1/1 Permanent Portfolio Update

I have been delayed in making this post due to some real life distractions. The year ended 2021 was a weak one for the portfolio, with a +5.70% return versus nearly +13% for a global 60/40 allocation and a blistering +28% for the S&P 500. A simple 50/50 NTSX/GLD portfolio would have returned +9.03%.

The full set of performance statistics is available here.

Current allocation:

You’ll notice I’ve made some allocation changes, notably by introducing a US small/micro cap value fund into the mix. This is a discretionary adjustment I’ve made as an initial, adaptive step in a macroeconomic and market environment that seems increasingly supportive of “value” (defined here as “statistical cheapness”). Since the purpose of this portfolio is to provide a stable core for one’s net worth, incremental adjustments are the order of the day.

2022 is shaping up to be a very interesting year so far. As I write this, this S&P 500 is -7.66% for the year. However, this bellwether belies huge dispersion across equity styles. US Small Caps as proxied by the Russell 2000 are down nearly 11.50%, and the Russell 2000 Growth index is down nearly 16% (!!). Ex-US and “value” style securities have delivered much more muted declines. Treasuries are down slightly and gold is flat.

All in all, the current market trends are relatively more favorable for a diversified portfolio such as this one. I say “relatively” because if 2022 plays out as the dominant narratives expect we are going to see rising interest rates, slowing growth and elevated inflation. A nasty cocktail for financial assets. Such an environment is one where most long-only allocations will be “taking their medicine.”

Nonetheless, a relatively stable portfolio core with some downside protection should provide a base of capital that can be selectively redeployed into the pain to scoop up some bargains in individual securities. I have a feeling there will be plenty to look at this year!

12/1 Permanent Portfolio Update

Updated performance statistics available here. The portfolio was -1.80% in November. This compares favorably with many equity market segments (US large cap being a notable exception). Relative to a “vanilla” US-equity-only implementation, ex-US equity exposure and a growth style tilt weighed on performance.

Month-to-date in December, the portfolio has been relatively flat, down 12 basis points. Overall it is shaping up to be a very mediocre year for the strategy (which I may write about more when the full year is on the books).

Current allocation:

Not Another Dune Take!

But yes. Another Dune take. I watched the movie over the weekend. Here are some unfocused thoughts. They are not particularly organized or polished. If you are not interested in Dune or the Dune movie you can safely skip this.

Overall, I thought this was about as good a Dune movie as you can make in a standard movie runtime. The challenge (and temptation) facing anyone adapting Dune to the screen is that it lies partway between space opera/fantasy (Star Wars) and what I will call “concept sci-fi” (The Three Body Problem; Solaris). Space opera films quite well. Concept sci-fi is trickier. It can involve action, but is typically more about ideas than characters. The things that make Dune uniquely Dune do not necessarily film well. They are more conceptual than operatic.

Villeneuve’s film uses production design and cinematography to pull some of the conceptual weight. It all “feels right” relative to the book. It leaves you feeling that the production team “did their homework.” Some of it may have been lifted directly from the thwarted Jodorowsky Dune adaptation (the Giedi Prime establishing shots come to mind). The “weight” of the novel’s worldbuilding comes through on the screen.

Problems? Conceptual issues aside, even in superficial plot and character terms there is a lot of stuff to jam into a Dune movie’s runtime. Inevitably, and even split into multiple parts, things end up feeling rushed. To a fan of the book, the first third of the movie feels extremely rushed. Borderline disjointed. (spoiler) As a result the downfall of House Atreides doesn’t quite feel “earned.”

To me the most natural form for any Dune adaptation is television mini-series. Perhaps this was considered and abandoned (I don’t know all the backstory). I suspect there are at least two seasons’ worth of material in the portion of the story covered in this first Villeneuve adaptation. This would allow the audience some time to marinate in the ambience. It would also reduce the need for clunky expository dialogue. These info-dumps are expedient but jarring, in contrast to the novel’s show-don’t-tell style of exposition.

10/1 Permanent Portfolio Update

Whoa. I really got behind on these updates. Here is the current portfolio allocation:

There have been some modest changes over the past three months (embarrassingly my last update covered through June). These are the result of market moves and also some mild rebalancing as I had cash flows into the portfolio.

The detailed performance comparison data is available here.

2021 continues to be a “take your medicine” year for the strategy. It’s a good illustration of why more people don’t invest like this. This kind of relative performance is trying, even for someone who has spent a good deal of time “doing the work” on the strategy.

Longer term, the static allocation (Portfolio 2 in the data) continues to perform as expected. The difference between this return stream and Portfolio 1 (the live track record) is partly why I decided to jettison the tactical elements of the original strategy. In 2020 the tactical overlays kept a significant portion of the portfolio in cash well past the nadir of the Covid drawdown. This led to poor up capture in the latter half of the year.

Source: Portfolio Visualizer / Demonetized Calculations

Ebb and Flow

Something I’ve realized over time is that my creative energy ebbs and flows.

