In Search of the Perfect Investment

Cash is king, sort of, especially when the market sucks or is about to suck. What to do with cash now? My friends used to stick their money in multiple bank CDs. You used to get 3% for a year.  Now you get  1% — which is barely worth the agony of dealing with all those banks, many of whom require personal visits.

My Australian Westpac Bank CD came due this week. I looked at alternatives in Australia — bank bonds, corporate bonds, preference shares,  cumulative preference shares, etc. My friendly Australian bond trader who is actually called Vito explained that Australia had suddenly become popular. Overseas money was flooding the country down under and there wasn’t much supply of good high-yielding stuff left.

So, I simply renewed my CD at 6.3%.

My prayers are for the Aussie dollar. It’s now worth more than the U.S. dollar. Thank you, Mr. Bernanke. I’m praying the Aussie dollar will stay up. It should. The Australian economy is so well managed. And the American economy so badly managed. And there are so many things going gangbusters in Australia. For one, check out today’s earnings report on Rio Tinto. Net earnings rose 192%. Which, as they say in Australia, is better than a slap in the belly with a cold fish.

The Permanent Portfolio and How it works. This makes enormous sense. There are money managers that follow it. This is from Richard Russell, stockmarket doyen — that means old, smart guy:

February 9, 2011 — The late Harry Browne was a good friend of mine. The last time I saw Harry was when my wife and I visited him in Vancouver. I remember that Harry was complaining that in Canada, regardless of how much he pays, he can’t get anything done. What did Harry want done? He had a leak in the bathtub of his rented apartment, and although he had three different plumbers over to check it out, not one of them was able to fix his “blasted leak.”

Harry was a brilliant fellow. He had a “genius way” of cutting through difficult ideas and situations and rendering them simple and understandable and workable.

Back in the late-1970s Harry Browne came up with an ingenious method of investing. He called it his Permanent Portfolio.

In general, Harry did not believe it is possible to predict the future, and that trying to do so was futile. Therefore, he preceded to design a Permanent Portfolio that maintains one’s purchasing power over all time horizons, both long and short, and also independent of future market conditions.

Here’s how it works. He divided his portfolio into four parts. Harry argued that a balanced portfolio made up of stocks, bonds, cash and gold would hold up well, no matter what the circumstances. Harry felt that this combination would do well in any kind of an economy.

“Stocks, bonds, gold and cash combine to provide balance and safety, one that will do well in any economic environment,” he wrote.

Harry’s original strategy was to invest equally – 25% in each category – into four investments: growth stocks, bonds, precious metals and cash (T-bills or money market funds). …

Harry’s thesis is not lost. An outfit now runs what it calls the Permanent Portfolio, modeled after Harry Brown’s original strategy.

How it works. If any part of the portfolio has dropped to less than 15% or grown to over 35% of the total, then you reset all four segments to 25%.

Today, the Permanent Portfolio Fund has a similar mix:

• 25% precious metals (20% gold bullion, 5% silver bullion);
• 10% Swiss franc bonds yielding less than 2%;
• 15% real estate and natural resource stocks, foreign and domestic;
• 15% aggressive growth stocks;
• 35% in government securities, including T-bills.

Essentially, the Permanent Portfolio Fund is a low-cost, no-load hedge fund that requires little trading while offering “non-correlated” assets that avoids short-term volatility while enjoying long-term net gains. It also has the advantage of actually holding the metals themselves, not just mining stocks. During a stock market crash, mining stocks are likely to crash too, even though the metal itself rises (as was the case during the October 1987 crash).

The chart below is interesting. The red line is the Vanguard S&P 500 Index fund (VFINX). The black line is the Permanent Portfolio Fund (PRPFX). Interestingly, the Vanguard Fund holds $59 billion under management. The Permanent Portfolio Fund has $10 billion under management.

There is a good deal of information via the Internet regarding the Permanent Portfolio. Or you can call (254) 527-3102 for information and applications. For daily quotes, go to Google and punch in PRPFX.

