WEBVTT - Pin the Tail Risk on the Quant 0:00:12.800 --> 0:00:16.160 Hello, and welcome to What Goes Up, a Bloomberg weekly 0:00:16.200 --> 0:00:20.759 markets podcast. I'm Sarah Ponzac, reporter on the Cross Asset team, 0:00:20.760 --> 0:00:23.520 and I'm Mike Reagan, a senior editor on the Markets 0:00:23.520 --> 0:00:28.160 team and Sarah's trusty sidekick. You didn't come up with 0:00:28.200 --> 0:00:31.960 one this week, so you just We've gone through Hall 0:00:32.040 --> 0:00:36.040 notes and Lavernon Shirlie. I'm I'm out. I guess what 0:00:36.240 --> 0:00:40.839 three weeks with tops? Yeah? Four weeks. Maybe maybe we'll 0:00:40.840 --> 0:00:43.839 get creative next time. Yeah, next week. But anyway, this 0:00:43.920 --> 0:00:46.400 week on the show, worries of a so called second 0:00:46.479 --> 0:00:50.120 coronavirus wave are growing, and questions over the pace of 0:00:50.120 --> 0:00:54.080 the economic recovery abound. With stocks now trading at pretty 0:00:54.080 --> 0:00:57.680 expensive levels, how worried should you be about a fast turnaround? 0:00:58.000 --> 0:01:00.840 Our guest runs a tail risk et that game your 0:01:00.920 --> 0:01:03.800 thirty percent back in March by investing in out of 0:01:03.800 --> 0:01:07.640 the money put options. He share his thoughts, and as always, 0:01:07.680 --> 0:01:10.839 will close out the episode with our tradition, the craziest 0:01:10.840 --> 0:01:14.360 thing I saw in markets this week? Uh? And if 0:01:14.360 --> 0:01:16.880 you saw something crazy by all means, give us a 0:01:16.920 --> 0:01:20.280 call on the podcast hotline and leave a voicemail. The 0:01:20.360 --> 0:01:24.920 number is six four six three two four three four nine. 0:01:25.080 --> 0:01:28.800 Oh and maybe we'll play your voicemail on the show, Sarah. 0:01:28.880 --> 0:01:30.440 I actually, I don't know if you realize this, but 0:01:30.480 --> 0:01:33.320 you cut me off before my crazy thing last week, 0:01:33.840 --> 0:01:36.560 Um because we were going we were all going too long. 0:01:36.600 --> 0:01:38.680 I think you've droned on a little too long and 0:01:38.920 --> 0:01:41.959 had to cut me off, which is fine, Which is fine. 0:01:42.400 --> 0:01:44.720 So that means you have too this week. That just 0:01:44.720 --> 0:01:47.520 fun because I couldn't find one this I saved up 0:01:47.600 --> 0:01:50.600 last weeks for this week. Okay, well, I apologize about 0:01:50.600 --> 0:01:54.800 cutting you off number one, but it betould be really good. 0:01:55.680 --> 0:01:58.680 I think it was actually Cameron His craziest thing lasted 0:01:58.880 --> 0:02:01.000 like it could have been its own podcast of talking 0:02:01.040 --> 0:02:05.960 about the box options in in I'll have to go 0:02:06.000 --> 0:02:09.240 back to listen to it. But anyway, very happy to 0:02:09.280 --> 0:02:11.679 have uh the guests on the show this week. I 0:02:11.720 --> 0:02:14.359 think a lot of listeners have probably heard of him. 0:02:14.400 --> 0:02:18.280 He's a very prolific writer, has written several books on 0:02:18.320 --> 0:02:22.000 the market, a lot of really interesting columns and blog posts. 0:02:22.760 --> 0:02:26.000 On top of all that, he's actually the co founder 0:02:26.040 --> 0:02:32.000 and chief investment officer of Cambria Investment Management. His name 0:02:32.080 --> 0:02:34.760 is meb favor meb. Welcome to the show. Great to 0:02:34.760 --> 0:02:38.080 be here, you're all thanks for having me, dad, fellow podcaster. 0:02:38.480 --> 0:02:41.240 I know a little bit of competition here, uh in 0:02:41.320 --> 0:02:44.680 podcast land. But Sarah met maybe smarter and better looking 0:02:44.720 --> 0:02:49.079 than me, but he doesn't have a hit millennial charming 0:02:49.240 --> 0:02:53.040 podcast co host like like me. So no, no pructure. 