Jay O'Keefe's Portfolio

Below are figures that illustrate my portfolio's performance during the last month, the current year and since 1-1-00. For simplicity, I have assigned a value of 100 to my portfolio on 1-1-00, hence the title Jay’s PF Index. Later dates show what $100 invested in my portfolio has grown to. In addition, for comparison purposes, you will see my portfolio compared to gold and the DJIA compared to gold for all of these periods of time.

V A L U E S
Date
Silver
Price
in USD
Jay PF
Index
in USD Gold
Price
in USD Oz. of
Gold /
1 USD

JPF/Gold

DJIA

Dow/Gold

01-01-2000 5.00 100.00 282 0.003546 0.3546 11,650 41.3121

01-01-2010 16.92 396.85 1,097 0.000912 0.3618 10,600 9.6627

01-31-2010 16.19 379.86 1,080 0.000926 0.3517 10,067 9.3213

02-28-2010 16.49 385.41 1,118 0.000894 0.3447 10,325 9.2352

P E R F O R M A N C E
Period Jay PF
% Chg
in USD Gold
% Chg
in USD
USD/Gold
% Change
JPF/Gold
% Change
DJIA
% Chg
Dow/Gold
% Chg

02-01-2010 to 02-28-2010 (Feb 2010) +1.46% +3.52% -3.46% -1.99% -2.56% -1.94%

01-01-2010 to 02-28-2010 (YTD 2010) -2.88% +1.91% -1.97% -4.73% -2.59% -1.94%

01-01-2000 to 02-28-2010 (122 mos.) 285.41% 296.45% -74.79% -2.79% -11.37% -77.14%

Notes:
(1) "USD/Gold % Change" is simply the reciprocal of the gold price in dollars. You cannot precisely compare the dollar with gold without adjusting for interest. The dollar earns interest. Gold does not. With interest rates near zero, this seems insignificant, but over time it is not. Interest rates must eventually rise. On the other hand, GATA and other experts on gold claim that the price of gold has been artificially manipulated downwards for many years by concentrated short selling on the futures markets. Some experts also believe that a significant percentage of physical gold supposedly held by futures exchanges does not exist. Furthermore, central bankers regularly talk down gold. After all, it competes with their fiat currencies and threatens their job security.
(2) The Dow Jones Industrial Average (DJIA) does not include dividends given to shareholders. These are typically reinvested, but nowadays the dividends are usually quite small. It also does not include the brokerage fees and capital gains taxes that usually accompany investments in the stock market.

I made two transactions during February. They are listed under Jay’s Recent Transactions. Here is my portfolio as of February 28, 2010:

CASH
29.6%
(MINIMUM 30%)
(US Treasury Bills 7.5%, HAGRF 6.5%, Bank deposits & Money Market 15.6%)

GOLD & SILVER 43.7% (MINIMUM 30%) Gold – 16.1% (Swiss 1-oz bars 5.6%, 1-oz Kruggerands 10.5%)
                         Silver – 27.6% (90% coins 18.3%, 1-oz eagles 2.4%,
                                                1000-oz bars 2.6%, SVRZF 4.3%;
                                                 note: silver was up 1.85% in February)

MINING SHARES 16.1% SSRI 5.5%; GDX 4.3%; SLW 3.5%; SA 1.0%; VGZ 1.0%; AUY 0.8%

NON-GOLD & SILVER PHYSICALS 10.2% Oil & Gas W/I – 10.2% (Non-publicly traded investment)

PUTS & CALLS 0.4% SSRI Jan. 21, 2012 Call, strike 30

TOTAL 100.0%

Jay O'Keefe's Portfolio, Feb. 28, 2010 Comments

In managing a portfolio, I believe it is good from time to time to pause and assess where you are and how you got there. I’ve tried to make that an easy thing to do by posting the monthly portfolio updates for the last two years. They are posted at Jay's Recent Portfolios. In preparation for writing these comments, I just finished re-reading the Comments section of the updates for October, November and December of 2009, and January of 2010. If you can spare a half hour and find a quiet place, I suggest you do the same. I found it very profitable. Those four reports explain why my portfolio has become simpler and more concentrated in two major allocations, cash and precious metals. They explain why I have increased my cash, why I continue to hold direct ownership in an oil and gas investment, why I no longer hold ETFs funded by commodity futures contracts, and why I hold a modest speculative position in mining shares including a tiny position in calls on a mining company (see last paragraph below).

