Safe. Stable. Simple. These are the words Harry Browne used to describe his investment philosophy in his October 10, 2004 radio show. He pretty much nails it.

October 10, 2004 Investing Radio Show

Safe

A portfolio that is safe is one that is invested conservatively but also with strong diversification in case things don’t go according to plan. People work hard for their life savings. Why gamble those savings on some get-rich-quick investing scheme that can cost a big chunk of it if things go wrong? A portfolio that is safe does not mean tucking the money under the mattress. What it means is that investors buy things only that they fully understand for a very specific reason. Risks are taken where they should be and avoided where they add nothing to the bottom line. A portfolio invested this way can hold assets that are “risky” but own them in a way where the risks wash out over the long run and produce actually safer and more consistent returns through diversification. Safety also means following some basic rules of investing that will make it much harder to fall into many common investment traps.

Stable

A portfolio that is stable allows an investor to not panic when the markets are in serious turmoil. Stability doesn’t mean investors won’t ever take a loss. What it means is that the losses will be dampened so that the pain is tolerable and not driving the investor to waking up in a cold sweat. These situations, if they occur, can cause investors to make bad decisions about their money usually at the worst possible time. Stability in a portfolio means that investors can focus on their work and savings which is really driving most portfolio returns (especially early on).

A portfolio that is stable also means it is giving out reasonable market returns. A consistent return over the years can grow a portfolio greatly due to compounding. There is no need to reach for the brass ring for double-digit growth because that always means higher risks. Higher risks means less stability and a potential for doing much worse in the markets than what an investor is expecting. On the other hand, a more consistent growth can prove incredibly powerful if just left alone and a stable portfolio means investors will leave it alone. Since long term investment success is related to the ability to stay the course and not try to time the markets, stability in the portfolio is an important ingredient because it helps keep emotions in check no matter what the markets are doing.

Simple

I love simplicity, especially for investing. Complicated investing strategies and products can conceal many risky moving parts underneath. Many times these risks will not be discovered until it’s too late. Not just this, but often financial advisors will sell complicated strategies because it makes sure you keep them around to manage it all for a hefty fee. Investing does not need to be, nor should it be, complicated. There is a strong relationship between complicated investment approaches, lower performance and higher risks – All things you don’t want. Portfolios that are simple have lower management fees, lower taxes, lower chances of hidden risks, and can be managed without the use of a financial advisor with very little time commitment on the part of the investor. All of these attributes ensure a greater chance of long-term investment success.

There you have it. Safe. Stable. Simple. The three words that define the Permanent Portfolio. If you’ve never heard this radio show, you’ll enjoy it. Harry Browne discusses these and other important topics that are the foundation for growing and protecting wealth.

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Camo

Like most hunters, I wear camouflage because it may give a slight edge under some circumstances. Yet it seems many of the hunting patterns out now are really more for attracting hunters to the clothing racks than concealing. Is it really necessary for all these new camo patterns to come out each year or is it just to sell new clothes? Do you really need camouflage underwear that matches your camouflage pattern on your jacket? Hmm…Methinks that marketers are designing this stuff and not hunters.

Observations on Camouflage

When looking at this issue in my engineering way, I noticed that bigger open patterns tended to work well at breaking up the human outline (a forest green wool plaid shirt still works for instance). On the other hand, fancy prints with lots of detail of trees, etc. and false depth of field added actually had worse performance at distance from my own observing. I’ve noticed these things a number of times at archery shoots where you get to see many people traipsing through the woods wearing all sorts of camo patterns.

In short, the patterns that looked like nothing always seemed to do the best when the randomly changing backgrounds of the woods was taken into consideration. Patterns that looked like trees and leaves sometimes worked OK if the tree you were next to matched it, but didn’t work especially well for ground blinds or if you have to move and get away from the trees. In areas with limited concealment, complex patterns tended to be too dark and in the bright sun they really stood out as the darker colors they used didn’t reflect light the way surrounding vegetation did.

Is Simple Camouflage the Best?

Simplicity usually trumps complicated. Game animals in the wild are largely just variations of tan, black and brown. Simple. Yet, they are very hard to see when in concealment or even in the open. Their fur diffuses light and the color scheme is so neutral that it tends to look dark when in shadows and lightens up when in the sun. The color works regardless of the conditions or time of the year. Most hunters will tell you that game animals are incredibly hard to see (especially when they aren’t moving). So why aren’t these animals covered in barks, twigs, acorns, and leaves like the camouflage we see in the stores?

Is There an All Season Camouflage?