0:02:53.080 --> 0:02:54.440 But I really need you to lay it on thick 0:02:54.520 --> 0:02:58.520 this week. All right, well, we'll try it out. We'll 0:02:58.520 --> 0:03:02.200 bring our best. Well, but let's let's start with talking 0:03:02.240 --> 0:03:04.919 about that notion of tail risk and and the Cambria 0:03:05.280 --> 0:03:08.360 tail risk ETF. Boy, this is the year, I think, 0:03:08.520 --> 0:03:11.680 when a lot of people realize the value of tail 0:03:11.840 --> 0:03:14.760 risk hedging. UM. So I'm curious just to hear sort 0:03:14.760 --> 0:03:18.440 of how you develop that product. I know it relies 0:03:18.440 --> 0:03:23.000 a lot on on options, uh put options on the market. Um. 0:03:23.080 --> 0:03:25.480 And I'm surprised to read in one of your blog 0:03:25.480 --> 0:03:29.600 posts recently, uh, how heavily you are allocated in at 0:03:29.680 --> 0:03:32.600 least in your personal investments. So it's tail risk and 0:03:32.639 --> 0:03:34.800 in Cambria as it Well, I correct me if I'm wrong, 0:03:34.880 --> 0:03:37.240 but at as of that writing, it was something like 0:03:38.600 --> 0:03:42.120 in your own portfolio and as far as the firm's cash. 0:03:42.160 --> 0:03:45.800 It was it was something like, you know what, I'm wondering, 0:03:46.360 --> 0:03:48.839 at what point, um, do you sort of balance back 0:03:48.880 --> 0:03:50.440 down out of that? Do you sort of take the 0:03:50.480 --> 0:03:53.040 profits on that? Or are we in the type of 0:03:53.160 --> 0:03:56.400 environment where it makes sense to keep a pretty heavy 0:03:56.440 --> 0:03:59.400 allocation to to sort of a tail risk strategy. So 0:03:59.720 --> 0:04:04.000 coming into this discussion, had we been doing this, uh, 0:04:04.120 --> 0:04:07.880 say in December, would have been much more theoretical than practical. 0:04:08.320 --> 0:04:11.880 And uh the SMP just finished one of the best 0:04:11.880 --> 0:04:14.440 decades ever, put it in the top five or probably 0:04:14.440 --> 0:04:18.080 the past dozen or so decades. Ended the decade at 0:04:18.120 --> 0:04:21.960 a pretty lofty valuation. But if you rewind about three 0:04:22.000 --> 0:04:24.039 years ago, we had written a paper called Worried about 0:04:24.040 --> 0:04:26.279 the Market, It might be time for the strategy. A 0:04:26.320 --> 0:04:30.320 little early. You had the first time in history the 0:04:30.320 --> 0:04:33.560 stock market went up every single calendar month. But we 0:04:33.640 --> 0:04:36.640 what we wrote about in this paper was thinking about 0:04:36.640 --> 0:04:38.960 hedging risks, and we said the first way to think 0:04:39.000 --> 0:04:40.800 about it, and the one that we most traditionally think 0:04:40.800 --> 0:04:44.120 about is US stocks don't take the risk in the 0:04:44.160 --> 0:04:46.000 first place. That's the best way to hedge it. So 0:04:46.040 --> 0:04:48.279 if you have a hundred percent portfolio in stocks, maybe 0:04:48.320 --> 0:04:50.760 you should have eight or sixty and the rest in 0:04:50.800 --> 0:04:53.880 cash and bonds. Second, Uh, it's great to diverse by 0:04:53.920 --> 0:04:57.560 into other sort of investment, traditional things like foreign socks 0:04:57.600 --> 0:05:00.080 and bonds, real estate commodities. So in this paper we 0:05:00.200 --> 0:05:04.000 looked at what historically hedged US stocks and their very 0:05:04.000 --> 0:05:07.240 worst months when they were down like ten in a 0:05:07.279 --> 0:05:10.400 month and during bear markets, and the things you expected 0:05:10.560 --> 0:05:15.440 probably not hedge foreign stocks, real estate commodities didn't. Historically, 0:05:16.200 --> 0:05:19.880 things you expected to help bonds did, but they didn't 0:05:19.880 --> 0:05:22.960 have hugely strong returns. They're mostly flatish. Gold did a 0:05:23.000 --> 0:05:25.920 good job, but not always one time it was down, 0:05:27.120 --> 0:05:29.239 and then the best during the bad times, of course, 0:05:29.320 --> 0:05:32.919 was buying puts. The problem with that is, uh, the 0:05:33.040 --> 0:05:35.800 cost in the good times, right, Um, the same way 0:05:35.839 --> 0:05:39.719 people think about car insurance or house insurance or anything else. 0:05:40.360 --> 0:05:43.400 And so we looked at historically how that worked with 0:05:43.440 --> 0:05:49.799 the portfolio. Now walk forward to it's been uh only 0:05:49.880 --> 