Jay O'Keefe

Jay's Working Hypothesis

Last updated July 31, 2009

A Primer on Investing
in Major Asset Classes
by Jay O'Keefe

Table of Contents



Gold and Silver

Silver vs. Gold


Long Term Bonds


Real Estate and Other Non-publicly Traded Investments

The Permanent Portfolio Fund (PRPFX)



That which has been is what will be,
That which is done is what will be done,
And there is nothing new under the sun.
Is there anything of which it may be said, “See, this is new”?
It has already been in ancient times before us.
There is no remembrance of former things,
Nor will there be any remembrance of things that are to come
By those who will come after. 
(Ecclesiastes 1:9-11 NKJV)

What goes up must come down

I believe it will be helpful to begin with a brief summary of the strategy used by the experts I follow. They all believe that every asset class goes through regular secular (long term) up/down cycles.  A typical duration of a secular bear market is 10 to 20 years. Following a secular bear market bottom, it usually requires 10 to 20 years for the ensuing secular bull market to become a bubble and top out. Thus a full cycle of one secular bull market followed by one secular bear market will typically require 30 to 40 years.

The strategy of my experts:

  1. Identify an asset class which has been for several years in a secular bear market which appears to be ending, i.e., reaching a bottom.  Rogers calls this a “hated asset class” with almost no buying interest and most of the sellers having already sold.

  2. Determine that this asset is selling well below its intrinsic value and has great long term fundamentals, i.e., demand greatly exceeding supply, with years and much higher prices required to bring supply and demand into balance. 

  3. Purchase the asset near the bottom of the secular bear market or near the bottom of a large correction.

  4. Hold it until it becomes a bubble.

  5. Sell it in increments as it appears to be approaching the top. Note: Partial profit-taking sales may be made sooner by allocation changes dictated by the permanent portfolio strategy (see the Summary below.)

Why long term cycles?

One might wonder what causes these long cycles. The simple answer is human nature, the emotions of greed and fear. As a secular bear approaches a bottom, the “strong hands” begin buying the hated assets at bargain values. Since there are few sellers, the price of the asset will begin to rise, and a new secular bull market is born. Rising prices attract new buyers, further increasing demand for that asset. A crowd forms and grows driving the price higher and higher until it far exceeds the intrinsic value of the asset, eventually becoming a “bubble.” The strong hands begin selling (distributing) their holdings to the weak hands, late buyers in the bubble at high prices. Prices begin to fall creating fear and further selling, and the secular bear market is born. The strong hands begin reinvesting their proceeds in other assets selling at bargain prices, which will become the next bubble.

Why knowledge of long term cycles is crucial

Even with the knowledge of these cycles, it is difficult to extract profits from that knowledge, because within each secular bull or bear market, there are counter trend moves against the major trend, significant both in terms of time and price movement. In a secular bull, this is often called a "cyclical bear market," or "correction." Likewise within a secular bear market, a "cyclical bull market" or "bear market rally" may occur. But without the perspective of these secular bull and bear markets, it is almost hopelessly impossible to consistently achieve superior investment results.

Buy and hold vs. short term trading

Most of my experts do not attempt short term trading of the counter trend movements within the long term secular trends. As Jim Rogers puts it, “I am the world’s worst trader and market timer.” They buy early in a secular bull market and hold through all the short and intermediate ups and downs until they identify the bubble near the end of the bull market, then sell. If they miss getting in early at bottom prices, they either wait for the next secular bull market, or, if a major correction in a current bull market occurs, and they believe the bull market has several years left, they will buy or add to their holdings if they have new money which needs to be invested, but they do not sell until the bubble stage is reached, nor do they trade in and out during the life of the bull market. I have chosen to follow this buy and hold strategy. If you want to become a short term trader, I suggest you not follow my portfolio nor investment rules. Many of my rules will be exactly opposite to good trading rules. Please do not interpret this as a condemnation of short term trading. There are experts who succeed at it. There are a number of different strategies which can succeed. If that were not the case, the markets would freeze and all trading cease since everyone would be attempting to do the same thing at the same time. My point is I have never been successful at short term trading. If you believe it is the strategy you should use, I recommend you ask God to lead you to experts who use that strategy.

