Canadian Couch Potato Interview

General Discussion on the Permanent Portfolio Strategy

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Canadian Couch Potato Interview

Post by craigr » Thu Sep 01, 2011 5:02 pm

I did an interview two weeks ago with The Canadian Couch Potato (aka. Dan Bortolotti) about the Permanent Portfolio. He has started posting the interview to his website. You can follow the links from here:

https://web.archive.org/web/20160324133 ... interview/
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Re: Canadian Couch Potato Interview

Post by craigr » Fri Sep 02, 2011 11:58 am

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Re: Canadian Couch Potato Interview

Post by Indices » Fri Sep 02, 2011 12:03 pm

Thank you for spreading the gospel Craig.
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Re: Canadian Couch Potato Interview

Post by Lone Wolf » Fri Sep 02, 2011 12:20 pm

Nice job, Craig, both in the interview and fielding questions in the comments.

It's funny to see how often the same questions come up.  (Gold mining stocks, why own assets with 0% real return, can I use TIPS instead of gold, etc.)  Even though they now seem cliche and clearly wrong to most readers of this forum, I can certainly remember most of them going through my mind until I took the time to think about them more deeply.
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Re: Canadian Couch Potato Interview

Post by MediumTex » Fri Sep 02, 2011 12:39 pm

Lone Wolf wrote: Nice job, Craig, both in the interview and fielding questions in the comments.

It's funny to see how often the same questions come up.  (Gold mining stocks, why own assets with 0% real return, can I use TIPS instead of gold, etc.)  Even though they now seem cliche and clearly wrong to most readers of this forum, I can certainly remember most of them going through my mind until I took the time to think about them more deeply.
The early stages of PP understanding is sort of like a game of pin-the-tail-on-the-donkey.

Patience is needed in bringing people around to what the PP is all about.
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Re: Canadian Couch Potato Interview

Post by moda0306 » Fri Sep 02, 2011 12:41 pm

Why should we believe that in the REALLY long run, a share in the ownership of a business would have the so much more value than a precious metal.  Since businesses arise from the human need to make an income to provide for needs & wants, as well as other humans to provide those wants & needs for value, not some "rule" that businesses are ultra-lucrative and perfectly judge the market decades and centuries into the future, why should we believe that all these businesses are thinking MUCH more short-term than we'd like them to be... that they're not accurately taking into consideration what demand may be in 5, 10 and 20 years for their goods or what the input costs or political environment might be at that time. I mean you're not going to hear that kind of long-term macroeconomic pessimism from CEO's, or at least not with any real thought put into it.  They don't use it for planning, or tell their shareholders (we're just going to stop making widgets so we can invest in long-term bonds, cash and gold for the pending future economic collapse... you can thank us later).  They work within a certain short-to-mid-term framework that simply doesn't give someone with one shot at life and 20 years of really good income much room to play with.

I mean this idea of "real return" is so neutered in terms of the intellectual curiosity outside-the-box thinking that it stops in its tracks.  Inflation could be measured as an increase in the money supply.  It also could be measured as an increase in the overall prices of a basket of goods.  Or somewhere in between.  Even having a basket of goods implies a biased view towards the average American's priorities, past, present and future... not to mention whether what the "average American" buys has any weight as far as what inflation rate I should impute onto myself or what my priorities and risks are.  It's a basket filled with nonrenewable resources, whose increase in price may not be a result of monetary policy, and it also holds consumer goods, whose decrease is probably not a reflection on whether life is getting more or less difficult, especially when you factor in improvements in those goods that make our lives easier.  A basket of these things may be a helpful metric to watch, but it hardly tells the whole story when it comes to our portfolios and what will provide "real return."

So we take all our human buying power and priorities and try to trap into this box called "real return" and it's easy to think of the PP as a joke.  Once you start to realize that to put the inflation/deflation debate into a CPI or money supply box is a gross oversimplification of our interactions and priorities in life, you'll start to realize the PP has a lot more merit than that investing jargon would lead you to believe.
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Re: Canadian Couch Potato Interview

Post by Indices » Fri Sep 02, 2011 12:42 pm

How many businesses from 100 years ago are still around? That should tell you how good stocks are for the long run.
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Re: Canadian Couch Potato Interview

Post by moda0306 » Fri Sep 02, 2011 12:52 pm

Ha...

Indices, I think that's an oversimplification, but it's a way to look at it.  This is why we diversify into a massive index that absorbs new companies as fast as it disposes of insolvent ones.

