Meb Faber: The Problem with Long-Term Investing

[00:00:00] Pierre Daillie: Hello and welcome to Raise Your Average. I’m Pierre Daillie. Co-hosting with me today is Adam Butler, CIO at Resolve Asset Management Global.

There’s a great quote from Fidelity legend, Will Danoff. "Want to be a contrarian? Then invest for the long term." I love this quote and the reason for that is in 11 words, Danoff sums up the implication and benefit of what it means to be a longterm investor, and it may seem too obvious at first, but perhaps this implies that you should invest in a way that allows for you to have enough space to be able to be a longterm investor. But how do you do that? How do you build a portfolio with allocations you can live with, and hold, and run for decades no matter what’s happening in markets? A portfolio that allows you to sustain a holding that you’ll feel little need to trade when everything around you is flashing red?

And if you weren’t in a portfolio like this beforehand, before the likes of the market we’re in now, what’s the roadmap for transitioning to one that is? Meb Faber, co-founder and CIO at Cambria Investment Management is joining us from LA. Meb is the manager of Cambria’s ETFs and separately managed accounts. Meb is the author of a multitude of books and white papers, a prolific podcaster, a frequent speaker, and has been featured regularly in Barron’s, the New York Times, and The New Yorker. So stayed tuned, I promise this is going to be a fully loaded conversation. While the music’s rolling, hit that subscribe button, like us, and leave us comments.

[00:01:30] Disclaimer / Announcement: The views and opinions expressed in this podcast are those of the individual guests and do not necessarily reflect the official policy or position of AdvisorAnalyst.com or of our guests. This broadcast is meant to be for informational purposes only. Nothing discussed in this podcast is intended to be considered as advice.

[00:01:51] Pierre Daillie: Meb, awesome to have you back. How’s it

[00:01:53] Meb Faber: going?

What up? Great to see everybody. Happy summertime.

How are things in LA?

It’s always sunny here, we were just talking about. Things are good. I’m a little homeless. As I mentioned in the … in the intro, I’m picked the worst time in 20 years to, um, do a little rene- house renovations, so we’re we’re living the supply chain dream. [laughs] but, good excuse to travel, get back out in the world, so we’ve we’ve hit up some fun spots, seen seen some of y’all in the real world recently, which is great, and hopefully back in soon. We’ll see. Y’all y’all listeners are welcome to come drop me a line in Manhattan Beach and have a coffee, a beer, or go for a surf when you’re here.

I highly

[00:02:34] Adam Butler: recommend taking Meb up on that, actually. Meb

[00:02:36] Pierre Daillie: has, I think I think, Meb, next time next time we’re in LA, we might, maybe, physically get together and have a … and record a podcast then.

[00:02:45] Meb Faber: Let’s do it, man. I’m I’m game. Anytime. Come on down and once I … once we’re back in our house, I’m, like, not gonna wanna go anywhere, [laughs]. This may be the … this is the

[00:02:55] Pierre Daillie: chance.

I thought this would be a really good time to talk about portfolio construction and you’re just like the perfect person to talk about this very subject. We’ve been having these conversations lately. You weren’t … you weren’t with us recently, Adam. We did a whole podcast on the adaptive asset allocations strategy that you guys are running at resolve. It was terrific. This is like the perfect part two of that conversation.

But you know what? To kick things off, why don’t we why don’t … why don’t you tell us the story of how you got into the business in the first place, how Cambria Investment Management came to be, and what you’re up to these

[00:03:36] Meb Faber: days?

What am I up to these days? I ac- I actually spend a lot of time thinking about your intro, when you were talking about longterm time horizons, which I feel like everyone says but no one actually does, right? It’s kinda like people say, I’m on a," this is wha- this is needling Adam and his crew, "I’m on a keto diet," but then you watch them go get the croissant at breakfast, or whatnot, right? They say it, but then, it’s do they actually set up systems to behave that way which is why we see so many investors fail.

Anyway, let’s rewind. Yeah. Look I save a lot of my anger, vitriol, angst for the Robin Hoods of the world, which alludes to your … what you were just talk- talking about. Like, how do you set yourself up for success? But I try not to be too judgmental. Look, this was me 20 years ago. I fully participated in the internet bubble. I was an engineering student studying biotech, so it was a dual bubble for those who weren’t around back then, so it wasn’t just the internet stocks. It was biotech it was just as crazy, which has a v- a very similar vibe and feel today, right?

Biotech stocks are down like a third this year probably from the peak 50, maybe. So it’s got a f- similar vibe and feel to, to that, my favorite bubble, which was the late ’90s. But yeah. I was, all intents and purposes, ready to do a PhD, and grad school and biomedical engineering, and kinda got swayed by the dark side, perhaps. And my year or two off, I did go to grad school but my career trajectory I started working a biotech mutual fund, and then just kept getting more and more quant, more … less and less biotech and life sciences, and one day, woke up and my hobby became my career and vice versa.

And here we are. We started Cambria right before the financial crisis. Survived it, started launching ETFs in 2013, and here we are now with a dozen funds. And almost a decade under our belt we always sa- we always tell people the best compliment you can give someone in the world of entrepreneurship or investing or life, really, look, we’re all … we’re all here another day, is to is simply that you survived. So we’re happy, [laughs], we’re ha- happy to still be around, in particularly these crazy times, last few years to have made it thus far. That was two-minute. How’d I do?

[00:06:11] Adam Butler: Brilliantly, as usual.

One of the things I thought we could get into, Meb, trying to, think about topics we haven’t covered over and over extensively is how you, right from the start, approached investing with, a rules-based bias, right? You published that quantitative, what was it? Quantitative asset allocation, … a process allocation paper in, what was that? ’06? ’07? Yeah.

… It was a long time ago. And but obviously you coming out of grad school and working at a biotech fund, I suspect they weren’t particularly rules-based in their approach, right? So h- how did you cotton on to rules-based thinking and begin to move in that direction? What motivated that?

You

[00:07:04] Meb Faber: know, I talk to a lot of the younger investors or … on Twitter today too, and I try to say this with a … without the old person judgment that feels so off-putting, where I’m like, "Look many people have lost a ton of money in this last year and many people have lost all their money in the last year. And there’s, kinda, two paths people take from that. The first path being we blame, the grifters and promoters, or all the bad actors on Wall Street," which have been around for 100 years, by the way.

The charlatans and all the bad guys out there and say, "It was their fault. It’s my neighbor. I cannot believe he put me in that Dogecoin, or that SPAK," or whatever, "and then I lost all my money." that’s a story that’s as old as time. What we tell, hopefully, to younger people, it’s not much money. If there’s … it’s older and more experienced, it’s a little harder, when you gotta family and a bunch of kids to feed, et cetera. But what we say is "Look, take some pride in it," "You may be eating mustard sandwiches for a year and … but learn from it, and say what … take responsibility. What did I do that was stupid? How do I take these scars, and be humble, and have the humility to learn from all these experiences?" Because again, this was me 22 years ago. I lost all my money, I was trading biotech stocks, I was trading options, and it was like a checklist of doing dumb things. Over-concentrated, check. Having an investment plan and not sticking to it, check. Having a trade idea, then not changing the rules as you went along, check. On and on.

And even the fund I worked for, which was a sector-based fund, didn’t matter if you had relative performance, if you did -70 when the index did -80, [laughs] goo- good luck. There’s nobody around anymore. But it set me down that path of, "Okay. How can I think rules-based or objectively about what’s going on? How can we put this into a process?" And, look, that’s obviously, like any of us it’s a growth process. It’s ongoing 20 years later and we’re still refining it, but certainly that decision to remove, and I had all the biases, I still do.

