Gyroscopic Investing

I've been making my way through the massive PP thread on the Bogleheads forum and I just have to say that taking in the sheer volume of MediumTex's posts all at once makes you really appreciate how simple, articulate, and intelligent his writing is.  I also began to enjoy his elegant and at times artful writing style.  Around pages 30-50, I began keeping a record of some of my favorite quotes.  Feel free to share your own as well:

"What we are seeing right now is, to me, just a pile of ashes--the only phoenix is likely a hallucination brought on by drinking too much Fed kool-aid."

"The question is what will the PP do from here? I have no idea, but I do know that the probability is not high of a new secular bull market for stocks coming out of the smoldering ruins of an overleveraged economy with burst housing and credit bubbles and in which shellshocked financial institutions and consumers are all staggering around the debt-scorched landscape like a gaggle of punch-drunk zombies."

"The PP is in some ways almost too simple for its own good. It vexes the mind accustomed to a world of Rube Goldberg devices."

"We have right now what you might call a 'Joan Rivers Economy.' It's an economy that desperately wants to cover up its age and convince everyone it can still do all the things it used to do. The price of this charade is, however, a collective delusion about the actual state of things and how far we really are from the salad days."

"In a serious inflationary episode, TIPS will provide about as much protection to your wealth as a copy of the Constitution will provide against a bayonet thrust."

"Here's another nice TIPS analogy: they're a bit like a bulletproof window that no one has shot at yet. The question is not whether the glass is strong (it's undoubtedly very strong), the question is whether you are comfortable standing on the other side of it when someone starts shooting at it. "

"Think of the PP as a Toyota Camry with a 96 month bumper to bumper warranty and five star side, front, top and bottom crash test ratings. VWINX and VWELX are also good funds. I think of VWINX as sort of like a Honda Accord LX with the standard warranty (think of VWELX as the EX model)."

"I think that one should treat the PP like a marriage. There will be ups and downs and there will be those days you want to kill it, but if you can remember what attracted you to it in the first place it will help you get through the difficult times. As with a marriage, be cautious about letting your eye wander and chasing returns. Some people say don't get married to a strategy. Although that's true with respect to many loose and trendy strategies, I think that the PP is a strategy that you can take home to mama (she might decide to use it as well)."

"Gold is sort of like the mini-skirt or bell bottom of the investing world. When it's out of style, it WAY out of style, but when it comes back around everyone wants to get in on it."

"Much of modern finance is structurally similar to a game of musical chairs."

"Think about it like this: Let's say you're at the beach and you see an enormous wave begin to form far off shore. At first, you think to yourself 'Oh no, this huge wave is going to kill us all.' As you are pondering that, however, out of the corner of your eye you see a big and rugged lifeguard with Ben Bernanke's head stroll up to the edge of the water with a 'Sham-Wow' in each hand. He calmly turns to the crowd and says: 'Don't worry everyone, it's going to be okay. I've got the tools to take care of that wave. Just get back to your beach fun.'"

"As far as alternatives go, some prudent investors say that just buying Wellesley or maybe doing a 50/50 VTSMX/VBMFX mix is hard to beat, but I personally believe that the best approach right now is the "Galactic Emerging Digital Technology Age Market Flux Capacitor Optimized Ultra-Hedged Strategy", which utilizes a warehouse of fortune tellers, tarot card readers and Oija board experts in Malaysia to provide superior returns at very low risk."

"The hubris, the attitude, the tragedy...it's like Tom Cruise's character from 'Top Gun' playing the lead role in 'The Flight of Icarus.'"

"For the longest time I thought all Europeans looked like the bad guys from the first 'Die Hard' film."

Awesome.  Though we've barely scratched the surface.

MT's entertaining and insightful posts are what keep me coming back here.  He is like the Hunter S. Thompson of the investing world. 

"Here's another nice TIPS analogy: they're a bit like a bulletproof window that no one has shot at yet. The question is not whether the glass is strong (it's undoubtedly very strong), the question is whether you are comfortable standing on the other side of it when someone starts shooting at it."

This is just beautiful.

Wow guys.

Thanks for the walk down PP memory lane.

When you have written a lot on a topic you don't necessarily remember everything you have written.  I enjoyed reading a lot of those quotes as well, as if someone else had written them.

Part of what makes it easy at times to come up with great quips is when you are discussing a topic with a lot of sloppy thinking sloshing around.  When it comes to investment advice, many of the fortune tellers are not aware that they are fortune tellers, and thus wander around wearing the mental equivalent of a sorcerer's robe and pointy hat.  When you start to calmly discuss the merits of sorcerer's robes and pointy hats as a way of providing better investment returns it can seem like you are the clever one, when in reality it is the guy wearing the robe and hat that has provided the real entertainment.