0:05:53.040 six months into the decade, but my god, it's felt 0:05:53.080 --> 0:05:56.360 like an entire decade already with with six months and 0:05:57.080 --> 0:06:01.000 you played out in real time, uh playbook from this 0:06:01.080 --> 0:06:07.080 paper and the same exact strategies and ideas that helped historically, 0:06:07.120 --> 0:06:09.760 going back fifty years helped again. And the things you 0:06:09.839 --> 0:06:13.600 expected not to didn't. Foreign stocks, real estate commodities member 0:06:14.240 --> 0:06:16.479 traded negative at one point, with the futures on on 0:06:16.520 --> 0:06:20.800 the oil base and so um. This concept, though, is 0:06:22.520 --> 0:06:25.680 I'm a quant and if you think about markets and 0:06:25.760 --> 0:06:28.880 optimizations and the ideal portfolio, it's so easy to do 0:06:28.920 --> 0:06:33.120 on paper, but when you play it out in real life, 0:06:33.200 --> 0:06:36.080 the very real pain of losing money, waking up every 0:06:36.120 --> 0:06:40.640 day to markets being up down, limit, watching overnight futures, 0:06:40.640 --> 0:06:42.520 that's not something most of us want to spend any 0:06:42.560 --> 0:06:45.800 time doing. And so this idea of adding something like 0:06:46.000 --> 0:06:50.039 tail uh, you know, is almost more from the behavioral 0:06:50.200 --> 0:06:54.360 or psychological standpoint. And you noted my own personal investments 0:06:54.360 --> 0:06:58.040 that seem far skewed larger than than whatever makes sense 0:06:58.040 --> 0:07:00.600 for anyone. In the opinis of the paper. We had 0:07:00.640 --> 0:07:07.400 an interesting thought process experiment where we said, pretend you're 0:07:07.400 --> 0:07:10.640 a financial advisor or an asset manager, anyone involved in 0:07:10.680 --> 0:07:14.000 our world. Um, you're actually probably three or four times 0:07:14.080 --> 0:07:16.320 leverage the stock market, whether you know it or not. 0:07:16.720 --> 0:07:19.600 You have your own personal portfolio. If you're an investment 0:07:19.640 --> 0:07:23.600 advisor or a financial planner. Your clients, uh, their main 0:07:23.800 --> 0:07:27.160 investment is in US stocks. If you're revenue based, if 0:07:27.200 --> 0:07:32.200 the stock market goes down, your revenue goes down. Clients 0:07:32.240 --> 0:07:34.720 panic at the bottom and they tend to sell and 0:07:34.760 --> 0:07:36.920 just can't take it anymore. And then on top of that, 0:07:36.960 --> 0:07:39.840 if you don't work for your own company, uh, you're 0:07:39.920 --> 0:07:43.160 subject to layoffs and downsizing and recessions. So you can 0:07:43.200 --> 0:07:46.600 make the argument because of all your human, professional and 0:07:46.760 --> 0:07:49.760 personal capital are invested in markets, and no one else 0:07:49.800 --> 0:07:52.000 believes this, by the way, so to take that for 0:07:52.160 --> 0:07:55.280 what it is. But the same way an airline company 0:07:55.280 --> 0:07:59.440 would head fuel costs or a multinational company making cereal 0:07:59.480 --> 0:08:02.160 hedgess we it makes total sense to hedge the number 0:08:02.160 --> 0:08:05.280 one risk in our world, which is simply U S stocks, 0:08:05.480 --> 0:08:09.320 and most don't. I do. I'm a little crazy, um, 0:08:09.320 --> 0:08:13.680 but it's a way of if you can just get 0:08:13.720 --> 0:08:16.760 to the finish line and sustain with the rest of 0:08:16.800 --> 0:08:20.160 your portfolio, if some things help you get there, to me, 0:08:20.240 --> 0:08:23.480 it's all worthwhile and the whole, the whole goal of 0:08:23.520 --> 0:08:26.200 all this is to not get taken out of the game. 0:08:26.240 --> 0:08:28.320 If you're at the casino and you lose your bankroll, 0:08:28.520 --> 0:08:31.040 you can't bet, and that's the worst thing that can happen. 