Look, you guys know me. I’m overconfident. You give me all the risk I’ll take it. Bring it on baby, and so I need to set up the guardrails. If I have vanilla ice cream, or mint chocolate chip, probably, in my freezer, I’m going to eat it. At … there’s no more certain outcome, so putting in the rules and processes that, help you behave and diet, I think, is such a great example, but exercise and just life in general is … so many things with personal finance set me on that path. And it’s been a long one and it’s ongoing.

It’s funny because you mentioned that original paper. I was in my late 20s when I wrote that paper which is all v- very popular now, today, but at the time which is all very popular now today. But at the time I sent it out to a dozen people that I really respected in the industry and got like universal F. It was like when the teacher gives you back a, it was like F, circled red.

I had one hedge fund manager. We started compiling these by the way, I have a whole list and in Google sheets that I call Meb haterade. So anytime someone writes a particularly nasty response to some of my work or something, we just fi- we smile, laugh, file it away. This is a long document, by the way now listeners. [laughs] This is many pages, but this first paper, this young, impressionable twenty something wrote it, trying to first attempt at getting out this rules based process. And one of the most respected hedge fund managers, everyone on this podcast know and would recognize, wrote back.

He’s "This is worthless." Not Hey man, cool paper, I disagree with it. He’s "This is worthless." I’m like worthless, come on. Like at least give me something to work with. But but anyway it’s been a, it’s been a journey, like everything in life, but I think for me in particular, the emotional component of money, which we all know is the most important, like part of behavioral, like this relationship to money, there’s so much built up into it psychologically that if you don’t have processes in place, it makes it really hard to do a good job of it.

Yeah.

[00:11:43] Adam Butler: So pull- pulling on a couple of threads there. One is, do you think you could have arrived at a more rules based orientation if it hadn’t been for the pain that you endured by taking a more discretionary or free-wheeling approach before that?

[00:12:04] Meb Faber: Like anyone, I tend to think there’s like many different paths we all could take in life. I think everyone, the easiest way to visualize this is like with life partners, people you’ve dated, [laughs] right? Like most of us didn’t marry or currently with the first person we met. So there’s a whole laundry list of good, bad in between. And for many of us we’ll be in the future as well, and so I like to think that there are many paths that would’ve been fine, there was a path where, outta college, I was interviewing with DeCODE Genetics. Any one remember this? This was an Icelandic biotech company that was focusing on sequencing the genome of their company their country, which is very homogenous, right? Iceland is known for being very… They even have an app if you’re dating that lets you know how closely related you are to a person that’s like a tender, but for Iceland but’s unique properties.

And I was like, where would I be today? Would I be talking with you good looking gentlemen having gone to work in Iceland for a few years? Who knows what I’d be doing. Professional skier, that’s what I’d like to be thinking. But who knows? I think there’s, I was listening to a clip with Eddie Vetter that’s so I recently saw my first Pearl jam show, was on my bucket list and they’re getting older, but he had a quote, not at the show but he was talking about his early career and he said he wished he enjoyed the struggle more which is easy to say hard to do, right? Like when you’re broke and lost all your money or you have all these trades, like that’s, it’s easy to be like, yeah, this was great learning experience. Man, I’m so glad I went through this struggle.

So I don’t know how necessarily like that has guided the path, but I’m certain that it did, do I think I would’ve been okay as a, venture capitalist in biotech or as a discretionary manager focused on farmland investing, probably, like it’s the old John Bogo quote he’s is this indexing portfolio right for me? Yeah, I think so. Are there better portfolios? Sure. But I can tell you certainly there’s infinite that are worse. And so for me, like I it’s, I’ve arrived at this sort of rules based world, which seems to fit the personality, which I think is a big key for a lot of people. Doesn’t matter if you’re a goal bug, if you’re a crypto person, if you’re whatever, find something that aligns with your worldview and psychology is easy to say but hard to do, but once you get there, I think is the fit that matters?

[00:14:49] Pierre Daillie: Yeah, for sure. I think that’s the after having all these conversations, the last couple of years since we started, podcasting in earnest, I find I think I finally realized that behavioral risk is the biggest of all. It’s more important to address the behavioral concerns before you do anything else. And getting into rules based investing starts to make a lot more sense once you get over that hurdle of realizing that you’re basically you’re your worst enemy.

[00:15:32] Meb Faber: And I think what’s important on this too, is I think there’s a lot of investing approaches that are just fine, right? If you look at the Venn diagram, you put one huge circle or list over here of things that are totally fine, and thing on the other side, things that are totally not fine. The list of what’s fine is probably long. If you had an advisor, an investor that came up to me and say, Meb, here’s what I do. I buy 10 high yielding dividend stocks each year I put them away and each year I buy 10 more and that’s it. I dollar cost average in them. What do you think about it? And I say, look, that’s not for me, nor do I think that’s optimal, but if that works for you, God bless you, right? Like fine. Like as long as you understand, and this is the problem for most investors is, because they haven’t studied history, and at least the basics of what has happened in the past that at least gives you some foundation or anchor from which to have expectations and say, "Hey, look, this portfolio…" He says, "Look, I recognize this portfolio will decline 50% maybe once or twice a decade. I recognize the worst case scenario. This portfolio will go down 80% plus.

And I’m okay with that. And I’ve built in things to where, these processes, this money over here, I’ve paid. I don’t have any debt yada, I’m fine with that. Then that’s fine, is it ideal? Is it what I would do? Hell no. But is it okay? Now there’s things that, where you set yourself up to almost guaranteed fail, as like when the old Forex brokerages had to publish, what percentage of customers lost money day trading in Forex, it was like 98%. It’s this is going to be that other scenario. I’m like the Robin hood investors when Vlad’s the majority of our investors are buying hold. I’m like that is a bold face lie. There is no scenario, what you just said is true. But anyway so I think there’s plenty that’s fine and okay, there’s a lot that’s not fine and not okay.

If you were to ask me for advice or what I think sets people up for a better outcome, I think understanding the narrative and having a story is underappreciated in our world. The best investors, yeah, they’re good at investing whatever but they tell a good story or at least make it relatable, but you have to have the understanding of context, otherwise that’s when, it’s the same in relationships. You have expectations and they’re not met look out below, right? Like ready for fireworks. And the same thing in investing is like, so we were saying this about 60/40 this year, one of the worst year ever to begin for 60/40 was down like 12%, 13%. I said, if it closed here today, it’s top five worst you’re ever for 60/40 to US only.

And then I had pulled investors. I said, what do you think the worst draw down for 60/40 was? And almost everyone says 10%, 20%, but it’s 50 plus, right? And so those investors will be surprised if that ever happens again. And on top of that, the worst draw down by definition is always in your future. So it could be worse than that. There’s plenty of ways to do just fine, but I think the struggle comes with investors think A. So last year, the investors that expected 17% returns for the next decade, and then B happens and they get zero that’s when the cap- capitulation, bad behavior, panic, fear, all set in.

[00:19:08] Pierre Daillie: So how

[00:19:08] Meb Faber: would you, if you, someone,

[00:19:10] Pierre Daillie: someone comes and talks to you about their current 60/40 portfolio, which is down on all fronts and they wanna talk to you about, transitioning from that to something that’s going to be a little more successful throughout chaotic periods, what’s your advice like how, where do you begin to start to, reconstruct or retake the portfolio to

[00:19:38] Meb Faber: something that’s

[00:19:40] Pierre Daillie: more toward, more to what you would think is your liking?

