An interview with Rob Arnott describes the portfolio of Jacob Fugger (“Fugger the Rich”) who lived from 1459-1525. The portfolio that made him so rich sounded very familiar and I wanted to share this part of the interview with Mr. Arnott:

Rob Arnott: Where do we go from here?

Audience Question: It seems you’re simply promoting a diversified approach to investing. How is this different than basic portfolio theory?

Arnott: There’s nothing new under the sun. Questions: How many people follow a truly diversified approach? How many think of their stocks as ownership of an enterprise (à la Graham & Dodd), rather than as some assemblage of portfolio characteristics? In the 15th century, Jacob Fugger (“Fugger the rich”) put his money in shares, in loans (bonds), in property and in commodities. And he’d rebalance when the mix drifted away from one-fourth each. The shares and the real estate did well when the economy was strong; the loans and commodities did well when it was weak; the commodities and real estate did well when the government was debasing the currency; and the stocks and bonds did well when the government and the currency were sound. Old ideas have a lot of power, and keep getting rediscovered.

(emphasis added)

Here’s another quote that I’ve seen attributed to Fugger in numerous places (Although none referenced the original source. If you know of it, please let me know.):

“Divide your fortune into four equal parts: stocks, real estate, bonds and gold coins. Be prepared to lose on one of them most of the time. During inflation, you will lose on bonds and win on gold and real estate; during deflation, you lose on real estate and win on bonds, while your stocks will see you through both periods, though in a mixed fashion. Whenever performance differences cause a major imbalance, rebalance your fortunes back the four equal parts.” (emphasis added)

- Jacob Fugger

I found it amazing that Fugger’s portfolio was so close to the 25% split that the Permanent Portfolio uses (Was this the inspiration or a rediscovery? We’ll never know.). Although, real estate is something the Permanent Portfolio avoids due to the illiquid nature of the asset and holds cash instead (if you own real estate, count it as part of your Variable Portfolio).

Note how Fugger’s approach sounds very similar to the Permanent Portfolio’s idea of holding assets that correlate to economic cycles of Prosperity, Inflation, Deflation and Recession. This insight is something that is missing from most portfolio allocation advice you see. Further, it’s also why many portfolios get blindsided by extreme events or protracted periods of underperformance in my opinion.

Now here’s something in Fugger’s quote that many people have a problem with:

Be prepared to lose on one of them [an investment] most of the time.

I get questions about some asset being too high and something being so bad that they couldn’t possibly go out and buy it. Yep. That’s pretty much how it always works. Here’s my official response:

Don’t look at asset classes in isolation. Look at your portfolio as a whole instead.

What do I mean by that? Well, it doesn’t matter if you lose 10% on an asset in a year if your total portfolio has gained in value. A 10% loss in gold but a 25% gain in stocks and bonds puts you ahead. A 20% loss in stocks but 30% gain in bonds also puts you ahead. The individual losses were offset by the winners enough to give you a profit in the total portfolio.

As it is, the Permanent Portfolio is designed to hold assets that are volatile so a decrease in one is almost always offset with gains in another. At any point in time you’re going to have something in the portfolio that is really hot and something that is a real dog. It’s almost guaranteed too happen. Why? Because the economic environments of prosperity, inflation, deflation and recession will never happen all at once. Since the assets are geared towards responding to these conditions individually you are going to have something that is always doing well and something that isn’t. It’s just the nature of the diversification.

The problem is that since we can’t predict the future we don’t know what asset is going to do well and what is going to do poorly ahead of time. So our solution is simple: We own them all no matter what.

If you don’t own all the assets, all the time, you don’t have the protection of the portfolio. It’s just that simple. You also need the guts to rebalance out of your winners and buy your losers. Something that has been talked about here in the past.

It looks like Fugger had this pegged a long time ago which is why he was Fugger The Rich and not Fugger The Pauper. It’s comforting to know that good ideas really are timeless.

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