I had read several of Harry Browne’s books in the past. I am a huge fan so I recently acquired almost all of them on ebay. Many of the early books follow a similar structure beginning with an outlook for the general economy, explaining how various parts of the financial system works and predictions of what might happen. The second half always gets into the way to build a portfolio to position for the economic environment outlined. What is most amazing is how so many of the conditions Browne warned about in the 1970’s and 1980’s are still concerns today. It feels as if his books written 40 years ago still have timeless advice.
I will not discuss the Permanent Portfolio base strategy at length as there are many resources on the web that have done this already. I will simply say it is comprised of Stocks, Long Term Treasury Bonds, Gold, and Cash with 25% in each.
Here are all his books I have read:
How I Found Freedom in and Unfree World
Why The Best-Laid Investment Plans Usually Go Wrong
How You Can Profit From the Coming Devaluation
The Economic Time Bomb
You Can Profit From A Monetary Crisis
Inflation-Proofing Your Investments
New Profits from the Monetary Crisis
In this post I want to share some things I discovered that might be new to a lot of people that have not read his books.
This is important as there is a strong following of people that employ his Permanent Portfolio strategy. Most people do so after reading his most recent, Fail-Safe Investing book. It is true that his thinking changed overtime and the recommended assets and allocations in this book are likely the best implementation. So this would be the best book to start with. Yet, I want to share how his thinking evolved in my option after having read his thoughts in the progression of his works.
Sadly, Why The Best-Laid Investment Plans Usually Go Wrong is no longer in print and used copies are expensive. But I believe this is the most in depth and complete work of his on investing. In the back of some of his other investing books he even comments that if one wanted further advanced knowledge they might consider purchasing it.
Browne’s early books warned of a period of high inflation and that gold and silver would be the best way to protect oneself. He mainly recommended investing the majority of ones money between Gold, Silver, and Swiss Francs. The Swiss Franc does not offer the benefits today that it once did. He liked it at the time as it was backed by gold and US citizens could hold Swiss bank accounts. New IRS rules FATCA and FBAR essentially render this strategy useless today. It was a brilliant recommendation and within a year or so after publications all 3 assets appreciated greatly in value. This gained him notoriety.
As his books progressed he started to offer more model portfolios that if one believed in different levels of inflation or deflation they could set a target differently. This included adding stocks and bonds to the mix. During this time Browne had a successful newsletters subscription service that he mailed out every 6 weeks or so. At the end of The Economic Time Bomb Browne writes a small afterword about stock market wizards. He explains that he was the only one in the 70’s that correctly called the boom in gold and silver, and when to sell near the peak before the prices came back down. He admits that the timing of when the book was published was fortunate to have made his prediction imminent. He appears to believe it was inevitable either way, but the timing worked out fortuitous for him.
One of Browne’s greatest gifts to the retail investor is how he progresses to admit that his subsequent picks were not as successful. I think the truth is they still were likely very good, but that they did not follow exactly what he thought they would. He further noticed how he would get aggravated when they did not pan out as he thought. He once loved speculation, but later became more interested in politics. His main point was that after his brilliant call in the 70’s he was cemented as a trading legend, but he knows that he can’t continue to predict with certainty what the future will bring and certainly not replicate the magnitude of those same gains again. This realization is what drew him to the Permanent Portfolio as we know it today. But even more importantly it is evidence to heed extreme caution when watching a financial expert make predictions about the future. Even if they have been right before, there is a good chance it was due to chance. Is there good reason to believe their luck continue into the future? He wants you to ask these questions and this is the reason he was so forthcoming about the role luck had in his investment gains.
Next I want to discuss some of his ideas about the Permanent Portfolio assets.
Stocks – The generally practiced approach by most investors is to hold the S&P500 or US Total Stock Market index. There are many investors that are steadfast against including foreign stocks. In Browne’s early works, he said one could include them, and might possibly benefit from the added diversification, but that it probably wasn’t worth the hassle. Back then trading commissions, and expense ratios were high and this makes total sense for him to not have strong recommendations for them. Before he recommended an S&P500 index he actually advocated stock warrants. We don’t see as many of them today, but in a way they are similar to LEAP options. It is a way to get a little more leverage on the stock portion. He also switched to the S&P500 as it offers greater diversification, as warrants sometimes were issued more in certain industries and simplicity of the index is easier for retail investors to follow.