[00:19:45] Meb Faber: I think most invest, we now have over a hundred thousand investors and in talking to them over the years, of all stripes, this applies to grandma with her E-Trade account in Texas, to institution or family offices all over the world. I think one of the most important things being relatable and honest is A, talking about everyone gets sold so much, right? They say, oh, you shouldn’t do this. You should do Y, and I think being upfront and honest personally, we talk a lot about this skin in the game and others don’t agree, but I think it’s important for managers to invest in their own funds. The average mutual fund manager has zero invest in their own fund. It doesn’t have to be close to a hundred like mine but it, I feel like it should be some.

And we often have conversations with investors and I was telling actually, our team this last week, I said, most, many investors that will come talk to us… Look, we have 12 funds, so something is always doing terrible, right? That’s just the nature of the world. Something is doing well, something is doing terrible. And someone will invariably come up to us and say, "Hey, look, I bought this fund three months ago, six months ago, it’s doing awful. Why shouldn’t I sell it? Why shouldn’t I do X, Y, Z?" And the response they always get from advisors is a long laundry list of like, why you should invest in this fund. But to me, often I say, oh looking at what’s happened, I say, oh, no, you don’t understand. If you think this is bad performance, this fund could do, this strategy could do way worse.

Like it’s only down 10%. Like this thing could go down 50 or 70, right? And this could under, under performance its index, not just one year, but like five. So let’s have some context, and and then we’ll talk about it. And same thing, going back to the very beginning of the discussion. And I’ve said this so many times, so I apologize, you guys have heard this, listeners may not, but people used to ask me, "Meb, I’m gonna allocate to this fund or strategy. How long should I give it? It’s been junk. I’ll give it like three more months." And I say, "No, that’s way too soon. You need to give it probably 10 years." And they just blank face, right? What do you… You’re joking, right? Come on. Waiting for me to say, "Okay, just kidding." But now I would say 20, and I can show you the stats and the math behind this, of these cycles and whatever.

So I think having an honest discussion of what can happen and ways to think about the world. So specifically to what you’re talking about, if someone came up to me and said, "Look, I’m 60/40, what’s your opinion on that? So I say, "Look, my priors are A, how much you save and invest in the first place is more important than what you invest in." So the fact that you decide to start saving at 50 versus 20 is the biggest decision, or the fact that you just started start saving 10% of your income versus 20%, those are gonna swamp. Some of these decisions we’re gonna talk about later. So assuming you’ve done those, assuming you have this portfolio, I’m like 60/40 over the next 40 years will probably be fine. Assuming you’re not paying 3% for a closet indexer, right? And tax inefficient, all these just basics that people overlook. So structure matters. Not doing stupid, selling at the wrong time matters. Once we go through these basic the it’s like the, is it Lambada? Which is the one you go under and the… Is Limbo? Limbo,

Limbo.

Lambada’s the dance, I think. It’s like the bar like of the pole vault it’s like the bar changes. So let’s jump over these easy hurdles first, and then we’ll get to the more important ones. And I’ll say, look, okay it’s well established 60/40, all the quants you can talk to will be like, this is one of the worst opportunity sets of our lifetime, if not ever. US stocks are expensive, bond yields are low. And here we are, with one of the worst starts to 60/40. Finally, now I would’ve said this a year or two ago too, so caveat.

But the basics to me are the main cooking ingredients are, the next one would be, all right, you wanna be global. It’s totally insane to me to be focused on one country. And this is like the most ratioed I get on Twitter anytime I talk about this, although that mood can and will change where I’m saying you shouldn’t put all your money in one country, and all the Americans lose their mind about it because US stocks and bonds have done great last 10 years. I say, do you think it’s smart for… Why don’t you put all your money in UK stocks and bonds or Greek or Russian, and they say, "That’s crazy. Why would anyone do that?" So you just made the same mistake we just talked about.

So going global to me is the next step is obvious, particularly now where I think foreign and emerging markets are cheaper. Tilting towards value and momentum factors, I think helps you stay out of big, crazy bubbles. I think it adds a little return over time. But I think more than anything, it keeps you from the real insanity moonshot ones. Obviously real assets, which almost no one has exposure to whatsoever outside their own house. So we’re talking commodities, real estate, tips to an extent farmland, if you could get it, are all I think in that category. That’s just for the base. This is a long and winded answer by the way, so sorry. That’s the basics of the global portfolio. And then for us, we’re huge, non-consensus here using momentum and trend, call it managed futures, you can call it trend following, call it whatever you want, relative strength, as a nice balance to that traditional portfolio.

And the nice thing, like there was an old writer Paul Merryman who used to do this and his was, he did buy and hold in entry, but he would walk through each step and show historically how it impacted return risk numbers for a portfolio, and shows takes you through the journey from basic 60/40 to this kind of finale. And so you can say, historically, this is why it’s been great. And then of course we’re all in a real time world. But to me, that’s the journey that kind of gets you to the finish line and ours is a bit different and non-traditional, but many of the past, if you stopped along the way, I think would be just fine, including all the priors that we talked about at savings investing. But if you were to ask me, what’s the optimal, for me that’s the trinity idea. And for me but back to Bogo, if you’re gonna do just the old buy and hold, it’s probably okay too.

One of the

[00:26:40] Adam Butler: things that I’ve been noticing over the last few years is as a bunch of tools have become available, especially online tools where they already have the data prepared in the background. You can just select funds or indices and they go back a long way. I’m thinking like portfolio visualizer type software is you see a lot of do it yourselfers who use those tools and they plug in, some of them have optimizers too which are, it can’t be even more dangerous, but they plug in asset allocations and then they run them back through time and then they post their Ws on, oh, I combined 62% US cap weighted with 8% US small cap value with, 7.2%, blah, blah, blah, blah. And they and they perceive this as gospel with some, measure or precision. And I keep trying to figure out how to maybe nudge people away from that kind of thinking, right? I don’t know. Do you come across that a lot? And what kind of guidance do you give to people who maybe are over determining that?

[00:28:01] Meb Faber: I got a good, I got a good story. My mom, my grandmother Southern cooks, and by the way I was thinking today I was chatting with a friend about sell a man, go away. I said, I have a Southern version of that. It’s called selling a man and see y’all in the fall. And it’s summertime, hopefully sabbatical comes around. But I got a good analogy from when I was a kid, we used to make those tollhouse chocolate chip cookies and would eat the butter. And they never use the recipe. They would just do it by hand, Southern cook, dash of sugar, this much butter, taste it along the way, on and on. And it invariably ended up fine, delicious. Like how hard is it to muck up chocolate chip cookies, right?

Now if you totally excluded the chocolate chips, it’s not gonna be as good. If you left out butter or flour, like it’s not gonna be a good cookie. So one entire category, but the exact percentages doesn’t really matter. It’s a chocolate chip cookie. It’s the sum total of parts and the analogy we give in the book our asset allocation book, which I need to update but this looked at like dozens of famous asset allocation strategies, 60/40, permanent portfolio, and these, caveats, these are all buy and hold market cap weighted. So things you can buy today for roughly zero not necessarily then but today. And we looked at all these portfolios and the shocking conclusion to me, and they’re hugely different. Some had 25% in gold, some had zero. Some had no real asset exposure, some was half. Some put 90% in US stocks. Some had 25%.

Surpri- two surprising takeaways. One was, they all had great performance, over time. And there was a fairly tight clustering of compounded returns over what is this, 50 years since the 70s. However, if you looked at the path they were bounce all over the place in any given year best to worst spread was like 30 percentage points, which is why in a short time, people go crazy. They’re like, oh my God, like this year, look, commodities is only thing roughly that’s up on a buy and hold basis. Everything else is in the tank, right? For the most part, not talking styles like value, just the buy and hold asset allocation. You invest in commodities the past 10 years, that’s a different story, right? It’s also a different story from 2000, 2008. And so over long period, simply owning assets that pay you to own them over long periods, you end up in the same place. The path is different.