0:08:48.760 --> 0:08:51.880 Well on this show, Mab, we really like crazy um. 0:08:51.880 --> 0:08:54.800 But like you said, I mean has seriously felt like 0:08:54.840 --> 0:08:58.280 a lifetime. It's as though we have experienced this mini 0:08:58.400 --> 0:09:01.199 cycle in a way, and I've find it very interesting 0:09:01.200 --> 0:09:03.079 at this point in time because I think the fragilities 0:09:03.080 --> 0:09:04.560 in the market have been very clear. I mean, you 0:09:04.600 --> 0:09:07.960 mentioned the days when every single day we were experiencing 0:09:08.000 --> 0:09:10.760 limit up or limit down, and I will be totally 0:09:10.840 --> 0:09:15.520 upfront last Thursday, it was when we got that about 0:09:15.559 --> 0:09:18.960 six percent self in the SMP. I was made to 0:09:19.000 --> 0:09:20.800 temple it out because that's what we do in the 0:09:20.840 --> 0:09:24.280 news industry, a circuit breaker story just in case that happened, 0:09:24.280 --> 0:09:28.520 because we're getting flashbacks of March. But even I mean, 0:09:28.559 --> 0:09:31.000 if you look at different metrics, like the c boat 0:09:31.000 --> 0:09:34.079 puts a call ratio, I'm I'm always so amazed at 0:09:34.080 --> 0:09:36.640 how extreme it is to the downside that people don't 0:09:36.679 --> 0:09:39.439 feel as though they have to protect it against downside loss, 0:09:39.480 --> 0:09:41.760 that maybe people are a little bit scared of missing 0:09:41.800 --> 0:09:44.880 out at this point in time. I mean, psychologically, how 0:09:45.160 --> 0:09:49.040 difficult it is it to get people to grasp onto 0:09:49.080 --> 0:09:53.120 the idea of hedging against downside risk, especially coming off 0:09:53.160 --> 0:09:56.959 of such a forceful rally that we've now experienced. Well, 0:09:57.200 --> 0:09:59.560 there's two points that I think you bring up that 0:09:59.600 --> 0:10:02.240 are really important. The first is, you know, if you 0:10:02.360 --> 0:10:07.360 have a portfolio. What we talk about on these podcasts 0:10:07.360 --> 0:10:10.679 and about investments, it's the sexy part about investments. It's 0:10:10.720 --> 0:10:13.160 talking about you know, what are stocks gonna do? Where's 0:10:13.200 --> 0:10:15.600 gold going? What about inflation? What about the Fed? But 0:10:15.679 --> 0:10:18.520 the whole point is you should have a plan ahead 0:10:18.520 --> 0:10:21.760 of the time. Right, the football quarterback I'm a Broncos fan, 0:10:22.040 --> 0:10:24.720 Peyton Manning goes the line of scrimmage. Uh, you know 0:10:24.800 --> 0:10:27.560 back in the day, he knew all of his options 0:10:27.559 --> 0:10:29.800 that were gonna happen when the defense lined up right, 0:10:29.840 --> 0:10:32.520 and so not having a plan, and then last Thursday 0:10:32.520 --> 0:10:35.640 comes along and all of a sudden, the markets down five, six, seven, 0:10:36.120 --> 0:10:39.520 whatever it was. That's when people start to just totally 0:10:39.559 --> 0:10:41.040 panic and use a different part of their brains. So 0:10:41.120 --> 0:10:43.199 we tell all investors doesn't even matter. It could be 0:10:43.200 --> 0:10:44.840 two bullet points, it could be ten pages like an 0:10:44.920 --> 0:10:48.200 endowment policy portfolio. Have an investing plan, write it down, 0:10:48.360 --> 0:10:50.760 share it with whatever your loved ones are neighbor to 0:10:50.800 --> 0:10:53.920 try to keep you on plan and and and honest, 0:10:53.960 --> 0:10:57.840 because otherwise there's so much um seduction to just do 0:10:57.960 --> 0:11:00.760 really stupid things. And we'll talk about this more more 0:11:00.800 --> 0:11:03.880 in a little bit um. But the challenge also is 0:11:03.920 --> 0:11:08.000 that there is a pretty wide spread right now between 0:11:08.240 --> 0:11:10.679 what most of us experiencing in the real world, in 0:11:10.720 --> 0:11:14.640 the economy and markets. And I said recently, I said, look, 0:11:14.640 --> 0:11:16.680 if you were to go back twelve months feels like 0:11:16.679 --> 0:11:19.960 a lifetime ago last summer and say, look, I'm gonna 0:11:19.960 --> 0:11:21.400 tell you what's going to happen the economy in the 0:11:21.400 --> 0:11:23.880 next twelve months. Unemployment is going to go from four 0:11:23.920 --> 0:11:27.160 to Gold is gonna be up thirty. Oil at some 0:11:27.200 --> 0:11:29.280 point will trade negative in the futures market