Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the All Thoughts Podcast.
Speaker 2: I'm Tracy Alloway and I'm Joe Wisenthal.
Speaker 3: Joe, do you.
Speaker 2: Ever feel like the investment gods are punishing you?
Speaker 4: Oh? My god. I think about this all the time. Like,
Speaker 4: you know, when I first started investing my money, I'm like,
Speaker 4: I'm going to be a very prudent diversifier, and I'm
Speaker 4: going to buy some bond funds.
Speaker 2: Some hard assets, some star funds.
Speaker 4: I'm going to invest internationally. I'm going to invest a
Speaker 4: little bit in emerging markets. I'm going to buy some
Speaker 4: ETF so I get a little income. Yes, I thought
Speaker 4: I was being very smart for that, but all it
Speaker 4: turns out is I should have just bought QQQ or
Speaker 4: you know, the big tech stocks how to inspire die? Yeah, yes,
Speaker 4: or over time I've become a little bit more aspired.
Speaker 5: Dye. H.
Speaker 4: You capitulated, Yeah, it capitulated probably means it's the top.
Speaker 2: Now I have the same thing. So obviously we're journalists
Speaker 2: and we can't really invest. We don't trade, right, we
Speaker 2: don't trade. H But for instance, we have retirement options yeah, right,
Speaker 2: And there are retirement options that are like, oh, an
Speaker 2: ex Us dividend fund or something like that. And I
Speaker 2: remember in the sort of mid twenty tens people talked
Speaker 2: a lot about international equity. Yeah, and like, don't just
Speaker 2: put all your eggs in the America basket. Make sure
Speaker 2: you have exposure to emerging markets in China and like Europe,
Speaker 2: even coming out of the Eurozone crisis. And it turns
Speaker 2: out that was a bad idea totally.
Speaker 4: You really should have just bought us big caps.
Speaker 5: You know.
Speaker 4: You mentioned like retirement like in our like four to
Speaker 4: one K options. I think I have money and some
Speaker 4: sort of target date funds. Yeah, which is a cool
Speaker 4: idea because as you get older and one right, I
Speaker 4: think so, you know, and like in theory, as you
Speaker 4: get older you're supposed to take on less risk and
Speaker 4: stuff like that, and so great, it seems like a
Speaker 4: good idea to want to like think about it too much.
Speaker 4: So it'd be nice if we're just sort of automatic.
Speaker 4: But man, all of this diversification is killing me. What
Speaker 4: a mistake.
Speaker 2: All right, Well, today we need to talk a little
Speaker 2: bit about why diversification for the past ten years or
Speaker 2: so at least, has turned out to kind of be
Speaker 2: a bad idea. You would have made a lot more
Speaker 2: money just putting stuff in the S and P five hundred.
Speaker 2: You certainly would have made a lot more money if
Speaker 2: you just, I don't know, bought Apple.
Speaker 4: Or QQQ, Yeah, just big cap tech.
Speaker 2: So why is that we need to talk about why
Speaker 2: we're being collectively punished for being prudent. We have the
Speaker 2: perfect guests to talk about this. We're going to be
Speaker 2: speaking with someone who I actually can not believe hasn't
Speaker 2: been on the show before. I feel like he has,
Speaker 2: but then I realized that, like he's sort of like
Speaker 2: the Rocky Mountains in the sense that he's just always
Speaker 2: kind of been there, but you kind of take him
Speaker 2: for granted. He's like out there, you know him, you
Speaker 2: read all his stuff, maybe listen to a show, see
Speaker 2: him on Twitter, certainly, and yet we've never had him
Speaker 2: on the show. We've just taken him for granted.
Speaker 4: Or outrageous oversight that we must now rectify.
Speaker 2: Yes, Okay, so I'm very excited to say we are
Speaker 2: going to be speaking with Med Faber. He is, of course,
Speaker 2: the co founder and CIO of Cambria Investment Management and
Speaker 2: also the host of the Med Faber Show the podcast,
Speaker 2: So meb thank you so much for coming on all blots.
Speaker 2: I feel so bad that you haven't been on before.
Speaker 2: I can't believe it.
Speaker 3: It's great to be here y'all. As a Colorado native.
Speaker 3: Maybe the Mountain analogies spot on.
Speaker 4: Oh that was better than you real. By the way,
Speaker 4: we're still out even though it's long past. We are
Speaker 4: recording this at the future Proof conference in Huntington Beach, California.
Speaker 4: Maybe you live like an hour away.
Speaker 5: Huh.
Speaker 3: Yes, Sadly we invited Joe and Tracy come surfing. They
Speaker 3: skipped out again for our surf lessons. But beautiful day,
Speaker 3: glad y'all are here.
Speaker 2: I'm not good with cold water, so I'm just gonna
Speaker 2: be like one hundred percent honest. It's like sixty five
Speaker 2: degrees at the moment in Huntington Beach. I could not
Speaker 2: fathom going willingly going into the water in this temperature.
Speaker 3: Who just talked about surfing, Actually, Joe mentioned that he
Speaker 3: likes getting punished in the market. Surfing will be perfect, right,
Speaker 3: It's the ultimate humility. You get out there and just
Speaker 3: get tossed.
Speaker 2: Pounded by the waves of bad decisions over and over again. Yeah,
Speaker 2: that sounds about right. Okay, Wait, so I mentioned that
Speaker 2: you've sort of always been out there, and certainly for
Speaker 2: as long as I can remember, in financial journalism, you
Speaker 2: were always there. Cambrio was always there, and so I
Speaker 2: never really stopped to think about what it is that
Speaker 2: you actually do. But what does Cambria do?
Speaker 3: Yeah, So we like to think of ourselves as the
Speaker 3: odd lots of ETFs.
Speaker 5: You know.
Speaker 3: See, But I'm being serious, you know. We fast forward
Speaker 3: from getting started pre GFC the company launched its first
Speaker 3: ETF and twenty thirteen, so over a decade old now,
Speaker 3: and we often tell people the best compliment you can
Speaker 3: give anyone in investing, but also in the asset management
Speaker 3: and entrepreneurship is just surviving. So Alpha all that extra wonderful,
Speaker 3: but just surviving is a big compliment. So we're near
Speaker 3: three billion in assets, sixteen ETFs now, but we often
Speaker 3: say it's the best time ever to be an investor.
Speaker 3: The choices are limitless. You can invest in ETFs for
Speaker 3: near zero fee, thousands of choices. But in that world,
Speaker 3: if you're going to charge more, you better be doing
Speaker 3: something weird. We're concentrated in different and so we try
Speaker 3: to only launch funds that don't exist in in a
Speaker 3: world of ten thousand plus funds, that seems like a
Speaker 3: hard goal, or that are sufficiently we think we can
Speaker 3: do cheaper or quote better and better off is a
Speaker 3: lofty goal too, But it has to be something I
Speaker 3: want to put my own money into. It has to
Speaker 3: be something that's backed by academic and practitioner research, and
Speaker 3: so that versus a lot of the industry. And I
Speaker 3: love our friends here that throw as much spaghetti against
Speaker 3: the wall and see what sticks. We want products that
Speaker 3: we want to invest in that don't exist.
Speaker 4: Speaking of academic research, didn't you write some like it
Speaker 4: was one of the most downloaded papers ever on SSRN
Speaker 4: about market timing?