And then the analogy we give in the book is as if you layer in a ton of buy and hold asset allocation fees, that’s actually more important. We start talking to financial advisor, average mutual fund back then trading costs, whether you do short lending or not, on and on, that’s actually way more important than the actual asset allocation for a buy and hold investor, which is a crazy takeaway. And I don’t know really anyone else in the world that believes this besides me [laughs]. And everyone always gets mad. The Bogo heads are mad at me about this. Like we, like the everyone gets mad at me. Twitter gets mad at me. I don’t, I say your asset allocation, if you do buy and hold, doesn’t matter that much.

Now it’s funny, ’cause you mentioned optimizer, because the funny thing is what people include in the initial conditions of their experiment, and it shows their bias, right? And so we’ve talked about this, but there was, I think it was Goldman, there’s an old investing report where it was doing classic mean variance optimizer, and it’s easy to go back in history. Like we can all do a great back test. I’ve done millions, right? Like someone once called me the king of back test, which was meant to be disparaging, but I took as a compliment. And you can come up with a beautiful assets allocation curve for anything. And the challenge is how do you create the tolerance bands or restrictions? And so we’ve talked about this where you throw in any index of trend following or managed futures, and then you blind the name of the asset classes and strategies. And you just watch how much of a allocation that strategy gets.

And it’s usually on the far right into the curve. And Goldman, I forget when they did this strategy optimization, it was like, I think it was over half in trend. And they’re like we all know that’s crazy. So we can’t do that. [laughs] And what do you mean that’s crazy? That’s what your experiment just showed, but you don’t like the result. I was actually just reading a book on cannabis and was talking about, this huge history of cannabis legalization and all the problems it caused over history. And they’re like, Nixon commissioned a big medical association study in the 70s and the study came back and was like, Hey, guess what, cannabis is not only not harmful, it’s actually pretty beneficial. And he is just ignored it, right? And then created 50 years of all the problems that occurred.

So it’s like these initial conditions and bias we have, and this is true for so many investors, how and this is a conversation, that we have often with investors, is we say, can you honestly be asset class agnostic? And it’s really hard for people, cause they wanna be a crypto bu- I’m a crypto bull. You cannot pry these Bitcoins out of my cold dead hands, or say I’m a dividend girl or a gold bug and trying to have the independence of thought to say, look, some of these are good sometimes, and some of them are garbage other times. That’s just the way it goes, so it goes, as [inaudible 00:33:32] would say, I think that’s harder but again, you guys gotta ask me quicker, you gotta cut me off after two minutes, say Meb two minute answer.

No, but I was

[00:33:42] Adam Butler: the other way I was going with that is that the, with the proliferation of so many niche products as well, right? Liquid niche ETFs that are theme based, sector based, style based, cetera, right? This is where things can get real… Like I think when you say it doesn’t really matter what asset allocation you adhere to is so long as you adhere to something, those experiments are like big, broad asset classes, right? Like glo- global equities or maybe US equities, [inaudible 00:34:14] emerging global bonds or US and ex-US bonds, that kind of stuff, right? The big muscle movements and for most of history, that’s really all that investors could have access to on the index side, right? But now with the proliferation of all of these different niche strategies, you’ve got so much more opportunity for people to misuse and abuse these types of analytical tools, especially optimizers. If you don’t really understand, I like your use of the word initial conditions, right? Like any type of strategy that, that emphasizes duration over the last 40 years is gonna look smart, right? If you’re going to use just the empirical data to determine your optimal asset allocation and you’ve got 40 years of data, it’s gonna tell you, you wanna own an abundance of long bonds.

We probably shouldn’t have the same expectation on long bonds going forward,

right?

[00:35:13] Meb Faber: As you and I both know the challenges of investors is we love to get enamored with what’s working the hot dot, the hot fund, the hot manager, the hot strategy and love to run away from what’s doing poorly. And the challenge of this you have this problem now ’cause you’re RD mix fund is doing great. You’re in the hot seat of good performance. But, we talk to investors and I remember having a conversation with a very large investor once and they said, we’re going through our funds. They go Meb, tell me like, what’s your best fund? I’m like, I was like, what’s what does that question even mean? What do you mean what is my best fund? And he goes, what’s been the best…

And he goes, look, I’m no noob. I’m not asking you like, what’s your best performing fund in the last three years. That’s crazy. He goes, what’s your best risk adjusted fund performance for the last three years? And I said,

[laughs]

… and I said to him and I paused and I said, "Ah, oh, I know why you’re asking me this question. You’re asking me this question ’cause you wanna avoid that fund, right?" And he said, "What are you talking about?" I said we all know that once you have a strategy in an asset class, like they go through periods of out-performance and under performance and you’re not just gonna chase the hot one. You wanna avoid the hot ones. You’re looking at ones that may be out of favor, right?" And just, this a long pause of I wasn’t trying to shame him, just have this moment of thinking, oh wait, my process is actually just chasing whatever’s working. That’s crazy.

But it’s, it’s easy and seductive and it feels safe, right? That’s like the safest thing in the world. Nobody wants to buy a chart of something that’s been going down. We did a we did a piece like a year and a half ago. I said, as managers, it’s easy for us to always market what’s working and talk about, how awesome we are. No one on Twitter’s ever had a losing trade, right? But the older folks you guys, I’m putting you in my camp we’ve have the scars and the humility. We know that. And I take it with pride, like all the mistakes and thousands of losing trades. My God to be a trend follower like that, you have to be death by a thousand cuts.

And so I said, look let’s write a different piece, and we let’s profile a strategy that has done very poorly but we still believe in for reasons that are just conditions haven’t been favorable and not doing a defensive way, be objective about it. And so we wrote a piece called, Totally Not Crushing It, and said, here’s a strategy that’s been absolutely God awful. And this was a buy and hold, multi-factors of valued momentum US stock strategy. So mostly value though. But it would hedge the portfolio with US futures on the S&P in 25% chunks, half of that’s top down value, half of it was trend. And so as you can imagine, leading up to 2020, it had every possible headwind, growth, outperformed value, large cap outperform small. The choice of hedge was poor on and on. It just been awful.

But I think we appease the market gods. They’re like, bless you son. You’re showing humility. ‘Cause as soon as we wrote that fund has been an absolute tear. So now it’s gonna be like an annual practice from what is our stupidest, worst performing, stinky, nauseous inducing fund strategy? And we got a few that we’re gonna start to write about. But part of that is thinking in terms of the beginning of our discussion, like having a policy portfolio, having rules to where you have perspective because no one, and you guys can tell me if anyone’s ever said this to you. I’ve had a million people come up to me and say, "Meb, your strategy, your fund has been garbage. It’s doing worse than expected. We’re selling it. We love you. You’re nice guy, but we’re selling it."

I heard that a million times. You know what I’ve never heard, and this is verifiably true is that, "Hey Meb, your fund is doing way better than expected. Amazing. So you know what, we’re selling it, we’re coming back down to target or we just don’t understand why this is doing so well." ‘Cause they just say, "Oh, my God, you’re brilliant. The strategy’s amazing. We’re gonna add more." [laughs] if you don’t come up with rules around how to think about those situations, and most people don’t, they just do the buy decision and wing it. That’s where I think you get into a lot of trouble, and all the academic research shows, this is not an individual problem. Institutions are equally as horrific at chasing what’s working.