p M. 0:11:29.360 --> 0:11:32.080 I will go from positive to negative. Interest rates, Oh, 0:11:32.120 --> 0:11:33.480 by the way, the Fed go from two and a 0:11:33.520 --> 0:11:36.520 half to zero. Where do you predict stocks will be 0:11:37.000 --> 0:11:39.600 twelve months from now? And I guarantee you no one, 0:11:40.080 --> 0:11:43.240 no one would have said up ten or about where 0:11:43.240 --> 0:11:45.880 we are right even flat everyone who said down twenty down, 0:11:45.880 --> 0:11:49.079 forty down, sixty down eight um. And so that disconnect, 0:11:49.120 --> 0:11:52.040 I think is is very challenging for a lot of people. 0:11:52.160 --> 0:11:54.920 But again going back to it, uh, the beginning of 0:11:54.920 --> 0:11:58.560 the discussion, having a balanced portfolio and strategies that you 0:11:58.559 --> 0:12:02.439 can at least simulate for last fifty hundred years. Despite 0:12:02.880 --> 0:12:05.640 the velocity at which we had the down draft and 0:12:05.679 --> 0:12:08.360 the bounce, most everything's looked, I hate to say it 0:12:08.720 --> 0:12:12.240 kind of normal, you know. Remember I correct me if 0:12:12.240 --> 0:12:14.520 I'm wrong. But I think is it's safe to call 0:12:14.559 --> 0:12:18.040 you a value investor? Uh, if you were to sort 0:12:18.080 --> 0:12:21.079 of you know, have to pick a real broadbrush type 0:12:21.080 --> 0:12:26.440 of type of label. The two major foundational pillars that 0:12:26.720 --> 0:12:30.240 UM we base most all of our investing strategies on 0:12:30.360 --> 0:12:32.959 our value so again goes back to time at Ben 0:12:33.000 --> 0:12:35.240 Graham and before so a hundred years old and also 0:12:35.280 --> 0:12:39.280 trend following around the same time. Charles Dow been around 0:12:39.320 --> 0:12:41.200 for a hundred years. Both of those are sort of 0:12:41.200 --> 0:12:44.240 the yin and yang of our investment philosophy. We think 0:12:44.280 --> 0:12:47.959 both are are equal contributors to a great portfolio. So 0:12:48.040 --> 0:12:52.880 it seems like a good time to be bullish on value, UM, 0:12:53.000 --> 0:12:55.719 especially you look at the US valuations are are are 0:12:55.720 --> 0:13:00.600 pretty high. Once again, the foreign overseas by ouations look 0:13:00.600 --> 0:13:03.560 a lot more attractive, but it almost seems to me 0:13:03.679 --> 0:13:06.960 that in these times of turmoil that we saw this year, 0:13:07.360 --> 0:13:10.200 it almost seems like growth and sort of large cap 0:13:10.320 --> 0:13:14.280 us growth UM at least the main components of what 0:13:14.320 --> 0:13:16.160 you think of is that cohort. You know, your your 0:13:16.160 --> 0:13:21.120 big internet names, your alphabets, your Amazon's, your Facebook's. They 0:13:21.120 --> 0:13:24.960 almost seemed like a haven, uh in these times. So 0:13:25.760 --> 0:13:27.920 is it a good time to start looking for value 0:13:28.080 --> 0:13:30.760 and looking overseas if there is a lot of uncertainty 0:13:30.760 --> 0:13:35.000 about the macro backdrop or is there that risk that 0:13:35.000 --> 0:13:39.120 that once again valuations be damned, people are gonna want 0:13:39.120 --> 0:13:43.000 to be in those sort of mega cap growth names. 0:13:42.800 --> 0:13:46.400 It's always confusing to me or curious is a probably 0:13:46.440 --> 0:13:49.160 a better description to listen to people talk about valuation, 0:13:49.360 --> 0:13:52.560 because you always got to ask yourself what's the alternative? 0:13:53.240 --> 0:13:56.559 And is the alternative just buying stocks without any regard 0:13:56.640 --> 0:14:00.560 whatsoever to value UM. That seems like a really optimal 0:14:00.600 --> 0:14:02.600 way to invest, And it turns out that's what market 0:14:02.600 --> 0:14:05.440 cap waiting is. You just buy the entire market. The 0:14:05.520 --> 0:14:08.959 problem with market cap waiting you get extremely exposed to 0:14:09.120 --> 0:14:13.199 big booms and busts, and so a good example is UM. 0:14:13.280 --> 0:14:17.520 We wrote a recent article called the best valuation spread 0:14:17.520 --> 0:14:20.480 in over