Investing 1.01
Surviving a Long Depression
by Robert B. Gordon, Sc. D.

FOREWORD

What does one say when coming back from a long sick spell? Well, for much of the time I was simply too ill to think about reporting to my scattered friends. Today I have cut my nursing staff in half and am looking forward to some kind of work at perhaps half time.

I am expecting the market to drop substantially and take over the headlines for investors. I have been tantalized by the idea of creating an ultra-safe portfolio that will be much safer and more stable than any examples published in my previous essays. I have achieved my objective and hope that many readers will adopt either the IRA or cash portfolios. The resulting 5-fund portfolio is amazingly simple and is almost certainly the safest fund I have ever published.

IT IS TIME FOR A REVIEW

It is time for a review. Everything we have written in the past 3 years could have been written under this one title. So, for both our new and loyal readers, please regard this as possibly being our final summary of the hundreds written since 2000. If you are fortunate enough today to have most of your investment assets intact, you may consider yourself to be either a skilled or very lucky investor.

But, whatever you do right now, please do not become complacent about your investments.

The stock markets of the entire free world are about to suffer severe bear markets in the years ahead that will have very negative effects on the entire global economy. Whether you have been skillful in your investing so far or have lost a bundle, whether you are a new or old reader, this article will enable everyone to be on the same page as our stock market is about to enter the most devastating market the world has seen to date in its entire history. I urge every reader to cast aside his or her natural optimism and read the current facts as seen from my 64 years of actual market experience. The very fact that this bear market is now in its unprecedented fifth year should be a serious warning that something very unusual in the 230 years of the American stock market is now underway. In fact the only current example in the world is the Japanese bear market, which is leading the world bear market, now in its 14th year with no end in sight.

Please know and understand that responsible market experts like Bob Prechter have predicted that the current bear market (wave IV in our Grand Supercycle) may last for the entire current century. This expert judgment of what may lie ahead should wake up any investor now cozily happy with his or her retirement funds. If Prechter’s grave prediction comes to pass, this would wipe out the long held feeling that the stock market always goes up. At least, it would take several complete generations before any sign of optimism will return.

CURRENT GLOBAL MARKET STATUS

The stock markets of Europe and the United States first created a giant bull market top in year 2000 followed by the first major bottom in 2003. The markets then rallied sharply to a significant bear market top and are now gathering momentum to the downside as we write. There should be no doubt in any investor's mind about the direction of the major market at this time. All market segments are ready to start a deep bear market drop as we write. Any investor who has not put his or her assets in a safe bear market mode should do it now without any further delay.

After five years of movement to the downside, many young and less experienced investors are concluding that this bear is overdue to end. Unfortunately their conclusions about market cycles are dead wrong. The truth is, and it is not good news, that we are in a very long wave IV that can, and in my opinion, will last for many decades.

I fully realize that this article will reach countless younger families who have money set aside to build their dream home or for some other purpose. I hope and pray that this article will convince them to put off or delay this expenditure. When the bear market leg, now due, bottoms in a year or two, saving rather than spending money will have become very popular.

It is unfortunate but true that no one, not even our best experts, can describe how this great bear market will proceed to its conclusion many decades ahead. At the end of my active life, I can only recommend that all younger people adopt a very conservative plan to preserve the buying power of their savings and retirement funds. Please study the conservative plan recommended below.

AN 18% PER YEAR GROWTH FUND IS NOW AVAILABLE

The great 20-year conservative growth record of the CLIPPER mutual fund is now available directly from the management company. Previously it was available only to existing owners. So it is a tremendous opportunity to buy this great fund now, perhaps for a limited time. For 20 years the CLIPPER fund has maintained an 18% growth record, which is perhaps the very best in the country for the last 20 years. We are ready to use this great fund in a new portfolio given below and hope that you will join us.

We have decided that the CLIPPER fund will play a key role in a portfolio designed to provide long-term growth and stability. Only the very youngest investors will be able to benefit from the very long life we have built into this ultra-conservative portfolio. We wish a long and successful life to all those who build this portfolio for the long-term.

A CONSERVATIVE INVESTMENT PLAN

Based on what I have learned in my 64 years of investing, I have picked 5 mutual funds whose management styles, in my opinion, will survive whatever changes will occur in the next 50 years. My first rule for selection was safety of principal. My second rule was compatibility with other funds to provide good balance. We have achieved these goals in a portfolio that will save investment capital and provide modest growth. Every component of this unique portfolio has a proven management concept to protect capital in the difficult markets ahead. We conclude that this portfolio is the best we have ever assembled due to its great management plan. As individual funds, they have done very well. In combination, they should do even better.