Silver – This one was the most interesting to me. He later advocated to only use gold and no silver. Part of why he was big on silver in the 70’s is because US investors were not allowed to own gold. He also said that the US dollar is the #1 currency, and gold is #2. He said nothing else is the obvious #3 and if there was there is no way to say it would be silver. He said if one wanted to include silver they ought to spread it in half and count the holdings as equal between stock and the gold section. This was due to silver’s industrial use that responds closely with the business cycle. In some of his earlier books he did say Silver could help a portfolio, but it depends on if it is purchased at an attractive price. He thought $15 in one of his books written around 1980 was a fair price.
Real Estate – Browne was against holding real estate and even at times recommended selling it so that you could put the proceeds into the Permanent Portfolio. He himself later said he enjoyed owning a home so I believe he was okay with that. He for good reason thought rental property was too illiquid and tied up generally too high a percentage of ones overall wealth into a single asset. He also said it did not respond to the 4 economic cycles with any predictability. So he said there wasn’t a use for it, even though he said he long suspected it should be part of the portfolio. In an early book he said if you wanted to include real estate or REITS to count that as part of the gold section of the portfolio. I find this interesting as REITS have tended to trade like stocks, but that has been in more recent times. Earlier REITS did trade more distinctly and offered diversification from the stock market. So I think this leads reason to follow his more recent advise to just avoid completely. In Inflation-Proofing Your Investments he did include real estate in several of the model portoflios at around 15% exposure. He did say with increasing inflation that real estate likely would do well. He was mainly concerned about it getting pummeled in deflation and that it could be difficult to manage in runaway inflation.
PRPFX – The Permanent Portfolio Mutual Fund – Browne was an advisor to the fund. In one of his early books he suggested that an investor could get more diversification with the fund than doing the 4×25. But later on I remember on a radio segment he seemed to believe the 4×25 was preferable. I think he believed either was a good investment. What is interesting is that PRPFX still holds Swiss Francs. I believe I heard somewhere that the fund would have felt they betrayed their name if they switched the assets. If true this is shame as they do not serve the purpose today that they did before. The other difference with PRPFX is that it does hold REITS, and natural resource stocks. It also includes corporate bonds rather than only treasuries. The bonds are of a shorter duration as well than the 4×25. He talked about how different assets react to inflation at different times. I think this is why reits, silver, and natural resources were included to help smooth the returns.
Bonds – I did not find anything that different in the early books about either of these from the current recommendations. He has always recommended treasury bonds as the premier choice, but it wasn’t until later that he advocated long maturities. Initially he kept allocations small and I believe shorter duration.
Gold – I did not find anything vastly different from his earlier works than what he recommended in the current 4×25.
Lastly how much should you put in the Permanent Portfolio?
In the later books it seemed Browne promoted putting the majority if not 100% of your money in it. So I was surprised to find in an earlier book he recommended just 35%, with the other 65% being self directed. I think he later realized for most retail investors this would be problematic for some to allocate the 65% prudently.
The self directed account was called the Variable Portfolio. I think this was one of the overlooked genius parts of his investment plan. It was a way to get people to buy into the Permanent Portfolio, but left them the ability to speculate, tinker, or gamble as human nature is prone to. He figured if you did it with a small amount it could wet the appetite and keep you for messing with the majority of wealth.
In the Variable Portfolio he does go over some trading strategies, including fundamentals and technicals, the later he has less faith in, as ways to go for big returns. He figures if you are going to use the Variable Portfolio then you should try to hit homeruns with 10:1 ratios. He thought of the Variable Portfolio as a way to potentially get rich and the Permanent Portfolio as a way of preserving wealth.
One other thing to note is that in one of earlier books Browne said he believed the safe withdrawal rate of the Permanent Portfolio to be 5%. But keep in mind this was back when inflation was much higher today than it is now, so I would imagine that he would cite a lower figure today.
In the 4×25 a lot of people hold close to that 25% like religion. He actually said you could go as high as 35%, but not lower than 15% in any of the core four as long as you kept them static from then on and were not market timing. He said you could add a fifth item in there too, but hoped you would keep it small.
Hopefully some of these tidibts above were new to you and of value. For me it helped to see the progression of his thinking. I think this can help an investor in a few ways. First, to have more confidence in the system even in losing years. Second, knowing that you can change the allocations and assets slightly to something that you feel comfortable holding. One thing Browne said in his books is that he does not want anyone to blindly invest just because he recommends it. He said it is important the investor build their portfolio to fit their situation and comfort level.