Is there a cult of the equity investor (speculator)

Discussion of the Stock portion of the Permanent Portfolio

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6 Iron
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Is there a cult of the equity investor (speculator)

Post by 6 Iron » Tue Jul 20, 2010 12:13 pm

This blog post from seeking alpha is not comforting, but does support the agnostic, and diversified approach to investing of the permanent portfolio.

It can be summarized as a reflection on our country, and in particular, our financial services industry, having become centered on making money by doing nothing that adds meaningful goods or services to our economy.


http://seekingalpha.com/article/215312- ... vestor-die

I know that many recent posters are concerned about buying gold. I understand it, and I shared the concern. But once you have been in a permanent portfolio for a while, you realize that the world you want for your children is one in which stocks are carrying the portfolio. I have house insurance; I'd rather not use it.
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Re: Is there a cult of the equity investor (speculator)

Post by craigr » Tue Jul 20, 2010 12:50 pm

There is a cult like atmosphere with stock bugs. While I believe that portfolio growth is likely to be driven by company profits over time, I think it's also important to understand that the markets do not work on a timetable and that investors need to own a wide variety of assets to be successful. I also agree with the statement that there is this Warren Buffet myth sold to investors that they too can strike it rich by investing alone. Reality though says this just isn't true.  

Stock bugs are as bad as gold bugs by concentrating their wealth in a single asset class.  They'll talk about the diversification you receive by owning large cap, small cap, micro cap, international small cap, etc. But these assets all share common risk factors. It's as bad as a gold bug saying that to diversify you shouldn't own just gold, but also some silver and platinum to round things out. Neither approach is diversified and each has unique risks that can show up at any time.
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Re: Is there a cult of the equity investor (speculator)

Post by MediumTex » Tue Jul 20, 2010 1:14 pm

When an economy has a favorable demographic, economic and political environment and there is room to expand debt levels then stocks can make an investor a lot of money.  The U.S. in the 1982-2000 period had all of these things.

When an economy has unfavorable demographics, a poor macroeconomic situation, political strife and a huge debt overhang, then stock markets are typically going to struggle as the underlying economy struggles.  That has been the story in the U.S. since 2000.  The political situation in the U.S. is probably the least of its problems, but the dysfunction in that area is aggravating the rest of the picture.  When I say the political situation is the least of the U.S.'s troubles, I mean on a relative basis.  The U.S. is a remarkably politically stable environment, no matter what the talking heads on TV try to get you to believe.

It would shock me if the U.S. stock market started a new secular bull market before 2020.  It might, of course, and whether it does or not the PP will allow an investor to harvest equity gains as these nice equity bear market rallies periodically occur (as it did from early last year through early this year).  In other words, even if you are certain that stocks are going nowhere, stocks still have a role in a diversified portfolio such as the PP.
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Re: Is there a cult of the equity investor (speculator)

Post by 6 Iron » Tue Jul 20, 2010 2:32 pm

MediumTex wrote:
When an economy has unfavorable demographics, a poor macroeconomic situation, political strife and a huge debt overhang, then stock markets are typically going to struggle as the underlying economy struggles. 
With regard to poor macroeconomics, particularly when you combine our Keynesian government economic policies, and a financial services industry that has become so massively profitable and unstable, through derivatives and exponential debt leveraging. The chart from the article linked above showing the profits of the financial industry versus the economy as a whole is sobering, and tells me that we have not yet learned the lesson that this time has for us.
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Re: Is there a cult of the equity investor (speculator)

Post by LNGTERMER » Tue Jul 20, 2010 7:36 pm

"When an economy has a favorable demographic, economic and political environment and there is room to expand debt
levels then stocks can make an investor a lot of money.  The U.S. in the 1982-2000 period had all of these things."

When an economy has unfavorable demographics, a poor macroeconomic situation, political strife and a huge debt overhang, then stock markets are typically going to struggle as the underlying economy struggles


I totally agree with this assessment. In light of this chance coming to being do you think it's prudent to diversify our
25% stock portion so that it's equally divided between say US, emerging and developed markets?. The point is other
countries/regions might possess the growth characteristic when the US is lacking them. Is the fact the assets are $USD
denoted is what is rendering this point mute.
Last edited by LNGTERMER on Tue Jul 20, 2010 7:40 pm, edited 1 time in total.
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Re: Is there a cult of the equity investor (speculator)

Post by Pkg Man » Tue Jul 20, 2010 9:14 pm

My own approach, for what it is worth, is to keep the PP pure and only use US stocks.  But for my VP I heavily weight it towards international stocks, bonds, and currency.  I would rather do that than mess with the internal dynamics of the PP.  To me it is just one more insurance policy that I may never need but it helps me sleep better at night.
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Re: Is there a cult of the equity investor (speculator)

Post by KevinW » Wed Jul 21, 2010 2:53 am

LNGTERMER wrote: I totally agree with this assessment. In light of this chance coming to being do you think it's prudent to diversify our
25% stock portion so that it's equally divided between say US, emerging and developed markets?. The point is other
countries/regions might possess the growth characteristic when the US is lacking them. Is the fact the assets are $USD
denoted is what is rendering this point mute.
I also tend to agree with this assessment.  However, I don't think this is a reason to adjust the stock component for three reasons:

- The permanent portfolio already has an asset class for each possible economic climate in the domestic economy.  If these problems cause a lack of prosperity, then we'll be in some combination of inflation, deflation, and recession, and the PP is already prepared for those circumstances.