Now I wish to continue on a current assessment of my simplified allocation.

The 50-50 Portfolio Strategy

Over the years I have noticed that from time to time, one or more of my experts have recommended what might be called an ultra-simplification of the Permanent Portfolio (PPF) strategy, 50% gold and 50% cash. The logic is that the portfolio is equally divided into a hedge against inflation (gold) and a hedge against deflation (cash). Harry Browne’s original PPF strategy was also equally divided, but his inflation hedge was half common stocks and half gold, and his deflation hedge half cash (T-bills) and half long term Treasury Bonds.

It’s only been a few weeks ago that Richard Russell again mentioned the 50-50 strategy, and disclosed that his own portfolio was currently structured very close to that allocation. Think of the leisure and stress reduction of managing such a portfolio…no chasing after all the investment ideas we are bombarded with day after day, no attempts to call the short term up and down moves in the stock market, etc., etc. I decided to check out how such a portfolio would have fared. If you had begun a $100 portfolio with $50 cash and $50 gold bullion on January 1, 2000, and made no changes since, it would have increased to approximately $259 on January 1, 2010, a compound rate of growth of 10% per year. The reason I use the word “approximately” is that I assumed the cash would earn a little over 2% per year. Over long periods of time, safe cash has earned more than this on average. Currently, it is not. Interestingly, this rate of annual return is just about the same as the Permanent Portfolio Fund (PRPFX) has earned since the 1970s.

But wait, gold has not yet risen even half way to its 1980 high adjusted for inflation. Here’s a quote by Richard Maybury from his March Early Warning Report, “During feeding frenzies, markets usually overshoot, so I think before the great monetary calamity ends, probably somewhere between three and ten years, gold will hit $10,000 at least. Bear in mind, however, I’m not saying gold will rise that much. I’m saying the dollar will fall that much.” We’ve hardly even begun the bubble stage for this bull market. The biggest move lies well ahead. I want to make sure God’s wealth entrusted to my stewardship participates in the move.

Other experts have mentioned similar approaches to the 50-50 strategy. The one thing I find common to all of them is a large cash allocation at almost all times. This large cash position is by definition a hedge against an unexpected and unpredictable deflationary crash. But they have a far more important reason for holding it. They want to be in a position to act when opportunities to buy “hated” assets arise. Such opportunities come along only once every few years, after the crowd has liquidated an asset class, and there are almost no buyers interested. Jim Rogers has a great way of expressing this which I have burned into my memory. He says, “I wait patiently until I see money lying in a corner, then I just walk over and pick it up.” Think a moment about the mental picture this statement creates. Why doesn’t the crowd walk over and “pick up the money”? Because they don’t see it! It’s over in a corner. There’s no crowd lined up to buy the investment. If you have to stand in line to invest in something, you’re looking in the wrong place. People line up (or get on subscription lists) to buy IPOs (Initial Public Offerings). As a class, IPOs are one of the most over-hyped, over-valued investments you can make. Studies show that on average one year after an IPO, it will be down 50% or more.

Admittedly, it is difficult for small investors to perfectly emulate the wealthy experts. We don’t have the luxury of being able to hold huge cash reserves. But we can follow them by letting them identify a hated asset class, then make our investment with them near the bottom while scrupulously following a few other sound principles (investing only money we can commit for several years, having no debt, living on less than we earn and saving the difference, etc.). Rogers identified commodities as a hated asset in 1999, and wrote his great book on it in 2004, Hot Commodities. The message of this book is still pertinent today. If you have not read it, I highly recommend you do so.

