Gyroscopic Investing

HARRY BROWNE: Bob — out in cyberspace asks — what combination of events were in effect when the Permanent Portfolio produced a loss? Well, over the last 35 years, the Permanent Portfolio has had only four losing years. And it has averaged a [annual] gain of 9% for all of the 35 years. Now, the worst year that it had was in 1981, when it lost 6%. And the reason it lost 6% was because that year everything went down. Gold went down, stocks went down, bonds went down, commodities, currencies — everything went down. But, of course, that's a situation that cannot sustain itself. It's a recessionary situation. And the following year, 1982, everything went up, and really sprang up. Gold had big gains, stocks had a big gain. Bonds even moved up a bit. And the result was that the portfolio gained something like 22%. I don't have the figures in front of me, but it was over 20%. And that was as unusual as the 6% loss was the year before. So, given the two years, there was a net gain — quite a big net gain — bigger than we should expect in an average year for the Permanent Portfolio. But that's the only time that I know when you really had an inundation of losses in all of the investments. And otherwise, we always have at least one winning investment that's strong enough to pull the portfolio upward. And so, I hope that answers the question.

JOHN CHANDLER: It does, Harry. I would like to add one thing and that is that the world doesn't really work according to the calendar. The calendar is there for I think maybe the benefit of accountants.

HARRY BROWNE: And to remember our birthdays.

JOHN CHANDLER: Well, something of that nature. A lot, a lot of harm has been done because of the calendar. And one of the harms is trying to make everything fit neatly into a 12 month, or four week, or seven day pattern. The idea of the Permanent Portfolio is is that it invests in asset classes, which respond differently in different economic conditions. The economic conditions that makes one thing goes down, is the same condition that makes another asset go up. But, here is the key and that is that it does not happen overnight. It does take time for these economic forces to take hold. And I rememember back in the seventies, early eighties when we were doing research on the Permanent Portfolio, we found periods as long as 18 months where the portfolio could lose money. But, now that was about the longest we found. Now bear in mind that this is not a promise. It's not a guarantee without — saying that with only 18 months it can work. I can simply say, during the periods when it was being tested. The prices... doing tests on the Permanent Portfolio and what would happen in the different situations over long, long, long periods of time — about 18 months is the maximum we found where the portfolio could lose money before the economic forces took hold and balanced the portfolio out.

HARRY BROWNE: Yes, if you were to invest on day one, you did run the risk that maybe you would not show a gain for 18 months. But, as you say that's a unique situation. An unusual situation. But, it was a possibility, and it must be recognized. But, in any event, we know that the portfolio does right itself, and it doesn't take very long. That's the value of the stability. You look at the chart of the stock market, and you see these rollercoaster swings. But, you don't see that in a chart of the Permanent Portfolio, and you can see that at my website. You can get to a chart of the Permanent Portfolio and you just see the slow steady growth. Stability is very important, because if it's not stable, you'r going to be tempted to abandon the whole approach, and probably at the worst time.

craigr wrote: I agree with John Chandler on this. The 12 month cycle is just for accountants to know how to keep the books. Otherwise for an investor it doesn't mean much. The markets are not a light switch and the movements can take time to sort themselves out. Watching daily, weekly or even monthly swings can really play havoc on the nerves. Same with looking at assets in isolation. There is a lot to control emotionally when managing your own portfolio.

Lone Wolf wrote: Good work, 6 Iron.  One day at a time, brother!   :)

craigr wrote: I agree with John Chandler on this. The 12 month cycle is just for accountants to know how to keep the books. Otherwise for an investor it doesn't mean much. The markets are not a light switch and the movements can take time to sort themselves out. Watching daily, weekly or even monthly swings can really play havoc on the nerves. Same with looking at assets in isolation. There is a lot to control emotionally when managing your own portfolio.

Craig, I was curious how often you check up on your overall portfolio.  I've been trying to get into a monthly groove of checking the PP (basically just doing it at the same time of the month that I make sure my paycheck went to the right place and that nobody's funneling money out of my accounts!)  Maybe I should be scaling that back to more of a "seasonal" check.

cowboyhat wrote: If you are an established accountant maybe take a welding class, or if you are a welder learn how to do the books. Backing up your professional life is probably worth more to you on a risk adjusted basis than tweaking an extra 1% portfolio performance. The new intellectual challenge will keep you occupied and probably help you forget about your portfolio.

6 Iron wrote: After reading some powerful angst on the PP=RBD thread, I am reminded of this commitment I made over 3 years ago. For the last year, I have decreased my frequency of portfolio checking to every other month, and next year I am going to quarterly. I cannot begin to tell you how much easier a down year is to take by doing this.

buddtholomew wrote:

6 Iron wrote: After reading some powerful angst on the PP=RBD thread, I am reminded of this commitment I made over 3 years ago. For the last year, I have decreased my frequency of portfolio checking to every other month, and next year I am going to quarterly. I cannot begin to tell you how much easier a down year is to take by doing this.

What emotions did you experience after updating the NAV and seeing a negative return?

buddtholomew wrote: Perhaps a New Year's resolution is in order 

6 Iron wrote: Honestly, a cold detached acceptance now.

dragoncar wrote: It's impossible for me not to look.  It's just not gonna happen.  I make pretty regular purchases.

dualstow wrote: It's a great idea to not look more than once a month, quarter or year, but as I asked in another thread, how will I know it's time to rebalance?
I get some emails triggered by major stock market movements, but I don't know how to set this up for the other assets.
Could someone please wake me when gold drops below 1200?