Speaker 3: Yeah, well, it's funny you mentioned market timing. The original
Speaker 3: title was a better Approach to market timing, and no
Speaker 3: one would read it. I got a lot of really
Speaker 3: nasty responses from probably some prior a lot guests, but
Speaker 3: a lot of famous investors and a lot of really
Speaker 3: wonderful thought for responses too, and I changed the title
Speaker 3: to Quantitative Approach to Tactical Asset Allocation. Oh more, sounds
Speaker 3: way more like consultant speak. But it also there's a
Speaker 3: lot of luck. It came out pre financial crisis. Is
Speaker 3: a very simple trend following methodology, and trend falling goes
Speaker 3: back one hundred years, so nothing particularly new, but it
Speaker 3: would have worked great as trend falling tends to do
Speaker 3: during crisis and big bear markets, which we haven't had
Speaker 3: in a long time, and so it became very popular. Clearly,
Speaker 3: if I published in twenty ten, probably have zero downloads
Speaker 3: as well.
Speaker 2: It did better under the second title than it did
Speaker 2: under the market timing title. That's kind of crazy from
Speaker 2: a headline perspective.
Speaker 4: Well, tactical, I think is a great word to have,
Speaker 4: all right.
Speaker 2: The headline of this episode is going to be like
Speaker 2: med Faber on tactical allocation. Yeah, all right, okay, Well,
Speaker 2: so you mentioned in the beginning that if you are
Speaker 2: charging clients more, you better be doing something interesting and worthwhile.
Speaker 2: Convince me why I shouldn't just put all my money
Speaker 2: in spy.
Speaker 5: Long dramatic pause. So a couple of things.
Speaker 3: We always say the global market portfolio is the best
Speaker 3: starting point. And what is the global market portfolio's If
Speaker 3: you buy everything in the world, all the public assets,
Speaker 3: and that is roughly half stocks, half bonds, half US
Speaker 3: half foreign roughly speaking, and that's actually a really really.
Speaker 5: Hard portfolio to beat over time.
Speaker 3: But if you were to go back one hundred years,
Speaker 3: one hundred and twenty years, we were doing odd lots
Speaker 3: in London, sipping on some tea, drinking some champagne in
Speaker 3: eighteen ninety nine and trying to project what would be
Speaker 3: the successful country. You know, maybe we pick the US,
Speaker 3: Maybe we pick Argentina, you know, maybe we pick other
Speaker 3: countries and areas and stock markets. And my favorite investing book,
Speaker 3: Tryumph for the optimists, you know, outlines the historical returns
Speaker 3: of stocks, bonds, bills and all these countries. People always
Speaker 3: think the US is the best. It hasn't been. I
Speaker 3: think Australia and South Africa had better returns. But the
Speaker 3: US has darned near over two thirds of the world
Speaker 3: market cap today. So even if you invest in the
Speaker 3: global portfolio, you're putting ten times as much in the
Speaker 3: US stock market as any other country. And let's be honest,
Speaker 3: US has been on a roll. You guys know. I
Speaker 3: love to do my polls on Twitter. We did a
Speaker 3: poll the other day and listeners, you got to answer
Speaker 3: this before I give the answer up, I said, what
Speaker 3: do you think US stocks have done since two thousand
Speaker 3: and nine? And the multiple choices were do you think
Speaker 3: they've doubled, do you think they've tripled? Do you think
Speaker 3: they've quadrupled? And the fourth answer, which I had to
Speaker 3: google was non you polled, which is nine times, and
Speaker 3: then deck you polled, which is ten times. So listeners,
Speaker 3: think about what do you think stocks had done? The
Speaker 3: answers is almost a ten bagger. So one hundred grand
Speaker 3: in stocks in two thousand and nine, if you didn't sell,
Speaker 3: or you held, or you bought in March, you now
Speaker 3: have a million bucks million bucks. You got ten million
Speaker 3: bucks amazing fifteen percent returns. So you should have invested
Speaker 3: in spy right like you crushed everything in the world.
Speaker 3: But historically that concentration has not been rewarded. If you
Speaker 3: look at the other forty five countries and you talk
Speaker 3: to someone in Greece or Japan, or China or the UK,
Speaker 3: they would tell you that investing all their money and
Speaker 3: their home country was a terrible idea. But diversifying globally,
Speaker 3: particularly into the US, has saved their bacon for the
Speaker 3: past ten fifteen years.
Speaker 4: So Tracy mentioned that much to our regret we've never
Speaker 4: had you on the podcast before. I have interviewed you, however,
Speaker 4: once maybe twice on TV, and you're talking about some
Speaker 4: of these similar themes about international diversification, and I think
Speaker 4: if I recall, he was talking a little bit also
Speaker 4: about like sort of international extension of some of the
Speaker 4: ideas that Robert Schiller has talked about, and the idea
Speaker 4: of Schiller cape ratios, looking at market valuation from that
Speaker 4: point and opportunities to essentially invest in cheap markets overseas,
Speaker 4: and this idea that if it works in one country,
Speaker 4: maybe it works internationally. What's the basic idea behind that?
Speaker 4: And then you know, you mentioned, okay, the US has
Speaker 4: just like totally clobbered everyone else. Give us the rundown
Speaker 4: of like, I don't know, it was probably ten years
Speaker 4: ago or maybe eight years ago, what's happened over the
Speaker 4: last eight years internationally?
Speaker 3: So if you rewind the clock and look at these
Speaker 3: various regimes, and everyone wants to focus on what's the
Speaker 3: FED doing, what are earning? Is going to be what's
Speaker 3: going to happen this month, the election next month? A
Speaker 3: lot of these regimes play out over not.
Speaker 5: Just years, but decades.
Speaker 3: Right If you look at not that long ago, from
Speaker 3: two thousand to the financial crisis, the US stock market
Speaker 3: got creamed by everything.
Speaker 5: Else in the world.
Speaker 3: Reads, gold, foreign stocks, merging market stocks, and so you
Speaker 3: go through these periods where various assets have their time
Speaker 3: in the sun and day in the shade. If you
Speaker 3: look at the US market, say nineteen eighty super cheap, right,
Speaker 3: the US has been a long term KP ratio of
Speaker 3: five before, it's been as high as forty five at
Speaker 3: the peak of my favorite bubble ninety nine.
Speaker 4: Mine too.
Speaker 3: Yeah, it's a great time in the nineties, but if
Speaker 3: you look on average, it's usually like in the low
Speaker 3: twenties if inflation is chill. But you have all these
Speaker 3: countries and other examples. The classic we always talk about
Speaker 3: is Japan. You know, Japan was darn near one hundred
Speaker 3: in the nineteen eighties and then went nowhere for multiple decades.
Speaker 3: Now it looks great today after an entire generation has
Speaker 3: made no money in the Japanese stock market. But that's
Speaker 3: how long it often plays out in Japan's not some
Speaker 3: tiny economy, you know, this is a top three world
Speaker 3: economy in stock market, and what's the biggest stock market
Speaker 3: in the world at that time where the US is today,
Speaker 3: and the US isn't expensive today, it's in the mid thirties.
Speaker 3: It's not a bubble, but it tends to be a weight, right.
Speaker 3: It tends to be a headwind over time, because you're
Speaker 3: buying all the.
Speaker 5: Future cash flows.
Speaker 3: The good news is most of the rest of the
Speaker 3: countries around the world are reasonably priced to really cheap.
Speaker 5: The really deep.
