A Second Chance at our Group Research Project

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The Daily Reckoning | Saturday, April 7, 2012 Revisiting our latest Daily Reckoning Group Research Project... A “gold star” response to our Permanent Portfolio query... Plus, the best of this past week’s reckonings, neatly organized for your Holiday Weekend perusal... --------------------------------------------------------------- Urgent Report Goes Offline Monday, April 9th at Midnight! Expert Research Visits Restricted California Lab What did he find? He’s hot on the trail of what could be the biggest science story, ever. Millions of Americans could increase the QUALITY and QUANTITY of their lives due to this work. This could also make you much richer... Get inside these amazing wealth/science stories before midnight Monday, April 9 — click here. Joel Bowman, checking in today from Buenos Aires... Joel Bowman Okay, Fellow Reckoners... How are we doing with our little Group Research Project? If you replied, “Great! I’ve observed the five, easy-to-follow guidelines you guys set up and built a real, winning ‘permanent portfolio.’ And, because I know how much you appreciate it, I’ve even attached a little background, explaining the thought process behind my selections,” then, thanks. A gold star for you! If, on the other hand, you replied, “Group Research Project? What the heck are these guys yapping on about,” you must have missed this week’s feature article. Take a look, below... [This week’s feature column was originally published on April 4, 2011] The Daily Reckoning Presents The Permanent Portfolio Revisited Eric Fry Volatility tends to correlate with risk, but not always with return. Skydiving delivers more heart-stopping thrills than chess, but it also produces more heart-stopping disasters. Driving a Formula 1 race car produces a lot more million-dollar paydays than sitting in a La-Z-Boy. But no one ever crashed their La-Z-Boy into a wall and burst into flames. At least skydivers and race car drivers understand their risks — more or less — and are knowingly accepting these risks in the pursuit of a particular reward. By contrast, many investors assume risks unwittingly, and out of all proportion to the potential rewards. They are driving race cars, not to win millions of dollars, but to win a $50 gift card to Dave & Busters. They are tight-rope walking across Iguazu Falls, not to obtain international acclaim and a possible movie deal, but simply to get to the other side. That’s not a good trade. It is important to understand the risks one is taking...and to be as certain as possible that the risks and the rewards align intelligently. Every investment carries some degree of risk, the successful investor merely insists that he receive compensation commensurate with the risk he assumes. That’s easy to say, but how do we do it? Most of us have a hard enough time identifying a truly compelling investment opportunity, much less trying to assess the risks involved. So what’s our opportunity? Good news. You don’t have to be an expert stock-picker to rack up expert investment returns. But you do have to build a risk-resistant portfolio — one that is diversified in ways that will provide genuine protection against severe capital loss. The “Permanent Portfolio” has delivered that kind of protection for more than 30 years. (Readers of Addison’s Apogee Advisory learned all about the Permanent Portfolio when they subscribed to his newsletter. If you do not count yourself among those readers, you may wish to change that today, right here). In 1981, the best-selling investment author, Harry Browne, developed a set-it-and-forget-it strategy he called, simply enough, the Permanent Portfolio. The strategy is embarrassingly simple — consisting of just four components: gold, bonds, stocks and cash. The idea was that at any given time, two or three of these four components might underperform — but the other portfolio components would perform so strongly, you’d get an overall gain that would outpace any increase in the cost of living. So during an inflationary environment like the 1970s, gold would provide the juice. In prosperous times like the 1990s, stocks would be the engine that pulls the rest of the train. In a garden-variety recession, your cash and long-dated Treasury positions would put you in good stead, while gold and stocks struggled. Over time, the Permanent Portfolio has followed through on its objective admirably. From 1981-2010, the annual average return was a healthy 8.4%. Only two years have seen losses, and those were relatively small. And what about 2008? The Year of Doom? The Permanent Portfolio held its ground, and then some — gaining 1.9%. The Permanent Portfolio isn’t about trying to catch a wave. It’s about surrendering to the reality that you can’t predict the future — and still building up a nice nest egg, whatever the future brings. Set it and forget it. No doubt about it, Harry Browne’s Permanent Portfolio has performed brilliantly during the last 30 years... and perhaps it will continue to do so. But conditions have changed since 1981. Maybe we should change with them. Browne’s basic strategy remains as valid as ever, but maybe the components that populate Browne’s strategy need to change. For example, the Permanent Portfolio mutual fund (PRPFX), although based on Browne’s strategy, has tweaked his original allocation somewhat. The mutual fund’s allocation is as follows: 20% gold, 5% silver, 35% US Treasury bonds and bills. 10% Swiss government bonds, 15% aggressive growth stocks, 15% natural resource stocks and/or real estate stocks. This revised portfolio has been more volatile than the original, but it has also delivered greater returns, especially recently. During the last 15 years, for example, PRPFX has not only produced double the returns of the S&P 500 Index, but it has also outpaced the returns of that other permanent portfolio, Berkshire Hathaway. But that was then. What about now? Is Browne’s original allocation still optimal? Or is the Permanent Portfolio mutual fund’s allocation an intelligent refinement? Or should investors be heading in an even more radical direction? If, for example, you are very worried about the future of the US dollar, should you be allocating portions of the permanent portfolio to foreign stocks or bonds? We don’t know. But we’d like you to tell us. What do you think would be the ideal permanent portfolio for the next 10, 20 or 30 years? Here are the ground rules: 1) Select three to five investible assets — that means no less than three and no more than five. 2) Do not include any individual stocks, unless those stocks be an ETF or closed-end fund. Do not, for example, include Apple Computer as one of your Permanent Portfolio components (no matter how brilliant that allocation might be!) 3) Make sure the assets you select are public securities or indices. That means they are a mutual fund, ETF, index or commodity. 