Melding Graham and Browne: My PP + VP Approach

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Smith1776
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Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Mon Sep 02, 2019 3:47 pm

Hey all. I just wanted to share my latest thinking in approaching the PP and Browne's investment strategy. I don't want to write a wall of text in one post, so i'll separate this into two posts.

Thoughts on VP and PP

The first thing I'd like to note is that the discussion around the PP as of late has taken a lot of Browne's work out of context. Not so much by people on this forum, but certainly in other places where the PP is touched upon tangentially.

There are many such facets taken out of context -- such as the fact that cash is included in PP portfolio returns, but cash holdings are ignored by 60/40 investors. This distorts results. However, what I wanted to touch upon on this thread is how people have consistently ignored the importance of the VP in Browne's strategy.

The PP is about providing simple, stable, and safe returns; and it is for money that you can't afford to lose. PP detractors will point out that the overall returns of the PP in recent years are dwarfed by 60/40. This is true, but 60/40 has NOT historically proved safe for people who want a portion of their savings that they can't afford to lose. You never know when a deep drawdown might happen. The PP protects you from that.

However, you can't divorce the PP and VP and have a full picture of Browne's strategy. This is the mistake naysayers make all. the. bloody. time.

My VP has nothing but stocks in it, because I want to have some of the "fun" of security analysis, and I want higher long term returns.

No, it's not just mental accounting for two reasons: 1) the money in the VP is money I can afford to lose, and won't affect my life negatively if that happens; 2) the stock portion of the VP doesn't have offsetting volatile assets to makeup for losses in case 1929 revisits us. The stock allocation in the PP has protection. The stock in the VP does not.

This critical distinction between VP and PP equity holdings is super important IMO. Because it allows people to plan their financial lives in a much more granular way. It also means that people who lambast the PP for having lower historical returns than equity-heavy portfolios simply haven't taken the time to understand the nuances of Browne's thinking.

More traditional allocations have lost tremendous money during market crashes historically. A PP with an all stock VP might lose a similar amount of money overall during a crash, but the distinction between money you can afford to lose and not afford to lose gives the investor a wider array of mental equipment to put those losses in a constructive perspective. And perhaps most importantly, to not panic sell, because he knows all his VP stock holdings were money he could afford to lose, he keeps equanimity. The more traditional investor is probably in dire straits emotionally.
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Mon Sep 02, 2019 4:09 pm

Graham and Browne

The more I read about the stock portion of the PP, the more I'm convinced that Craig and Tex may have taken a slightly wrong turn in their book.

Browne has said in both Fail-Safe investing and How the Best Laid Plans that the stock portion of the PP should have greater volatility than the general market. I'm aware that he may have said "S&P 500 index fund" in his radio show, but I think that may have been more for the sake of brevity in discussion than anything else. I think if Browne were alive today, we really pushed him on the subject, and if he caught up on the latest vocabulary, he'd advocate for what we now refer to as a factor tilt in the equity allocation of the PP.

Yes, I'm reading into things a little bit, but I'm willing to stand on my statement. So, we've established that tilting is okay and even advised in my view. How to best do that?

I find it funny how the PP and VP concepts dovetail quite closely with what Benjamin Graham referred to as the approaches of the Defensive Investor and the Enterprising Investor in his book The Intelligent Investor. My favourite edition is the 1965 one.

In a nutshell, Graham in 1965 told defensive investors to look at a cross-section of large, prominent, and conservatively financed businesses, (in his example the DJIA) and to buy the 1/3 or maybe 2/3 of the issues with the lowest multipliers. That defensive classification is essentially what I'm doing with my PP via ETFs such as VVL (https://www.vanguardcanada.ca/documents ... vvl-en.pdf) and ZVC (https://www.bmo.com/gam/ca/advisor/prod ... file%2FZVC). So an overview for my PP:

- 25% precious metals (gold and silver)
- 25% long treasury bonds
- 25% low multiplier stocks (via VVL and ZVC)
- 25% t-bills

For the VP I'm actively implementing Graham's strategies for Enterprising Investors. Particularly, looking for bargain issues and so-called long-pull selections. My current three selections with any materiality are Canadian National Railway, Lululemon, and Berskshire B. This is satisfying my penchant for security analysis and looking at companies, while keeping the money I can't afford to lose safe in the PP. I will only have individual stocks in the VP. I'm finding this approach to be a very interesting and intellectually stimulating mind meld between Harry Browne and Ben Graham -- my two favourite investment thinkers. So, my current VP, which I will probably update in this thread as time goes on:

- Lululemon
- Berkshire B shares
- Canadian National Railway

What are you guys currently doing with your VP approach? ...and thanks to you and the kitchen sink if you actually read all this. O0
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Cortopassi » Mon Sep 02, 2019 10:12 pm

I've completely lost interest in trying to analyze, through whatever means (technical, fundamental, etc), individual stocks (I am 52). Probably because I sucked badly at it.

I have to question the "money you can afford to lose" statement. That is a disclaimer on stocks that might go to zero, but might become Amazon or Apple.

But I would have to ask, specifically, on your three:

- Lululemon
- Berkshire B shares
- Canadian National Railway

What is your long term strategy with them? If they drop drastically in a downturn, are you adding? Do you have an upside target where you'd sell? If you sell, are you moving onto other choices, or going to regret selling and get back in at possibly a higher price?

Perfectly fine to risk money for a moonshot, but you have to be able to stick it out and have some kind of exit plan to take gains and be happy with the gains even if it still keeps on going up.
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Tue Sep 03, 2019 1:13 am

Right, thanks for the input.

I, too, lost interest in doing any kind of financial analysis or looking at companies for a couple of years. Over the past little while my fascination with security analysis has made something of a comeback. The VP is a perfect place for me to partake in this mental exercise, while not endangering the money that I need to keep safe.