Speaker 3: Value like GMO and others talk about, is exceptionally interesting
Speaker 3: right now, So we manage these shareholders yield ETFs, and
Speaker 3: so the market cap in the US, the Achilles Heel
Speaker 3: of market cap indexing is there is no tethered to
Speaker 3: value whatsoever. It's the stock price times shares outstanding. And
Speaker 3: that's good most of the time because you're guaranteed to
Speaker 3: own the winners. But it's bad in the sense when
Speaker 3: things go crazy, they're really expensive, and everyone's talking about this,
Speaker 3: right the bag seven everything else, the really expensive stuff
Speaker 3: gets the highest weights, and so much like late nineties,
Speaker 3: a lot of the cheap companies high quality look exceptional
Speaker 3: not just within the US but in foreign developed and
Speaker 3: emerging as well. But everyone's forgotten about foreign stocks. Emerging
Speaker 3: market stocks wants any but that sets the stage for
Speaker 3: the next next outperformance as well.
Speaker 2: Wait, talk more about the role of the benchmark indices
Speaker 2: in all of this, because this is one thing that
Speaker 2: I've been really interested in in recent years. This idea,
Speaker 2: I mean, this is where the flows before pros kind
Speaker 2: of comes from. This idea that like, if you want
Speaker 2: to pick a winner, maybe rather than looking at the
Speaker 2: fundamentals or trying to see if something is underpriced or whatever,
Speaker 2: you want to look at where the flows are going.
Speaker 2: And a lot of those flows nowadays are dictated by
Speaker 2: index construction. And so how big a role does that
Speaker 2: indexing actually play in I guess the outperformance of concentration
Speaker 2: or US versus diversification and rest of the world.
Speaker 3: We always say flows drive performance, and you know in
Speaker 3: a particular small asset class or a concentrated strategy has
Speaker 3: a much larger impact. You've seen some active funds, some
Speaker 3: very famous fund managers over the past ten or so years,
Speaker 3: where the flows a dramatic impact on the way up
Speaker 3: and also on the way down. But this could also
Speaker 3: be if you're buying Brazilian small cap tech stocks, right,
Speaker 3: you can move those around with a lot less money
Speaker 3: than you could the SMP. But look, you go back
Speaker 3: fifty years, the concept of the market cap index set
Speaker 3: off just this neutron bomb across the industry. But it
Speaker 3: actually wasn't the index. That was the innovation, you know,
Speaker 3: John Bogo, Wells Fargos and others. It was what indexing enabled,
Speaker 3: which is low cost investing because you don't do anything
Speaker 3: and you're guaranteed to own the winners. So quote passive
Speaker 3: investing was an amazing invention. But here we are in
Speaker 3: twenty twenty four and you don't have to do market
Speaker 3: cap indexing to deliver the low cost right. We always
Speaker 3: say ETFs are eating the asset management industry. So you
Speaker 3: have all this historical very expensive mutual funds with conflicts
Speaker 3: of interest and front end loans and twelvey one fees
Speaker 3: that maybe index funds. But the index is not the innovation.
Speaker 3: It's the low fees, which is what John Bogo used
Speaker 3: to say. You know, it's not about index active passive.
Speaker 3: He's like, the debate is really high fee, low fee,
Speaker 3: and so now you can deliver these much more interesting
Speaker 3: exposures instead of just passive market cap waiting.
Speaker 5: That should do much better over time.
Speaker 4: You know, one of the things that really strikes me.
Speaker 4: And I think this is an important point that you've
Speaker 4: already touched on a couple of times, that the beauty
Speaker 4: of like the sort of modern ETF world is it
Speaker 4: used to not be trivial right to have substantial foreign exposure.
Speaker 4: And you know, especially thinking like before mutual funds proliferated,
Speaker 4: you might say, like, I've like Brazil, but when you like,
Speaker 4: go out and have a broker make a buye order
Speaker 4: for every individual stock, Like that's a cost process and
Speaker 4: now that's not costly anymore. And I think that's a
Speaker 4: really underappreciated fact about investing. But just sitting aside the
Speaker 4: US outperformance, what's going on in international markets so that
Speaker 4: investors haven't loved them, Like, yeah, why you talk about
Speaker 4: there must be great Latin American companies, Latin American tech companies,
Speaker 4: Latin American tire companies and beverage distributors and everything they have.
Speaker 4: Why haven't investors liked these companies?
Speaker 3: The US has certainly had great earnings growth, yeah, for
Speaker 3: the past ten to fifteen years, right, so it's led
Speaker 3: the charge.
Speaker 5: It's done really well.
Speaker 3: But if you look around the rest of the world,
Speaker 3: you know, and we manage my largest look, by the way,
Speaker 3: my largest fun long only US stock fund. So talking
Speaker 3: my book here, But looking at the foreign and emerging
Speaker 3: you see great companies, and so here's an example. You know,
Speaker 3: we run a value quality strategy. US shareholder yield doesn't
Speaker 3: have much tech exposure. Okay, surprising because tech stocks in
Speaker 3: the US on average are pretty expensive, but they also
Speaker 3: do a bunch of share issuance based on stock based compensation, right,
Speaker 3: so they have a negative buyback yield because they're issuing
Speaker 3: and issuing a ton of shares. But if you look
Speaker 3: at foreign, developed, and emerging, our emerging market fund, tech
Speaker 3: is the largest sector allocation, which is surprising to many
Speaker 3: people because it's a value strategy.
Speaker 5: But we always say.
Speaker 3: There's opportunities, people just aren't necessarily focused on them. As
Speaker 3: an example, our largest holding was a better performer than Nvidia,
Speaker 3: and it's a semiconductor stock, but nobody knows about it.
Speaker 3: Nobody talks about it because nobody cares about emerging markets.
Speaker 4: But used to be clear, setting aside what people care
Speaker 4: about at a given time, earnings growth in the US
Speaker 4: since two thousand and nine or really at any point
Speaker 4: has been extraordinary and over time. It just there are
Speaker 4: companies that buy and large are just continue to grow earnings.
Speaker 4: Has that not been the case internationally?
Speaker 3: Yeah, you haven't had the same earnings growth. But also
Speaker 3: within the US, you have had this tailwind of multiple expansion.
Speaker 3: Our buddy Cliff was talking about, He's like, the percentage
Speaker 3: of the returns that are attributal to multiple expansion is
Speaker 3: pretty high. Right, So you've had the US So back
Speaker 3: in two thousand and nine, right, we're hanging out in
Speaker 3: March somewhere at a pub in New York City, drowning
Speaker 3: our woes about the world going crazy. The US stock
Speaker 3: market talking about back to the Shuler cap ratio was
Speaker 3: low teens, but so was foreign developed and emerging. So
Speaker 3: the US has gone from twelve to let's call it
Speaker 3: thirty six today, whereas the rest of the world hasn't.
Speaker 3: It hasn't had that multiple expansion, and so that can
Speaker 3: be a massive tailwind and headwind over the course of
Speaker 3: a decade of like three, four, five seven percent per year,
Speaker 3: depending on what people are willing to pay for those stocks.