4) Design your portfolio with the idea that it would be re-balanced annually. 5) If you’d care to add a little color behind the thought process that produced your permanent portfolio, feel free. We look forward to your submissions and hope to be publishing many of them in a future edition of The Daily Reckoning. Regards, Eric Fry and Addison Wiggin, for The Daily Reckoning A Potential Fortune for Your Family’s Future Generations Hangs in the Balance... The wealth curve is “going vertical”. Find out what this means — and how you can take advantage of it today. Click here. ALSO THIS WEEK in The Daily Reckoning... The Upside to a Natural Gas Downturn By Marin Katusa Isaac Newton showed us that for every action there is an equal and opposite reaction. That is why every downside force in the energy sector creates upside opportunities elsewhere. The challenge is finding them. It takes an understanding of the entire global energy machine to figure out what areas are benefiting from the changing landscape. From this perspective, North America’s shale gas revolution truly earns its accolade as a “game changer.” As many people now understand, the boom in natural gas reserves and production in the United States and Canada is changing the way North America will power itself in the future. Are We Oppressed by Technology? By Jeffrey Tucker Auburn, Alabama Do we really need an iPad 3 after it seems as if iPad 2 was released only a few months ago? Was it absolutely necessary that Google give us Google+? Do phones really have to be “smart” when the old cell phones were just fine? For that matter, is it really necessary that everyone on the planet be instantly reachable by wireless videophone? The “Shadow Pharmaceutical” Sector By Patrick Cox Marco Island, Florida The business of medical biotechnologies operates within an extraordinarily complex regulatory system. The SEC and the IRS are only the beginning of the story...In the United States, the Food and Drug Administration determines what can legally be sold. It even exercises control over what can be said by companies about medical therapies. Elsewhere, other regulatory authorities play similar roles. Buy a House! By Addison Wiggin & Samantha Buker Baltimore, Maryland A little more than a year ago, a very successful professional investor declared, “If you don’t own a home, buy one. If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.” Since that declaration, house prices have continued drifting lower in most parts of the country. The Case-Shiller index of national home prices is down about 4% year over year. Even so, we’re betting this professional investor was merely early...not wrong. How about a little ‘revenge’ at the gas pump... For years, you’ve gotten gauged at the gas pump. Thanks to this little known “loophole” it’s your turn for ‘revenge...’ You could even use this “trick” to make Big Oil pay you to retire! Click here now for all the details. The Weekly Endnote... Now, if you’re wondering what a Gold Star Group Research Project submission looks like, here’s one we received earlier this week from Fellow Reckoner, Tex Norton: Interesting challenge! I surmised that your limitation was five (5) specific investments as well as five (5) maximum categories. I would have selected a few more specific investments but based on the above understanding, I’ve limited my submittal to 5 by 5: 1. Precious Metals: 25% ETF Securities Ltd: ETFS Physical PM Basket (Diversified gold, silver, platinum, palladium) Ticker “GLTR” Closed $93.20 2. High Yield: 10% Vanguard High Yield Dividend ETF Ticker “VYM” Closed $48.15 3. Currencies/Fixed-Income Combination: 15% Guggenheim Yuan Bond Fund ETF (Dim Sum Bond market) Ticker “RMB” Closed $25.21 4. Bio/Nanotech: 25% VanEck Biotech ETF Ticker “BBH” Closed $44.14 5. Energy: 25% Elements Rogers International Commodity Energy ETN Ticker “RJN” Closed $7.04 I would have liked to include agriculture and other commodities but in accordance with the rules of the game, I limited my choices to the above five. Kicking and screaming, I included bonds (ugh!) and somewhat reluctantly currencies (specifically the Renminbi/Yuan). I’ve done okay with the Renminbi but it’s been like watching grass grow over the past 9 years. I limited the total of these two (2) categories to 25% because I’ve never, in 67 years of active investing, invested in a bond. Double ugh! The precious metals and the energy categories should be self- explanatory. Watching the world economies self-destruct is not something I would have ever expected to observe in my lifetime; yet here we are. Finally, Patrick Cox has made a disciple of me. When he speaks, I listen. My Biotech/Nanotech category should be 100% for the non- precious metals category, but prudence dictates that I behave somewhat in accordance within accepted limits. P.S. I would rebalance the portfolio every May 1st (May Day) because “Sell in May and go away.” --- As always, we welcome your own thoughts and reckonings. Email them to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning P.S. Patrick Cox’s latest report is online only until Monday. If you’re interested, you can view it for another 48 hours or so, right here. ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com How to Engender the Return of a Bull Market How Austerity Hinders an Economic Recovery Opposing Trends in Debt and GDP Growth Risk Assets Trade in a Tight Range Astounding Facts About Fed Treasury Purchases Fed Gives Parameters for Additional Stimulus The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. 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