Jan 15, 2013

BkRev: The Permanent Portfolio

Craig Rowland and J. M. Lawson, The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy, Hoboken (New Jersey), John Wiley & Sons, 2012, 330 pages.

In an October 2, 2011 post, "The Most Important Books in My Life," for the "Money" category, I saluted Harry Browne's Why the Best-Laid Investment Plans Usually Go Wrong: How You Can Find Safety and Profit in an Uncertain World, written in 1987.

I can now suggest another book, published in 2012, as superior: Rowland and Larson's The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy, available on Amazon here. Rowland and Larson work from Browne's time-tested principles, explain them clearly, and show investors (at various levels from beginner to advanced, from small to large) how to implement those principles by buying particular investments from a variety of sources. My Amazon review is here.

The essence of the "permanent portfolio" idea is that our economic and political world is uncertain and volatile, and the best way to protect and modestly grow the assets earned through one's career is to invest in a way that takes advantage of that very unpredictability and volatility. There are four asset classes—stocks in productive companies, gold, bonds, and cash. Each initially takes up 25% of the portfolio. Usually some of the four classes are rising as others are falling. If one of the four 25% sectors rises beyond its band (35% of the whole), then, in the annual review, the investor sells the high performer and places the captured profits into the lowest sectors of the portfolio. (Meanwhile the portfolio continues to grow from reinvested dividends, capital gains distributions, and interest payments.) Over the long-term, the average rate of return has been about 8-9%, that is, about 5-6% above the inflation rate.

After the initial learning period, maintaining the portfolio requires little time and effort—perhaps an hour per year. I know from experience that this approach works. The portfolio grows (I seek 5% above the inflation rate), but with safety and with giving me a sense of peace no matter what the headlines of the day are screaming.

Sentence by sentence, the book is easy to understand. That does not mean the book is a quick read. I read one chapter—or less—each day. The authors present their material in an organized way and always give readers "road signs" for efficient reading. For example, "Level 1" readers (who are beginning investors, or do not want to be bothered with a lot of complexity, or have small initial portfolios) can concentrate on the Level 1 discussions and skim (or skip) the higher level discussions of each investment type. I would say I thoroughly read about half the book (taking a lot of notes), skimmed a fourth, and skipped a fourth.

Here is my salute to this book: Even though I have been following Browne's basic principles for about 40 years, after reading this book I have made some adjustments to my portfolio—adjustments which will probably improve my portfolio's performance a little and make it even more stable over the long-term.

To readers who want to protect the wealth they have earned from their careers, who seek modest growth, and who desire peace of mind in a volatile economy, I suggest reading the book.

Burgess Laughlin
Author, The Power and the Glory: The Key Ideas and Crusading Lives of Eight Debaters of Reason vs. Faith, here

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