- There is a grass-is-greener aspect to these things.  We don't tend to read the news from other countries, so we tend to assume everything is going great.  I'll admit I didn't know anything about the problems in Iceland or Greece until after their economies were pretty much trashed.  As bad as demographics and entitlement liabilities may seem in the US, things are generally worse in Europe and Japan.  Yes, "emerging" countries have room to grow, but they also have a host of practical problems that make conducting everyday business difficult.  Trying to pick winning countries consistently is hard for the same reasons that picking winning stocks consistently is hard, so your investing strategy shouldn't involve trying to pick well.

- Some of our most prosperous times have come during, or immediately after, some of our scariest moments.  There is simply no way to predict these things.

That being said, anything goes in the Variable Portfolio.
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Re: Is there a cult of the equity investor (speculator)

Post by MediumTex » Wed Jul 21, 2010 9:07 am

LNGTERMER wrote: I totally agree with this assessment. In light of this chance coming to being do you think it's prudent to diversify our 25% stock portion so that it's equally divided between say US, emerging and developed markets?. The point is other countries/regions might possess the growth characteristic when the US is lacking them. Is the fact the assets are $USD denoted is what is rendering this point mute.
Two things:

First, I do 15% of my stock allocation in an international index (VGTSX), so I am getting international exposure there.

Second, U.S. multinational corporations have their fingers in every corner of the world where there is money to be made, so there is already significant international exposure in a U.S. stock index fund.
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Re: Is there a cult of the equity investor (speculator)

Post by MediumTex » Wed Jul 21, 2010 2:10 pm

craigr wrote:Stock bugs are as bad as gold bugs by concentrating their wealth in a single asset class.  They'll talk about the diversification you receive by owning large cap, small cap, micro cap, international small cap, etc.
I was thinking about this topic today and I remembered that great line from the Blues Brothers when they went into "Bob's Country Bunker" bar and asked what kind of music they liked.  The woman answered cheerfully: "Oh, we like both kinds--country AND western."

I think that stock groupies like Cramer and his minions are that way about the stock market.
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Re: Is there a cult of the equity investor (speculator)

Post by craigr » Wed Jul 21, 2010 3:50 pm

MediumTex wrote:
craigr wrote:Stock bugs are as bad as gold bugs by concentrating their wealth in a single asset class.  They'll talk about the diversification you receive by owning large cap, small cap, micro cap, international small cap, etc.
I was thinking about this topic today and I remembered that great line from the Blues Brothers when they went into "Bob's Country Bunker" bar and asked what kind of music they liked.  The woman answered cheerfully: "Oh, we like both kinds--country AND western."

I think that stock groupies like Cramer and his minions are that way about the stock market.
Yep. Many underestimate exactly how much small cap companies rely on business from large cap companies to be profitable for instance. There is no guarantee that these stock sectors will move independently of each other enough to have any meaningful diversification. An economy that is bad for large companies is likely going to be bad for small companies.
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what is the pct of US stock market non-US rev or profit?

Post by nomamesbuey » Tue Aug 17, 2010 12:07 pm

MediumTex wrote:Second, U.S. multinational corporations have their fingers in every corner of the world where there is money to be made, so there is already significant international exposure in a U.S. stock index fund.
Is there any site that calculates the percentage of non-US revenues &/or profits for a US stock index? 

In the S&P500 there are companies like Coca Cola or 3M or Apple or Caterpillar that in some cases even get the majority of their revs & profits from non-US.

OTOH there are also many purely or 90%+ domestic type companies, especially in the FIRE & health care services sectors, such as Bank of America & other 2B2F banks, Wellpoint Health Insurance, Utility company, Real Estate Investment Trusts owning half-vacant strip malls, US airlines, etc.
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Re: what is the pct of US stock market non-US rev or profit?

Post by foglifter » Thu Aug 19, 2010 4:23 pm

nomamesbuey wrote: OTOH there are also many purely or 90%+ domestic type companies, especially in the FIRE & health care services sectors, such as Bank of America & other 2B2F banks, Wellpoint Health Insurance, Utility company, Real Estate Investment Trusts owning half-vacant strip malls, US airlines, etc.
Some of the big banks as well as Delta and United do make money globally.
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