Have you gotten to TIPSymandias yet?

First-class stuff!  Thanks for bundling all of these up.

Edit: And, uh, thanks as well to MT for actually writing them in the first place.    You have a superb way with words.

A note.... WVINX has outperformed PRPFX YTD. 5.7% to 4.8%.  I own lots of both and have VWINX put away for g-daughter's college. I still think PP a better pick, safer maybe.

VWINX should not be compared to the PP.  Would you have wanted to be sending your daughter off to college in 2008?



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MediumTex wrote: When it comes to investment advice, many of the fortune tellers are not aware that they are fortune tellers, and thus wander around wearing the mental equivalent of a sorcerer's robe and pointy hat.  When you start to calmly discuss the merits of sorcerer's robes and pointy hats as a way of providing better investment returns it can seem like you are the clever one, when in reality it is the guy wearing the robe and hat that has provided the real entertainment.

That's another good one.

Storm says VWINX should not be compared to PP and I would not want to own it in '08. Well, someone else mentioned VWINX and I thought it worth noting it was doing well. PRPFX is my largest holding, I hold a lot.

I'll cannot help but note there was a long time, a real long time the PP did not perform, I mean years. No, I'm not looking it up.

pershing83 wrote: I'll cannot help but note there was a long time, a real long time the PP did not perform, I mean years. No, I'm not looking it up.

You are probably thinking of the PRPFX chart from the 1990s when it appeared as if the fund was more or less flat.  During those years, however, the fund was making large distributions compared to what it has been doing in recent years.  In other words, the chart alone is misleading, though PRPFX did have some weak years in the 1990s (just not as weak as the chart makes it look).

As for the Harry Browne permanent portfolio, it has performed reliably year in and year out for decades. 

Anyway the fact remains we are in uncharted waters. I would guess we will be lucky to see again the "perfect storm" the led to PP's rise this past 10 yrs and particularly since '08. PRPFX represents 35% of my net so I have every right to bring this to the board's attention. The board seems a bit naive IMO about the the PP; I think I'm just being a realistic.

I will be delighted if we do 8-9% this year, the course we are on now. How many on the MB have 100% of their portfolios invested in a PP? None would be my guess.

MediumTex wrote: You are probably thinking of the PRPFX chart from the 1990s when it appeared as if the fund was more or less flat.  During those years, however, the fund was making large distributions compared to what it has been doing in recent years.  In other words, the chart alone is misleading, though PRPFX did have some weak years in the 1990s (just not as weak as the chart makes it look).

This chart includes dividends (from Morningstar).

pershing83 wrote: The board seems a bit naive IMO about the the PP...

How so?

Well, heh, heh, PP can do no wrong.

I was thinking on how MediumTex adds 10% EDV Long Bonds to PRPFX and wondered about a similar (10%) modification to VWINX.  Lots of folks like VWINX, though its historical returns could have been replicated with index funds—say, 40% Large Value and 40% IT Treasuries plus 20% LT Treasuries, and for less cost, and with a far happier 2008.  Point being the success is mainly about low-cost and its basic asset allocation.  But that's another story.

Still, VWINX has done well but some of its fans worry about rising rates and inflation.  Looking back (for whatever that is worth), a small amount in Gold took the sting out of bad inflation years, though not much help in the 2008 deflationary hit.  Still, for those who care about a smoothing effect or reducing the impact of the VWINX downside years, the Gold helped in every VWINX down year, but at the cost of upside in some very good years.  Overall, whether using Gold or CCFs, some volatility protection was had in basic Stocks and Bonds portfolios, and, as Craigr suggests, conventional investors might wish to consider a small allocation to Gold (Larry still prefers CCFs but has softened a bit in the anti-gold discussions, acknowledging there are portfolio improvement "hedging" similarities to holding either).

I'm guessing Tex's Long Bonds helped PRPFX more than Gold did VWINX, but would need to see the returns.  Since inception with 10% Gold, VWINX was still over 10% CAGR.