Flow (might as well just say “flow state”) is a delight.

The ebb periods can be brutal. Ebb periods go by lots of names. Blocks. “Resistance.” Creativity at a low ebb is painful. It is a depressive and somewhat neurotic state. When I was younger, my response to ebb periods was “delete everything and start over.” This was counterproductive. The best response to ebb periods lies in discipline.

I admire people who will knock out 1,500 words per day and just sit in front of a notebook or computer for as long as it takes to get that done. On the good days that could be an hour or two. On a bad day it could be half a day or more. I am not one of these people. For me, it’s better to ride the waves.

When you’re playing bad golf, your #1 problem is mental. It’s a loss of confidence. Tentative swings produce bad shots. A big part of scoring better (no matter your handicap) is developing strategies for finding confidence when it runs away and hides on you. The key understanding here is that your confidence (and/or skill) hasn’t disappeared. It’s just hiding away. (here I have shamelessly stolen this concept from the book Every Shot Must Have a Purpose).

I suspect the self-destructive tendencies people associate with creatives are rooted in unhealthy responses to ebb periods. A creative person unable to create feels as though a piece of her soul has been amputated. It is a kind of a trauma. It is natural, if unhealthy, to try to numb this with sex, drugs and booze. For some people this is a matter of life and death.

For me, surfing the ebb and flow of creativity means trusting that these states are temporary. When I’m down, I must trust that the highs will come back. When I’m up, I must recognize that eventually whatever creative euphoria I am experiencing will eventually ebb. For me, these cycles tend to last a few months to a year at a time. Consistency of output is a coping strategy, but it’s not a cure.

There is a deeper issue at play here: what is the purpose of creativity? What role does it play in my life?

There was a time when I would have said I wanted to make a career out of it. That wasn’t the right path for me. Making a career out of creativity ended up feeling like a shit compromise between earning a living and being creative.

Lately I have been thinking about how creating makes me feel. It is more or less a brain wipe. A productive creative period empties out my head. This is the mental and emotional equivalent of how you feel physically after crushing a difficult workout. It is a feeling of wholeness. I have seen this described in fairly woo terms as a form of co-creating with the universe. I think there’s something to that, even if it’s just some weird, evolved physiological response.

Power and Morality

(WARNING: Intense woo ahead)

The last post was about the nature of power.

This post is about moral and ethical considerations. To this end, I find the following table helpful.

Source: https://rpad.tv/2014/02/20/coffee-talk-615-whats-dungeons-and-dragons-alignment/

This one’s a little easier.

Source: https://rpad.tv/2014/02/20/coffee-talk-615-whats-dungeons-and-dragons-alignment/

If you are anything like me you will recognize these immediately as D&D alignments. Over time I have found this a surprisingly useful model for morality and ethics. For the sake of brevity, I’m not going to get into the ur-source for associating good with the the desire to uplift and protect the dignity of sentient beings and evil with the impulse to subjugate, oppress and destroy. Going to simply refer you to the discipline of moral philosophy on that one.

Now for the woo.

What I appreciate about this model is that it’s just a taxonomy. It isn’t normative. And likewise in the game of life, we are all just LARPing our own conceptions of self. There is something to the idea that people tend to embrace either the lighter or darker side of human nature. My personal cosmology is very much centered on the push and pull across a range of dualities. Altruism/selfishness. Creation/destruction. Order/chaos.

I’ve been tempted at times to believe a rich and meaningful existence is balanced on a knife’s edge between an infinite series of dualities. These days I’m more of the mind that the cosmos is a churning sea of chaotic forces (chaotic in the mathematical sense). These forces act on us externally in our physical reality and internally in our feelings about and models of that reality. You can flow with these forces or you can fight them. The output of this process is your character. Like, literally, in a deep sense, as well as in the superficial context of an elaborate D&D metaphor.

There is no objectively “correct” moral or ethical alignment. It’s all about which cosmological forces you choose to embrace and perpetuate with power.

“I don’t make choices about cosmological forces at all,” some might say.

In my view, whether we choose to think of the actions we take every day as choices is irrelevant. They are still choices.

From this point of view, the morality of power is simplicity itself. What do you want to manifest in the world? The answer is your moral and ethical code.

Now that’s not to say this is an easy or comfortable question to answer. Not if you’re being honest (as opposed to just vomiting up whatever you’ve been socially conditioned to adopt as moral values). If you’re anything like me, you will find honestly exploring the answer to that question often results in odd and irreconcilable contradictions. There is a difference between what you really want, on a “primal” level, and what you tell yourself you want on the basis of socially conditioned rationalization.

People tend to think of themselves as “good.” Yet there is an awful lot of “evil” in the world. I suspect this is simply because most people are just not very honest with themselves.

I am becoming more comfortable with accepting the contradictions and hypocrisy I find inherent in the human condition. Generally, I gravitate toward the light side of things (if you are curious my RPG characters lean toward the wizard archetype, usually with Neutral Good alignment). But I have some fascination with the dark bits as well (see: wargaming hobby). And in my own way I am pretty selfish and even a little greedy. I have to be mindful of overfeeding my selfish and greedy aspects. I do not always succeed. Such is the human condition.