Yeah. Lou Zhang

[00:40:03] Adam Butler: and the team that came up with the Q factor model, published a database, I think it’s 167 different investment strategies, and you can download all of them, daily returns back to the early 60s and many cases. And I thought this was a really good playground to dig around and see whether there’s just looking at performance, whether there’s any way to, identify when it might be attractive to switch or emphasize one strategy or one group of strategies over another. And I must have tried well over 200 or 300 different cuts at this thing and none of them were any better than just selecting a random handful of the strategies in all the different categories, right? There’s kinda like quality… There’s a limited number of ways you can skin the cat, right? There’s kind of quality, profitability, value, momentum, maybe, low ball, but there’s a handful, maybe a couple more than a handful of different ways you could skin it. Just generally selecting a across the different spectrum and just buying and holding them in equal weight was better than any of the different selection methods that, that I could come up with. The general lesson being…

Yeah, go ahead.

[00:41:31] Meb Faber: But the basic re- this includes the advice of basic rebalancing, right? But it, but to me, it’s the opposite behavior is what you’re avoiding, which is what if you just chase the hot manager after the hot period, and then continually switch into those to me that, is likely… Because it creates, it doesn’t… If you did it systematically, it might be okay actually, but no one does this systematically. They do it systematically in the opposite direction, where they’ll chase somebody who’s outperformed then buy the fund or wait till someone under-performs and then sell it. Like I do, can you take advantage of the opposite of that? I don’t know. I don’t, I think it’s really hard. But to do what they do is a guaranteed in my mind, negative alpha producer obviously creates taxes and other problems as well. I think simple rebalancing is probably, the smartest simple way to, to keep your mind about you. But it also goes into this whole, like, why did you buy it in the first place? And it,

Exactly.

[00:42:36] Meb Faber: … asking. We did it was like 90 something percent of investors who said, "Do you establish the sell rules?" And they said, "No." So if you write down, look, Hey, here’s why I would sell it… Doesn’t matter if it’s stock, a fund manager, a discretionary investment, a farm, whatever. Why and what are the conditions you will sell this and think about it because the way that most people do is they, they just wing it. They say, let’s see how it goes. I don’t know. I’m gonna buy some thing. I think this is a bottom in Tesla here. Let’s see how it goes. And that’s, it’s just fraught with

peril.

[00:43:08] Adam Butler: No, I think you want to do, I guess the point is, choose a few things that you think are reasonable and then hold them in equal weight. Or if they’re of wildly different risks, then hold them in equal risk weight, right? But trying to get too selective, I think is a major source of potential error. And then also trying to time the things that you think are gonna be effective over the long term is also almost certain to give, to deliver suboptimal outcomes, right?

There’s a fun, there’s a fun step-

Figure about what

[00:43:45] Meb Faber: you believe in and diversify.

If you go back a hundred years and look at just US stocks and bonds, and let’s say, average return for that, what are 8% 7%, you said, okay, I’m gonna get this exactly wrong. I have perfect foresight, and I’m gonna predict which one of these is gonna do worse every year, and invest in that one. You still make money. You don’t make much, it’s 1% but that is, that to me is astonishing that you could get it exactly wrong every year and you would still make money. And then look, how many people do we know that, do things like, Hey, I sold no nine and never invested again. Or I invested in… I couldn’t take it anymore, but I was like, you don’t even have to average, you could just muck it up the worst possible way you could muck it up every year and still make money. Like that to me is amazing. But it’s, what can you do that’s worse is where people get in trouble. Like the, I can’t take it anymore. I did this. This was stu- you know, on and on. So I think avoiding like this like long tail of worst case scenarios of behaving poorly is to me is really like the-

Agreed.

… The big part of all this.

[00:44:53] Adam Butler: And I think it’s, people come by it honestly, right? If you think about how we’re wired behaviorally, we spent the vast majority of our evolutionary existence on the African belt. If you had a group of people that are that run and they leap out of the bushes and then they start running, the other direction, you’re probably smart. Your instinct is I don’t know what they’re running from, but if they’re running, I should probably run in the same direction, right? And so if you apply that to stock market, it’s this fund has been doing really well. The last two or three years, I should probably run in the same direction. The reality is that the instincts that, the evolutionary behaviors that we’ve developed in markets mostly just gets you into trouble, and to, to Meb’s earliest point, a lot of the biggest value of implementing rules are is having guardrails against the behaviors that are, seems so instinctively natural. And and right. And yet in markets really serve to to set you back from where you, you might have been, otherwise, if you just behaved in a way that’s consistent with some very basic rules.

I

[00:46:11] Pierre Daillie: liked your point Meb that, the point that you made earlier, that as long as you’ve got all the ingredients, it’s really hard to screw it up, even if you don’t get the recipe right. As long as all the ingredients are there you’re at least gonna get the flavor of it, [inaudible 00:46:33] So you could do it, you could obviously do a lot of things worse. You’ve said there’s an infinite number of, funds that are worse, infinite number of strategies that are worse, but what are some of the ways that you’ve come up, that you’ve come to the conclusion are better way to put these

[00:46:55] Meb Faber: ingredients together?

Yeah. We did a post in the pandemic called, How I Invest My Money, 2022. So we go full kimono. And for me, I wanna spend almost zero time on my public portfolio. I want it to be set up and just were in the background, almost like a checking account. I don’t wanna have to think about it and let the portfolio make any adjustments that need be made. And so here’s my long list of things that I want in the portfolio. I want exposure to global stocks. I want exposure to global bonds. I want exposure to global real assets. I want tilts towards value. So I’m attracted to value and we do shareholder yield strategies partially because I love those like investing 101 strategy, high cash flows, cheap, keeping the CEOs in check with distributing cash to shareholders, on and on.

But it also, because of what it avoids. It avoids the opposite expensive companies. And think about the last year, how many of these stocks are down 70% to 90% now and I wanna avoid those. And so for me, that, that works, the value part works. We do some momentum sprinkling in, on the equities there, and then with the other half of the portfolio. So that’s what we call like the global market portfolio with tilts. On the other half, we do trend following. And there’s lots of flavors of that. There’s different cousins of whether you do long short, whether you do long flat. And I think really, either scenario is okay. And I want those to sort of yin yang. They don’t always yin yang. Sometimes they look like each other, right now they look extremely different.

And buying holds tough, ’cause you gotta hold on and just hope things work out. And usually it hits the fan when everything’s going crazy. Trend is tough because often it under-performs when your neighbor’s buying, a bunch of high flying specs and, IPOs and other things too. But it’s a nice blend. And to me it checks the behavioral box of not having to be binary all the way in, on one investing approach and just hoping it works out. I like the diversification. So for me, like I walk through that and, it, it works for me. Trinity strategies are up on the year. And so in a world where most aren’t, it’s doing something a little different, right?

I spend a lot of time also investing in, in, in private investments. So we come from a farmland background. Farmland, traditionally, one of the hardest things to allocate to, but is it fits in that category of too much work, I think for most people. So you want some sort of, ideally would be a passive exposure to farmland. I put real estate in that category. It’s like my old time nightmare. Like, why would anyone want operate, manage real estate? Oh, my God. And and then I do a lot of angel investing, but to me, I like, with equities, I want to put it in a lockbox and forget about it. 10, 20 years from now I find out it’s been acquired, merged, or it’s now huge company, shipping dividends, great. But I don’t I want to buy and hold forever on that bucket.

So that’s what I walk through. We did a post called, Journey To A Hundred X that sort of details a lot of the specifics, and happy to get into any of them. But that’s the one that, that works for me. And I have a very non-consensus view that that most global portfolios, mixed with some cash is actually a much safer investment than cash and or short term government bonds. And we’ve tried to demonstrate that historically, and don’t find many people that follow that line of thinking. Maybe Michael Sailor and he’s got a slightly different conclusion than we do, but but I think it ends up being a safer portfolio, particularly, and here we are in 2022 where inflation’s a lot higher than most would expect.

