Investing, economics, finance and random thoughts.
Porn and the Permanent Portfolio
You can learn things from the most unlikely sources. When people ask me what it was that got me to start following the Permanent Portfolio I respond with one word: Porn.
Yes, porn. I relate to you the story below that kicked me into gear to re-assess my portfolio strategy and risks I was taking several years ago. This is what got me to discover and start using the Permanent Portfolio allocation strategy.
I was buying some used welding gear off of Craigslist in late 2006(??) and go to this guy’s shop to look at what he had. We strike up a conversation and he tells me that he produces Adult Films but was getting out of the business (his shop had lots of light rigging and camera gear so I had no reason to doubt him). “Why are you doing that?” I ask. Because you’d think that making adult films is probably quite lucrative. I don’t know this, just a suspicion. He replies “I’m going into Real Estate!” He then spends the next 30 minutes telling me about flipping houses, second mortgages, zero down loans, etc. I just sit there and nod my head, buy the stuff he had for sale, and leave.
This bugged me because everyone was talking about Real Estate then and now I meet a porn producer going into it? It was just too much. On the way home I call my wife and say: “Honey, we’re going to sell everything we own relating to real estate. REITs, mortgage bonds, anything holding mortgages, etc. I’m then going to re-evaluate our portfolio from the ground up.”
I’m not a market timer, but that’s what I did. I call it a “Shoe Shine Boy” moment. A phrase I use that relates to a story where a famous investor (Joe Kennedy I’ve been told) was getting his shoes shined in 1929 and the shine boy kept giving him hot stock tips. He immediately went back to his office and sold all his stocks to avoid the big crash later that year. He figured that when the shine boy is giving you stock advice it’s time to get the heck out.
I sold everything that had real estate in it. I also sold all bond funds that had any type of credit risk. I had been an indexer for some years at that point so I knew I wanted an indexing strategy as active stock management just doesn’t work. Yet, I never felt comfortable with the claims of many about how you could own a bunch of stock index funds and take credit risk with bonds and have diversification. It was time I looked into the matter myself without any prejudices.
I looked at all the options and researched everything with a fresh take towards risk and uncertainty. Nothing was off the table no matter how it conflicted with what I’ve read before. Eventually, I ended up with the Permanent Portfolio after loads of research and scrutinizing of the approach.
The biggest thing about this experience is not that it helped me avoid a bad loss (which really was just sheer luck). It’s that it made me seriously explore what risks I was taking with my portfolio and how those risks were being counter-balanced with other assets I own. You can’t invest without risk. But it’s important to be sure you know what risks you are taking and how they can affect your life savings if they ever show up. It took a porn producer to get me to go back and evaluate these things. Life is strange.
| Print article | This entry was posted by craigr on October 29, 2009 at 11:42 am, and is filed under Investing, Permanent Portfolio. Follow any responses to this post through RSS 2.0. Both comments and pings are currently closed. |
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Comments are closed.
about 10 months ago
LOL……great story. What makes the Permanent Portfolio so effective is the fact that its contrarian. You can’t make money following the crowd. I wish I knew about the Permanent Portfolio back in 2000 when gold was under $300 an ounce.
I don’t know about everyone else on this blog but I’m worried about a potential dollar collapse. Does the Permanent Portfolio really protect us from such a catastrophic event when 50% of the assets are in government securities?
Also, I’m about fed up with this Federal Government (Ron Paul we NEED you) and I don’t trust them one bit. I stopped contributing to my Roth IRA and 401K since government can actually SEIZE these assets since they were granted through the tax code ala Argentina. Am I over reacting? The Permanent Portfolio is tax efficient anyway so there’s no need for retirement accounts I believe.
Lastly, as I said before I have a strong distrust for our Government. We were promised “change” but as I predicted its the same nonsense no matter who’s elected. I feel like a hypocrite having 50% of my assets (bonds & cash) in government securities……can’t I leave my cash portion in a solvent bank and my bond section in a AAA Blue Chip company like Microsoft? If so, would that dramatically alter the Portfolio in a negative way? I want to starve the beast…….but the Permanent Portfolio actually helps further their cause…….what a conundrum.
Thanks love the blog
about 10 months ago
Joel,
I don’t think anyone knows what a dollar collapse will do. Too many variables to predict such a thing. There was a 50% decline in the dollar over the decade of the 1970s and the portfolio did fine with gold posting large gains. Part of this was due to the breaking of the gold standard, but part of it was good ol’ fashioned dollar value panic.
IRA and 401(k) may indeed come under tax pressure in the future. IMO. I think there is just too much untaxed money sitting in them to not make them a desirable target by the parasites in DC at some point. It may not be a direct tax, but I could see some type of national sales tax imposed that would rope in those spending from their savings. Or there could be means testing where you get less of your SS benefits because you were responsible and saved “too much” in your own retirement plans. Who knows? For now they remain a viable option for some type of tax sheltering though so you may not want to forgo them completely.
If you don’t want to use US Govt. bonds for ethical reasons then you can use a LT corporate bond fund. Just realize that you are taking on credit risk and they may not perform as well if we get sustained deflation like the 1930s.
It’s funny that you mention Argentina. That was one of the countries I looked at closely in terms of a worse case scenario. I’ll be talking more about it in the future. For now, someone did an analysis of the portfolio as it would have worked in Iceland’s collapse last year. The portfolio did not turn a profit (something almost impossible to expect in such serious situations). However the portfolio did mitigate much damage and an Icelander who was using it is in FAR better shape than one who did not. Also an Icelander who had been using it before the crash was reducing their risks as the markets there rose by something like 700% they would have been selling down their stocks to buy gold and other assets:
http://europeanpermanentportfolio.blogspot.com/2009/08/permanent-portfolio-in-iceland.html
about 10 months ago
Craig,
I live in New Jersey and taxes of all sorts are significant issues, and have been for a long time. But that has never stopped any of our state legislators from increasing or creating new taxes (opps, sorry – they are called “fees”.).
At some point, even “progressive” elected officials will realize that you can only increase taxes so much before (1) There is a revolt, or, (2) Those who earn a high income decide to leave the state (happening already).
What has not been publically discussed, and what really concerns me, is not an increase in income taxes, but the creation of a net-worth tax. It is not inconceivable to me that New Jersey will shift from a gross income tax to a net worth tax. This approach has the benefit of capturing both income and wealth in one fell swoop.
I sure hope those in Trenton, NJ, our state capital, do not read this blog.
Ed
about 10 months ago
Ed,
A wealth tax has been talked about by some “progressive” types nationally. It’s not out of the question as social welfare programs tend to grow to consume all available wealth of the productive class.
I love the word “progressive” that these busy bodies give themselves. Stealing money that isn’t yours and spending it for your own benefit is not “progressive” at all. It’s as old as the hills.