My current policy with my VP stock holdings is to simply continue holding them, adding more if the price/value equation looks attractive, but never selling.

Unless, I can see that the fundamental economics of the business itself is deteriorating. Then I will sell. If any of that sounds familiar, it's because it's almost a direct mirroring of Buffett's words on selling discipline. ;D

EDIT: I'll add, this thread makes for a perfect time capsule that will allow everyone to see how these stock selections have turned out as time passes.
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Fri Sep 06, 2019 3:04 pm

Update

The Lululemon bet has paid off handsomely as the market was impressed with the company's recent earnings results. Canadian National Railway and Berkshire are more or less holding steady.
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Obviously I did not know that this gap up in price was going to happen so quickly after starting this thread. It is nonetheless interesting to keep track of developments like a diary of sorts.
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Thu Jul 09, 2020 8:25 pm

Quick Update: I have made a modicum of profit from my three holdings in this little variable portfolio. Lululemon skyrocketed, Berkshire lost big, and CNR stayed more or less stable.

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I am switching gears and selling these three holdings. I'm now putting all of my VP cash into a gold mining stock index as of tomorrow. My vehicle of choice is Blackrock's XGD. I am wanting to make what is essentially a leveraged bet on gold. https://www.blackrock.com/ca/individual ... -index-etf

We'll see how my bet turns out!
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Hal » Thu Jul 09, 2020 11:37 pm

If you prefer to be an "Enterprising Investor", have a read of Grahams other book.

Also, this YouTube talk describes in detail the pluses and minuses of ETF's
https://www.youtube.com/watch?v=TTzXLIT__6U

HB views were formed in the Inflationary 70's and BG's views in the Deflationary 30's.
Both got through with their shirt on their back, so I find their opinions valuable
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Fri Jul 10, 2020 12:27 am

Hal wrote: ↑
Thu Jul 09, 2020 11:37 pm
If you prefer to be an "Enterprising Investor", have a read of Grahams other book.
Security Analysis??? Never heard of it. ;D ;D ;D (Can't help but share with a fellow fan!)

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Re: Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Fri Jul 10, 2020 12:29 am

Hal wrote: ↑
Thu Jul 09, 2020 11:37 pm

Also, this YouTube talk describes in detail the pluses and minuses of ETF's
https://www.youtube.com/watch?v=TTzXLIT__6U
You always have the best video links! Keep 'em coming!

Incidentally, I am a huge Michael burry fan myself. He's my favourite character in The Big Short. He's apparently also a Graham disciple. I think I identify quite a bit with him also because of his apparently awkward social manner and trouble with face to face relations.
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Hal » Fri Jul 10, 2020 1:38 am

Smith1776 wrote: ↑
Fri Jul 10, 2020 12:29 am
You always have the best video links! Keep 'em coming!

Incidentally, I am a huge Michael burry fan myself. He's my favourite character in The Big Short. He's apparently also a Graham disciple. I think I identify quite a bit with him also because of his apparently awkward social manner and trouble with face to face relations.
Just for you ;D
https://drive.google.com/file/d/1iF5Ofz ... 476n5/view

and one of my favourites (in case anyone thinks their job is dangerous!)
https://www.youtube.com/watch?v=tPGcOSvxv5Y

PS: Ever tried the Toastmasters clubs for public speaking. Really helped me socially as I came from a small town where where the only topics were sport and drinking....
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Fri Jul 10, 2020 5:40 pm

Hal wrote: ↑
Fri Jul 10, 2020 1:38 am

Just for you ;D
https://drive.google.com/file/d/1iF5Ofz ... 476n5/view

and one of my favourites (in case anyone thinks their job is dangerous!)
https://www.youtube.com/watch?v=tPGcOSvxv5Y

PS: Ever tried the Toastmasters clubs for public speaking. Really helped me socially as I came from a small town where where the only topics were sport and drinking....
Toastmasters... I think I went to one meeting in college out of curiosity. I didn't give it a "fair shake" though. I wonder if they're doing online Toastmasters these days. Dang, now I want toast.
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Fri Jul 10, 2020 5:41 pm

For posterity! My VP has all gold mining stocks via XGD now at this price. O0


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Re: Melding Graham and Browne: My PP + VP Approach

Post by buddtholomew » Fri Jul 10, 2020 6:47 pm

To be young with so much energy...

I have adopted the PP + VP approach but the VP is 2x the size and definitively not money I can afford to lose.

If these stocks truly represent a fraction of your wealth in relation to the PP then it’s a hobby and the results are only meaningful to you and your psyche. Remember not to replenish the VP from the PP and you should be insulated from too much damage :D
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Fri Jul 10, 2020 7:28 pm

buddtholomew wrote: ↑
Fri Jul 10, 2020 6:47 pm
To be young with so much energy...

I have adopted the PP + VP approach but the VP is 2x the size and definitively not money I can afford to lose.

If these stocks truly represent a fraction of your wealth in relation to the PP then it’s a hobby and the results are only meaningful to you and your psyche. Remember not to replenish the VP from the PP and you should be insulated from too much damage :D
Considering your fitness level and your workout routine I have a hard time believing you don't have energy!
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Re: Melding Graham and Browne: My PP + VP Approach

Post by Smith1776 » Mon Jul 27, 2020 12:24 pm

Update on my XGD (global gold mining stocks) bet in my Variable Portfolio. Total return since purchase has been just over 11%.


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Re: Melding Graham and Browne: My PP + VP Approach

Post by Hal » Mon Jul 27, 2020 1:11 pm

If this presenter is correct, you will be smiling :D

https://www.youtube.com/watch?v=v27qqzd7VRk
Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
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