forty years. And if you look at market 0:14:20.520 --> 0:14:22.840 cap waiting globally, the US is a percentage of the 0:14:22.880 --> 0:14:25.880 world right now is about half. But if you go 0:14:25.920 --> 0:14:28.480 back to the nineteen eighties, Japan was the biggest stock 0:14:28.520 --> 0:14:31.320 market in the world and most peas we use a 0:14:31.360 --> 0:14:33.520 long term tenure p ratio. We call it the KPE 0:14:33.600 --> 0:14:36.880 ratio based on Rob Schiller's work going back to again 0:14:36.920 --> 0:14:39.520 to the time at Ben Graham Um. It's a tenure 0:14:39.560 --> 0:14:43.160 pe ratio adjust for inflation, but the average over time 0:14:43.200 --> 0:14:46.640 is usually around seventeen mild inflation around twenty two. In 0:14:46.680 --> 0:14:48.680 the U S. It's been as low as five and 0:14:48.720 --> 0:14:51.280 as high as forty five in the late nineties. Massive 0:14:51.320 --> 0:14:53.800 bubble in the late nineties. Japan hit a bubble of 0:14:53.880 --> 0:14:58.320 almost a hundred in the eighties. For the older people 0:14:58.320 --> 0:15:01.320 on this listening or the market historians out there that 0:15:01.560 --> 0:15:05.920 recall every cover of magazines, every TV show, every book 0:15:06.000 --> 0:15:08.320 was all about the Japanese business model is gonna take 0:15:08.360 --> 0:15:10.800 over the world. And it's really just the biggest equity 0:15:10.840 --> 0:15:13.720 bubble we've ever seen. We see a different flip flop 0:15:13.800 --> 0:15:15.880 story now and the seesaw has kind of gone the 0:15:15.880 --> 0:15:19.000 other way, where the U S stock market is trading 0:15:19.000 --> 0:15:23.000 at a value of around thirty pe ratio UM, which 0:15:23.040 --> 0:15:25.080 is high by historical stands. There just not a bubble. 0:15:25.080 --> 0:15:27.280 It's not as crazy as the nineties, but it's high 0:15:27.400 --> 0:15:30.520 and future returns expected to be low single digits. Even 0:15:31.200 --> 0:15:34.200 John Bogel said this before he passed away, and so 0:15:34.400 --> 0:15:37.000 it's more about expectations. The good news is the rest 0:15:37.080 --> 0:15:40.160 of the world for and developed is down around the 0:15:40.240 --> 0:15:42.960 high teens, for and emerging is in the low teens, 0:15:43.280 --> 0:15:47.760 and the cheapest bucket is around ten and so um, 0:15:47.880 --> 0:15:51.720 you have this major, major discount, these alligator jaws spread 0:15:52.040 --> 0:15:55.440 between the US and foreign The biggest we've seen except 0:15:55.440 --> 0:15:58.000 four years ago is US Japan. Now here's the funny thing. 0:15:58.880 --> 0:16:01.440 I guarantee you there's a million people listening to this 0:16:01.480 --> 0:16:04.840 that say, no, no, MeV the US deserves a premium. 0:16:04.880 --> 0:16:07.880 It's it should trade it to higher multiple, to which 0:16:07.920 --> 0:16:10.280 I usually respond, well, what do you think the historical 0:16:10.320 --> 0:16:14.120 premium has been? And the answer is actually zero. Over 0:16:14.120 --> 0:16:17.320 the past forty years, US has had no valuation premium 0:16:17.360 --> 0:16:20.040 over the rest of the world um. And so it's 0:16:20.040 --> 0:16:23.360 only really this period post financial crisis. And if you say, 0:16:23.400 --> 0:16:28.160 what is uh US stocks have stomped foreign stocks over 0:16:28.160 --> 0:16:30.680 this period? How much of that has come since two 0:16:30.720 --> 0:16:33.160 thousand nine? And the answers all of it. So you 0:16:33.240 --> 0:16:36.520 have this period it seems like it's lasted forever, but 0:16:36.600 --> 0:16:39.080 really has only been a decade. But it's setting it's 0:16:39.160 --> 0:16:42.240 this regime of US outperformance is setting the stage for 0:16:42.400 --> 0:16:45.280 future underperformance at least the rest of the world. So 0:16:45.320 --> 0:16:47.720 I'd say, yes, barish on large cap in the US. 0:16:48.280 --> 0:16:50.720 Um the good news is the drubbing in Q one 0:16:51.680 --> 0:16:55.560 small cap value, which at some point was down created 0:16:55.600 --> 0:16:57.880 some wide