Gyroscopic Investing

William Bernstein's new book discusses the problem with alternative asset classes:  as they become better known and more liquid, the returns go down and the correlations go up.  He discusses the PP in this regard as well:

http://www.amazon.com/gp/aw/d/B00AKJ7WZM

Bernstein has a web article "wild about Harry"

http://www.efficientfrontier.com/ef/0adhoc/harry.htm

"Thus, it will be nigh-impossible for even the most disciplined investors to adhere to the TPP in the long run"

which did not leave me with a favorable impression of Bernstein even though I know he is supposed to be an excellent source of info.

Did he discuss the fact that this applies to people as well?

When Warren Buffett became a household name I figured the dramatic growth of Berkshire Hathaway stock was over (and it was).

Bernstein tends to be more objective about the PP than a lot of others, so I was curious to hear what he had to say.

I was a little disappointed in his (brief) critique, mostly because it's so schizophrenic.  At one point he says it has "a lot to recommend it" and at another that "there will be tears" (in reference to those who use the PP). 

The main idea of the book is that asset classes that are not correlated tend to become correlated once a lot of people discover them, so his critique is based mostly on asset class correlation. 

I agree that non-correlation is part of what makes the PP work so well, but I think it's the underlying reasons for this non-correlation (the 4 economic cycles) that make the PP work so well.  Bernstein doesn't even mention these is his book.

AdamA wrote:
The main idea of the book is that asset classes that are not correlated tend to become correlated once a lot of people discover them, so his critique is based mostly on asset class correlation. 

That's too bad...

If I remember correctly I have never seen a correlation matrix in any of Browne's work. I am not even sure if the word correlation is even mentioned... I should double check 

AdamA wrote: Bernstein tends to be more objective about the PP than a lot of others, so I was curious to hear what he had to say.

I was a little disappointed in his (brief) critique, mostly because it's so schizophrenic.  At one point he says it has "a lot to recommend it" and at another that "there will be tears" (in reference to those who use the PP). 

The main idea of the book is that asset classes that are not correlated tend to become correlated once a lot of people discover them, so his critique is based mostly on asset class correlation. 

I agree that non-correlation is part of what makes the PP work so well, but I think it's the underlying reasons for this non-correlation (the 4 economic cycles) that make the PP work so well.  Bernstein doesn't even mention these is his book.

It's interesting how people sometimes seem not to consider that there may be larger forces at work in an economy that are driving asset class correlations, and a small increase in popularity of one asset in relation to another couldn't possibly offset the macroeconomic forces driving the overall markets in the different assets.

The PP's assets are nothing like the relationships you see between different sectors of the stock market and different sectors of the bond market.

IMHO, there isn't enough "hot money" in the world to cause the long term relationships between gold, stocks, cash and long term bonds to break down over a long period of time.

Often when I am having a PP discussion with someone, I want to stop and say "Listen, it's a bit more subtle than you may be appreciating right now.  I don't think that you are seeing the whole picture yet based on the criticisms of the strategy you are offering."

The PP has macroeconomic fundamentals working in its favor in ways not too many other strategies do. I definitely think some weaknesses will start to show that will make starting a VP look more attractive, but as a core starting point for any investing strategy the PP is the way to go. There are too many good lessons built into Harry's logic around each asset to consider anything else focused on non-fundamentals.

IMHO, there isn't enough "hot money" in the world to cause the long term relationships between gold, stocks, cash and long term bonds to break down over a long period of time.

Glad to hear this.I had guessed,or hoped,this was the case.

Often when I am having a PP discussion with someone, I want to stop and say "Listen, it's a bit more subtle than you may be appreciating right now.  I don't think that you are seeing the whole picture yet based on the criticisms of the strategy you are offering."

The PP appears so simple that it's not to be believed.Darndess thing!

moda0306 wrote: The PP has macroeconomic fundamentals working in its favor in ways not too many other strategies do. I definitely think some weaknesses will start to show that will make starting a VP look more attractive, but as a core starting point for any investing strategy the PP is the way to go. There are too many good lessons built into Harry's logic around each asset to consider anything else focused on non-fundamentals.

I have often thought that an asset class weighting scheme in the VP to overweight one of the four core assets is the way to go, but just haven't had the will or energy to backtest such an approach yet.  After all, percentage gains are only marginal at a portfolio level even if larger in absolute terms.

MediumTex wrote: IMHO, there isn't enough "hot money" in the world to cause the long term relationships between gold, stocks, cash and long term bonds to break down over a long period of time.

I'm going to hold you to this in the years ahead because the gold market is minuscularly small.  It cannot take in any "hot money" without significantly breaking apart from the other asset classes.

Perhaps it has started already.  It is rather historically strange for stocks to be going up while real interest rates are negative.

MachineGhost wrote:

MediumTex wrote: IMHO, there isn't enough "hot money" in the world to cause the long term relationships between gold, stocks, cash and long term bonds to break down over a long period of time.

I'm going to hold you to this in the years ahead because the gold market is minuscularly small.  It cannot take in any "hot money" without significantly breaking apart from the other asset classes.

Perhaps it has started already.  It is rather historically strange for stocks to be going up while real interest rates are negative.

You're right that the gold market is small compared to the stock market and the U.S. bond market, but for whatever reason no one seems able to control it, even though controlling it would be in the best interest of the largest holders of gold in the world (i.e., central banks).