Speaker 2: So just on this point, one of the criticisms that
Speaker 2: is sometimes leveled against diversification or strategies that are focused
Speaker 2: on diversification is the idea that well, your purposefully kind
Speaker 2: of adding losers to your port, Like you're not really
Speaker 2: trying to choose winners, You're trying to distribute your risk
Speaker 2: among a bunch of different entities. And the analogy that
Speaker 2: I sometimes use, which probably will not resonate for either
Speaker 2: of you or like most of our listeners, but I
Speaker 2: sometimes think it's kind of like trying to find a
Speaker 2: single guy over forty in New York City, Like there's
Speaker 2: a reason they're desirable to single women. But on the
Speaker 2: other hand, like, there's probably a reason that they're single
Speaker 2: over forty. There's probably something wrong with them, right, and
Speaker 2: that's why this is good, That's why they're single. So
Speaker 2: I sometimes think about diversification or like value investing in
Speaker 2: those terms, why should you seek out things that are
Speaker 2: probably going to be losers at least for you know,
Speaker 2: the short to medium term.
Speaker 3: There's the late Peter Bernstein had a great quote which
Speaker 3: I'll get directionally correct, which was he's like, look, acid
Speaker 3: allocation is a defensive strategy, but it's also an aggressive
Speaker 3: strategy because you never know where the next windfall is
Speaker 3: going to come from.
Speaker 5: Look around the.
Speaker 3: World, today gold all time highs. Nobody's talking about it,
Speaker 3: at least at this conference that I'm chatting with. But
Speaker 3: you never know if you look at various assets, whether
Speaker 3: it's coffee, whether it's the yen, whether it's foreign stocks,
Speaker 3: merging markets, reads, bonds, even US stocks value right quality,
Speaker 3: you never know the exact timing of it. And that's hard,
Speaker 3: you know, And we have a lot of non consensus
Speaker 3: views when it comes to acid allocation. I actually don't
Speaker 3: think if you're doing buy and hold, your allocation matters
Speaker 3: much at all, which I think it's like my mom
Speaker 3: is a Southern cook and you know, you make She
Speaker 3: makes chocolate chip cookies with just by by a feel right,
Speaker 3: She tastes some. But as long as you have the wheat,
Speaker 3: the flour, the butter, the chocolate chips, like it's going
Speaker 3: to end up okay, you totally omit one thing and
Speaker 3: it's probably going to be suboptimal. And that's the way
Speaker 3: with this ass allocation. You have some global stocks, some
Speaker 3: global bonds, and some real assets, meaning like tips reads,
Speaker 3: the allocation percentage doesn't much.
Speaker 5: And when we wrote this book, this.
Speaker 3: Acid Allocation book a decade ago, which were updated, we
Speaker 3: actually found that if you look at overtime the last
Speaker 3: fifty the last one hundred years, and compare the best
Speaker 3: performing strategy relative to the worst. And we looked at
Speaker 3: all of them en DOWNMNT permanent portfolios sixty forty, on
Speaker 3: and on, we found the spread was actually pretty tight.
Speaker 3: They all returned about within a percent or two percent
Speaker 3: of each other. And the crazy part is if you
Speaker 3: took the best one, you say, all right, Joe Tracy,
Speaker 3: I'm gonna give you crystal ball. We'll hop in the Dolorean,
Speaker 3: go back fifty hundred years. I'm going to tell you
Speaker 3: which asset out case and strategy was best. How much
Speaker 3: would you pay me that? You know, PIMCO probably give
Speaker 3: me a billion dollars for that knowledge. But I said,
Speaker 3: hold on the genie. There's one rule. You have to
Speaker 3: implement it with the average mutual fun feed of today,
Speaker 3: not back then one point two five percent today that
Speaker 3: takes the best performing allocation makes it almost as bad
Speaker 3: as the worst.
Speaker 5: Wow.
Speaker 3: So all this time we spend on the FED, on
Speaker 3: gold or whatever. And this is for buy and hold,
Speaker 3: just market cap indexing. We're not talking about all the
Speaker 3: good stuff that we do. Trend following value, YadA YadA,
Speaker 3: just the basics. And so we often say, you're acid,
Speaker 3: alt care doesn't matter that much, but what does matter
Speaker 3: is expenses, costs and taxes.
Speaker 4: Yeah, yeah, I remember seeing I think, well, it might
Speaker 4: have been like the bulgel Head Forum is back in
Speaker 4: the day, and it is so much about like the
Speaker 4: cost matter is hypothesis as being a more powerful idea
Speaker 4: than the efficient market hypothesis for this exact reason. So,
Speaker 4: you know, we've been talking about Okay, since two thousand
Speaker 4: and nine, we know US stocks have clobber the rest
Speaker 4: of the world. When was the last time, Actually that
Speaker 4: wasn't the case.
Speaker 3: Well, so we wrote this piece. It's called the bear
Speaker 3: market and diversfication. Yeah right, and so since two thousand
Speaker 3: and nine, US stocks again, listeners, think in your head
Speaker 3: fifteen percent per year. Yeah, that's only happened on a
Speaker 3: ten year rolling basis four times in history. And they
Speaker 3: all have names. Roaring Twenties, in fifty fifty, the Internet bubble,
Speaker 3: and then whatever we're calling this COVID meme sonk Ai
Speaker 3: era right now, you don't know how long it's going
Speaker 3: to last.
Speaker 5: And on the.
Speaker 3: Backside, they also all have names, the Great Depression, the
Speaker 3: inflation seventies period, the dot com bubble burst in GFC
Speaker 3: echo and whatever comes next.
Speaker 5: Who knows.
Speaker 3: It doesn't mean so during.
Speaker 4: Those periods that we don't have good names for, international
Speaker 4: diversification has paid off.
Speaker 3: If you look at this period has arguably been the
Speaker 3: worst period ever for an acid allocation portfolio. And we'll
Speaker 3: just use the Global market portfolio versus the SMP. The
Speaker 3: only comparable period is post World War two. And this
Speaker 3: is not just in terms And first of all, didn't
Speaker 3: do bad, did like seven percent a year? Totally fine,
Speaker 3: Joe's four to one k seven percent a year not bad.
Speaker 3: But if you look at in terms of underperforming your neighbor,
Speaker 3: so an absolute underperformance versus the sb But the worst
Speaker 3: part is not the absolute poortance, it's the years in
Speaker 3: a row. It is something like thirteen of fifteen years.
Speaker 3: It's funder perform the SMP. So it's just bodyblow after
Speaker 3: body blow of looking less smart than your dope neighbor
Speaker 3: who bought the cues.
Speaker 4: And that's upsetting. Yeah, I know it's not fair.
Speaker 2: I'm trying to process this because it bothers me so much. No, okay, well,
Speaker 2: since you brought up taxes and the cost base as
Speaker 2: such a big factor to investment success or outperformance. Talk
Speaker 2: to us about what you're seeing there in terms of
Speaker 2: I guess innovation, because we often talk in the investment
Speaker 2: space in ETF certainly about the race to the bottom
Speaker 2: in terms of costs. And to me, I look around
Speaker 2: at some of the tax yields on these things, it
Speaker 2: feels like you can't get that much lower, but maybe
Speaker 2: you can.
Speaker 3: There's a lot about ETFs that I think that people
Speaker 3: don't know. First of all, a lot of public funds
Speaker 3: will do short landing and return that revenue to the consumers.
Speaker 3: So on top of the fee you have, let's say
Speaker 3: like we charge half or percent well the short landing revenue,
Speaker 3: and some funds at may be ten basis points, at
Speaker 3: maybe twenty. In some cases it could be very material
Speaker 3: fifty over one hundred basis points. So there are plenty
Speaker 3: of ETFs out there that actually already have a negative
Speaker 3: expense ratio. So let that sink in. You're getting paid
Speaker 3: to own this fund. That's pretty cool, right. Second is
Speaker 3: the ETF expense ratio is also tax deductible. Right, It's
Speaker 3: coming out of the income. So if you're comparing that
Speaker 3: to a traditional separate account, which is not deductible. That's
Speaker 3: an additional essentially benefit of the ETF over these traditional structures.
