Nikkei - 27 Years, 0% Return

[Gumby]

Regarding the PP portion of your portfolio, if the PP were to take a 10%+ loss, would you stop-loss it?  Or would you view it as more fundamentally sound as-is and hope/plan for a quick rebound?

Harry Browne wrote about the pitfalls of using stop-loss (and other signals) in Why The Best-Laid Investment Plans Usually Go Wrong. He was a fan of using stop-loss orders for speculative purposes, but he was against them for non-speculative investing. The biggest problem is that you can often a false signal or a price reversal. You sell one asset and the next thing you know it goes up for the next 24 months. That would not be good.

That price-reversal flaw leads some people to use moving average systems instead. But he also shows that moving average systems can often give false signals as well — causing the investor to be jerked around with many buy and sell orders and sometimes even with accumulated losses after many transactions.

If you're going to use stop-loss or moving average systems, only do it with your VP.

[moda0306]

I agree... stop losses in a PP don't really mix.  In fact, it's almost the opposite (rebalance INTO hardcore lagging assets)... I was just wondering if Clive used them in his PP.

[MediumTex]

If you're going to use stop-loss or moving average systems, only do it with your VP.

If you moved to Japan in late 2007, taking $4m savings with you, and opened a PP in January 2008, buying $1m into each of the PP's four assets, then by year end 2008 stocks were down -42% and gold was down -16%. Over half a million $ lost in those two assets. Cash (ST) rose 0.8%, and LT's rose/declined +6%/-4% depending upon what stats you look at (10 year and 30 year maturity respectively).

That wasn't an isolated incident. 1990 stocks down -40%, gold down -10%. 1992 stocks down -21%, gold down -9%.

Phutt! Half a mill $'s blown, even if partially offset/compensated for (but not always) by LT/ST 

Yes I know you should consider the 4 assets as a collective set and have faith that over 2 or 3 years it probably will all work out ok - but Faith and Probably have a nasty habit of running into Judge Murphy.

How did other allocations with heavy Japanese equity exposure do during those periods?

When I look at the pitiful Japanese equity returns of the past 20+ years, and I see that the Fed is taking the U.S. down basically the same path Japan has travelled over that period (QE and low interest rates administered more or less continuously), it gives me the willies.

[AdamA]

When I look at the pitiful Japanese equity returns of the past 20+ years, and I see that the Fed is taking the U.S. down basically the same path Japan has travelled over that period (QE and low interest rates administered more or less continuously), it gives me the willies.

Definitely makes you want to pick a few extra gold coins!

[Gumby]

If you're going to use stop-loss or moving average systems, only do it with your VP.

If you moved to Japan in late 2007, taking $4m savings with you, and opened a PP in January 2008, buying $1m into each of the PP's four assets, then by year end 2008 stocks were down -42% and gold was down -16%. Over half a million $ lost in those two assets. Cash (ST) rose 0.8%, and LT's rose/declined +6%/-4% depending upon what stats you look at (10 year and 30 year maturity respectively).

That wasn't an isolated incident. 1990 stocks down -40%, gold down -10%. 1992 stocks down -21%, gold down -9%.

Phutt! Half a mill $'s blown, even if partially offset/compensated for (but not always) by LT/ST  :'(

Yes I know you should consider the 4 assets as a collective set and have faith that over 2 or 3 years it probably will all work out ok - but Faith and Probably have a nasty habit of running into Judge Murphy.

Or said another way.... a Japanese PP lost 12.5% after 2007.

I'm not sure that's a good enough reason to recommend that people jettison one of their PP's essential pillars. You can't guarantee that the worst pillar of a PP won't rebound at any given moment — that's why we hold 4 different assets in the first place. The stop-loss strategy is not a slam dunk since false signals or price reversals are always a possibility. One could just as easily accumulate even larger losses by removing a PP pillar.

The 4 assets aren't a magic collective mixture. There's actually a legitimate reason why each asset needs to be held at all times. Unless of course you've figured out a guaranteed way to eliminate one of the four economic conditions. Keep in mind that the Japanese constantly fear triggering high inflation with a BOJ misstep.

[Gumby]

The PP relies upon gold providing a hyperinflation hedge. In the German crisis it would appear that didn't work.

Huh? In 1918, 1 Gold Mark was equal to 1 Reich's Mark.

By 30 Nov 1923 1 Gold Mark was equal to 1,000,000,000,000 Reichsmarks.