No, there isn’t. Most camo will need to be designed for the expected operating environment to work best. But some designs have made a good attempt at trying to work adequately in a variety of situations. One such design came out in the 1980s as a camo pattern called ASAT. ASAT is short for All Season All Terrain. It has since developed a legendary status among people who need to get really close to game animals to get a shot off: bowhunters. It’s a tan base color and just has some brown and black in it as a breakup pattern.

The ASAT company sells generic printed garments, but also offers an overall 3D “Leafy” version of their camo that adds an effect of blowing leaves. The suit is very lightweight and pulls over your clothes and can cover up just about anything you have on. It also isn’t so bulky that it gets in the way of running your bow or other hunting gear.

Test Photos

I recently took some ASAT and put it up against a couple popular military camouflage patterns below. I have also done it against some other hunting patterns but I will have to save that for another post. I just wanted to test the different camouflage ideas that exist. The military (and ASAT) for instance tends to focus on the patterns that look like nothing in particular and works better among what is called negative space (the area between objects like trees in the woods). Many commercial hunting companies tend to focus on patterns that look like trees, bushes, etc. or what could be considered positive space.

The photos were taken on a cloudy day in some generic wooded area with pines and deciduous trees during winter. The garments were each hung on their own in the same random place with light or no concealment and I stepped back a distance and took progressively closer photos until I was within about five feet of the camouflage (except the last series where I went for a long distance so you could see how they blob up from further away). The last photo in each series will show you which garment it was and is labeled in the caption. The first photos are all the garments laid out by pattern (MARPAT, ASAT, DPM, ASAT Leafy). The series of photos is random in which garment is being tested so you won’t know until the end which it is. Check out the full-screen mode for higher resolution images.

The Most Effective Camo

Just note that no camo is really going to save you if you’re caught out in the open (save a heavy and bulky Ghillie suit). Virtually all of these patterns work best with some light concealment in front of them at a minimum. And the best camo of them all for hunting or otherwise is to NOT MOVE, don’t make any noise, and make sure your scent is not blown towards the animal (regardless of what magic hunting cologne or scent control clothes being used). Eyes are drawn to movement but if you are wearing camouflage you may get a slight edge if you are seen or heard because the animal may not be able to tell what you are. If they smell you though they’ll be out of there.

I know this is not scientific and is not designed to critique military camo which has different purposes than hunting camouflage. For one, the camera sees things differently than a human eye and something that appears obvious in these photos was not really that obvious when I was using the standard human-issue eyeball. Secondly, military camouflage also needs to be invisible to things like infrared and thermal imaging which is not a concern for hunting because deer do not wear night vision equipment. Lastly, the military operates in many areas that are not woodland (urban zones, desert, etc.) and these are not considered in this test.

Here are the contestants:

MARPAT - USMC Digital Woodland Pattern

MARPAT – The US Marine Corp digital woodland pattern. This pattern was released several years back and is effective in woodland environments. The pixelated edges are not just for looks. They actually work to help confuse the eye up close and at further distances and keeps the pattern from blotching up. It appears to my eye to cause the edges to go out of focus between the color transitions.

British DPM

British Disruptive Pattern Material (DPM) – This pattern has been out for decades in slight variations and is used by British forces. It’s an effective pattern because it uses larger swashes of color and tends to blotch up less than others I’ve seen. Another thing to this pattern is that it looks like brush strokes and the irregular edges this causes makes the transition regions between colors to be less defined just like MARPAT’s digital scheme.

ASAT - All Season All Terrain on Sitka Gear Jacket

ASAT – This is a Sitka Designs jacket in ASAT that I’ve owned for years. This is the standard ASAT printed on flat fabric. ASAT doesn’t offer the Sitka gear any more. That’s a huge shame. Sitka gear is awesome stuff and works in a wide range of weather conditions and is quiet in the bush.

ASAT - All Season All Terrain 3D Leafy Suit

ASAT Leafy 3D Suit - This is the ASAT leafy suit top. The package comes with the top, bottom and full head net. It packs down small and weighs about 2lbs. It can be taken on and off over most clothes (even heavy insulation or rain gear and with your boots on). You can stow it easily in your pack when hiking to your hunting location and put it on when you arrive to begin the hunt. It’s all synthetic so bad weather won’t bother it. The foundation is a netting so it’s very light and well ventilated. It’s also very quiet in the bush when I’ve tried it so you can stalk with it on and not spook game.