Speaker 3: But here's the challenge. If you've been participating, you're one
Speaker 3: of the lucky ones. You bought a bunch of stocks,
Speaker 3: you own a bunch of Nvidia since two thousand and nine.
Speaker 3: You're sitting on a ten bagger gain. And if you
Speaker 3: talk to older generation, if you look at Buffett, you
Speaker 3: know all these decisions that he has to make on
Speaker 3: Apple where he has to eventually pay the taxes. Right,
Speaker 3: you talk to the order gender and say, well, I
Speaker 3: just can't sell my Microsoft or GE or IBM because
Speaker 3: the taxman would kill me. We had Hank Bessenbinder on
Speaker 3: the show recently, who did the famous paper to stocks
Speaker 3: outperformed T bills. We had Hank run for the past
Speaker 3: one hundred years. I said, hey, what's the best forming
Speaker 3: stock of all time? And listeners, you have to guess
Speaker 3: this too.
Speaker 5: You may get it.
Speaker 3: Of the top five, the top three, I don't think
Speaker 3: I could guess two or three ever heard of them,
Speaker 3: but Vulcan Materials I think two.
Speaker 5: Kansas City was.
Speaker 3: Third and number one was railrud Yeah, okay, and this
Speaker 3: is just you are optimizing on length of compound.
Speaker 5: Yeah, so one hundred years.
Speaker 3: But Altria you put It's like you put one thousand
Speaker 3: dollars in al three hundred years ago, you now have
Speaker 3: two billion. Anyway, the point being is that if you invest,
Speaker 3: you eventually have a bunch of capital gains. Great good
Speaker 3: problem to have, right if you're in a taxable investor,
Speaker 3: and if you have been invested in the US stocks
Speaker 3: in two thousand and nine, you have ten x capital
Speaker 3: gains on average. Right, So that's a problem for investors, right,
Speaker 3: because you got to make a decision. Am I just
Speaker 3: going to bite the bullet? Sell this, pay the taxes
Speaker 3: and move on. Because these power laws dominate everything we
Speaker 3: do in investing. It's in VC, it's true in public
Speaker 3: markets where the best performers, it's like five percent of
Speaker 3: stocks generate all the return. So if you end up
Speaker 3: with one of these, your whole portfolio is now this
Speaker 3: appreciated stock or portfolio. What I'm getting at is what
Speaker 3: do you do well. There's actually been something that's been
Speaker 3: around for one hundred years called the exchange fund. It
Speaker 3: was popularized really in the nineteen seventies by eat Advance
Speaker 3: by now Morgan Stanley Goldman does it. And it's like
Speaker 3: a ten thirty one exchange.
Speaker 5: If you have a portfolio, this is it.
Speaker 4: The ten thirty one is that how real estate investors
Speaker 4: never have to pay ten.
Speaker 2: That's like when you buy a house, if you buy
Speaker 2: an if you sell it and then buy another.
Speaker 3: One commercial you buy it, you buy a hotel, you
Speaker 3: buy some farm.
Speaker 4: Commercial real estate. People love this. This is like the essence,
Speaker 4: what's it?
Speaker 3: Indefinite tax referral. And it builds generational wealth. And it's
Speaker 3: why you see so many people that you know, they
Speaker 3: they talk, well, my grandmother bought this property at ten
Speaker 3: thousand dollars and now it's ten million. You know, So
Speaker 3: it's great. It's a huge wealth compounder over time. But
Speaker 3: so with stocks, you eventually have to pay the pipers.
Speaker 3: So there's this thing that's been around forever called exchange funds.
Speaker 3: And the way they work is if you have highly
Speaker 3: appreciated positions, you get a bunch of other people, you
Speaker 3: contribute them to a portfolio, and there's some rules. You've
Speaker 3: got to be accredited or qualified. You've got to hold
Speaker 3: it for seven years and at the end of seven years,
Speaker 3: you get back at diversified portfolio, so you you eliminate
Speaker 3: your concentration risk. But the problem of the course is
Speaker 3: it's run by the traditional asset managers who love to
Speaker 3: charge exceptionally high fees. They're going to ding you probably
Speaker 3: a percent or two just to get in, and then
Speaker 3: they're going to ding you a percent or two every
Speaker 3: year for seven years for the privilege of having this
Speaker 3: exchange fund. So there's others trying to do this. There's
Speaker 3: a company called cash that's doing this, trying to disrupt this.
Speaker 3: But if you think of the ETF structure, which is
Speaker 3: a massive innovation where you're having actively managed portfolio at
Speaker 3: index portfolio, you're only paying taxes when you sell that fund,
Speaker 3: so the turnover doesn't matter. I think that's well understood
Speaker 3: by most investors today, hopefully. But if you look back
Speaker 3: at Spy, if you bought it in ninety seven, I've
Speaker 3: paid no capital gains at all, despite the fact that
Speaker 3: trades consistently. That's not a feature of mutual funds or
Speaker 3: hedge funds, and that's why ETFs are eating asset management.
Speaker 3: They're vastly more tax efficient, which on average is probably
Speaker 3: about a seventy basis point after tax benefit relative to
Speaker 3: mutual funds. Monster number probably more important than the expens ratio. However,
Speaker 3: what if you've got a bunch of stocks have gone
Speaker 3: up a ton, so you could go to this exchange
Speaker 3: fund route, you're stuck.
Speaker 5: You could sell it.
Speaker 3: But what you've started to see over the past five years,
Speaker 3: you've seen the riding on the wall, and the traditional
Speaker 3: mutual fund industry is doing one of two things. They're
Speaker 3: going Ostrich style head and sand I'm just going to
Speaker 3: ride this till I retire and we'll just deal with
Speaker 3: the outflows and someone else's problem. Or their shops like DFA,
Speaker 3: they say.
Speaker 5: You know what, we're going to convert.
Speaker 3: We're going to They do fifty billion of mutual funds
Speaker 3: to ETFs. And then you see some innovation going on
Speaker 3: where a group we're partnering with Wes Gray and his
Speaker 3: team at Alpha Architect ETF Architect, they we're able to
Speaker 3: go to an asset manager and say, okay, well.
Speaker 5: Let's convert your clients.
Speaker 3: So they had five thousand clients from separate accounts to
Speaker 3: an ETF and it's not a taxable transaction. And so
Speaker 3: I started to think about this. It's called a three
Speaker 3: fifty one exchange again, been around for one hundred years,
Speaker 3: and you start the brain working in an odd lot's
Speaker 3: way and taking this to its logical conclusion. I say,
Speaker 3: this is a really cool idea, and to my knowledge,
Speaker 3: we're going to be the first to do this. And
Speaker 3: so I said, why can't we open this to everyone?
Speaker 3: Why can't we make this so that it's disrupting the
Speaker 3: entire industry. You make it democratize it where you don't
Speaker 3: have to be a qualified investor. You can just be
Speaker 3: any investor that's sitting on capital gains.
Speaker 5: And so the way that works.
Speaker 3: Is you can contribute a portfolio of stocks ETFs whatever,
Speaker 3: and there's some rules like one position can't be over
Speaker 3: twenty five percent, the top five can't be over fifty.
