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Fail-Safe Investing

Fail-Safe Investing is a condensed but comprehensive publication of the late Harry Browne’s permanent portfolio investing philosophy. Browne begins with an important distinction: the difference between investing and speculation. An investment is a long-term position in dividend paying stocks or an interest bearing savings account or money market fund, as part of a diversified and balanced portfolio. Speculation is picking individual stocks or mutual funds based on fundamentals and/or technical analysis on a more short term basis with the belief/expectation that you can beat average market returns. Most successful speculation is based on a contrarian approach (i.e., buy when everyone else is selling and sell when everyone else is buying). Browne states that there is nothing wrong with speculation but you should only do it with money you can afford to lose. Do not speculate with your retirement funds.

While Browne was a libertarian by philosophy, his investment advice is consonant with that of the Bible. “Cast thy bread upon the waters: for thou shalt find it after many days. Give a portion to seven, and also to eight; for thou knowest not what evil shall be upon the earth” (Ecclesiastes 11:1-2). “He that hasteth to be rich hath an evil eye, and considereth not that poverty shall come upon him” (Proverbs 28:22). You cannot predict the future and while luck can result in occasional fortune, the pursuit of quick riches will result in sorrow and loss 99% of the time.

Browne’s recommended portfolio can be set up in a day and only requires one day a year to monitor and rebalance if necessary. A basic Browne portfolio would allocate funds equally between the following four asset classes: stocks, bonds, gold, and cash—so that each class comprises 25% of the portfolio. Thenceforth, on an annual basis, the portfolio should be rebalanced if necessary. A portion of any class that has appreciated to over 35% of the total value should be sold to bring the value of that class back down to approximately 25% of the total value and the proceeds used to bring the value of any class fallen below 15% back up to approximately 25%; if no class has fallen below 15% then used the proceeds to bring any class(es) fallen below 25% back near 25%. When you do this you’re buying low and selling high.

Browne warns investor to avoid the lure of following some ‘guru’ who has had a hot streak because in accordance with Murphy’s Law, as soon as you subscribe to his service his streak will turn cold and you’ll lose money. A former manager of the famous New Orleans Investment Conference has recounted the penchant of people to seek out gurus in pursuit of quick riches. Each year, following a lucky call or two, a few gurus would gain fame and draw scores if not hundreds of people to their sessions at the conference. Conversely, Harry Browne, though a perennial guest speaker, had trouble drawing a dozen people to his presentations. His sensible approach held no promise of quick riches and was just too boring. Invariably, the gurus’ lucky streaks would end and their latest recommendations would cause their followers to lose everything they’d made them plus more.

In closing, Browne notes that you should not invest to prove something and that humility is an investor’s most vital asset.

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