But in the end, this form of diversification will only get you so far.

Business in some form will always exist, but publicly traded securities in the form they're in now are hardly necessarily permanent, and even more risky, in some ways, than closely held businesses because there's this separation of ownership and management that creates this collectively (and conveniently) rosy picture of the future demand of their products.  Ford may admit that they need to shift their fleet to more efficient vehicles, but they're never going to buy oil futures in mass to prepare for collapse.  That's not their job, not what their shareholders are going to pay them for, and their narrative and plans are going to reflect that.

That's where the rest of our portfolios come in.  Because Ford, Microsoft and everyone else is offering us investments that fit within a certain view of future prosperity, we need to step back and realizing what is missing in their risk analysis, and cover that ourselves.
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Re: Canadian Couch Potato Interview

Post by MediumTex » Fri Sep 02, 2011 12:54 pm

Indices wrote: How many businesses from 100 years ago are still around? That should tell you how good stocks are for the long run.
It's funny how the basic insight that few investors or advisors seem to fully grasp is the following:

Stocks are great investments during secular bull markets, and they can be very poor investments during secular bear markets.

The whole "in the long run" narrative is irrelevant if you grasp the basic idea above.  In a secular bull market, you don't need to wait for "the long run" because you're making money right now.  In a secular bear market, however, "the long run" can easily be much longer than your investing time horizon (especially if you're over about 35 years of age).

I don't know why so few people seem to grasp this aspect of stock investing.  I also don't know why so few people seem to grasp that secular bear markets are as much about P/E compression as they are about static or declining corporate earnings.  You can pick a great stock with great earnings and in a secular bear market it can still go nowhere for years.
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Re: Canadian Couch Potato Interview

Post by stone » Fri Sep 02, 2011 1:03 pm

Craig, your PP analogy of sodium and chlorine making benign salt like the volatile PP components make a stable portfolio is really nice.
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Re: Canadian Couch Potato Interview

Post by moda0306 » Fri Sep 02, 2011 1:15 pm

That is a good one.

I like the band analogy too... alone, they may sound ok, but you really need all 4 together to get a perfect song.
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Re: Canadian Couch Potato Interview

Post by KevinW » Fri Sep 02, 2011 1:24 pm

moda0306 wrote: Why should we believe that in the REALLY long run, a share in the ownership of a business would have the so much more value than a precious metal.
Gold and cash represent pure, unused capital.  Equity represents capital put to use in combination with human labor.  I do believe that in the very long run, human labor and ingenuity works, and produces more than capital at rest.  The problem is that there are many short term setbacks and malinvestments made along the way.
MediumTex wrote: I don't know why so few people seem to grasp this aspect of stock investing.
I do believe in stocks for the long run.  The fly in the ointment is that "the long run" is defined as 100+ years.  Longer than anyone's lifetime and certainly longer than any individual's investment time horizon.  Longer than the heyday of any one company, sector, or even nation.  I think few people internalize this because few are willing and able to confront their own mortality and relatively insignificant role in the universe.

"Stocks for the long run" is useful for wealth that will last hundreds of years: dynastic wealth, endowments, etc.  But IMO anything with a time horizon shorter than three digits needs to be in a low-volatility investment, and the PP is the best low-volatility investment I've found.
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Re: Canadian Couch Potato Interview

Post by moda0306 » Fri Sep 02, 2011 1:26 pm

P/E Compression is huge... P/E is a tool with which we can price stocks and speculate, but it's one that's floating on an emotional market... one that uncontrollably sways between looking at past performance and looking at possible future outcomes.

Remember, with a 50% profit margin, it would only take a 20% reduction in demand for a company's product to reduce their earnings by 40%.

Depending on how much of the market is based on "want" vs "need," that 20% could be very easy to reach very quickly.
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Re: Canadian Couch Potato Interview

Post by moda0306 » Fri Sep 02, 2011 1:33 pm

KevinW,

I'll see your "very long run" and raise you a "very."  In the LOOOONNG run, there will be no humans... eventually we'll all be dead, in all reasonable likelihood.

So that whole system of rewarding risk comes back to nothing again.  All you can do is ride along the way with the time that's given to you.

The time that was given to those bornin the 40's has been much better than the time given to those born 18 years before the civil war.