Speaker 3: You contribute a basket of stocks, you get an ETF
Speaker 3: in return, and you get essentially a tax deferral diversified
Speaker 3: portfolio that now has a diversified strategy. It could be
Speaker 3: whatever strategy. The first one we're doing is actually a
Speaker 3: riff on an old paper we wrote which demonstrated that
Speaker 3: if you're a high tax investment in it plays like
Speaker 3: California or New York. The last thing you want is
Speaker 3: dividends or high dividends. So we demonstrated that if you
Speaker 3: had a value strategy that targeted stocks that paid load
Speaker 3: to no dividends your act after tax, you do much
Speaker 3: better than the SMP or high divinut strategy. So this
Speaker 3: takeaway of this idea is that you can contribute a
Speaker 3: basket of stocks end up with a great ETF and
Speaker 3: you could launch a series of these every year, every
Speaker 3: three months, every six months, and let people opt in.
Speaker 5: What do you think, great?
Speaker 4: This sounds good. I wish I had some gigantic capital
Speaker 4: gains that I needed to solve for, but a loss
Speaker 4: that's not my problem. But let's just talk a little
Speaker 4: bit more mechanics. So let's say ten years ago, I'd
Speaker 4: bought a bunch of Apple and Nvideo and Microsoft and
Speaker 4: whatever else, JP Morgan, a bunch of names that have
Speaker 4: done well. Okay, So I have these and now I'm thinking, Oh,
Speaker 4: the market's kind of expensive these days, I'm nervous, et cetera.
Speaker 4: I'm thinking about I want to sell them, but I
Speaker 4: don't want to like write a huge check come next April. Okay,
Speaker 4: so that's my problem. Talk to me the specific mechanics.
Speaker 4: Now your fund suddenly, your new ETF suddenly exists. Walk
Speaker 4: me through the specific mechanics of what I have to
Speaker 4: do to swap them.
Speaker 2: I don't understand how you like deliver it.
Speaker 4: Yeah, so I swapped that into this thing so that
Speaker 4: now I'm in a diversified portfolio that's a little bit
Speaker 4: de risked. Thanks to diversification, I don't have my concentration problem,
Speaker 4: but I didn't have to pay the taxes. Talk to
Speaker 4: me about exactly.
Speaker 3: This is why we're partnering with our friends ETF architect
Speaker 3: like you have things like ten thirty one, have very established,
Speaker 3: templated rules how to do it.
Speaker 5: And this is the first time we going through it.
Speaker 3: So I'm sure it's not going to be one hundred
Speaker 3: percent without headaches and hiccups. But the first thing you inquire, right,
Speaker 3: So we set up camera investments dot com, forward slash tax.
Speaker 3: Put in your name, your info. I got this portfolio.
Speaker 3: Joe's got a portfolio. Swab Yeah, it's I literally do have.
Speaker 3: So you know, here's I'm interested. Send me more information.
Speaker 3: I'm sure we'll do a webinar, we'll educate everyone and
Speaker 3: we'll say here's the menu, here's the process of what's
Speaker 3: going to happen on I'm just making up this date December. First,
Speaker 3: your portfolio will contribute to the ETF.
Speaker 4: Everybody, How does that work?
Speaker 5: Magic?
Speaker 3: Hopefully you know the plumbing and the pipes of it.
Speaker 3: We'll have to get Wes on the show and get
Speaker 3: him to get really deep on it. But they just
Speaker 3: did it with a five thousand account.
Speaker 4: But like Schwab or whatever, like, they have mechanisms for.
Speaker 3: Yeah, I mean, I'm sure, like I don't know whether
Speaker 3: it's going to be you know, acadding and whether it's
Speaker 3: going to be just electronic transfer.
Speaker 4: Okay, but you can do that with shares, yeah, okay, Okay.
Speaker 3: So we wrangle up a bunch of people with all
Speaker 3: sorts of different securities and they all contribute them, and
Speaker 3: then the next morning they have an ETF in their
Speaker 3: swap account.
Speaker 5: It's beautiful.
Speaker 3: And then there you know they have a diversified portfolio.
Speaker 3: And we have a few different ones lined up. We
Speaker 3: have an endowment style. You guys probably seen me pick
Speaker 3: my fights with cowpers.
Speaker 5: Over the years.
Speaker 3: We have a global shareholder yield style. So the menu
Speaker 3: will be different for people that may want different ideas,
Speaker 3: but the first one, at least, we're doing US stock exposure.
Speaker 2: So once you're in the diversified portfolio the ETF, presumably
Speaker 2: if you sold that you would still have to pay
Speaker 2: capital gains, but the benefit is that you're getting out
Speaker 2: of that like big concentrated position and going into something
Speaker 2: more diversified.
Speaker 5: That's the hope.
Speaker 2: Okay, that sounds interesting.
Speaker 4: It sounds very interesting. Can I ask a question? You
Speaker 4: mentioned Wes's company, Wes Gray. You mentioned Wes's company is
Speaker 4: called Alpha Architect. Since you've been in the ETF game
Speaker 4: for a long time, can you talk a little bit
Speaker 4: about how, you know, if Tracy and I have an
Speaker 4: idea for an ETF, some strategy that we think could
Speaker 4: be interesting, how much easier is it today in twenty
Speaker 4: twenty four to build What is the process of Like, okay,
Speaker 4: we want to build an ETF around this versus say
Speaker 4: twenty fourteen or two thousand and four.
Speaker 5: It's night and day.
Speaker 4: So what's the what's it like?
Speaker 3: You know, we originally were gonna sub advise on a
Speaker 3: couple of funds. The Forbes family was gonna move into ETFs.
Speaker 3: It's a fun fact they didn't because it was two
Speaker 3: thousand and nine. So we eventually sub advised on a
Speaker 3: fund with advisor shares. Because back then it costs half
Speaker 3: a million a million bucks a year just to get
Speaker 3: the trust permission to launch ETF, so a huge pain.
Speaker 3: We eventually bit the bullet starting launching funds in twenty thirteen.
Speaker 3: Fast forward a decade in the ETF rule which was
Speaker 3: passed a few years ago that really streamlined everything, changed
Speaker 3: it all. And so the two main companies, so ETF
Speaker 3: architect and then Title, which are both groups that do
Speaker 3: this white label ETF business. You could go to them
Speaker 3: now and say, Joe's got his idea for this ETF.
Speaker 3: It's only going to invest in companies in North Carolina.
Speaker 3: The letter M like, whatever it may be. You know,
Speaker 3: who knows. Three months from now you could have a
Speaker 3: fund out. Wow, it's going to cost you, I don't know,
Speaker 3: fifty grand and startup fees. But the big problem, and
Speaker 3: you know everyone sees the gold at the end of
Speaker 3: the rainbow, but you really need to be able to
Speaker 3: get to twenty thirty forty million. So a lot of
Speaker 3: people sit at zero.
Speaker 2: Is that just to make the economics of actually like
Speaker 2: managing and trading the ETF actually work well.
Speaker 3: If it sits at zero, you're on the hook for
Speaker 3: probably quarter million expenses per year two hundred and fifty grand.
Speaker 3: But that's if it sits at zero, and so then
Speaker 3: you're subsizing. You know, writing twenty k checks per month
Speaker 3: adds up over time.
Speaker 2: Here's something I always wanted to write about or talk
Speaker 2: about reverse inquiries in ETFs. I think this is sometimes
Speaker 2: like an underappreciated perspect of how ETFs come into being.