disparities within the market, so you can now 0:16:58.000 --> 0:16:59.920 you can at least find some opportunities within the U 0:17:00.240 --> 0:17:04.639 s but certainly look beyond your shores to foreign particularly 0:17:04.680 --> 0:17:26.040 emerging markets small cap value around the world. I love 0:17:26.119 --> 0:17:29.320 the alligator jaws spread description. It really is a nice 0:17:29.400 --> 0:17:32.479 visualization of what we've seen. But how do you actually 0:17:32.520 --> 0:17:36.679 go ahead then and balance value investing with usage of 0:17:36.840 --> 0:17:39.199 trend following as well? I mean, I would get the 0:17:39.240 --> 0:17:41.280 sense that at least if you're thinking about one asset 0:17:41.280 --> 0:17:44.120 class in particular, let's just use stocks because it's easiest. 0:17:44.320 --> 0:17:46.520 If you're thinking of yourself as a value investor, but 0:17:46.600 --> 0:17:49.639 you also want to employ methods of trend following that 0:17:49.720 --> 0:17:53.760 at times that may be flashing different signals. Okay, there's 0:17:53.760 --> 0:17:55.520 a lot on that question. So let's start with what 0:17:55.560 --> 0:17:57.800 we call the global market portfolio. If you just went 0:17:57.840 --> 0:18:00.600 out and bought the entire world of public assets, what 0:18:00.640 --> 0:18:04.240 does that look like. It's roughly half stocks, half bonds. 0:18:04.280 --> 0:18:07.320 Of that, it's roughly half US and half foreign. If 0:18:07.320 --> 0:18:10.840 you look at most US investors portfolios, it's dominated by 0:18:10.840 --> 0:18:14.000 the US. The stock allocation is up around the bond 0:18:14.040 --> 0:18:17.800 allocation is almost always a percent US, almost no foreign bonds, 0:18:17.840 --> 0:18:20.359 despite the fact foreign bonds are the largest asset class 0:18:20.359 --> 0:18:23.800 in the world. So at least getting back to the 0:18:23.840 --> 0:18:27.520 index starting point, the Vanguard die hard. You know, if 0:18:27.520 --> 0:18:29.760 you're a die hard index or, you should have half 0:18:30.280 --> 0:18:33.200 in foreign stocks and half bonds, and almost no one does. 0:18:33.280 --> 0:18:36.960 That's particularly problematic right now because the US is the 0:18:37.000 --> 0:18:39.119 largest stock market in the world, but it's also what 0:18:39.280 --> 0:18:41.760 the out of forty five countries we track, the second 0:18:41.840 --> 0:18:44.359 most expensive. So you're putting most of your money in 0:18:44.480 --> 0:18:47.119 US stocks, and many people in US are putting so 0:18:47.200 --> 0:18:51.160 being valuation mindful, I think is important, and we tell 0:18:51.200 --> 0:18:54.320 people that are crazy like me, you can tilt even 0:18:54.359 --> 0:18:57.320 further away from the global market portfolio into value, but 0:18:57.400 --> 0:19:00.679 at least get back to the global index because the 0:19:00.720 --> 0:19:04.160 same problem, this home country bias happens everywhere. My friends 0:19:04.160 --> 0:19:08.399 in Japan, Israel, UK, Australia everywhere put most of their 0:19:08.400 --> 0:19:10.480 money in their own markets and it's a really foolish idea. 0:19:11.119 --> 0:19:13.359 Now you've got a second topic, which is a little 0:19:13.359 --> 0:19:15.879 more esoteric, which is trend falling. And it shouldn't be 0:19:15.880 --> 0:19:20.520 that esoteric because every single index that's market cap weighted 0:19:20.520 --> 0:19:23.399 in the world already is a trend falling index. The 0:19:23.440 --> 0:19:26.920 only variable they're doing price of the stock, time shares outstanding, 0:19:26.960 --> 0:19:29.399 So you own more of Apple and Amazon as they 0:19:29.440 --> 0:19:31.760 hit a trillion, you own less as they go down, 0:19:31.800 --> 0:19:34.320 So you're already a trend far. Most people just don't 0:19:34.320 --> 0:19:37.760 know it. Um, But trend falling as a methodology has 0:19:37.800 --> 0:19:41.800 been around again as long as value has, and there 0:19:41.800 --> 0:19:44.160 tends to be a lot of misinformation when it comes 0:19:44.200 --> 0:19:47.440 to to be investing