I wanted to mention the 50-50 Strategy before introducing a new potential expert who has come to my attention.

Introducing Chris Weber

Chris Weber is one of the writers for the Stansberry Research group (publishers of The Daily Crux and many other publications). He is about 50 years old. He writes The Weber Global Opportunities Report (published twice monthly, $249 per year, www.weberglobal.net ). I kept hearing comments from the other writers for Stansberry Research, like this one, “If I had to pick one person to manage money for me, Chris would be that person.” I decided to give him a try. I took out a one-year subscription. After reading the three most recent issues and several back issues, I was amazed. Here are a few brief quotes from his latest issue.

“In my way of thinking, the stock market has given a rare reprieve to those who hold most of their money in it. This is a time to be moving out. You don’t even have to abandon the stock market entirely (though I myself very nearly have). You can just lower the percent you hold in stocks to 33% or so.

“Cash and physical metals could make up the other two-thirds. You can have some precious metals stocks, but try to arrange things so that you own them with as little risk as possible, and have patience. A new leg down in the general market could take down all stocks, even the mining stocks.

“I know it can be hard for people to visualize what they grew up with completely being turned on its head. But investment history teaches us that this is exactly what happens, time and time again.”

Wow! This is amazingly close to my thinking, but he has some valuable insights on how to apply patience to investing. That’s something I need. Here are two more quotes.

“So far if you look at the markets this short year, you get a picture of deflation. Nearly every asset has fallen in value except cash, bonds and gold. These are the very assets that rose in value during the last great deflation of the 1930s when everything else fell. It is still too soon to say that we are repeating that tragic period, but the actions so far this year should give pause to anyone who thinks that deflation is impossible.”

“Let others do and think what they may: for me I’m most comfortable sitting in a mix of cash and precious metals. For the great majority of my holdings, this is the mix I’ve had for a while, and I’m comfortable doing nothing to change it.”

This is exactly the same conclusion I have reached. I should also mention that Chris speculates with a very small part of his portfolio, similar to Harry Browne’s Variable Portfolio, which is separate from his PPF. I am looking forward to Chris’ ideas for this part of my portfolio.

I’m adding Chris to our list of potential experts. I’ll keep him on probation for a time, but from what I’ve seen so far, he is a (younger) man after my own heart, and I expect him to add value to my portfolio in the future.

My Speculative Positions

As mentioned in the first paragraph above, I currently have two speculative positions in my portfolio, a portfolio of mining shares with a target allocation of 15%, and a tiny .4% position in 2-year calls on Silver Standard Resources Co. Limiting my mining shares to 15% on a cost basis, and owning no other common stocks is my way of controlling stock market risk. I am prepared to hold this small portfolio through thick and thin until we reach the bubble stage of the secular gold and silver bull market. This could be as soon as 2 years, or as long as 10 years in the future. My best guess is 3 to 5 years, but that’s only a guess. My calls on Silver Standard are a way of risking a small amount of money for a chance at making a return of 10 times to 100 times. This is a more sophisticated kind of investment requiring a brokerage account which allows purchase of options, and requiring approval of the account owner to purchase them. For that reason I have not tried to explain option investing. If any of you think you are interested in doing this, I’ll do my best to help you. Chris Weber occasionally adds this kind of investment to his portfolio. If I like one of his ideas, I’ll let you know.

Final Thoughts for the Month

Cast your bread upon the waters,
For you will find it after many days.
Give a serving to seven, and also to eight,
For you do not know what evil will be on the earth.
If the clouds are full of rain,
They empty themselves upon the earth;
And if a tree falls to the south or the north,
In the place where the tree falls, there it shall lie.
He who observes the wind will not sow,
And he who regards the clouds will not reap.
As you do not know what is the way of the wind,
Or how the bones grow in the womb of her who is with child,
So you do not know the works of God who makes everything.
In the morning sow your seed,
And in the evening do not withhold your hand;
For you do not know which will prosper,
Either this or that,
Or whether both alike will be good.

(Ecclesiastes 11:1-6 NKJV)