Which part of a train is always moving backwards while the train is moving forwards? And why is this part of the train absolutely critical to ensuring a successful and safe journey?
Take a look at this train and think about it for a minute before reading further.
Moving Backwards While Moving Forwards
The answer to the riddle is the bottom flange of the train’s wheel.
The inner part of the wheel rests on the rail, and it’s what pushes the train forward. As long as the train isn’t slipping, this point is stationary as the train is rolling down the tracks. Friction holds it still.
The flange of the wheel however sticks down below the the top of the rail. Because it has a slightly longer radius than the rim of the wheel, the wheel’s rotation causes it to move slightly backwards even while the train is rolling forward.
The dynamics of the rest of the wheel are interesting too. The rim of the wheel at the top is moving at twice the speed of the train because the wheel is rotating. No part of the wheel is moving at the same velocity. Yet the axle of the wheel is moving constantly forward.
It’s a strange concept. The train can be moving forward one hundred MPH down the tracks, yet the bottom of the flange is always moving backwards. The faster the train moves forward the faster the bottom of the flange moves backward.
The Flange of a Portfolio
I’m often worried if some part of Geometric Balancing isn’t moving backwards, or at least stationary. Granted I’m very happy any day that everything is up. But I don’t take it as a good omen for the future. If everything is rising at the same time, then everything can fall at the same time. This coordinated volatility is worrisome, and can lead to oversized drawdowns, lower geometric return, and much more uncertain outcomes in the future.1
I’m most comfortable when two parts are moving forward and one is still or moving ever so slightly backwards.
Necessary for Stability and Control
Notice that if the train’s wheel flange did not exist, the train would literally go “off the rails”. It would crash. The part of the wheel moving backwards is the part of the train that keeps the train from sliding sideways off the tracks. Without it, the train couldn’t corner, and would be bounced off the tracks with the smallest bump. The train would never finish its journey.
From Jason
The part that moves backwards stabilizes the entire train.
Furthermore, if the entire wheel does start moving forward, then the train has lost traction with the rail and is slipping. It’s lost control and could be headed for a crash. The train won’t regain control until the friction takes hold again and the bottom of the wheel flange starts moving backwards again.
Cycle of the Wheel
Now the actual part of the flange which is going backwards changes through time because the wheel is rolling through a cycle.2
Each part of the flange gets its turn to first move backwards, then up and slightly forward, then forward very quickly at the top, and then forward and down again, moving toward the bottom to take its turn again going backwards.
The backwards piece is always changing, however some part of the wheel is always moving backwards.
All the while, the hub of wheel is moving forward at a constant speed, propelling the train forward.3
Is Your Portfolio Stable?
Portfolios work the same way. Without one piece standing still or going backwards, the portfolio risks losing traction to its guiding rails. The piece of the portfolio moving backwards will change through time. This month it might be bonds, next month gold and then next month stocks, but if constructed well something will always be moving backwards.
This is good. It means the portfolio is stable and not likely to crash soon. As the portfolio moves through the various investing cycles, the bottom of the portfolio wheel ensures the entire portfolio moves forwards at a constant speed.
If your portfolio is all winners, then you should probably worry about an increased potential for a collision. Your portfolio may be about to come off the rails.
But if your portfolio is mostly winners with a few losers, you’ve got a good portfolio. Don’t look down on the losers. They are still serving a purpose, providing stability for the entire portfolio and ensuring you stay on track and reach your final destination safely.
1-This is why I add cash sometimes. Cash doesn’t move and provides some stability.
2-Interestingly, the equation for the resistance of an object to rotation, the moment of inertia, is exactly the same as the equation for calculating the variance in an investment’s returns. I’ll explore this further in a later post.
3-Rotation is often very stable. The reason a bicycle doesn’t fall over easily is because the wheel has rotational inertia, and it wants to keep spinning vertically. Therefore it resists tipping over.
A bike wheel of course works similarly to a train’s wheel, as the bottom is stationary, other parts moving forward a little bit, and the top moves forward very rapidly. The bike stays upright because all parts of the wheel are not moving forward at the same velocity, and instead rotate through a cycle.