in trend falling and so UM 0:19:47.640 --> 0:19:49.600 we've written a lot of papers on this and books, 0:19:49.600 --> 0:19:51.560 but basically, you want to be invested in markets as 0:19:51.560 --> 0:19:54.280 they're going up and have some sort of systematic exit 0:19:54.320 --> 0:19:56.600 as they're going down. It's not going to protect you 0:19:56.640 --> 0:19:58.680 in the five or ten percent moves, but it will. 0:19:59.000 --> 0:20:02.320 It's sort of the forty six moves which we've seen 0:20:02.400 --> 0:20:05.280 in markets in history. I shouldn't say it will, it 0:20:05.359 --> 0:20:09.199 should and so um. But that's very much a different 0:20:09.200 --> 0:20:13.119 psychological approach than just buy and hold buy and hold. 0:20:13.119 --> 0:20:15.560 The problem. The biggest problem with buy and hold it's 0:20:15.600 --> 0:20:20.879 totally fine investing strategy is that everything bad happens at once. 0:20:20.960 --> 0:20:23.760 You've gotta buy a whole portfolio. It gets smoked in 0:20:23.800 --> 0:20:27.040 the financial crisis. It got for the most part, very 0:20:27.119 --> 0:20:30.520 challenged in Q one, So it's very high, highly correlated 0:20:30.560 --> 0:20:34.199 to the economic environment with people losing their jobs, everything 0:20:34.200 --> 0:20:37.120 else going south, and so you're sort of doubling up 0:20:37.119 --> 0:20:39.920 on what's going on in the world. Trend following usually 0:20:39.920 --> 0:20:42.320 does well during those periods, and for most part did 0:20:42.359 --> 0:20:44.840 a good job this year. Problem with trend following is 0:20:44.880 --> 0:20:47.120 the other periods um for the most of the two 0:20:47.160 --> 0:20:52.240 thousand the ads that are sorry. UM. Trend falling wasn't 0:20:52.280 --> 0:20:55.000 great fantastic during the financial crisis. The biggest problem with 0:20:55.040 --> 0:20:58.200 trend falling is you look different, and usually it's it's 0:20:58.240 --> 0:21:01.159 not um great or fear, you know. Buffett says that 0:21:01.280 --> 0:21:04.240 really drives markets, it's envy. And so when the markets 0:21:04.280 --> 0:21:07.400 up thirty percent last year, uh, and all your neighbors 0:21:07.440 --> 0:21:10.520 are talking about vacations and buying new cars and houses, etcetera. 0:21:11.320 --> 0:21:13.720 A strategy like trend folling that may have lagged is 0:21:13.760 --> 0:21:16.520 hard to keep up with, particularly because those can go 0:21:17.000 --> 0:21:20.639 I don't know, two, three, four, or five ten years uh, 0:21:20.760 --> 0:21:23.080 with some disparity in return. So we like to have both. 0:21:23.280 --> 0:21:25.320 It's sort of a guineyang. We probably put more in 0:21:25.359 --> 0:21:28.000 trend folling than any adviser in the country, but we 0:21:28.119 --> 0:21:30.480 like to go half and half technical term. We we 0:21:30.600 --> 0:21:34.480 like to call going have these to use the jargon, 0:21:34.760 --> 0:21:37.359 to use the industry jargon. So you are a true 0:21:37.440 --> 0:21:40.560 Florida woman for picking up on that alligator reference there, 0:21:40.600 --> 0:21:42.760 I I uh, your true color is coming out there. 0:21:43.359 --> 0:21:46.080 We had an alligator behind our house supposedly the other week. 0:21:46.240 --> 0:21:48.960 So alligators are in front of mine, top of mind 0:21:49.000 --> 0:21:51.240 for me because I don't want to run into it. 0:21:51.400 --> 0:21:53.800 So i'd widger you have one behind your house probably 0:21:53.880 --> 0:21:58.840 right now if it's Uh, I wouldn't be surprised. Uh. 0:21:59.000 --> 0:22:02.480 You had a really interesting hosts recently talking about how 0:22:02.520 --> 0:22:05.240 you invest your own money, and I think this is 0:22:05.560 --> 0:22:06.639 you know a lot of I've seen a lot of 0:22:06.680 --> 0:22:09.280 these pie charts of masset allocation. I think yours is 0:22:09.320 --> 0:22:13.640 my favorite I've ever seen because there's some small slivers. 0:22:13.640 --> 0:22:18.760 They're like comic books, less than one percent. I guess, um, crypto, 0:22:18.920 --> 0:22:21.159