Overall, the attraction of one-fund portfolios (like VWINX or PRPFX) is that it is harder emotionally to partile "the horror" when individual asset classes decline, which has its benefits. Since I never underestimate the emotional, if holding just one fund helps stay the course, so be it. And even if a 10% add-on, improves the portfolio, if the cost is fretting over that wee 10% when it gets crushed, then that capitulation threat is something to consider.  Thus, the addition of just one little fund to a base holding might be worse than having, say, four distinct funds equally-weighted.
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I have some highly successful portfolio managers and brokers as clients.  I showed them the HB PP with its yearly returns through 2010.  One (a bigtime "young gun") loved it but immediately showed me how he thought it could be improved with Oil and High Yield Bonds (and spent some time on it), until he was illuminated when observing occasions when the correlations turned brutal.  Another, a money manager over 60)  also loved it but felt he wanted the ability to manage it—as needed.  The third (the best broker at a major house and a veteran of 50 years in the field and numerous downturns) simply did not believe the portfolio returns possible, even as he could have had his people look up the four-asset individual returns as I urged him to do;  he actually thought I made it up to tease him, and that in any case, I had to be wrong.
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I agree with Pershing that we are in "uncharted waters".  My belief is that we are always in uncharted waters, especially when assessed at the very time one is swimming through those waters.  The comfortable charts always follow in the calm of ex-post, when all is clear, obvious.

pershing83 wrote: Well, heh, heh, PP can do no wrong.

Interesting perspective...

A large portion of the posts are spent obsessing, in minute detail, about hypothetical scenarios in which the PP may fail.

Pershing,

If you look a little closer, you'll realize we're constantly analyzing possibilities based on history and based on likely and possible future events. Our opinions of macroeconomics, often, aren't simple and say "the PP can do no wrong."

The last 10 years haven't been a "perfect storm."  

- Gold's rise has beaten inflation, as its 13 year decline obviously tremendously lagged inflation during a disinflationary prosperity.  Do you find what gold has done to be unreasonable?

- Stocks have barely done anything in the last 10 years.  I guess that will naturally help the PP vs coffeehouse, but that's why the PP is there to begin with... to protect us against long stock market lagging periods, which have shown to happen several times in our history.

- Cash has had pretty measly returns

- Bonds have had relatively modest returns

I don't disagree that the PP may have problems beating 8-10% consistantly over the next 10 years, but at some point you have to dive into the individual assets, look at what else is out there, and ask yourself what's going to make the portfolio lag.

You're welcome to join in the debate of what you think the different assets may do in possible future economic cycles, or what those cycles are likely to be, or whether gold is completely out of line... but I think you're simplifying most of our opinions.  We have a suprising diversity of thought on here if you take the time to see where we debate some of these issues.

Pershing,

One last thing I'd add, is that when you think of the fact that HB had a very conservative mindset, and after making a ton of money in precious metals, at the right time, decided to get out and develop a more balanced portfolio.  After some tinkering he basically came up with the two "wtf?" assets, gold and LTT's, saying that gold's monetary nature and LTT's lack of default risk (and uncallability) will protect you where other inflation hedges and bonds will fail.

When you look at 2008, decades after he made such a rational "call" on those two assets, and see how their counterparts performed (LT corporates sank, as did almost every other LT bond instrument... REITS & non-gold commodities had huge losses) it's REALLY hard not to walk away with a boat load of respect for a man & strategy that had such a nuanced macroeconomic traits.

I have tons of doubts going forward... I could easily see gold dropping 30% with the other assets doing their part to offset it (1981 in repeat)... I think cash is a tough pill to swallow today.  I'm scared for the long-term future prosperity of our country and world due to lack of natural resources, though, so I don't really know how to play those fears whilst properly hedging myself.

Where do you think the PP, or more importantly, the individual assets, will falter in the coming decade?

pershing83 wrote: The board seems a bit naive IMO about the the PP.

You obviously have not spent much time reading threads around here.

pershing83 wrote: PRPFX represents 35% of my net so I have every right to bring this to the board's attention.

LOL at thinking you are bringing something to the board's attention.

Storm wrote: VWINX should not be compared to the PP.  Would you have wanted to be sending your daughter off to college in 2008?



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Max draw-down during last crisis:
VWINX: 19%
PRPFX: 19%
HB PP: 17%

Using Morningstar for the first two and http://www.etfreplay.com/combine.aspx for HB PP.

Mgmt has picked some excellent stocks, last I looked BHP top holding or second anyway. They were not buying the S&P. Gold and silver, spectacular, REIT's great, Swiss currency fine, good bond mkt's. That is the perfect storm. Look we might do 10% this year, who knows, sort of on target.

No, I'm not going back and read all these posts; you all are a sensitive bunch. No one has answeered my question: is all you money in PP?

HB lived just outside of Nashville in Franklin, by all accounts really a great guy. I did not know him but friends did.

I can speak for myself, and yes, right now, all of my money is in the PP.  I'm developing some thoughts on how to enact a VP based on where I think the economy will go, but I haven't saved up enough to feel comfortable making such a dive yet.

Many people here will tell you different things regarding their PP allocations and VP stuff.

Arthur Laffer and Nichole Kidman with husband Keith Urban live down there, among others.

pershing83 wrote: HB lived just outside of Nashville in Franklin, by all accounts really a great guy. I did not know him but friends did.

Fascinating.