Very recently the Fund hasn’t been doing as well. The one-year trailing return is 20.60%, while the Vanguard S&P 500 Index fund has a trailing return of 47.50%, and the Vanguard Target Retirement Income fund has a trailing return of 16.90%. But over the last 5 and 10 years, the fund has beaten out most balanced mutual funds of stocks/bonds.

By the way, I make not a penny on anything I recommend.

Confession — I manage my own accounts plus the accounts of my five kids plus the accounts of my five grand kids. This is one huge load of work, and I’m now over my head. After much thought, I’ve decided that what I need is a system or a method that does the work for me, something that I can trust. The Permanent Portfolio fits the bill, and this is where I’m putting a good deal of the various funds for my kids and grand kids.

Another problem. Maybe I read too much and think too much. I recently read the works of A. Gary Shilling and Bob Prechter’s Elliott Wave Forecast, and they provide really convincing reasons as to why we’re going into deflation. I read Larry Edelson and a dozen other advisors and they provide excellent reasons why we’re heading into hyper-inflation.

I watch the market, and it’s as mixed and as divergent as any market I’ve dealt with (and I’ve dealt with a lot of markets). I knew Harry Browne well, and I’ve always respected his thinking. The Permanent Portfolio started in 1983, and its record has been good over the years. The Permanent Portfolio lost money in only two years — 1981 down 3.9%, 1994 down 2.5%. It’s expenses are .82% and its turnover is 12.8%. Total assets $10.7 billion. Minimum investment:$1,000.

On today’s market, Russell writes:

The chart below continues to both puzzle and worry me. It’s the percentage of NYSE stocks that are trading above their sensitive 50-day moving averages. While the Dow continues to plow higher, this chart is deteriorating. Extreme liquidity appears to trump technical analysis — but not forever.

Ibex is having their winter sale. My children swear by the Ibex outdoor woolen clothing. I have one piece, also. It’s super great. Click here.

It’s time for a sex strike. A Belgian senator is calling on the partners of government officials to quit having sex with them until they can compromise on a governing coalition. Belgium held elections in June 2010, but after 241+ days, the country still hasn’t been able to form a government – only Iraq and Somalia have taken longer.

Here’s Belgium’s lonely empty  parliament chamber.

How about this for a job? Zimbabwe has a Secretary of Indigenization and Empowerment. His job is to make sure the Zimbabwe takes white owned assets and transfers them to preferred black people, especially those in his (oops Mugabe’s) party — the Zimbabwe African National Union-Patriotic Front (ZANU-PF)

Hint: When you see big words, you know they’re covering up something naughty.

All about Groupon. Yesterday I wrote how Groupon, the world’s fastest-growing company, had rejected a $6 billion takeover offer from Google and had just sold $950 million of stock at a valuation “north of $10 billion.” Yesterday, the New York Times’ excellent technology reporter, explained the excitement around Groupon:

Psyched to Buy, in Groups
By DAVID POGUE

You might think that this column is about Groupon.com, the white-hot Web site whose coupons save you 50 to 90 percent at local businesses. But it’s not. It’s about psychology.

Each day, Groupon offers for sale a deep-discount coupon from a business in your town. It might be a $25 coupon that buys you a $50 bike tune-up, or a $40 coupon for a $90 massage, or $25 for $100 worth of fitness classes. The coupons aren’t actually distributed until a critical mass of people (50, for example) have clicked “Buy.” After all, shopkeepers can’t afford discounts that steep unless there’s something in it for them.

If not enough people express interest, the deal dies. No coupons are issued, and nobody’s out a cent.

Groupon is, therefore, a huge win-win-win. You save eyebrow-raising amounts of money. Local businesses pick up a landslide of new customers overnight without doing a lick of marketing on their own (a Phoenix aquarium, for example, sold 10,000 tickets in 24 hours). And Groupon collects half the money from those coupons. No wonder it became profitable after only seven months.