Now, here's how the price of a loaf of bread increased from 1918-1923 (in Reichsmarks):

December 19180.5
December 19214
December 1922163
January 1923250
March 1923463
June 19231,465
July 19233,465
August 192369,000
September 19231,512,000
October 19231,743,000,000
November 1923201,000,000,000

Would you mind explaining how a 1,000,000,000,000 increase in 25% of my wealth versus a 402,000,000,000 increase in real prices doesn't preserve my purchasing power?

Obviously it would be risky to rebalance during a hyperinflation scenario (beyond the need for survival) — I don't think anyone disputes that.

[moda0306]

Gumby,

Right on... not a slam to Clive by any means, but way to collect and display that info for us!!

Now imagine if that's a reserve currency of the world and sovereign to the world's largest economy and military that's collapsing.

I think 25% will be more than enough.  The more I think of gold and central banks and the world economy, the more I think we can view gold on a very exponential type of scale in terms of its reaction when problems afflict our economy and central banks.

And I think it'd be interesting to try to imagine a point at which inflation/hyperinflation's self-reinforcing nature becomes completely destructive to a currency.... at that point the rebalance bands associated with cash and bonds are probably moot, as there's so little faith in the currency, that it can no longer be considered your "domestic currency" with a straight face, regardless of what the techincal definition is.

[Gumby]

not a slam to Clive by any means

Certainly not. We are all very much interested in Clive's opinion on this. Browne staked his reputation as an investor on the PP. I just have a hard time believing that Harry Browne didn't stress-test a hypothetical Weimar PP (or a Japan PP) when formulating and refining the 4x25 PP.

[moda0306]

Clive,

Aren't we forgetting to look at the German stock index, too?  I'm not saying it would have had real returns, but it probably wouldn't have been worthless like the Mark.

Further, if gold jumped exponentially on the German mark, can't we expect some kind of uber-hyper exponential move on the world's reserve currency going belly up?

[MediumTex]

One of the core premises of the PP is that the U.S. dollar is the most popular form of currency in the world, and gold is the second most popular.

With the rise of the euro, I think it's probably no longer true that gold is the second most popular currency in the world, but I think the basic premise is still sound--i.e., the PP is based upon investing in a strong currency, and if that currency begins to falter the PP picks up the slack through its gold holdings.

Using this logic, a PP with any strong currency is probably okay, while a PP using a weak or obscure currency is probably a lot riskier.

To me, the currency of a country that just lost a world war and is saddled with huge reparations and poor political leadership is probably not a currency suitable for a PP to begin with, since such a currency clearly doesn't meet HB's premises behind the PP that an investor is using the #1 and #2 most popular world currencies.

Where does this leave an investor in a country with a weak non-reserve currency?  I don't know, but perhaps such an investor should consider splitting his cash holdings between his home currency and some kind of basket of world currencies or perhaps U.S. dollars since that is still the primary world reserve currency.

[Gumby]

Clive,

Aren't you assuming that stocks and bonds and cash go to zero? I have a hard time believing that those other assets should be valued at absolute zero. (Although, who am I to say). While stocks tend to lose money in real terms, I would think that they should generally increase in nominal terms.

If company X is worth $10 Billion Dollars, I would think it should be worth something in the neighborhood of 100,000,000,000 times that after you revalue the company's assets. And rebalanced bonds should be paying some crazy amount of interest (even though not nearly enough). What do you think?

[moda0306]

Gumby,

The stocks point is one I made above and I think you're totally right.

Regarding the bonds/cash... I didn't think of that... while you are waiting for your gold to rebalance again in a quickly failing currency, let's not forget the fact that your cash has got to be paying insanely high interest rates, even if they're losing out to inflation... if anything, this is slowing the rebalancing process.

Can anyone find what savings account or money-market account (whatever they had in Germany at that time) interest rates were during this period?  It really would be interesting to see truly how much they lagged inflation.  Significantly to be sure, but a portfolio with 25% gold (leveraged reaction to inflation), 25% stocks (losing real value... but representative of a certain amount of assets and previously acquired debt, so can't be too bad), and 25% cash (something that refinances into going rates every day) have to be enough to make the PP reasonalbe in Weimar Germany.

So the big question... what was the inflation/interest-rate spread in Weimar Germany during the hyperinflation.

[Gumby]

Clive,

Thank you for sharing your new strategy. It's very interesting, indeed. So, if I understand you correctly, the Stop Loss itself is your deflation protection, correct?

16.6% S.AFRICA SL10(stocks) APR (demographics and foreign during sell in May (to Sept))

Since South Africa is below the equator, shouldn't you sell in November?