Historic secular trends in chart form

With that foundation in mind, let's look at some of these historic secular trends in chart form. Logic suggests to me that at any point in time there should be some asset class or classes in a secular bull market, while some other asset class or classes are in a secular bear market. The charts clearly show this to be the case.

In 1999, Jim Rogers predicted that a new secular bull market in commodities was beginning, and a new secular bear market in stocks was beginning, each estimated to run 17 to 20 years. With the benefit of hindsight, that appears to have been an incredibly prescient call on Rogers' part. By acting on that one assumption (avoiding common stocks and investing primarily in commodities, including gold and silver) my investment group has enjoyed well above average annual returns over the last ten years. Let's look at the charts which show this in picture form.


Stocks valued in gold

I begin with common stocks because of the public's huge participation in this asset class as a repository for its retirement savings in the past several decades. Chart 1 is a 208-year chart of the Dow/gold ratio, meaning the Dow Jones Industrial Average in terms of gold...how many ounces of gold could be bought with one unit of the Dow Index at any point in time.

        Chart 1
200 Years - Dow/Gold Ratio

The conclusion drawn from the first glance of this chart is that over the 208-year period, stocks (as represented by the Dow) have outperformed gold on average! This is a vindication of the American free enterprise system as one of the best for creating wealth and prosperity during this 200-year period. A more detailed discussion of this chart is given in the article, The Most Important Chart in the World for Long-term Stock Investors.

But a closer look at the last 80-years or so of this chart shows periods of 10 to 20 years during which stocks greatly under performed gold. Chart 2 is a blow-up of this period and clearly identifies the secular bull and bear markets.

Chart 2           
Dow-Gold Ratio - 1926 to 2009

The above charts are provided courtesy of http://www.speculative-investor.com and http://www.decisionpoint.com/ 

Notice how accurate Rogers' prediction in 1999 was that a new secular bear market in stocks was beginning. The lower part of this chart shows the average P/E ratio of the S&P 500 stock index over this period, and clearly demonstrates how stocks move from under valuation to overvaluation and back to under valuation during these cycles. As Richard Russell has pointed out many times, secular bull markets tend to top out around 20-times earnings, or more, and bottom well below 10-times earnings.

A look at the Dow in dollars

Chart 3 is an even closer look at the last 12-years of the Dow Index.

Chart 3
Dow Jones Industrial Average, 1998-2009

This chart is denominated in dollars. It shows that those who bought or owned stocks when Rogers' made his secular bear market prediction have gotten essentially a zero return for 12-years, plus losing the opportunity for their capital invested in stocks to earn handsome returns in gold, silver and other commodities.  Next, chart 4 is a 59-year chart of the S&P 500 in dollars.

Chart 4    
S&P 500, 1950-2009

You will note that like Chart 2 (80-year chart of Dow vs. Gold), Chart 4 shows a long upward trend against the dollar, and contains the same bear markets, although their sizes and shapes vary some. Obviously, the reason is that gold and the dollar were also varying up and down against each other. I believe that gold is a more accurate measure of value, but the same conclusions can be drawn from both charts.

Thus, it appears we are somewhere in the middle of a secular bear market in stocks, which likely has 5 to 10 years more to run. I believe the probabilities favor the conclusion that we are currently in a bear market rally and that lows below the March low (Dow 6600) will be seen before this bear market ends. Rogers and Russell have both expressed this opinion recently.

Is it possible that the lows in this bear market have already been seen and that we are in a new bull market? Many analysts are saying this.  It is possible. Anything is possible. No one knows the future except God. Completely unexpected events could change the outcome. But why fight the clear secular trend when there are great opportunities in an asset class which is in a secular bull trend? Until I have a reason to change my working hypothesis, I will avoid any asset class in a secular bear market (e.g. stocks) and concentrate my portfolio in the asset classes in secular bull markets. This strategy goes against the strategy of Harry Browne's Permanent Portfolio, but my experience with my experts tells me it's the most prudent strategy. (I'll explain more about the Permanent Portfolio below.)

Stock dividends and stock valuation

A lot of corporations have sophisticated marketing departments that work with the mainstream media and can make most people believe they are doing well.  Talk is cheap.  Historically, one of the best ways to know if companies are over or under valued is to look at their dividends.  Chart 5 below shows dividend yields of the Dow Jones Industrial Average stocks from 1925 to 2009.