I think we're dealing with a more profound case of recency bias to say to ourselves that stocks will outperform "in the long-term."
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Re: Canadian Couch Potato Interview

Post by KevinW » Fri Sep 02, 2011 2:39 pm

moda0306 wrote: I'll see your "very long run" and raise you a "very."  In the LOOOONNG run, there will be no humans... eventually we'll all be dead, in all reasonable likelihood.

So that whole system of rewarding risk comes back to nothing again.  All you can do is ride along the way with the time that's given to you.
This is nihilism, right?  Human civilization will eventually end, so any activity, thought, or attachment is pointless.  You can make that argument against *anything* that anyone wants to do, including investing, but also working, learning, having families and laws, and so on.  Suffice it to say I'm not a nihilist.
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Re: Canadian Couch Potato Interview

Post by moda0306 » Fri Sep 02, 2011 2:43 pm

I'm saying that society will go through an expansionary phase, and either come to a sudden end, or slowly decline.

1800-2000 were obviously part of an expansionary phase.

I wonder what a long-term decline would look like, with decreasing GDP, decreasing wealth, etc.

I'm just trying to think outside the box of economic expansion fuelled by growing populations and abundant fossil fuels..
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Re: Canadian Couch Potato Interview

Post by KevinW » Fri Sep 02, 2011 2:48 pm

moda0306 wrote: I wonder what a long-term decline would look like, with decreasing GDP, decreasing wealth, etc.
Well there's the perennial example of the late Roman Empire and the Dark Ages.
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Re: Canadian Couch Potato Interview

Post by Indices » Fri Sep 02, 2011 3:03 pm

KevinW wrote:
moda0306 wrote: I wonder what a long-term decline would look like, with decreasing GDP, decreasing wealth, etc.
Well there's the perennial example of the late Roman Empire and the Dark Ages.
It might not be that bad. Look at Japan. Low unemployment, just a lot of old people walking around.
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Re: Canadian Couch Potato Interview

Post by MediumTex » Fri Sep 02, 2011 3:05 pm

KevinW wrote:
moda0306 wrote: I wonder what a long-term decline would look like, with decreasing GDP, decreasing wealth, etc.
Well there's the perennial example of the late Roman Empire and the Dark Ages.
We have several thousand years of great examples.

Normally, a society runs into trouble when it encounters an unanticipated scarcity of its least abundant necessity, which is normally food or fuel.

To the extent that existing belief structures are built around certain assumptions such as "the gods will always provide us with enough food through good crops" or "there will always be enough wood for us to build our homes and heat them in the winter", when those belief structures begin to be challenged by a change in the underlying ecological conditions you begin to see a loss of cultural cohesiveness, which creates brittleness in societies and makes people even less well adapted psychologically to a changing world. 

In other words, it's bad enough that the gods have left me without enough food to feed my family, but the failure of the gods to do what I thought they were going to do has planted a seed of doubt in my mind about their ability to validate my society's basic belief system, which has made my feelings of insecurity even more acute and my suspicion of the authorities in society more pronounced.

Substitute "technology" for "the gods" in the paragraph above (and change the plural to singular) and you may have a sense of what the future of our current society might look like.

Joseph Tainter's "Collapse of Complex Societies" discusses the dynamics of de-complexification (I made that word up) in many different settings, including what triggers it and how it tends to unfold. 
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Re: Canadian Couch Potato Interview

Post by Lone Wolf » Fri Sep 02, 2011 3:11 pm

I'm very much the long-term optimist.  I hear all this stuff about long-term decline and the 80s baby in me just doesn't buy it.  We have the chance to harness and (perhaps in my lifetime) even construct enormous amounts of intelligence.  I think that we have some great times ahead of us (but unfortunately, some tough years dead ahead.)

But considering that how much of my standard of living and career is already tied to prosperity, in reality I'm much more than 25% tilted toward prosperity even as a Permanent Portfolio adherent.

Besides, who cares what I "predict"?  Certainly not me.  :)
KevinW wrote: This is nihilism, right?  Human civilization will eventually end, so any activity, thought, or attachment is pointless.  You can make that argument against *anything* that anyone wants to do, including investing, but also working, learning, having families and laws, and so on.  Suffice it to say I'm not a nihilist.
I agree.  In fact, everything you do is so important precisely because it won't all last forever.

The opportunities of the present are precious because eventually time takes everything from everyone.  We live in an insanely good world, but only for a little while.  No time to waste.
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Re: Canadian Couch Potato Interview

Post by moda0306 » Fri Sep 02, 2011 3:13 pm

Wow MT... I think I need to print that paragraph and put it up on my wall to keep me from getting too bullish on stocks whenever some handy indicator is crossed.