Speaker 2: But I have heard that, like a hedge fund or
Speaker 2: an investor will go out and say, we want the
Speaker 2: opposite exposure to this particular thing. We want to take
Speaker 2: the other side of the bet. Will you create an
Speaker 2: ETF that allows me to do this?
Speaker 3: Yeah, you see that more at a lot of the
Speaker 3: trade specific shops and firms that want those thematic exposures.
Speaker 3: You know, we tend to focus on ideas I want
Speaker 3: to put money into. You know, the average mutual fund
Speaker 3: manager has zero dollars invested in their own fund, which
Speaker 3: is an astonishing statistic. And half of all public funds
Speaker 3: close over the course of ten years, so there's a
Speaker 3: massive amount of turnover and people that don't have skin
Speaker 3: in the game, and so a lot of these ideas.
Speaker 3: You know, I want nothing to do with a lot
Speaker 3: of these tradeable thematics, right, but if people build them,
Speaker 3: they want to invest them, God bless them.
Speaker 5: Right.
Speaker 3: But we we air on the side of things that
Speaker 3: we think make a material impact to investors, you know,
Speaker 3: future returns and portfolios and.
Speaker 5: A lot of out there.
Speaker 3: You know, I wouldn't touch with a ten foot pole,
Speaker 3: but some of them raise a billion, ten billion dollars
Speaker 3: or what do I know.
Speaker 4: It's interesting hearing you describe how much easier ETF creation
Speaker 4: has gotten, because it strikes me that it's like the
Speaker 4: ETF physation of the ETF industry, because ETFs, of course
Speaker 4: make investing in a country or a theme much easier
Speaker 4: than if you had to do it by hand and
Speaker 4: buy a bunch of stocks. And this is essentially taking
Speaker 4: that same idea except applying it to the creation of ETFs,
Speaker 4: where you have all these white label things. The infrastructure
Speaker 4: is already there, so all you have to do is
Speaker 4: supply the idea. This gives me just something I've always
Speaker 4: just sort of been wondering about what happens when in
Speaker 4: the ETF dies. So Tracy and I launch our fund
Speaker 4: where we only invest in North Carolina stocks where the
Speaker 4: ticker has the letter eminem and then, for whatever reason,
Speaker 4: in two years we have five hundred thousand dollars under management,
Speaker 4: which is probably high, but clearly not enough to build
Speaker 4: a business on. You're like, you know what, we don't
Speaker 4: want to do this. We don't want to write the
Speaker 4: twenty thousand dollars checks a month to support this. When
Speaker 4: we decide to wind it down, what happens.
Speaker 3: They go to the ETF ticker in the sky graveyard,
Speaker 3: you know. I mean it's a pretty orderly process. There's
Speaker 3: a lot of prior arity, of course, you know, I
Speaker 3: think on very very rare cases.
Speaker 4: The investors get distributed the stock or do they get
Speaker 4: distributed the cash.
Speaker 5: It's usually cash.
Speaker 3: But the correct answer for the vast majority of investors
Speaker 3: just sell it before close it down, you know, you
Speaker 3: sell it on the secondary market. Yeah, like, hey, we're
Speaker 3: going to close this into the year. We'll just sell
Speaker 3: it now and just be done with it. But you know,
Speaker 3: I think a lot of people take a negative view
Speaker 3: of the amount of products out there. You often hear
Speaker 3: people say there's more ETFs than stocks, right, and say, well,
Speaker 3: there's more words than letters like that, that doesn't ye like.
Speaker 4: It doesn't more sentences than words, but.
Speaker 3: You have sort of the ability to have this limitless
Speaker 3: grocery choice. There's a lot of areas that I think
Speaker 3: haven't developed the way that they will eventually in One
Speaker 3: example is the all in one acid allocation ETF. We
Speaker 3: have three of these, but if you look at the
Speaker 3: traditional mutual fund asset allocation industry, it is multiple, is
Speaker 3: more expensive and tax inefficient compared to the ETFs, and
Speaker 3: yet they still have about a trillion in assets. And
Speaker 3: you know those type of assets, it's usually death or
Speaker 3: divorce or bear markets where they all come out all
Speaker 3: the money at some point, but they never go back
Speaker 3: to paying two percent. And so I think you'll see
Speaker 3: over the next ten to twenty years a big shift
Speaker 3: and assets and structures, but eventually it all leads to
Speaker 3: the ETF.
Speaker 4: You know, you mentioned the sort of global market portfolio,
Speaker 4: and we can never own the global market portfolio truly,
Speaker 4: so you only are like trying to get close, right,
Speaker 4: because the global market portfolio also includes all real estate
Speaker 4: in the world and just a number of things like
Speaker 4: you can approach it maybe asymptotically, but you'll never truly
Speaker 4: own the global market portfolio. But the old academic Reais
Speaker 4: search says, like to own the global market portfolio every
Speaker 4: asset in the world. How close do you get in
Speaker 4: one of these funds? Are you like ninety five percent
Speaker 4: of the way there?
Speaker 3: I'd say it's closer to like ninety nine, you know.
Speaker 3: The if you look at one of my favorite examples
Speaker 3: we always joke on these assy action from portfolios. We
Speaker 3: have one called the Talmud portfolio, which is based on
Speaker 3: there's a piece of advice where it was like, let
Speaker 3: every man invest a third in business, a third in land,
Speaker 3: and a third keep in reserve, which we interpret is
Speaker 3: a third in stocks, a third and real assets, and
Speaker 3: the third and bonds. That portfolio is almost impossible to beat.
Speaker 3: And if you look at a lot of like Cowper's Bridgewater,
Speaker 3: and we do all these articles and say should these
Speaker 3: big institutions just be managed by a robot? And they,
Speaker 3: for the most part, usually can't beat these basic asset
Speaker 3: allocation benchmarks. It's really hard for them. Some you include
Speaker 3: a little leverage because they have a lot of private
Speaker 3: equity and leverage vehicles, but these basic portfolios are a
Speaker 3: heart high.
Speaker 4: Bar that's funny.
Speaker 2: I hadn't considered talmudic investment philosophy for the wind, but
Speaker 2: I guess it works. Okay. So this whole conversation has
Speaker 2: reminded me that I am old enough to remember when
Speaker 2: active ETFs were first becoming a thing and they were
Speaker 2: going through like regulatory approval process. Obviously they've become much
Speaker 2: more of a thing since then, and we've seen mutual
Speaker 2: funds convert into ETFs. As you mentioned, what's the next
Speaker 2: big thing in the etfification of the market.
Speaker 3: Now, there's a few areas we're always interested in. And
Speaker 3: when we look at the Vinn diagram or you make
Speaker 3: the columns of things that are totally fine, Okay, good,
Speaker 3: there's plenty, right.
Speaker 5: You know.
Speaker 3: I was chatting with someone last night and he's like, look,
Speaker 3: I used DFA, Why should I use your funds? I'm like, don't.
Speaker 3: DFA is fine, you know, but the bad news is like,
Speaker 3: there's a whole universe of absolutely awful, god awful, terrible.
Speaker 3: I have a Twitter thread that's just instant. I made
Speaker 3: the mistake of bookmarking a spammy, sleazy Instagram ad for
Speaker 3: private real estate. It's always private real estate, right, fifty
Speaker 3: percent per year.
Speaker 5: You know, they're.