             Chart 5
Dow Jones Industrial Average Stock Yields, 1925-2009

Note the dividend yield bottoms at stock market peaks in 1929, 1966 and 2000. Note also the dividend yield peaks at stock market bottoms in 1932 and 1980. Stock bull markets tend to top out when the dividend yield is in the 1% to 2% range, and rise to the 6% to 10% range at bear market bottoms. At the bull market top in 2000, the dividend yield on the Dow was about 1%. At the bottom of the depression bear market in 1932, the Dow yield was over 10%.

Interestingly, according to Barron's the dividend yield on the Dow stocks in early July 2009 was 4.05%, and on the S&P 500 it was only 2.29%!  This is one of many reasons I do not want to be in the stock market at this time.

Gold and Silver

Almost every reference I make to gold will also apply to silver. Over time they move up and down together, but the moves in silver are generally greater percentage-wise than gold. This increases the short-term risk in silver, but also increases the long term potential of silver over gold following its major swings down. More on this later.

Chart 1 is the most logical chart to begin with in our study for gold, and little more need be said than what was said above. Note again that over the 208-year period covered by this chart, stocks outperformed gold. But for 10 to 20-year periods, gold outperformed stocks. Here I would point out that in the last secular bull market in gold (1970 to 1980), gold outperformed stocks by 29-Times! Hard to believe? Yes, but it’s true. The chart clearly shows it. In 1970 the Dow was selling around 1000. Gold was $35. Thus, one unit of the Dow would buy about 29 ounces of gold. In 1980, one ounce of gold reached $850 at about the time the Dow was selling at $850. Thus the Dow Index would buy only one ounce of gold. During this 10-year period gold went up 24 times in dollars, from $35 to $850. Gold went up 29 times against the Dow Index.

Comparing the 1970-1980 and 2001-present gold bull markets

The 1970-1980 gold bull run was mainly due to Richard Nixon in 1971 agreeing to "temporarily" letting the US default on its obligations to deliver gold to foreigners holding US dollars.  (FDR defaulted on the obligation to US citizens in 1933. They both had fallacious arguments for their actions.  See FDR defaults on gold delivery and Nixon defaults on gold delivery.)  A simple declaration that paper dollars were irredeemable for gold was all it took.  People with common sense knew that anyone who breaks a promise to deliver something is in trouble, so people hoarded gold.

Today, we have a similar situation in that more and more people are beginning to wonder if the US dollar will one day become irredeemable for all goods and services.  This may be years away, but another default is more likely to happen sooner: the default of paper gold.  Theodore Butler and Jason Hommel have written extensively on this.  They believe that even a small default in delivery of gold or silver (planned or unplanned) could cause even greater upward surges in the prices of gold and silver.  It may not happen this year, but it will most likely happen one day.

Also, note that from 1970 to 1974 gold rose from $35/oz to $200/oz - almost a 500% rise in 4 years.  Then, from 1974 to 1978 it dropped back to $100/oz - a 50% drop in 4 years.  Finally, from 1978 to 1980 it rose from $100/oz to $850/oz - a 750% rise in just 2 years!

Just as it appears that we may be half way through the secular bear market in stocks, we are likely about half way through the secular bull market in gold. So far, bottom to top, Gold has risen from a low of 257 to a high of 1032 (about 4 times, or a gain of 300%) in ten years, and has since corrected back to 700). This is a 30% drop from its high compared to a 57% drop in the Dow from its high. Currently, gold sells near 930, down only 10% from its all time high. The Dow is currently down 40% from its high.  Try to imagine how much gold could rise from here, especially if there are defaults in paper gold and/or the US dollar loses its world reserve status.

The big question: a gold bubble?

Is the current gold bull market going to approach the performance of the 1970-80 gold bull market? See Chart 6 for a view of the 1970-80 gold bull.

