The Permanent Portfolio And Joel Greenblatt’s Big Secret

The Permanent Portfolio And Joel Greenblatt’s Big Secret

I recently wrote an article for on an asset allocation strategy called the ‘Permanent Portfolio’ (PP). For readers who don’t know, or who haven’t heard about this portfolio approach before, it was first published in the 1970s by Harry Browne, a U.S. writer and politician (book).

Browne’s goal was to create a simple portfolio that would be easy to manage and protect his wealth in all market environments.

The approach is simple, Browne recommended investors separate their wealth into four equal buckets, allocating 25% to cash, 25% to gold, 25% in shares and the final 25% in long-term government bonds.

The Permanent Portfolio

According to, which compiles the returns of various investment strategies over extended periods, over the past few decades this investment strategy has produced steady returns for investors.

Since the 1970s, a portfolio constructed this way would have returned 5% per annum. In comparison, a traditional 60/40 stock bond portfolio produced an annual return 5.9% during the same timeframe. Considering the S&P 500 has produced an average annual return of around 10% for the past several decades, the 5% yearly return offered is not particularly impressive.

However, the PP’s most attractive quality by far is its exceptionally low volatility.

The average standard deviation of returns since the 1970s is 6.9% and the most substantial drawdown recorded was 14% — it took five years for the portfolio to return to its high water mark. The standard deviation for the 60/40 portfolio was 10.8%, and the most substantial drawdown was 34%. It took 12 years for the portfolio to recover from its most significant drawdown.

Joel Greenblatt's big secret

Put simply, theĀ PP is a simple approach to protecting and growing your wealth, particularly (thanks to the high gold allocation) during periods of high inflation.

The portfolio approach in itself, is relatively simple, but what got me thinking was a reader comment below the article:

“Sorry, this looks like a terrible long-term asset allocation. Since when does cash, bonds or gold outperform good businesses over the long run?”

I’ll admit, I hold a somewhat similar view. There is plenty of evidence which shows that gold and cash are poor investments over the long-term, and bonds are only slightly better. But I also think this misses the point. The PP was designed in a time when inflation was rampant, and interest rates were high, so the potential returns were greater then than they are today. However, what the PP still provides is stability and stability of returns. If we take what we know about investor behaviour, then this is bar far the more important benefit of using such an approach.

Investors (that includes you and me) are generally quite bad at timing the market, but this doesn’t stop us trying. Unfortunately, because we think we know best, our returns suffer significantly.

Joel Greenblatt’s big secret

Joel Greenblatt, hedge fund manager, investor, adjunct professor at the Columbia University Graduate School of Business and author of the Little Book That Beats The Market, has done a tremendous amount of work on behavioural investing over his career. Greenblatt built his reputation on the so-called Magic Formula method of picking stocks, which he publicised in the Little Book That Beats The Market. His approach is simple; find good quality stocks trading at low valuations by, and hold. This approach, he claims in the book, generated annual returns of 30% during testing.

The Magic Formula is a topic for another day. What I want to look at here is some of Greenblatt’s later work, which he published in another book eight years ago.

Titled, The Big Secret for the Small Investor, this is not a book of investing strategy, but investing behaviour. He tries to answer the question, why does the average investor struggle to make a profit over the long-term?

The answer is, we just are not patient enough:

“I wrote a book several years ago called the Big Secret for the Small Investorā€¦ In the book, I looked at several studies including the performance of the best mutual fund over the period 2000 to 2010. During this decade, the best long only equity mutual fund returned around 18% per year, compared to the market which was flat. The average investor in the mutual fund lost 11% a year on a time-weighted basis. The way that they did it is that after the market went up, people piled in. After the market went down, people piled out. After the fund outperformed, people piled in. After the fund underperformed, people piled out. That’s how they turned the 18% analyzed gain into 11% dollar-weighted losses.”

— Joel Greenblatt, Value Invest New York, December 2018.

So, what does this have to do with the PP? As noted above the most attractive quality of this strategy is its lack of volatility. The less volatility there is, the less likely it is investors will make a dumb mistake such as selling at the bottom or buying more of the top. To put it another way, the most significant benefit of using the PP approach could be its ability to protect your money from its biggest enemy: you.

There is a downside to all of this, and that is the relatively low returns that the strategy has produced over the past few decades. 5% per annum is not much, although it is significantly more than the 11% per annum dollar-weighted loss most investors end up with according to Joel Greenblatt’s figures.

Greenblatt’s books:

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