The Permanent Portfolio, Investing, Finance and Random Thoughts.
Investing
Investing
Hindenburg Omen Goes Up In Flames
Flashback to August 2010 in the Wall Street Journal:
Yes Folks, Hindenburg Omen Tripped Again
The Hindenburg Omen reared its ugly head late last week, signaling more doom and gloom as stocks plod along amid the dog days of summer.
The Omen, a technical indicator which uses a plethora of data to foreshadow a stock-market crash, was tripped again on Friday, marking the second time since Aug. 12 it has occurred. (It also came close on Thursday, but one of its criteria fell short.)
The latest trigger has prompted the Omen’s creator, Jim Miekka, to exit the market. “I’m taking it seriously and I’m fully out of the market now,” Miekka, a blind mathematician, said in a telephone interview from his home in Surry, Maine. “I would’ve probably stayed in until the beginning of September,” depending on how the indicators varied. “That was my basic plan, until the Hindenburg came along.
…
“With what we have now, I think it’s possible we could get a 20% decline going into the fall,” Miekka said. “But I would expect some type of selloff and be buying at a lower price.” (emphasis added)
Since August 2010 when the Hindenburg Omen was spotted in the market, what has happened?
The Vanguard Total Stock Market index is up almost 30%:
Lessons?
1) Technical analysis is bunk.
2) Don’t time the markets.
3) Hold all your Permanent Portfolio assets all the time no matter what you read in the news.
Penny Stock Fraudster
I saw this ad recently for a get rich quick penny stock scheme:
An ad for penny stock trading
Let’s look at the ad copy a bit and provide some interpretation:
“23-year-old college student John Bell isn’t like most of his classmates…In 2009 he turned a $10,000 student loan into $1,000,000 by betting on risky penny stocks.”
Yes he is different than most of his classmates. His classmates probably didn’t take out a loan for college and then invest it in a risky penny stock scheme. This is flat out fraud. He wouldn’t have gotten a student loan if he disclosed on his application that he was going to use the money to gamble in the stock market.
In other words, John Bell is a liar. I don’t think this story is remotely true. Even if it were, would you trust a liar to teach you his deep dark profit making secrets?
“John has now decided to teach his ‘penny stock secrets’ for free at his new website. John claims he can teach anyone how to make $10,000 a month. He even taught his mother…”
Don’t bother going to his website, I have the four step plan already:
1) Take out a loan under fraudulent pretenses.
2) Invest it in junky companies selling for prices less than $1.00 with other suckers.
3) Lose all the money and spend the next several years dodging loan collectors.
4) Create a “free” website to pump and dump your worthless penny stocks so you turn a profit after all. (H/T to commenter Pres below!)
Great plan, John! Thanks for sharing.
Gold ETFs and Gold Bubbles – Who Cares?
1 year ago
I’m seeing other articles on Gold ETFs (H/T Austen Heller) fueling a gold market bubble. I made comments about this in the recent past. My position is still the same which is that I don’t worry about it.
Why not?
Well the #1 reason is I don’t look at assets in isolation. Gold is just one part of the Permanent Portfolio. So let’s look at this quickly from a portfolio perspective and away from the realm of market prognosticators (which cannot predict the future).
Worst case scenario: Gold drops to $0.
How does that affect the portfolio? With a 25% allocation you are, at worst, down -25%.
But what are the odds of that happening? I’d say zero. Yes, I’m going on the record to state that gold will not approach $0. This is barring some amazing breakthrough in fusion technology. Or, an end of the world scenario where humans revert to a leather clad motorcycle gang nomadic life as we desperately try to escape the Thunder Dome. Even in that case, I doubt gold would be worthless.
Going further, even assuming gold becomes worthless (which is one of the most moronic statements I hear on this subject) what are the odds that your stocks or bonds wouldn’t go up to offset such an event? Pretty low. Again, an end of the world scenario comes to mind. But, why should some other investment portfolio be doing any better in this case?
But, let’s say the drop is -50% back to $700 an ounce (a -12.5% portfolio loss). Not great, but hardly a life destroying event for most I suspect. Again though, what are the chances the stocks and bonds couldn’t take up the slack? How does this -12.5% loss compare to the -30+% loss stock heavy portfolios took in 2008? Pot, meet kettle.
I don’t worry about this stuff. The Permanent Portfolio uses the 25% split because it protects you against catastrophic losses in any one part of the portfolio. The portfolio needs to be viewed as a package and not as assets in isolation. The portfolio doesn’t hold just gold. It holds stocks, bonds, cash and gold. A massive loss in one asset (like happened to stocks in 2008) was not a major event for the allocation. And, a massive gold crash won’t be either (already happened in the early 1980s with minimal effect).
Investors that need to worry about these catastrophic events are those with very concentrated exposure to individual investments. Gold bugs and stock bugs with heavy allocations to their pet assets are one group that face this risk. The reason we diversify and we hold all the assets, all the time, is to protect against these possibilities.