                Chart 6
Gold Price in Dollars, 1965-2009

Another way of posing the question would be, is the current bull market in gold going to become a bubble? I will share with you the thinking process going on in my mind. It may not be worth anything, even though it is based in part on what I am hearing from my experts. They are unanimous in believing gold is going much higher from here. So far, only one of them (Fred Hickey) has used the word "bubble." He said, "With gold in a long term secular bull market since 2001, I've been thinking that the next central bank-generated bubble could be in precious metals. A final parabolic move up in gold would be the classic climax that most secular bull markets experience in their final phases...The one ingredient seemingly missing was the financial or technological innovation that typically captures the imagination of investors during bubbles...Then it hit me - the innovation in the precious metals market is the World Gold Council's establishment of gold ETFs. These ETFs removed the past barriers to buying gold...With one click of a computer key, one can now own as much gold as one wants..." (The High-Tech Strategist, June, 2009).

I am seeing anecdotal signs weekly that the public is beginning to get interested in gold - new demand in countries around the world, rising demand in the coin shops in the US, even gold vending machines in Germany. When I try to assess the coming effect of the oceans of newly printed fiat currencies, dollars as well as most other major currencies, the size of the debt pyramid in the US today compared to the 1970s, I conclude that inflation is only in the beginning stage, and fated to rise to levels at least as great as the 1970s.

Then I look at the current gold bull market, up 4-times in ten years, compared to the 1970-80 gold bull, up 24-times in ten years, I get the feeling the gold bull market is just getting started, and the bubble-phase lies ahead. If you adjust the 1980 high of $850 gold for inflation since 1980 (even using government figures), you arrive at $2,300 as the inflation-adjusted value of gold presently. That tells me that today gold is nowhere near the bubble stage. In my opinion, we don’t need to spend any time worrying that gold is too high, and I believe the inflation which lies ahead after the creation of several trillions of new fiat dollars, will push gold to at least several thousand dollars an ounce. For the last five years, Jim Sinclair has forecast a price of $1,650 per ounce by January, 2011. Recently he has revised his forecast for the $1,650 price to be reached much sooner than 2011, and expects a price in a range between the predictions of two of his colleagues, $3,500 to somewhere above $10,000. Richard Maybury has also suggested a range between $3,500 and $10,000. And Richard Russell, a few months ago commented that we might again see the day when one ounce of gold would buy the Dow Index, suggesting they might one day “meet” at, say $3,500, just as they met at $850 in1980.

The ultimate hedge against inflation

What about the predictions of hyper-inflation we are hearing about today…the type of inflation experienced in Germany in 1923, or in Zimbabwe just recently? This type of inflation reduces the value of the currency to zero. Could the dollar lose all its purchasing power and fall to zero? It’s well known that the dollar has lost more than 95% of its purchasing power since the creation of the Federal Reserve in 1913.  See Chart 7 below.

           Chart 7
US Dollaar Purchasing Power, 1900-2009

This is purely my opinion. I believe in the next 3-4 years we will reach inflation near the levels experienced in the 1970s, which was in the 20% range. This is high inflation, but not hyper-inflation, which rises to thousands of percent and reduces the currency value to zero. Such an occurrence is possible, but if it does ever occur, I believe it will be many years into the future. I believe that until the US ceases to have the world’s strongest military, and the dollar ceases to be the world reserve currency, the US government will still be able to perpetuate its inflationary policies and keep the inflation at or below 20%. I do think there will be experiments which attempt to strengthen the dollar, such as partial backing by gold. These could dampen inflation for some years. Eventually, the market will punish our financial mistakes, and we could collapse into a third-world country.  Some people believe the punishment will be in the form of nuclear annihilation (See Rev. 17:16, 18:21, Is the United States in the Bible? and Is America The Mystery Babylon of Revelation 17 and 18?) In either case, over the next 3-5 years, I expect they will keep the current fiat money system going, and if I am right, I think the $3,000 to $10,000 range for gold is a reasonable and conservative estimate.

Would this be a bubble? Well, let’s see. This secular bull market in gold began with gold at $257. The gold bull market of the 70s took gold up 24-times. That surely qualifies as a bubble in my opinion, and very profitable for those who participated in it. If we multiply 24 times 257, we get $6,168, right in the middle of some of the best estimates I’ve heard. That would be a bubble in my opinion. I intend to have a good stake in it, the Lord willing. See details in Jay’s Portfolio.

Silver vs. Gold

Safe store of value

As often stated, I consider gold and silver together as one asset class for my portfolio, and I want about 1/3 of my invested capital (at cost) in this class. Both have been a good store of value and actually served as money for several thousand years. Both have outlasted several thousand paper currencies which have lost all their value through history. You may wish to hold only one of them for your 1/3 allocation, or an equal amount of each. In my opinion, over time either plan will serve you well.