Speaker 4: Claiming those guys got closed. There's twenty See.
Speaker 2: Some of the videos are like, if you just commit
Speaker 2: investment and tax fraud, you can make like a two
Speaker 2: hundred percent return in six months.
Speaker 3: So all my all my ads are now these scams. Right,
Speaker 3: I just get delivered because they I bookmarked it, so
Speaker 3: I get all these So just avoiding and doing the
Speaker 3: really dumb stuff is the key to almost all of this.
Speaker 5: Right.
Speaker 3: We did an old article about the food pyramid. You
Speaker 3: remember the food pyramidal?
Speaker 5: Yeah, you know.
Speaker 3: The base of that when we were kids was eat
Speaker 3: a bunch of cereal and bread and pasta, you know,
Speaker 3: and it's kind of inverted now where thinking about it.
Speaker 3: But the same thing with investing is like the basics.
Speaker 3: Get the basics right, payloa fees, payload taxes, get your
Speaker 3: money invested. That's the number one piece of advice of
Speaker 3: all this is get to work, let it compound, right,
Speaker 3: and then the other things take care of themselves. So,
Speaker 3: but because this is the Wonky Show and we get
Speaker 3: into this, I think the things like the three fifty
Speaker 3: one exchange idea we're talking about are going to be
Speaker 3: extremely material when we're talking about.
Speaker 5: This in a year or two.
Speaker 3: I've seen some other companies and we don't do this,
Speaker 3: But I love the idea of taxable target date ETFs.
Speaker 3: We see people behave better in target date style funds.
Speaker 3: I think there's some ideas and concepts around building personal
Speaker 3: pensions where people are locked into their investments and get
Speaker 3: them to behave in a good way where you know,
Speaker 3: these fiduciaries, you're kind of forced to hold investments and
Speaker 3: let the compounding do its work. There's a lot of
Speaker 3: innovation in some of those ideas. But if you go back,
Speaker 3: I have a joke, I'm like, so many of the
Speaker 3: fintech ideas are just vanguard with a shiny coat of paint, right,
Speaker 3: Like you already have pretty great out there. But there's
Speaker 3: there's some more ideas we're working on too.
Speaker 4: I love the idea of like a sort of like
Speaker 4: forced pension because it intuitively it seems like a most
Speaker 4: people make mistakes when they're like left on their own,
Speaker 4: so you just sort of want to lock it up,
Speaker 4: would be. It also seems like there's probably excess returns
Speaker 4: for like that commitment where if like you trade off
Speaker 4: the liquidity profile, then you get paid more anyway, med favor.
Speaker 4: It's so great to finally have the show. Great to
Speaker 4: catch up with you in your natural environment at.
Speaker 2: The surfing on a beach.
Speaker 4: Yeah, it's like okay, like, yeah, we didn't have MeV
Speaker 4: on for a long time, but if we when we
Speaker 4: did finally have it, we're like literally on the beach
Speaker 4: right now, listeners.
Speaker 5: You heard it here.
Speaker 3: They're committed to us serving with this future.
Speaker 4: I don't know.
Speaker 2: Only I said only if the temperature is above eighty
Speaker 2: degrees or someone like loans me a what you.
Speaker 4: Just it's freezing.
Speaker 3: I'm really cool care of it.
Speaker 2: I've been cold for two days.
Speaker 4: It all right, thanks so much, man, take.
Speaker 5: Great, y'all.
Speaker 2: Well, I'm glad we were finally able to do that, Joe,
Speaker 2: as you say, in Meb's natural environment. One thing I
Speaker 2: was thinking was just about that new fund and the
Speaker 2: sort of tax focus of it. It is in interesting
Speaker 2: because you know, our whole conversation was about how over
Speaker 2: the past ten years or so, those big concentrated yeah
Speaker 2: investments are what have paid off the most, and I
Speaker 2: guess people are now trying to think through how they
Speaker 2: actually crystallize those wins and so it's interesting to see
Speaker 2: the market trying to come up with a solution to
Speaker 2: that problem.
Speaker 4: The solution of the problem of people having to pay
Speaker 4: tax and people having to eventually pay taxes. You know
Speaker 4: what I think is interesting to me to going back
Speaker 4: to the sort of diversification story and getting punished for
Speaker 4: diversification where we started. I like the idea that one day,
Speaker 4: like the sort of I'm still kind of diversified, you
Speaker 4: know that, like my prudent approach is going to pay off.
Speaker 4: But it's also interesting that like the periods that were
Speaker 4: paid off are like not great periods. So it's like, Okay,
Speaker 4: I want my.
Speaker 2: Diversification yocer and forgettable.
Speaker 4: Yeah, or like the aftermath of a craft and so
Speaker 4: like I want my diversification to pay off, but I
Speaker 4: don't want to crash.
Speaker 2: This is exactly what I was thinking. The trigger for
Speaker 2: diversification coming back would be something very bad happening that's
Speaker 2: right in the US. Yeah, And as people who live
Speaker 2: in the US were de facto over levered.
Speaker 4: Yeah, we're always going to be levered to the US.
Speaker 4: I mean, our jobs are levered to the US economy, right,
Speaker 4: So I think about this a lot, which is like Okay,
Speaker 4: it makes me uncomfortable as not just someone with money
Speaker 4: in the market, but it makes me uncomfortable as a
Speaker 4: press of the world that, like, we have this market
Speaker 4: that is just so heavily concentrated and so levered to
Speaker 4: the success of Meta and Nvidia and Amazon, and I
Speaker 4: don't really like that. It rubs me the wrong way.
Speaker 4: It doesn't sit right with me as something. But on
Speaker 4: the other hand, if I think about what would change that,
Speaker 4: it's nothing good. Yeah, there doesn't seem to be like
Speaker 4: a positive version. Now I would see the one exception
Speaker 4: where maybe this doesn't have to be the case would
Speaker 4: be kind of like a market in which the investments
Speaker 4: that are being made in things like the Inflationial Reduction
Speaker 4: Act and the chipsy Act, where there's like this industrial
Speaker 4: renaissance in the US and that really started taking off,
Speaker 4: or where you have such above trend growth and productivity
Speaker 4: that a lot of the so called like real economy
Speaker 4: stocks really start to do well, et cetera. So there
Speaker 4: is like that sort of golden.
Speaker 2: Scenario where more winners come in this right right, and
Speaker 2: so like having more exposure to potential winners that pays off.
Speaker 2: But on the other hand, it feels like the downside scenario,
Speaker 2: where like the current winners just get just.
Speaker 4: Are no longer the winners and everyone loses, and then
Speaker 4: seems more probable. It seems more probable, and so it's hard. Yeah,
Speaker 4: it feels like when the regime shifts, which will happen
Speaker 4: because regimes shift, and maybe it'll be one hundred years
Speaker 4: from now and it will be dead and whatever. But
Speaker 4: it seems most likely that when the regime shifts, it
Speaker 4: will not be because things are good.
Speaker 2: Yeah, nothing last forever shed dramatic tear, including our time
Speaker 2: at Futureproof on the beach. So shall we leave it there?
Speaker 4: Let's leave it there.
Speaker 2: This has been another episode of the oud Lots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 4: Follow our guest meb Fabor. He's at meb Faber. Follow
Speaker 4: our producer Kerman Rodriguez at Kerman ermann Dashil Bennett at Dashbod,
Speaker 4: and Kelbrooks at Kelbrooks. Thank you to our producer Moses Ondam.
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