Stay diversified and don’t time the market. It’s the only strategy that works.
Chasing Yield with your Cash
1 year ago
Treasury Money Market Fund rates are about 0% today. Many may think this is a reason to chase after some higher yield. My advice: Don’t.
In 2008 when the credit crisis hit it was the higher yielding assets in many money market funds that faced problems. Some of these funds broke the buck. Others dealt out large losses to customers. The slight extra yield being received over the years was met with a quick evaporation of principal in some cases, freezing of redemptions in others, or just a nail biting experience watching it all happen. Was the extra percent or so a year worth it?
It could have been worse, you just weren’t being made aware of the problem (H/T Nisiprius on Bogleheads):
’08 data show Hub firms in grip of panic
The level of panic in the money market industry in the fall of 2008 was much greater than previously disclosed, with many Boston firms tapping into billions of dollars the US central bank made available to avoid further financial chaos, data released this week show.
Nationwide, nearly 200 money market funds tapped into the Federal Reserve Bank’s program, with much of the $217 billion gushing out over five brisk days in late September that year. Bank of America Corp.’s Boston-based Columbia money market funds tapped $13 billion, the Evergreen Funds used $9 billion, and Fidelity Investments sought $5.5 billion, among many others, according to the Fed data released this week.
If you own Treasury Money Market funds you will never have to face these issues barring total implosion of the US Govt. There is no need to worry about FDIC or if the assets underneath are going to be liquid in a crisis. US Treasury securities are one of the most liquid assets on the planet. FDIC is not needed because if the Treasury can’t pay you on the T-Bills then FDIC is kaput anyway.
It’s not a good idea to chase yield with short-term cash reserves. I’d want to keep that money in the safest form I can find and take risks on the other parts of the investment portfolio if I need more growth. That’s why Harry Browne always advised holding your cash in a US Treasury Money Market Fund that only held 100% US Treasuries. If you did this in 2008 you faced no problems and no sleepless nights.
What about reaching for some yield? Couldn’t an investor react on the onset of a crisis and move the money out someplace safer? No, I don’t think so. Things can happen so quickly in the markets you’ll have no time to react. You’ll just be one of many people running for the exits. But the exits may be chained shut.
Of course it’s the eternal battle in the investing world:
1) Higher Returns
2) Safety
Chose one.
For cash I think Safety is #1. If I want to risk more returns I’ll split my cash between a Treasury Money Market fund and a Treasury Short Term Bond Fund (average 1-3 years maturity). This can give more yield without compromising the cash safety too badly (it introduces slightly more interest rate risk).
I read about people moving money around into CDs at shaky banks hoping to rake in some extra interest and get paid off if FDIC comes to bail things out. There is a piece of me that hopes they get their rear ends handed to them. It’s like getting into a car with a drunk driver because you think the air bags are going to save you if it wrecks. Me? I’d rather not get in the vehicle.
But the odd thing about this behavior is they obviously are keeping this cash around for some kind of short-term purpose (otherwise why not just buy stocks that have a better chance of higher returns?). It’s like they have a split personality that knows they want cash, but just can’t come to grips with the idea that it won’t return as much. So they pursue these strategies that are risky, but have somehow convinced themselves that because it’s “Cash” it’s not really risky at all even though they are doing some pretty hairy things. I don’t get it.
Don’t fall into this trap. Keep your cash in a Treasury Money Market fund and you eliminate a whole raft of potential problems. The rest of the Permanent Portfolio can drive the returns so there is no need to sweat chasing yield with your cash.
Your Money and Your Brain – Interview with Jason Zweig
1 year ago
H/T to Tao6 for sending in this video link on human behavior as it relates to investing:
Behavioral economics is a very interesting field. It explores how humans make decisions about money and how their decision making (and emotions) can affect their investing performance. Since I’ve been talking about simplicity in portfolios lately, I’ll just add that having a simple portfolio makes it easier to keep emotions in check. It requires fewer decisions to manage a simpler portfolio and provides less opportunity to make big mistakes.
I have not read Jason Zweig’s book Your Money and Your Brain, but plan to after seeing this interview. Another book on the subject that I did read was Why Smart People Make Big Money Mistakes and How to Correct Them by Gary Belsky & Thomas Gilovich. This book covered many of the same areas and was an excellent primer on recognizing how your behavior and emotions affect your investing decisions. Knowing how humans react to issues surrounding money can better prepare you to deal with your own investing hang-ups and avoid making blunders.
Another book I recommend on seeing how emotions can make very smart people do questionable things with their money is A Mathematician Plays the Stock Market. I wrote about this book in a previous post.
Understanding behavioral economics can really help control investor emotions. I recommend picking up a couple books and reading about it. I certainly have used the knowledge to keep my own investing emotions in check.