Why more silver than gold?

But I want my silver to be a larger allocation than my gold. There is a blizzard of literature supporting the pros and cons for this position. Before you make your decision, I suggest you re-read the section above entitled Buy and hold vs. short term trading, and decide whether you want to become a short term trader or follow the buy and hold strategy advocated by my experts. Make certain you are comfortable with that decision. If you choose short term trading, I suggest you seek counsel and guidance from experts at that strategy. It will be different from my strategy and that of my experts. And it will affect your decision about what portion of your gold and silver allocation you hold in gold and what portion in silver.

Let me explain. Silver is much more volatile than gold. From the beginning of the commodity bull in 1999, silver has gone up about 243% to date. Gold has gone up 262% to date, not a substantial difference. However, when silver touched $21 in 2007, it was up 425% for its bull market to date, while gold near $1,000 was up 289% for its gold bull market to date. That was a substantial difference. Silver fluctuates greater percentages than gold, thus the gold/silver ratio fluctuates widely over time. This is a trader’s dream. See Letter 8 - Silver for a discussion of this.

Although I intend to invest in both metals using the long term buy and hold strategy of my experts, I believe silver has the greater potential in this current secular bull market, therefore I hold more of it than gold. Furthermore, if the gold/silver ratio becomes extreme in either direction, I may vary the proportion held in each metal. Any changes will be disclosed when/if they occur. Recently two of my experts have expressed their opinion that silver has a greater long term potential than gold, but neither has disclosed his own allocation between the two metals. If you want to study this subject, two of the best who believe silver has the better potential are Theodore Butler and Jason Hommel. There are numerous other experts that recommend gold but rarely mention silver. The decision is yours. I seek God’s guidance in prayer. I can’t prove that He has done so, but it is my firm conviction that He has.


Wars and commodity prices

Having discussed gold and silver in the preceding section, we now turn to commodities as an asset class which, of course, includes gold and silver. Chart 8 is a 205-year chart of all commodities as an asset class. It shows clearly the secular bull and bear moves over time.

      Chart 8
Commodity Price Changes, 1804-2009

Note how easy it is to identify the most recently completed secular bull and secular bear market. The most recent bull market ran from 1965 to 1980. Following that, a bear market ran from 1980 to about 1999.

At that point, a new secular bull market began. Note the major move up which has occurred since. For this we look at Chart 9, which tracks the CCI (Continuous Commodity Index) from 1999 to the present.

    Chart 9
Continuous Commodity Index (CCI), 1999-2009

We are now almost 10-years into this new secular bull market in commodities, with at least another 5 to 10 years expected by my experts. Note that this index rose from about 150 at the beginning of this bull market to a high of 620 reached in 2008, up about 4-times, or a gain of about 313% bottom to top. Then came the financial panic beginning in the summer of 2008, and the index corrected back to about 325, a decline of 48%. At that point it began recovering, rising to 420, a gain of 30% from the bottom.

What should our strategy be in relation to the commodity bull market at the present time? Remember that the strategy of the experts is to enter at the beginning of secular bull markets when prices are at bargain levels. They buy “hated assets” to use Jim Rogers’ term. They bought in 1999-2001. But that is not possible currently because we are in the middle of the commodity bull market.

However, the major correction in the commodity bull has given us an opportunity to participate in it in some measure. After oil had risen from 20 to a high of 147 in 2008, Jim Rogers was repeatedly asked if he would buy oil at 147. His answer was, “I would not buy oil now, but I would not sell my oil. I haven’t sold a single barrel of my oil, nor any of my other commodities.” I will sell my oil in 2017 (or later). New highs will be made by that time. Obviously with the benefit of hindsight, the sale of oil at 147 would have been a great move. He could have bought it back for 35 or 40 or 50 a few months later. But he does not trade in and out, and declares he has never been successful doing so. He buys an asset when very few have any interest in it, at a bargain price, and holds it until it becomes a bubble, then sells. See Letter 33 - The Experts' Strategy Made Simple.