Now, this concept — Internet-organized group buying — has been tried many times before. Remember MobShop? Mercato? LetsBuyIt? They all worked, in principle, the same way.

But Groupon is suddenly everywhere you look — in the headlines, on Facebook, in dinnertime conversations. The company says that it operates in 175 North American cities and 500 overseas, has 54 million members and has saved them $1.6 billion so far. In fact, Groupon is the fastest-growing Web company in history, having attained a $1.5 billion value in only 18 months.

(On the other hand, not all of the dinnertime conversation about Groupon is positive. The company’s SuperBowl TV ads last weekend backfired. One seemed to belittle the oppression of Tibetans under Chinese rule — “The people of Tibet are in trouble. Their very culture is in jeopardy. But they still whip up an amazing fish curry!”— and struck many viewers as juvenile and insensitive.)

Frankly, I couldn’t understand the big deal about Groupon. Why is it such a superstar when so many competitors labor in obscurity?

The answer: clever psychology.

First of all, Groupon’s sales staff tries to cultivate deals that suit the audience in each city. If you’re in San Francisco, you get offers for Segway tours of vineyards, flying lessons and skateboarding gear. In New York City, you’re more likely to see huge discounts on music lessons, theater tickets and interesting restaurants. In most cities, you’re likely to spot lots of deals for spas and cosmetic surgery, which hints at the upscale female customers who constitute Groupon’s biggest buyers.

In suburban Connecticut, where I live, I saw offers like “$10 for $20 worth” of Italian food at a restaurant nearby, “$15 for $30 worth of dry cleaning,” and “$10 for $20 worth” of goods at Barnes & Noble. Since that’s all stuff I’d buy anyway, I took the plunge. I bought the Barnes & Noble coupon and the restaurant coupon.

A few hours later, I received my coupons by e-mail. They pointed out that I could avoid printing the coupons if I used the free Groupon app for iPhone or Android phones.

At the bookstore, I picked out a couple of books totaling $23. I showed my phone to the cashier, who had been trained to enter the Groupon codes. I was the ninth person that day to cash in.

I paid the $3 overage, and that was it. I loved it. I’d just gotten $10 worth of books free. It almost felt as if I’d shoplifted.

More psychology, of course. It’s absurd that I should have felt so giddy. I mean, is saving $10 such a landmark event? The last time you bought a house, a car or even a night at a hotel, did you haggle for another $10 off? You probably could have gotten it. But you didn’t.

Somehow, though, in the Groupon context, it feels like a steal. There’s something about the simple phrase, “$10 for $20 worth of stuff” that gets you.

Furthermore, your coupon is good for anything in the store. It’s not the same as a Half-Off Sale, where the store chooses what goods to discount.

That “tipping point” business — the minimum number of takers an offer has to have before it becomes valid — is part of the psychology, too. Sure, this element was created to protect the merchant’s interests. But let’s face it, the tipping-point requirement adds a certain thrill to the proceedings. You’re invested in the outcome.

Even the scarcity of deals — one each day — plays on your feelings. It adds to that sense of exclusivity and of serendipity.

So does the Groupon editors’ whimsical description of each deal. (“A beloved book is like an old friend: full of familiar stories, rich in endearing details and just as enjoyable when covered in highlighter,” began the Barnes & Noble coupon. “Make a new literary acquaintance with today’s Groupon.”)

Finally, Groupon also seems to be extraordinarily free of red tape and clutter. The fine print is labeled “The Fine Print” in a big bold font, and there’s not much to it: usually just an expiration date and “Limit one per person.”

In truth, there is more fine print. But it describes the whole concept, not any one particular deal. A few things can go wrong.

The biggest gotcha is that expiration date. Oh, it’s plenty generous — usually six months to a year. But you know how people are with coupons; we forget them. We lose them. Once again, Groupon has built psychology into its business model. Every time someone forgets to use the coupon, that’s free money for Groupon and the merchant.