I suppose you could call al this a moral compass.

Where exactly did it all come from? No idea.

And I’m not sure it matters, either.

Power

Everything is turning into a loaded term these days. Power is no exception. I am not a fan of the current public discourse around power. To my eyes this has degenerated into a turgid morality play. (Though in fairness, public discourse around any topic has a tendency to do that)

I like to think of power in neutral terms, as a kind of force. Like gravity. What does that force do? It compels. Power operates on a spectrum of intensity, from subtle influence to physical coercion.

Different attributes and abilities strengthen and weaken any given individual or group’s power. Power has many different sources. Different types of power are fungible, to varying degrees. The most obvious example of this fungibility is with money. If you happen to have a lot of material wealth, say generational wealth, you have lucked into a major source of power. It is trivial to convert money to influence. Hell, mere proximity to wealth can be a source of power.

Another example is being super hot (extremely attractive). Being super hot is a kind of power. It is a form of sexual power. Sexual power, too, is fungible, though not to the same degree as money. For example, if I am super hot I can become a trophy husband and trade hotness for material comfort. (IRL this option is not available to me) Of course, the term “trophy spouse” implies another power relation. You can extend this kind of thing on and on and on.

To me, it is trivially obvious that human civilization is a web of power relations.

This is neither inherently good nor bad. It merely IS. Toss a rock out a window and it falls. Put humans together in groups and you get webs of power relations. This is a fractal pattern that runs from the nation state to the bedroom.

“I don’t have that kind of relationship with my husband/wife/partner,” some will insist.

To which I say: LOL. LMFAO.

As long as you sometimes have conflicting interests and desires, you have some level of conflict that needs resolving. And if you have some level of conflict that needs resolving, the balance of power in the relationship will influence that resolution. Again, that statement isn’t a value judgment. In good relationships, conflict is resolved through mutually empowered negotiation. In toxic relationships, conflict is resolved through emotional and physical coercion.

Here I’m touching on the ethics of power a bit, though the ethics of power are beyond the scope of this post. The ethics of power have no bearing on the nature, existence or pervasiveness of the web of power relations that shapes human interactions. The ethics of power are about the means and ends to which we exercise power. .

There is quite a bit of intention around the use of the term “web” here. A frustrating and pervasive mischaracterization of power is that it is some kind of weird binary–that you either have power or you don’t.

Power is not a binary concept. It varies in its precise nature and intensity. Read up on Nelson Mandela’s time in prison sometime. Mandela possessed extraordinary power, though not always in a conventional political sense. Mandela, and indeed all great leaders, understood the fungibility of power intuitively.

Another abuse of the concept of power that frustrates me is when it is used to pass moral judgments. “Having power = bad. Not having power = good.” That kind of thing. But weakness itself is not a virtue, and strength itself is not a moral failing.

Of course, if we want to get meta about it we can observe that occupation of the moral high ground (the perceived moral high ground, anyway) is a source of power. If we want to get extra meta (and I always do) we can further observe that the ability to define what constitutes moral high ground is an even more fundamental kind of power.

If you feel you are locked out of power, a decent strategy is to redefine the discourse. Not all wars are fought in meatspace. Insurgencies can be waged over ideas.

06/21 Permanent Portfolio Update

Due to my recent data issues, I’ve moved the performance tracking for the live leveraged permanent portfolio strategy over to Portfolio Visualizer. Fortunately, I was able to recover old performance using past updates posted on the blog.

Below is data since I went live with the strategy. Portfolio 1 is the live track record for my implementation. Portfolio 2 is the performance of a static allocation to my implementation since inception. Portfolio 3 is 100% SPY.

Source: Portfolio Visualizer & Demonetized Calculations

As you can see, my implementation has underperformed the static allocation. Bummer. The reason for this is that up until 2020 I was adjusting the gross exposure based on trailing volatility. The strategy de-risked significantly in March 2020 and was slow to get invested again. I’ve since decided to drop this aspect of the strategy and stick to a relatively static allocation with occasional rebalancing going forward. I’m confident the divergence between the live implementation and the static-since-inception implementation will narrow over time.

Current allocation:

33% S&P 500 Futures

22% Laddered Treasury Futures

33% Gold

28% ex-US equity (active mutual funds)

~118% gross exposure (numbers above are rounded)

Periodically I get questions about quirks of this implementation. The lack of US small cap exposure, for example. There’s a simple reason for this. For structural reasons, this isn’t my whole portfolio. I can’t own this strategy in my 401k. Also, I invest in a concentrated portfolio of individual securities with a sleeve of my net worth. So overall, I have that exposure. If the leveraged permanent portfolio were 100% of my portfolio, I’d bring in more of that US small and mid-cap exposure. As I’ve said many times, the philosophy underlying this approach is extremely flexible.