performance of the market and 41% of the risk, the permanent portfolio underperformed the
risk adjusted market. Still, he did OK. But it would have been
more rewarding to take a bit more risk.
Just a different point of view from a different time period.
Another post by T in Sept 2008, just to give everyone a flavor...
As reported, during the unraveling of the worst of last week's financial crisis, money was looking for safe havens. Certainly, precious metals will fit that category, but I believe that for many investors a healthy dose of IShares' Switzerland (EWL) may worth a look to cure high anxiety.
First, the currency if Switzerland has traditionally been viewed as solid and less prone to wild the gyrations of a volatile financial crisis elsewhere. Second, I have always liked the portfolio of this ETF. The companies are gold standards in their league from top to bottom (EWL holds forty-one securities). EWL, while under performing modestly over the past several years, is poised for growth in a new, more fiscally regulated world. Third, EWL has never been a disappointment to me as a core holding in my permanent portfolio. Long term, being able to sleep at night is a feature not lost on the portfolio holding this ETF
"explore the possibility?"
Heck it's not a possibility, it's over half the reason. I'm always interested in new portfolio ideas, but my interest is probably double due to 2008 performance. It just seemed to hit home a lot harder than the drop earlier this decade. Not sure if it's 'cause I lost a lot more, 'cause I've got a wife and kids to take care of, or what.
As Oil is a bit of a cross between gold and stocks, another variation of the PP might be to blend equal parts of XOM, IAU, DOW, BIL, SHY and TLT
You end up with something like this
where the whole nearly cancels each other out, providing a smoother ride, but little in the way of capital gains.
You're then more dependant upon any rebalance benefits and income streams.
I suppose all of the stuff on asset class correlation can be traced back to Fama and French, the original deep thinkers behind MPT. I think someone (Bill B?) may have also referenced the DFA portfolios at one point, which personally I find more attractive because they make fewer large bets than the PP.
Nothing like time and responsibilities to sharpen the wits (and make one more risk averse). Way back when I was much younger and working a new gig I was told there was a pension plan but had no interest in contributing until it was mentioned the company would match and I could withdraw the savings later whereupon I thought, cool, a quick bump to my salary that I can pull out, pay a little penalty and party hearty on before I die: I look at that old pension a little differently now; amazing what family and a few decades can do to perception (to say nothing of compounding).
You are right Roger that people are heavily influenced by the recent crash - but this is how humans work ;) If the market roars up 60% and you only gather 20% then you have still paid a heavy cost. Though in the big scheme of things studying how to cover your left tail is much more important for long term investing health I would think.
I am not losing sleep worrying about giant rallies. Maybe this will make more sense if I tip my hand about where I think we are in the macro picture: c. Jan 1975. Which would mean anemic nominal stock market gains but inflation adjusted losses. Maybe we will see energy volatility, international strife and stiff economic competition in addition to high inflation. I just bring this up because I think it is important to prepare for turbulent sideways markets, not just straight up and straight down.
http://www.crossingwallstreet.com/archives/2009/03/43_years_of_no.html
Someone brought up 3 year performance of the PP in the Hulbert guide again today. I am not sure how useful of a data point this is, but the important thing to observe is that "risk" in this sense means standard deviation calculated over a short period of time. Imagine explaining what "risk" is to Taleb using this terminology ;) He would probably just think "Turkey" and walk away.
It would interesting if T would weigh in on what he had in mind yesterday. The excerpts today seem to suggest 'PP in name only', also EWL just tracked SPX in 2008.
"I did notice that craigr from crawlingroad did refer to the "Taleb/Swedroe model" in his comment yesterday. He seems to imply some commonality of thinking or approach between the two, though the "wild crazy speculative risks" of Swedroe aren't quite so, compared to what Taleb might do."
I referred to it as "Taleb/Swedroe" simply because I read and heard of the approach first from Taleb in his books and interviews. I have no idea if there is a commonality, but just suspect there was some cross-pollination going on.
Taleb advises using much different bets with out of the money options, etc. Swedroe tends to want to use historically volatile stock asset classes for his speculation. The idea though is to keep the bulk of your money very safe (80% or so) in T-Bills, TIPS, etc. Then to take big risks with your 20% knowing that you're may lose quite a bit, but when you win it will make up for the losses.
This portfolio requires a personality constitution that most people may not have which is why I think Swedroe doesn't push it too hard in his books. Taleb though has said in his past interviews that it's how he recommends people invest.
"All of this makes me wonder (borrow process) how I might merge Mebane Faber's five asset class model with the PP approach. One thought is simply to apply the 200 dma decision rule to the PP asset classes. Another might be to add a position in gold to Mebane's asset classes."
Harry Browne disliked the use of technical indicators for investing decisions. He never found they worked well enough to rely upon. Also, technical indicators can dramatically increase portfolio turnover which drives up the costs of running the portfolio.
The idea behind the PP portfolio is to have very wide diversification. Further, no asset class should ever be large enough that if it were to drop in half you'd be seriously damaged. With a 25% starting point for asset classes, a 50% drop in any one of them will only move the portfolio down 12.5%. This is assuming that no other asset spikes in price to offset the losses as usually happens.
There are many portfolio ideas out now trying to come to grips with the idea of "fat tail" risk reduction. I give credit to Harry Browne and his partner Terry Coxon who came up with the PP which was one of the first portfolio designs to really look into the matter closely over 30 years ago.
Another thing you may enjoy, when Terry Coxon and John Chandler started the Permanent Portfolio Fund in the early 1980s they had a real problem registering it in many states because it was the first fund to hold commodities directly (gold and silver). They had to make special trips to many states to meet directly with examiners and present their case. They ultimately were able to convince them that the idea of a portfolio holding hard assets was a sound approach and were approved in all 50 states. So if you're in a fund today that holds commodities as part of the asset allocation, you can thank Terry Coxon, John Chandler and Harry Browne for that, too.
In any event I'm encouraged to see people taking stock market risk more seriously and exploring all of these options that attempt to provide acceptable returns while reducing significant losses. I think many people will find, just as I found, that you can achieve very good returns with very low volatility with the right asset allocation. A stock heavy approach is not the only way to win the race.
Thanks again to Roger for his blog.
I hate to see Oil on Monday. What a mess!
http://www.comcast.net/articles/news-general/20090612/AS.Koreas.Nuclear/
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