A second chance for latecomers

I come now to the point toward which I have been driving in the two preceding paragraphs. The 48% correction in the secular commodity bull market has presented those who have not yet invested in commodities an opportunity to participate. Rogers is now adding to his commodities with money available for new investment. We can’t get in at the bottom, but we can get in at very good values and participate in the remaining 5 to 10 years expected in the commodity bull. The introduction of the Rogers commodity ETFs has made this easy. While I am willing to invest 1/3 of my capital in gold and silver, I am willing to invest an additional 1/6 of my capital in RJA, RJN and RJI, with emphasis on the agriculture ETF (RJA). See details under Jay’s Portfolio.

Long Term Bonds

Although long term bonds are usually defined as bonds with maturities of 10-years or more, I would consider any bond of 5-years or longer as long term. The reason is that bonds are near the top of a 28-year secular bull market. They are in fact a bubble, and a secular bear market in bonds could begin at any moment. See Chart 10.

Chart 10
30 Year US Treasury Bond Yield, 1929-2009

In this 80-year chart, two secular bull markets, with an intervening secular bear market are easily identified. The first secular bull market (1929-1941) is easy to understand. We had a gold-backed currency and a depression, which drove interest rates to historic lows. The secular bear market (1941-1981) is also easy to understand. We had a fiat currency and growing inflation, and a free bond market, which was pricing inflation into long term interest rates by lowering bond prices. Volcker ended that bear market with his huge increases in short term interest rates. Then the world’s savers began buying our government bonds subsidizing our deficit spending. 

This kept the bull bond market (1981 to the present) going until fairly recently. It would have surely ended a few years ago, and a new bear bond market would have started IF the government had permitted the free market to operate.

This has kept the bull bond market going from 1981 until fairly recently, when it made a spike top, followed by a sharp downward correction. The secular bull may be over - however, that is not yet confirmed. It could still go to a higher high, dropping yields to a new low of 1% or lower. But end it must. When is unknown, but its remaining potential is mathematically minimal. It would have surely ended a few years ago, and a new bear bond market would have started IF the government had permitted the free market to operate.

Bonds are not a candidate for my portfolio

For purposes of allocating my portfolio, this is really all the information I need. I would not want to own any long term bonds of any kind, government or corporate bonds. They are one of the most overpriced asset classes there is in my opinion. Even though there is no credit risk in government bonds, there is significant price risk as a secular bond bear market could begin at any time. Corporate bonds also have that risk, but also credit risk since they do not have the full faith and credit of the government behind them. Some will pay their interest and the face amount at maturity, but I would not want to be a portfolio manager trying to guess which ones will take bankruptcy during this financial crisis, and which ones will survive.

Conclusion: I am thankful that I do not own any bonds right now. I do not expect to add them to my portfolio in the foreseeable future. If you already own bonds, I highly recommend you study a more detailed analysis of bonds in the article, Are Long Term Bonds a Bad Investment Today? 


Cash is my sole hedge against deflation currently

For much of the twentieth century, long term treasury bonds have also been a good hedge against deflation. Not only do they serve the same role as cash when the dollar is gaining purchasing power due to deflation, their price also rises adding to the deflation protection. This is clearly seen in Chart 10 in the secular bond bull market (1929-1941). During this period, the bond yield fell and the bond price rose, providing additional protection during the deflationary depression.

However, during the secular bond bear market (Chart 10, 1941-1981), as yields continuously rose, the price of the long bond continuously fell, offsetting part, and at times, all of the interest paid on the bond. This was a period of moderate but generally rising inflation. During much of this period, the long bond would have been equally effective as a deflation hedge as cash deposits. When the current secular bull bond market began (Chart 10, 1981), the long Treasury bond was the very best deflation hedge, adding value to a portfolio as the price rose continuously during the 28-year bull market. Now, however, the long bond has become a bubble, and the risk of a major decline of its price during a new bear market makes cash deposits a safer deflation hedge in my opinion.

Which currency?

At times I have held my cash in more than one currency. I look to my experts for help in selecting other currencies. But since the onset of the current world financial crisis, my experts have become more cautious about the currency markets. Rogers has stated a number of times recently that he is unsure which currencies will do the best during this uncertain time. He has said he expects chaos in all the currency markets. For this reason, I have decided to hold all my cash in US dollars for the foreseeable future. I have my cash in safe deposits in the safest bank and money market I can find.