[00:51:00] Adam Butler: Given where we are in the cycle, how do you think we can nudge investors into thinking more broadly about diversification, both from a, into hard assets and then into different styles after,

… US 60/40s treated them so well for the last decade.

You

want

[00:51:20] Meb Faber: the realistic pessimistic view. You’ll like this, Adam. I think they’ll do it after the fact. I think they’ll buy what they wish it bought right down the road from me in LA. I think when the gas station goes from, I think I, I saw $8 in the wild once that rolls over to 10 and they have to add like a whole another digit, ’cause they don’t have a tens digit on the gas station people will probably get excited about buying commodities and/or other real assets. I don’t know. I’m hopeful, but eternally frustrated at, the timing of people to get it right on, on the sentiment side. Is anytime a good time to become a globally diversified investor? Yes. And do these things. … often having been through a couple big ones and a couple smaller ones, bear markets, particularly in US stocks have a way of refocusing people’s attention, I think would be the right way to say it, where, investors, you lose some money, and I think it gets like it’s like a I’m in LA, so it’s like a earthquake logarithmic scale. Like every 10% down, it gets 10 times worse. So down 10%, whatever. Down 20 is like the inflection point where people, I think start to wake up and be like, "Oh crap this how bad can this get?" And then obviously down 30, 40, 50, on and on is, gets more traumatic. But I think bear markets have a way of liquidating people’s current portfolios. And we say to people, we say, look, listeners of this show, take out a blank piece of paper, write down your ideal portfolio if you had no positions today.

Alright. You clean out your garage. There’s nothing in there. What would you put in your garage? It’s, it is definitely not what is in there currently, all that garbage in there is, you would not go… You know what, I’m gonna buy all this again. I really, wanna put in these old scooters from the 70s and this old RK game that doesn’t work. I’m gonna go buy that on Craigslist. No one would do that. It’s crazy. So write down a piece of paper. This is my ideal portfolio. This is my current portfolio. And then realize how much emotional attachment you have to these legacy positions. And so it’s a very cathartic, no one will do this, but let’s say taxes, aren’t an issue. Just go sell the whole thing.

And then you have this moment of peace where you can say, okay, I’ve gotten rid of it. I threw all the way, all that baggage. Let’s begin a new. What would you invest in? And it’s never the same as it was, almost never for people, right? They go I brought this Bristol Myers in the 90s and I just, I don’t know, waited to get back to even." Or, "I own this fund. And, I just, they throw a great party," like it just on and on, right? But those emotional decisions, not objective ones. And so I, I think that process, which most won’t do, email me. Let me know if you guys do it. [laughs]

Listeners, but

[00:54:21] Adam Butler: What complicates it in this cycle I think is just how spectacular the lottery gains have been for, US equity, capitated investors, right? You’ve literally, you’re operating off 2X, 3X in in the last decade excluding 2022. And, so I wonder if my, it might take a substantially larger downdraft that, that persists for longer to give people that kind of pause and potential for review, catharsis and review, just because, people are just so much more wealthy than I think anyone ever dreamed they would be five or six years ago due to the fact that indices have compounded it, three to four times their normal rate over the last decade. Especially on a risk adjusted basis. You think it might take a little bit more pain to get people,

Yeah, I

[00:55:23] Meb Faber: mean,

… motivated them to change?

… look the, you and I we’ve been doing this for a few years now, chatting and we probably would’ve said a lot of similar things last year and two years ago, but it’s different now in 2022. We, the world has changed. And we said this on Twitter, we’re like, this feels like one of these periods where you look around and say, when did all these stocks go down 70% to 90%? And then there’s a list you can now pull it up on, on a lot of these companies that are down 70% to 90%. And so it’s happened in a tiny corner of the world. You see a lot of our DC friends losing it already. And the rest of the world’s like what, you guys like stop being so dramatic.

Yeah.

[00:56:05] Meb Faber: What’s going… And you see some of these funds that are down 50%, 60% be like, what, when did this just happen? Like how are you guys down 60% so far this year? And so I think it’ll be a process, right? Like GDP net worth and income in the US relative to GDP is the highest it’s ever been higher than the 20s. And you had this period that overshot. Now, my least popular tweet in a long time. And that’s something, that’s saying something, ’cause my tweets are on average, very unpopular. And this tweet had no opinions. It just was factual commentary. It was, I said, look, historically speaking, if you look at valuation multiples in the US, this is back when tenure cape ratio, we like to use it, doesn’t really matter was at 40, it’s now at 30, but the same thing still applies. I said, hypothetically speaking, investors don’t like paying huge multiples on the stock market when inflation is high.

So up to 4%, doesn’t matter. Above 4% is when it starts to kink, and it gets worse over 6%. But historically, investors pay low teen multiples of inflation is where it is today. Or even if it goes back down to 6%, even back down at 4%, it’s a third lower than it is today from here, not from the peak. And man, people are angry about that. They were really up in arms and huffy about that. And I said, I didn’t even say anything. I just said, this is a historical data fact. And I said, by the way, this isn’t sailing through the mean and median, this is just the actual average, which means half or worse lower than that.

And so I think look man it’s been… We just did this fun podcast. You heard of Peter Zion. And he is look, this has been a great time, and so I translated to markets, like it was amazing run for the S&P for a decade. Like my God, like you had some of the best returns ever that should give you pause already, right? Everything we know about markets.

I think it’s the exact playbook like we know what’s gonna happen. People find religion after the fact perhaps, but I, yeah, I, I don’t really particularly with all the private equity flows I think it could be a process. I don’t think this is a one year deal, would be my guess, but rem- remember my quote, you can put this on my gravestone, is I think is better to be Rip Van Winkle than Nostradamus, right? Like just invest, get this great portfolio, put it on autopilot versus trying to predict. And I’m waiting into prediction territory, but my guess is it, yes, it could be an extended period and it doesn’t have to be a decade. It’d be a couple years, but where things don’t do 17% a year and people will start to reflect a little bit. Bon- bonds, I think has been a big surprise for the negative sentiment. I think people assume wrongly that bonds would always hedge stocks. And that’s certainly not the case this year.

[00:59:23] Adam Butler: We’ve been friends a long time and I’ve never heard you use that quote, but I love it. I’m totally stealing it now.

Yeah.

Better to be Rip Van Winkle than Nostradamus. That’s awesome.

Yeah.

[laughs].

Yeah.

That’s so smart. I like the I, the point you made I just, I find all the,

[00:59:39] Pierre Daillie: The more energy we put into making a decision about a particular holding and it, when it fails, we’re even more unlikely to get out of it because we put so much decision power into it. So when you go to the other extreme of having a rules based strategy where you had absolutely no park in the decision making, then, when your portfolio changes, because the rules changed, because the rules determined that your portfolio should change, you have no part in that either because you have no emotional stock in that. But when you do have emotional stock, I found like for me personally, the holdings that, that I was, most low to let go, like the stuff in the garage that, that, we hoard,

[01:00:32] Meb Faber: right? [inaudible 01:00:33]

Perhaps you guys have to post pictures of your garage after this show and we can just hold everyone’s feet to the fire and say, all right, guys, this is the episode of hoarders. We gotta take, we gotta take your portfolio. Mine is, one of mine is completely full currently, that’s such a

[01:00:50] Pierre Daillie: great analogy because… That’s such a great analogy Meb because, it’s true. I think most investors, most, most retail investors anyways are to a large extent, they’re waiting to break even, they’re holding stuff that is never gonna break even, it’s never, might never be fixed for them, but the, but because they made a decision, they liked it at some point it’s almost like they’re having to come to terms with with shame or humility and they just can’t do it.