In building this great new portfolio, we have chosen five funds with proven records. And then, in an original step not used before, I am grouping four of them into pairs to provide even more safety in troubled markets. These 2 groups are shown below.

PORTFOLIO REBALANCING

We gain even greater safety and balance in building a portfolio by means of making changes in the quantity of each fund as shown below. Please read the important message below.

 

 

Please read this section carefully, because we are recommending important management changes in the interest of achieving maximum safety in the 5-fund portfolio. We are recommending that the investor should occasionally, as required by the fund volatility, add the two Hussman fund assets together and split them equally. This will affect a rebalancing of the entire portfolio and should be done only when the disparity of the two funds warrants it.

Likewise, periodically, perhaps once per year at either a market top or bottom, a rebalancing of the Clipper fund and the Prudent Bear Fund should be made, after which they will be equal in dollar amount. This rebalancing will be most important since a long and short fund are involved. If the discrepancy in value is too great, it may be necessary to rebalance the Clipper and Prudent Bear funds every 6 months at high and low points of the Prudent Bear fund.

There should be no need to rebalance the Permanent Portfolio among its 6 components, because it is done monthly by the fund management company. Thus, its 6 asset classes will always be able to continue their fine performance as they have done over its 33-year history.

Finally, at intervals to be determined, there may be a need of rebalancing the entire 5-fund portfolios. Start with an annual rebalance of the entire 5-fund portfolio and then follow the actual experience for the need and frequency of rebalancing all of the five funds to their starting percentages in the total portfolio. Rebalancing of the two fund pairs will probably prove to be more important.

So, using everything I have learned over a long career, we have put together a 5-fund portfolio with 10 asset classes and the ability to move safely through the ups and downs lying ahead. We are starting a fund exactly as explained and managed above and expect to do so for the rest of our life. We trust that many of our readers will do so likewise. We believe that, with just five components but special rebalancing actions, this portfolio will achieve a new level of safety and growth in the stormy seas ahead.

If any reader has a question about building this 5-fund portfolio or managing it, please send your question to me. I have great positive hopes for the success of this portfolio, if carefully rebalanced as suggested in the above paragraphs.

PURCHASE REQUIREMENTS

The Clipper fund requires a minimum for an IRA of $3,000 purchased from the fund FPA Fund Distributors. Inc. 11,400 West Olympic Blvd., Suite 1200, Los Angeles, CA 90054. A cash purchase requires a minimum purchase of $25,000, also purchased from the fund. I have made the larger purchase.

The minimum portfolio requires $24,000 for an IRA and $125,000 for a non-IRA portfolio. Having spent every bit of our past experience in creating this portfolio, we have great expectations for its performance. It will not only weather a very heavy sea, but will lend itself to sleeping well at night. The great stability of this portfolio and absence of volatile price changes justifies fully these necessary large price levels.

Here is what we know about the safety of the portfolio’s components. The highest safety level we know is provided by the two hedged Hussman Funds - one for stocks and the other for bonds. We further enhance the safety by periodic rebalancing of the weaker and stronger fund.

To this very high safety level we add next in safety and stability, the Permanent Portfolio, which has an unmatched 33 years of steady growth and stability. Its performance will be rebalanced periodically with the other four portfolio components.

Finally, we will rebalance the above mentioned components with the interesting growth potential of the high performing Clipper fund protected against market weakness by the expert management of the Prudent Bear fund in both gaining and losing markets. It will be really fun to watch the gains from this pair in all kinds of markets. I can hardly wait to get my portfolio activated and hope your will join me.

FUTURE QUARTERLY REPORTS

In place of past data which would have been difficult to provide due to the rebalancing acts, we are going to provide quarterly reports that will give the complete future data on this great new portfolio with our comments on the progress and any unusual action. We will determine later the distribution for this report. We will be looking ahead to Report No. 1 about the end of March. We look ahead to the data and expect it will show considerable out performance in stability. Remember our goal is for stability with smooth modest growth - a portfolio you can fall in love with while the market crashes.

HEALTH REPORT

I have cut my nursing care from 8 to 3 hours a day as I slowly gain strength. I have an incurable nerve pain originating in one ear and running halfway across my head. I have just had my pain pills cut to see if I can live with the lower dose. My vital signs are quite good, if I can live with the pain. I am slowly learning the price of old age. I greatly enjoy reading your letters in my e-mail.

Robert B. Gordon, Sc. D.
Sun City West, Arizona
December 13, 2004
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