Real Estate and Other Non-publicly Traded Investments

There are many assets not included in the asset classes analyzed above, which do not trade under a symbol in the public markets, but which have been good investments over the years. They include houses, commercial real estate, farm and ranch land, antiques, collectables, rare coins, diamonds, and others. All of these are outside my own areas of expertise, and are rarely mentioned by my experts. Therefore they are not a part of my portfolio. The one exception is my oil and gas interests which I have included because they are part of the secular bull market in commodities. However they don’t trade publicly under a symbol, and I may decide to eliminate them from my portfolio analysis so that everything in the portfolio can easily be duplicated, and the market value of the portfolio known accurately.

What I can say with some degree of assurance is that these non-publicly traded assets move in secular bull and bear markets like the ones which are publicly-traded. Everyone is aware that housing had a long secular bull market which rose to the bubble stage in 2008. Then the bubble burst, and a significant part of the gain made over many years has been taken away in a year’s time. The same appears to be happening in commercial real estate, and no doubt in some of the others mentioned. Most of these asset classes are tangible, real, assets, and are therefore assets which help protect against currency inflation. It appears to me that we face major inflation in our future. If that is correct, then many of these assets will be great investments over the long term.

Caveat emptor (let the buyer beware)

That brings me to emphasize a statement Jim Rogers makes often, “Never invest in any thing you don’t know about or understand.” I take that statement very seriously. That is the reason I don’t invest in these non publicly-traded assets, and the reason I follow my experts in the publicly-traded ones I do invest in.

Buy a farm?

Having said all that, there is a possibility that one of these high-potential assets may become available to the average investor, and that is farmland productive of agricultural products. For the past few years, Jim Rogers has stated that his favorite asset class is agricultural products and farmland which produces them. My portfolio is participating in the agricultural products thru the commodity ETFs. But I have not yet found a way to own farmland. Recently Rogers joined a group of investors who formed Agcapita Farmland Investment Partnership, a Calgary based, agriculture private equity firm that allows investors to cost effectively allocate a portion of their portfolios to Canadian farmland via professionally managed funds without the need to take on the complex legal and operational responsibilities of ownership themselves. At the present time this partnership is open to Canadian citizens only. The partnership is reviewing the launch of a farmland fund structured specifically for non-Canadian investors. The only information I have about this is found on their web site.

I will be following this and suggest some of you might like to also. To date I have not heard Rogers mention this in any of his interviews, but I suspect he may do so at some time in the future.

The Permanent Portfolio Fund (PRPFX)

A great concept

From the very beginning of my investment counseling activities I have recommended that investors study Harry Browne’s book, Fail-Safe Investing. It describes the investment strategy he invented and called The Permanent Portfolio, designed to protect one’s capital in all investment climates. In the early 1980s, he and a group of analysts formed a publicly traded mutual fund which follows the principles taught in the book. The fund is called The Permanent Portfolio, symbol PRPFX. For the life of the fund, it has accomplished its stated objectives, and has produced an average annual return of approximately 9.5% per year over this period, while experiencing very few down years, none as much as 10%, including its worst year, 2008, which was down about 8.4%.  Chart 11 shows PRPFX since it started in 1983.

Chart 11
The Permanent Portfolio Fund (PRPFX), 1983-2009

In Letter 2 - The Permanent Portfolio, I suggested that the use of the PRPFX was a good way to control one's risk in investing. For those who want little or no risk, they can invest 100% in PRPFX. For those willing to speculate with a part of their investments, they can invest the part they want to keep at low risk in PRPFX, and speculate with the remainder. Each individual investor must make that choice, and must assume responsibility for the results of the choice. In the letters which followed, I suggested several choices for those willing to speculate with a portion of their investments. These choices were not recommendations, but options which the investor could choose if he wishes. One option is to follow my portfolio with whatever portion, if any, of his invested assets he chooses.

Why I sold my PRPFX

My position on PRPFX has not changed. So why bring up the issue now? Because, I want everyone to understand clearly why I no longer have a position in PRPFX in my portfolio. Two years ago I did have. There are three reasons I sold my PRPFX:

  1. They have a position in long term bonds, which are now at the top of a 28-year secular bull market, and have reached the bubble stage. See section above on Long Term Bonds. So I do not want any long term bonds now.