[01:01:21] Meb Faber: Yeah. There’s a lot of emotions wrapped up in money, right? Like you think of… And I think it’s probably better now than for our parents and parents’ generation before that, money, very, a taboo topic not just personal finance and investing if people even talked about investing, I think it’s a lot more out in the open now. But still, I bemoan the lack of, finance education or personal investing in schools, but it’s getting better with y’all’s good work and others, right? We’re trying. But yeah it’s tough. It’s a tough topic. Shouldn’t be,

[01:02:00] Adam Butler: It’s underappreciated though, how it’s a really good point, Pierre, I think, and under-appreciated that the more research and due diligence that you that you do on an investment, the harder it is to let go and the easier it is to become over confident and probably over concentrated in it, right? So there’s this tension between wanting to know what you own, but not wanting to know it so well that you wanna just concentrate everything in it and, or you’re reluctant to let it go if you learn something new about it, that makes it not nearly so attractive, right? That’s another advantage to rules based investing, right? You don’t fall in love with any of the investments because, you’re just following this set of fairly abstract rules and there’s nothing to be emotional about.

Yeah.

[01:02:56] Meb Faber: That’s the we say there’s two class of investors and I’m now pretty heavy in both, trend following of course, where it’s got a pretty low batting average, on average. And we had somebody talking to us on Twitter and they were talking about a long term moving average. And they’re like, "Meb, how could you use this? Look at this, the last three trades have been losers." And I was like, "Three, you think that’s a lot? This thing could do 10 in a row losing trades." Like the batting average is not what matters here, right? It’s the big, huge winners, the power laws of investing. That’s all that matters in investing is this power law concept where you have these huge winners. And this applies to market cap indexes too. Like all the gains come from McDonald’s and Walmart and Amazon, doesn’t matter if you have an Enron in there.

And one of the beauties of the trend following is you learn to live with the losers. Like you, you get, it’s not a big deal. Like you get a little Zen mentality oh, here’s another buy signal for wheat. Oh, here’s another buy signal for wheat. Oh, here’s another buy signal for wheat. Angel investors, it’s the same math, right? Like you do a hundred investments, half are gonna go to zero, And they’re totally at peace. That it’s interesting to me though, that there’s not a lot of overlap between the two camps. I don’t know a lot of angel investors that used managed futures or trend or there’s some on the opposite. But I was into a debate with a guy on, on Twitter, a famous angel investor, Dave McClure. And we were talking, I said, and this is the beginning of the year. And I was like, it’s strange to me that not more private equity, but also a venture capital considering how auto correlated some of their boons and bursts are to such very large magnitudes. I said, I’m surprised that A, don’t allocate to trend to manage futures, or B, use trend to hedge.

It seems like that would be a very obvious psychological, wouldn’t take much for them to understand. "Oh, okay. This would make sense to do the," but I don’t know any that do in the traditional sense that way. There’s some to there’s some endowments that allocate to both, but

Yeah.

[01:04:58] Meb Faber: I don’t know a lot that, that think that way, but you gotta embrace the losers. I love the losers. That’s you gotta be… We had a post something called to be a good investor, you have to be a good loser. We spend most of our time in a draw down. So it’s either all time higher or draw down and you gotta be com- comfortable with both.

Yeah.

[01:05:18] Adam Butler: Who said it, you gain something from every trade, either a profit or a lesson?

[01:05:22] Meb Faber: Yeah. You you oh man, I just blanked on it. You you gain wisdom oh… How you… You set, it’s like listening to a song and someone plays you the wrong song, and then you get that one in your head and then you can’t sing the song in the melody, is like either make money or learn from every trade, but never both. That’s not quite it, but it’s close.

[01:05:48] Adam Butler: Yeah. Wisdom or profit, but never both. Something like that.

Never both.

[01:05:52] Meb Faber: Yeah.

[01:05:52] Pierre Daillie: Failure

[01:05:53] Meb Faber: is a better teacher than success.

Yeah.

Definitely.

[01:05:57] Meb Faber: [inaudible

01:05:59]. No, don’t let me go. I was gonna ask what you guys got on your brain. What are you guys working on? Anything particularly interesting in this sell in May and see y’all in the fall, summer sabbatical. What’s going on this summer? What are you guys? What are you guys up to?

No,

[01:06:12] Adam Butler: we’ve, Mike’s going to South Africa for a month in July. So he’s looking forward to that. I’m taking the family to Europe in August.

[01:06:21] Meb Faber: I was gonna say speaking of running towards running towards the tiger on the Savannah, may not see Mike again. [laughs]

Yeah.

I don’t know if he has the gene, the runaway. I think he’s the run towards gene.

Yeah, I think you’re

[01:06:34] Adam Butler: That’s a… He’s a good, he’s a good one to have on safari with you.

Yeah. Yeah. There you go.

But he’s not, it’s not healthy for him to go on safari. I-

[01:06:43] Meb Faber: He’s a bigger meal for the lion. He’s a lar… A lion’s not gonna be looking at me and be like, oh let’s just, he’s a morsel. I want this big lumbering antelope over here. That’s what I’m gonna go for.

[01:06:55] Adam Butler: Yeah. That’s right. Tell you what, we’re we’ve been trying to kick the tires on whether we want to add crypto futures to our risk parody strategy. ‘Cause one of the interesting things we’ve noticed over the last decade is that, definitionally, when only a very narrow segment of the market is delivering all the returns, then any attempt at diversification looks silly, right?

Yeah.

[01:07:21] Adam Butler: And the last decade, what seven or eight stocks delivered like 90% of total global gains, [laughs] across all markets. And so how do you have hedge against these crazy concentrated growth cycles and while probably in the next growth cycle, whenever it happens, 10 years from now or whatever crypto won’t be a good hedge for that, but it is an interesting, different bet that you just aren’t capturing in any of the other markets that you would

[01:07:51] Meb Faber: typically,

What are you leaning towards? Yay or nay?

[01:07:55] Adam Butler: Because the risk allocation the capital allocation would be so small because they’re so volatile, we’re talking about like 1% or less an aggregate to the two contracts, but because they’re up like 4000%, that actually has a meaningful return contribution, even though the risk is a little lower. Now, who knows what it’ll look like going forward. But again, it’s just like a different

bet.

[01:08:19] Meb Faber: I like the idea of it. There Kim Harvey had a recent paper out on trend following in crypto and had some positive remarks on it. You can add in the show note links. I, we were hanging out with professor Dr. Sharp, Nobel Laureate the other night. And someone asked him a question and they’re like, Dr. Sharp does crypto have a role in the global market portfolio? And he paused and he is, he’s like as sharp as, not sharp, he’s as smart as a whip as he ever was. And he paused and he goes, "Yes, but not a positive one." [laughs]

[laughs]

[laughs]

That was So funny. So funny. He was like just trolling everyone in the audience. And he is he is like the traditional view of Hey, this doesn’t have cash flows. It’s not a cash prod- a yield producing asset, whatever. But it’s as an actual trade diversifier to a traditional portfolio, I don’t know why not, I think it’s a, it’s not a huge percentage of the global market portfolio. And because of the volatility, like you said, you can deal with the risk by simply sizing it appropriately. That’s, we’re getting to the end of the podcast and now we’re getting to the real genes, portfolio sizing, position sizing, is probably more important than everything we talked about thus far. If you put me on the resolve board, I’ll vote yes. That, that, that would be my, I say, yeah, you guys include it. [laughs] I think that’s a, I think it’s a great input.

