The Past Does Not Predict the Future

Johnny Carson as the Amazing Carnac

Johnny Carson as the Amazing Carnac

Have you seen the statement from the SEC that states: “Past performance does not guarantee future results?”

Harry Browne once said that the above was one of the only true things he ever saw come from a government agency. However, it’s also the core belief behind the Permanent Portfolio strategy.

While I have presented an analysis of the portfolio performance from the past, it is important to remember that this does not prove anything about the future. It just shows that the strategy has survived to this point. This means that there is no guarantee in the world of investing no matter what strategy you are using. Whether it’s the Permanent Portfolio or something else.

However, what the Permanent Portfolio attempts to do is give you wide enough diversification so you have a better chance of prospering in an uncertain future. This is not a guarantee, but an attempt to disperse the risks of investing across disparate asset classes so a very bad event that happens to one part of the portfolio is not fatal to the rest. So while nobody can promise the portfolio strategy will always work going forward, what we can do is diversify in a way to try to minimize the impact of the unpredictability of the future. That’s simply what the Permanent Portfolio tries to do.

Over at the Bogleheads forum, Taylor Larimore reminded readers on the massive Permanent Portfolio Thread about this statement. To build upon this idea, I went through the first chapter of Harry Browne’s classic Why the Best-Laid Investment Plans Usually Go Wrong and pulled out quotes that speak directly to the issue:


“The best-kept secret in the investment world is this: Almost nothing turns out as expected.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 (First sentence in his book) pg. 15

“Forecasts rarely come true, trading systems never produce the results advertised for them, investment advisors with records of phenomenal success fail to deliver when your money is on the line, the best investment analysis in contradicted by reality.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 15

“Despite the plausible ideas, the computer-tested systems, the economic wisdom, the refined techniques, the simple truth is that practically nothing in the economic or investment world works out as we were assured it would.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 20

“The investment literature of the past tells of so many certainties – ideas that were so clear, so sensible, so obvious that they weren’t even controversial. And yet time has proven them false.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 21

“The beginning of investment wisdom is to accept that we live in an uncertain world, that we don’t fully understand what makes markets move, that we don’t know a great deal about the present – much less about the future.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 23

“No one can tell you when the stock market will peak, how far it will fall, or which market group will lead the way back up.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 23

“When you give up the hope that some advisor, some system, some source of inside tips is going to give you a shortcut to wealth, you’ll finally begin to gain control over your financial future.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 23

“…since the winners make the most noise, it’s easy to gain the impression that you should be able to find an advisor who can make large gains for you every year.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 33

“…the same principles apply to indicators or systems that are supposed to tell you whether the market is going up or down. Even if the assumptions behind all of them are foolish, there are bound to be some indicators that have amazing records.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 33

“If a computer sifts though the daily record of prices for the past 20 years, testing several hundred different moving averages, it’s bound to find a few that confirmed – quickly and accurately – each turning point in the market. But there’s no reason they have to work the next time.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 35

“The past is full of meaningless coincidences that are waiting to be discovered by investors and advisors.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 36

“Many of the best-laid plans go wrong because they assume that some past pattern will continue into the future.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 36

“The average person wouldn’t consult a fortune-teller to learn what the future holds for his career, his love life, or his health…But when he approaches the investment markets, the first thing he looks for is a fortune-teller – someone who can tell him what next year’s inflation rate or Dow Jones average will be.”

Why the Best Laid Investment Plans Usually Go Wrong, 1987 pg. 42

You can find copies of this book for a couple bucks in used book stores. It’s well worth the read for the first part alone where he thoroughly discredits much investing hokum you see around you. While some of the ideas are outdated now (the use of warrants and actively managed mutual funds for instance), the book does help layout in deeper detail why and how the Permanent Portfolio works. For an updated and shorter read on the portfolio idea you should really download the e-book version of Fail-Safe Investing.

The future is not predictable which is why you need to diversify your investments. The Permanent Portfolio is Browne’s attempt to deal with this uncertainty. Once you embrace that the future is unpredictable you are then able to impartially analyze and implement strategies to deal with it.

Craig Rowland

I own the place.

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