  2. PRPFX has a 30% position in common stocks. I want under 20%, and that limited to mining shares.

  3. PRPFX has a 20% position in gold, which is good, but only a 5% position in silver. I want a higher silver position and lower gold position as explained above. This is not a major problem in PRPFX, but with the bond position and higher stock position, I prefer to build my own permanent portfolio.

Key point: I still believe in the permanent portfolio concept of protecting against both deflation and inflation, so I increased cash, increased gold and silver, removed the bonds and reduced common stocks.

I believe my portfolio has more protection against deflation and more protection against inflation than PRPFX. But I could be mistaken. The managers of PRPFX have made some minor changes which tilt their allocation more toward mine. Don’t misunderstand. My portfolio has out performed PRPFX over the last ten years, and if I didn’t think it would continue to do so, I wouldn’t have changed it. But they are capable managers and could out perform me in the period ahead. Thus the key point: If you want to follow my portfolio verbatim, you will have to liquidate PRPFX, and use the proceeds to bring your allocations equal to mine (Be sure to check the tax effects of such a move). But realize that if you do, when I drop out of the picture, unless you feel confident to take over your portfolio, I suggest you will be best served by returning to PRPFX until such time as you feel that God is leading you to another advisor.

I realize this could be confusing for some. I couldn’t figure out an easy way to present it. Every one’s situation and objectives are different. If you have a minor position in PRPFX (under 20%), it’s probably not worth the effort to change it. But if you have a significant position in PRPFX, a telephone conversation might be very helpful. I will be glad to receive a call from you if you wish.


If you have persisted through, and grasped the basic thesis of, all the material above, then you understand that the objective of this document is to help you identify the asset class or classes which are currently undervalued and in secular bull markets, as well as those which are in secular bear markets. By owning the former and avoiding the latter, you will have, theoretically, significantly improved your probability of investment success. The record shows that this has been the case with the experts I have followed for many years.

But what I pray you will understand as clearly as this objective is, that knowing which asset class to invest in and which to avoid, does not tell you how much of each asset class to own and when to sell…i.e. how to allocate your portfolio among the best investments. I do attempt to glean as much allocation information as possible from my experts, but the amount I get is very minimal from most of them, and non-existent from the others. Here I rely on my own investment knowledge and experience, but even more so on prayer and guidance from God. What you see under Jay’s Portfolio is the result. It is there for you to use to whatever extent you choose.

Finally, I feel motivated to say a word about the world financial situation in which we find ourselves as this is written. I have lived through many different economic climates. It is my firm conviction that there is as much risk in all asset classes today as any time during my lifetime. Some are assuredly less risky than others, and a main objective of this discussion is to identify risk to the best of my ability. So, my closing statement is to urge you to carefully assess your risk tolerance, and do so with the assumption that today’s financial climate is dangerous and uncertain. One glance at the allocations for my portfolio should indicate how cautious I am now. I urge you to consider seriously all the comments made about the Permanent Portfolio concept as you make your investment decisions.

Be assured that as I pray for God’s guidance, you will be included in my prayers.


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Biblical Economics - what most people don't know the Bible teaches about economics
All I Have Commanded - an exhaustive list of what Jesus expects of His followers

"Well done, good and faithful servant; you were faithful over a few things,
I will make you ruler over many things.  Enter into the joy of your lord"
(Mt. 25:21 NKJV)

If you have not been faithful in the unrighteous mammon, who will commit to your trust to true riches?" (Lk. 16:11 NKJV)

The Apostle Paul wrote, "Now godliness with contentment is great gain. We brought nothing into the world and it is certain that neither can we take anything out. So having food and clothing we will be content with that. But those who want to get rich fall into temptation and a snare and into many foolish and harmful desires, that plunge people into ruin and loss; because the love of money is a root of all kinds of evil; in their greediness some have been led away from the faith and have impaled themselves on many distresses." (1 Tim. 6:6-10 NKJV)

This information is public domain.  Jesus said, "Freely you have received, so freely give." (Matthew 10:8b)

The information on this page is the responsibility of Mr. E. Jay O'Keefe, but all your decisions are your own responsibility.

This web page was last updated on 02 May 2011 .