That was extremely well put and very true.

That is something you'll never hear from a parent, politician, teacher, CEO, or financial advisor, though.  It's refreshing to think a bit about what the true realm of potential possibilities actually is.

By refreshing I mean scary as hell.
Last edited by moda0306 on Fri Sep 02, 2011 3:25 pm, edited 1 time in total.
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Re: Canadian Couch Potato Interview

Post by Indices » Fri Sep 02, 2011 3:22 pm

This forum should produce a book. MT and Craig could easily produce one of the best books on investing ever written. I'd certainly buy a dozen copies.
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Re: Canadian Couch Potato Interview

Post by Indices » Fri Sep 02, 2011 3:25 pm

moda0306 wrote: Ha...

Indices, I think that's an oversimplification, but it's a way to look at it.  This is why we diversify into a massive index that absorbs new companies as fast as it disposes of insolvent ones.
I agree with you, but who is to say Vanguard or Fidelity or whomever will be around in 20 years? Vanguard has already strayed very far from its founder's vision in some areas. I'm sure they will stray further.
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Re: Canadian Couch Potato Interview

Post by MediumTex » Fri Sep 02, 2011 3:39 pm

Okay, LoneWolf, Help me reconcile these two comments:
Lone Wolf wrote: I'm very much the long-term optimist.  I hear all this stuff about long-term decline and the 80s baby in me just doesn't buy it.  

...

The opportunities of the present are precious because eventually time takes everything from everyone.  We live in an insanely good world, but only for a little while.  No time to waste.
What does it mean to be a long term optimist who also recognizes that time takes everything from everyone?

Part of the thrust of my thinking on some of these issues is not that social and cultural decline are the result of our moral and ethical failings, or the result of an insufficient amount of optimism to propel ourselves forward, but more a recognition that ways of life in general (and the folklore and thought patterns that accompany them) have their own life cycles, and when the assumptions on which a society is premised begin to be invalidated, it is normal for such societies to go from a state of vitality to a state of disrepair and decline.

In other words, just as "time takes everything from everyone", so too does time take everything from every human institution.  It's just a question of whether a certain way of life lasts 100 years or 1,000 years.  When checking the life expectancy of a human institution, its reliance on complex organization and its need for inputs of scarce resources are normally strong indicators of its durability in the face of Father Time.

Our current society is based upon one overriding and unchallenged premise, and that is that low cost energy inputs will always be available in whatever amounts we desire.  This basic premise has found its way into virtually all economic thinking through the blind faith in the endless substitutability of one resource for another.  Of course, this underlying premise can only animate our social and economic structures until it ceases to be true.  When the premise begins to be invalidated, one would expect to see a scramble for remaining resources characterized by political, cultural, and military conflict, which then spills over into other areas of life and begins to erode social and political cohesion in all societies that are affected by the resource competition from many angles.  I think that's where we are right now.

But there is still plenty of fun to be had today, no matter what tomorrow brings.  :)
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Re: Canadian Couch Potato Interview

Post by MediumTex » Fri Sep 02, 2011 3:50 pm

Indices wrote: This forum should produce a book. MT and Craig could easily produce one of the best books on investing ever written. I'd certainly buy a dozen copies.
I've thought about this a lot.  One of the challenges is to go from a type of writing where you wait for someone to ask the perfect question so that you can share what you believe to be the perfect answer, and beginning with a blank page on which no one has posed any questions and you must first prepare the reader's mind to understand what you think the perfect questions are, and then you can go on to share what you believe to be the perfect answers to these questions.

In a sense, the audience here is always "warmed up" and completely up to speed on a long-running discussion.  In that framework, good writing sometimes feels like batting practice.  If, however, you put someone in front of a crowd that is cold and knows nothing about the ideas the writer wants to share, the job is a LOT harder.

Craig has probably done a much more difficult kind of work with his blog, where he has continually written things for consumption by a "cold" crowd.

I obviously think that there is a coherent view of effective investing in the form of the PP that doesn't get near as much attention as it should.  Having something important to say that hasn't already been said a million times by someone else is a rare treat.  I really believe that most investors, if they could somehow have the PP explained to them properly, would instantly see that it is a near-perfect strategy for lots of people who just want a simple low-risk, low-stress approach to investing.
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