Some Twitterites complained that Groupon’s overwhelming something-for-nothing appeal persuades them to buy things they’re not actually interested in. (Kind of hard to blame Groupon for that one.)

Then there’s the Groupon Effect. Groupon lore is rife with stories of small businesses swamped by the response — a yoga studio, family photographer or helicopter-ride outfit getting 1,000 calls a day, for example. That kind of overload isn’t a win-win-win; it’s a mess. (Groupon now encourages susceptible small businesses to set a maximum number of coupons for each deal.)

Finally, the occasional deal goes wrong. When I asked my Twitter followers (I’m @pogue) about their Groupon experiences, most — both customers and merchants — were ebullient. But a few reported flawed transactions, shelves picked clean by Groupon hordes and businesses that had gone under since the coupon was offered. (Groupon issues prompt refunds in that case.)

But never mind all that; this Internet trend is on fire. Groupon imitators are everywhere.

For example, LivingSocial, Groupon’s closest competitor, is in 175 cities and says it has 20 million members who have saved $300 million. Its also offers sub-services dedicated to deals for family activities and fixed-price travel getaways.

Then there’s BuyWithMe (12 cities; you have a week to buy rather than a day); BloomSpot (eight cities, several offers a week); CrowdSavings.com (six cities, no tipping point); GiltCity (six cities; luxury stuff like restaurants, spas, museums, galleries; no tipping point); Jasmere (price goes down the more people buy in). That doesn’t even count Weforia, Coupme, Groop Swoop, Groupalia, TownHog, TeamGrab, Agenzy, DailyQ, Tippr, Woot, Ideeli and eWinWin. Like Groupon, most give you financial kickbacks for roping your friends into getting involved.

These group-buying sites represent an effective, no-strings blessing in tough economic times. You really should try them. There’s very little risk, and an enormous upside: the triumphant feeling of having gotten something for nothing.

And now, if you don’t mind, I have to wrap this up. I’m off to order $50 worth of Italian food that I bought for $25.

The accommodating hotel.
Being a modest man, when I checked into my hotel on a recent trip, I said to the lady at the registration desk:   “I hope the porn channel in my room is disabled.”

To which she replied, “No, it’s regular porn, you sick bastard.”

Harry Newton who wonders about American Express. I wrote about my friend Peter being really pissed at the 2.7%  “foreign transaction fee” Amex had added to his Platinum bill. He had  spent a  week at the Maroma Resort and Spa somewhere in deep, darkest Mexico.

A bunch of readers wrote in and said, “Heh, Capital One (and other banks) issue credit cards that don’t charge a foreign transaction fee. (It turns out that my Citibank Visa actually charges 3%.)

Well, the story doesn’t end there. Seems Peter was pissed enough to call Amex back and bitch. Says Peter, “When I challenged them this morning they said they’re dropping the fee as of March 1. Where does that leave me? I’m caught in their 60-day trap. That’s how long Amex charged the 2.7% fee before the demonstrations and rock-throwing started outside their headquarters palace… Or am I mixing all that up with Egypt?

Hold on. It gets better. I read in the New York Times:

“There will be no ending of the regime, nor a coup, because that means chaos,” Mr. Mubarak’s hand-picked successor, Vice President Omar Suleiman said. He warned the protesters not to attempt more civil disobedience, calling it “extremely dangerous.” He added, “We absolutely do not tolerate it.”

Egypt is, of course, a police state. I read somewhere that as many as 17 million of Egypt’s 85 million people are paid by the government to spy on their neighbors. Egypt’s prisons are loaded with political prisoners being tortured. Makes you feel wonderful to know that the U.S. has been funding the Mubarak regime to the tune of at least $1.3 billion a year. We’ve been played for fools. Egypt’s future depends on how much longer its police, its military and its secret police are prepared to arrest, torture and kill their fellow citizens.