It’s funny, like you talk to all the trend followers, half the time it’s like, what’s your best returning position. It’s like carbon credits or, like whets having an amazing year, but for the last 10 years, like who which investor has a significant wheat, and forget about energy in general. Two years ago we have this conversation is, it’d be like, that’s going to zero somehow, but so yeah.

Or negative.

Wait, so by the two contracts, you mean Bitcoin and Dogecoin or Dogecoin and Shiba Inu

[01:10:30] Adam Butler: Yeah, just the listed futures. But anyway, yeah, there’s always something new to think about. That’s one of the directions we were kicking the tires on, but yeah. There’s things going on.

Awesome.

[01:10:40] Pierre Daillie: Oh, Matt, What do you see, what do you see right now as being the most contrarian thing

[01:10:46] Meb Faber: to do in the market?

I have a whole list on Twitter. I’d love to see Adam do this, ’cause I feel like most of his views would fit this category, but I have a whole running list of called Meb’s contrarian takes on investments that at least 75% of my peers don’t agree with. And it’s about, it’s up to about 20 right now. That’s not your question, but it’s a fun list because it’s an equal opportunity offender. There’s takes on there that will offend every single person at some point. So restate it. What is the most contrarian investment right now? Is that what you said? Okay. I’m gonna tell you one more story, ’cause I can’t answer a question straightforward. And we did a post on Twitter a couple years ago where I said, okay, nominate an investment. Here’s a contest, but it’s, the game is you have to nominate something that’s gonna lose the most money over the next year.

And the number one and number two investments, you can’t make this up, were Bitcoin and Gamestop. Both of which went up 1000% in the year that the goal was to lose money, not make money. They went up 1000%. I’m gonna give you one, and this would’ve been one I would’ve said last year too, probably, and it’s only gotten worse. I think emerging market value foreign value in general because now a lot of foreign, developed depending on location is also pretty, pretty beaten down. We bemoan all the US stock valuations, but the reality is foreign developed is totally reasonable and foreign emerging is scorching cheap. Now that is after, but also before Russia essentially went to zero and 95% of emerging market funds, including ours held Russian stocks.

Now what’s interesting, and I gotta be careful what I say here. So I’m not talking about our fund, but I’m talking about funds in general. To my knowledge, every ETF out there that owned Russian securities has marked those positions to zero. Now, who knows what the future’s gonna hold. We’re ignoring all the obvious death and destruction, the sadness that’s going on just from a purely investment standpoint. Russian people are not their government. Russian companies are not the government, yada, on and on. And you do a, we have to think in all of our world, quantitative investing like a probabilistic thinking, right? Here’s the possible outcomes. Here’s the odds we’re giving it. The majority outcome of this scenario is probably, hopefully, and this is, ideal that this conflict winds down, there’s a treaty, new lines are drawn, maybe the sanctions remain whatever, but there’s a value to those companies and it may be 20 cents on the dollar. Okay. But it’s not zero. It can’t get worse, right? It can’t go worse than zero.

There’s a small percentage where things go to hell in a hand basket and it is worth zero, but that’s already priced in. There’s a scenario where, Hey humanity is restored and things just go in the right direction. It’s a small percentage, we’re not only do those stocks hit par, they hit double or triple par. But all of that is already marked at zero, right? So I can, saying it’s a free call option is not quite accurate but that is one component to this, in addition to the rest of the emerging market portfolio, which is already at huge valuations huge, cheap valuations relative to its history and relative to the US. Now, there’s a big looming Jupiter of the emerging markets, which is China and most emerging market funds if you own it, it’s half China by the way. Or some of them it’s more.

And China, some people think this is a test run like Russia and Ukraine versus China and Taiwan. But China, if you look back, has a very short history with valuations in the 2000s, like it’s only traded at this valuation twice before, so it’s like a 10 PE ratio. It’s low for China. And in both times a year or two, hence was up 50% and the other time was up 200%. Now, are you getting any sort of premium for investing in Chinese stocks? Are you willing to make that bet? That seems pretty anti-contrarian to me right now. China’s gotta be up there in, in emerging markets in general.

Now I could talk about the individual countries I love like Poland and UK. Is at half or two thirds lower valuations in the US and going back 150 years, those two kind of zig and zag? I got them all day. You guys, we could do this. We used to do a post for a long time looking at what is the most beaten down investment. And for many years in a row, it was energy and ag. So if you Google, like why you want cold stocks in your stocking for Christmas,

… it was cold stocks, uranium stocks and then Ags, and I think last year everything had been going up for a while. So I think it was like Pakistan, was like the only thing we could find that was like down three, four years in a row or a bunch. Anyway, there’s a lot more now today, but I’m gonna stick with that. That was my very short winded answer to your question.

[01:16:45] Adam Butler: You’re not worried about Peter Zion’s comments about China going into a demographic collapse this decade?

[01:16:53] Meb Faber: The, this is the beauty of being a quant. As I say I can gossip and drink beers with you guys and talk till the cows come home on investment opinions and it will not matter one wit to what my portfolios actually do. And as a good example, our largest and oldest fund consistently buys stocks that I would vomit and never in a thousand years buy if given the discretion. Our largest holding is Dillard’s. Dillard’s is it’s like a department store. I don’t think I’ve been in since the 90s. And I’m like, are you gotta be kidding me? This looks, sounds like the worst investment of my lifetime. I wanna buy something exciting, that, disruption, innovation and we got Dillard’s? Anyway. So that’s the beauty of what we’re doing.

We’ve actually, most of our value strategies had avoided China for a long time now. Now they held Russia, so a bit of a wash, but I would be surprised… It owns a lot of our emerging market strategy actually has a heavy tech allocation, which is interesting to me, ’cause the US and the developed don’t I would be surprised if it didn’t in the coming quarters year, start to allocate more towards China. I, it makes me nervous as hell, [laughs] but I’m nervous about anything doesn’t matter. So we’ll see. We’ll see what happens.

What do

[01:18:21] Adam Butler: you think Pierre man?

Meb, do you have any what other ground do you wanna cover,

[01:18:24] Meb Faber: buddy?

Yes, we could talk for hours. I’m I’m easy, man. It’s summertime. It’s getting ready to be. I’m ready to wax up the surfboard. Come down to Caymans, cruise around on a foil board. We’ll see. I you get up to Canada. We, I’m ready to travel again, go some fun places. I got a couple sabbatical projects for the summer that won’t happen, that I’ve been trying to do for the last four years. We’ll see when those get, get some time.

[01:18:57] Adam Butler: Are we gonna get that Jap- Japan ski trip going this year or?

[01:19:01] Meb Faber: Yen, is it 20 or lows, my friend. So not only that-

This is the year.

… you’re gonna get a fat discount. This is the time to, this is the time to, to book it. The Yen seems to be about, about ready to take a big dirt nap. It’s getting cheaper.

[laughs]

I

like

[01:19:16] Adam Butler: it. Okay.

Yeah.

All right. Thanks, Meb. Generous as always.

Yeah.

[01:19:21] Pierre Daillie: Meb, thank you so much. That was I’m always, I’m at a loss for words because…

[01:19:29] Meb Faber: I am not, I could talk for an hour more. I’m not a loss for words. We could do this.

No, I do. This is like-

Part One

[01:19:38] Pierre Daillie: of the trilogy.

Absolutely. I feel like the conversation could continue, but if we start a new topic we’re gonna be another half hour.

[01:19:45] Meb Faber: Yeah. Easy.

Could be.

All right, guys. It’s been blast. Blessed to spend a time with you and thanks for having me.

Thank you so much.

Thanks, bud.

[01:19:53] Adam Butler: Good to see

[01:20:25] Meb Faber: you.