Conclusions

Overall, I think that ASAT flavors did well at breaking up the human silhouette at distance. Up very close in the open the ASAT was mediocre compared to the military patterns (the Leafy 3D did almost as well though). Behind some mild concealment however the ASAT performed well. The ASAT coloration of tan, brown and black is effective even in light concealment where the darker greens in the military camouflage sometimes tended to stand out as a blob. Also, the ASAT had a disrupting effect on my eyes especially when it is behind a few branches. Meaning that it made it very hard for me to discern the shape of the jacket from a distance even when I knew it was there. The British DPM was the worst performer in this regard and often was too dark in the area of operation where these particular photos were taken. MARPAT tended to fall somewhere in the middle. MARPAT and DPM both did best when out in the open up close. On the forest floor in the open, MARPAT is very effective and DPM a close second. In dense underbrush all the patterns did well. One possible improvement to ASAT would be to apply the digital texturing technique to the edges of the brown and black stripes to soften the edges and create a smoother transition between colors like MARPAT and DPM have done.

The ASAT 3D Leafy suit was very effective. It may not have come out as much in the photos, but with the naked eye it really did a good job. It impressed me with how well it worked even on a bare open pile of wood, behind some small branches or in deeper concealment. Considering it is so light, easy to pack, and relatively inexpensive compared to a full set of super deluxe camo patterns, I think it’s a great deal. It’s certainly something for a hunter to consider adding to their pack if they are expecting some close encounters with game. Wildlife photographers and others wishing to get close to wild animals may also consider adding the ASAT 3D suit to their equipment list.

What do you think? Post your comments below on what your eyes say and vote in the attached poll at the top.

Obviously, my site features some banner ads from Google. These ads bring in enough revenue to cover the costs of the web hosting (if that). Well lately I’ve been seeing ads encouraging people to buy California Bonds at this site:

Buy California Bonds

I’ve never seen a state so aggressively advertising their bonds in banner ads. I can’t say it would put my mind at ease if I owned California Munis to see this.

EDIT: I’m not the only one who noticed this:

Bill Lockyer Goes Direct To Retail Investors With The “Terrific” Opportunity To Front Run Institutional Investors In Cali Bonds

EDIT #2: Here’s the ad that just showed up on my site:

Oh! The offer ends March 10th! Better hurry! I’m sure they’re selling like hotcakes so don’t miss out!

Over at the Diehards forum a conversation came up about the fad of Person to Person (P2P) lending.

When I first saw this idea years ago, the first word to pop into my head was “foolish.”

The first reason I knew it was foolish is because business magazines thought it was a great idea.

The second reason is why in the world would anyone make an anonymous loan over the Internet to someone they know virtually nothing about? I’d rather just donate the money to charity where it could be better used.

What’s funny though is that these sites got started for reasons of undermining The Man (being the banks) that are so mean by requiring, you know, to prove credit worthiness. How archaic! Clearly we live in a world now where deadbeats, I mean “sub-prime borrowers”, are not risky at all. We’ll just do P2P loans and sing Kum-Ba-Ya and it will all work out and we’ll cut out those greedy middlemen.

But maybe The Man had this figured out long ago as the default rate on these peer to peer loans is abysmal. Check out the graph from this blogger:

http://www.prospers.org/blogs/Fred93

Prosper Default Rates Over Three Years

Since loans that are one month late nearly always default at these sites, that’s a 20% default rate after the first year and keeps going up the longer the loan is. Ugly! Now we know why loan sharks need to charge so much to their clients to turn a profit. No real bank could survive on default rates this high.

But it seems that sites like Prosper.com are trying to clean up their image.

Clark Howard reports:

But now Prosper is back in action with a relatively low default rate of 5% among borrowers, according to Barron’s. This service and its competitors are now putting people through their paces to weed out the baddies. The company claims 850,000 members and just a little under $200 million in loans underwriting at this date.

Lending Club has a 3% default rate, meanwhile, and turns down 90% of potential borrowers in an effort to cull the herd and find the most credit worthy.

The article follows up with this salient point:

That, of course, begs the question: Why would anyone go the P2P route if you’re credit worthy?

Yeah that’s pretty much what I think, too. If someone needs a loan from P2P they are probably doing it because nobody else trusts them enough.

But what about the returns?

The returns you might get as a lender can be enticing. Prosper claims the average lender earns 7% on their money, net after expenses and charge-offs. But those who are really into this virtual underwriting boast that they can make a 12% return.

The stock market has averaged around 9-10% a year the past 80 years. And now they’re telling me I’m going to beat the market by 20% a year with 12% returns by making loans to anonymous people that can’t get a real low-interest rate loan from a bank? Sounds like BS to me. If someone claims you are getting above market returns you are taking above market risks. There is no free lunch.

If I wanted to risk a 12% return (and let’s not kid ourselves because it would be quite risky) I’d just put the money I was going to use for P2P loans into a volatile emerging market stock index and let it ride. It may be a bumpy ride, but it could pay off. Yet, I may not get 12% over time but I’m not going to lose -100% either like with a large number of P2P loans. And for 7% returns? For that I’d just put it in the Permanent Portfolio allocation and go do something less stressful with my life while earning more money.

What’s most interesting is that these P2P sites started up to give loans to people that evil banks wouldn’t consider because of the credit risk. Now they are turning into weeding out credit risks just as evil banks do because of the deadbeats ruining it for everyone. In other words they’re turning into….evil banks! The hippies must be choking on their granola at this thought.

From all of this there is a lesson to be learned and that is that banks can seem heartless at times, but they have their reasons. Ultimately, as a depositor giving them my money to help fund loans for others, I want them to be picky. When they’re not picky (or told to not be picky by government rules) we end up with things like real estate bubbles where someone earning $20,000 a year is given $500,000 to buy a house. Also, loaning money to someone who can’t pay it back just makes that person’s situation worse by straddling them with more debt. How is that fair to them? It’s an overall bad deal for everyone involved.

Yeah I know there are some people that are not deadbeats in this P2P thing and could be good loan risks. But mostly I think these loans won’t lead to any additional profits vs. just doing something simpler (and safer) with the money. If you are trying to be charitable, then just donate the money to charity.

Overall, this entire idea of P2P loans reminds me of an Onion article I read a while back.

What was this stuff I kept hearing last year about the dollar crashing? In December 2009 this talk reached a fevered pitch. Here’s the dollar index over the last year and you can see how much it’s recovered since the dark days of December 2009:

You can track the US Dollar index at this link.

Since this time the Euro has taken a pounding due to the issues with Greece possibly going into sovereign default. This drove the Euro down and the Dollar was the beneficiary. I’m not a dollar bull necessarily, but I post this just to show (yet again) that reacting to news that everyone else already knows is rarely a good way to invest. The markets are random and things we think must happen may not happen for a very long time (if at all).

Best to ignore all of the financial news and just stick to a simple diversified portfolio that can take care of you whether the dollar is sinking or flying.

For our readers across the pond there is another blog that focuses on Permanent Portfolio investing. The blog by Marc de Mesel looks at investing in the Permanent Portfolio from a European perspective. The blog is in Dutch, but Google translate does a passable job for those looking for foreign analysis of investing markets:

Marc de Mesel’s European Permanent Portfolio Blog (Dutch)

Marc de Mesel’s European Permanent Portfolio Blog (Translated through Google – Click on the blog links and they will translate for you.)

Marc covers many topics affecting Europe that aren’t covered here. He runs his own Permanent Portfolio using European-centric assets (like German Govt. Bonds vs. US Bonds). You’ll enjoy it whether you live in Europe or not. Check it out.

UPDATE: Marc adds that he still has a couple articles up at this link that discuss the Permanent Portfolio. In particular, he provides an interesting analysis of how the portfolio would have fared vs. a stock/bond only portfolio during Iceland’s 2008 currency collapse:

English European Permanent Portfolio

Sure it is! And I wish I could have my home destroyed by a tornado tonight so I can support the local construction workers. Maybe I’ll luck out and get killed at the same time so the coroner has some work to do as well.

This is what’s called the Broken Window Fallacy as presented by Frederic Bastiat in his essay That Which is Seen, and That Which is Not Seen. It’s also the main theme in the classic book by Henry Hazlitt: Economics in One Lesson - An easy to read book that is required for anyone interested in understanding economics.

Here’s the jist of of the fallacy:

If someone comes and throws a rock through a window in my house, some say we should not punish this vandal but praise him. After all, now I need to buy a new window and this puts the people in the glass business to work which is good for the economy. But what about the fact that now I have to buy a new window? Maybe I wanted to spend that money on a new suit or a new camera or another product? So the glass company has work to do, but what about the other people who could have gotten that money instead?

I know this makes perfectly good sense, but many prominent (and award-winning) economists believe that doing destructive things, and having destructive things happen, is good for everyone. In this view the vandal isn’t some rogue, but some type of rock hurling employment agency.

Like the vandal’s broken window, wartime is a waste of resources. Instead of factory workers producing something more useful like computers, cars or appliances they’re making products designed to get destroyed like bombs, tanks and planes. The people in the cities where the bombs fall (assuming they survive) now have to rebuild the city structures that were leveled instead of using those resources to enhance the city further. Soldiers on both sides are slaughtered and can’t contribute to the economy in their former professions. Politicians may come up with a myriad of reasons that a country may want to wage a war, but being good for the economy certainly isn’t one of them.

I really wish this fallacy would die. But sure as the sun will come up tomorrow, you’ll hear this dumb idea get trotted out after the next major disaster or war as if these events are some type of benefit to society. Next time you hear someone using this line of reasoning for justifying destructive acts, do me a favor and relay the story of the broken window and fix their thinking.