WEBVTT - Protecting Your Portfolio From Black Swans 0:00:05.800 --> 0:00:12.160 Welcome to Trilliance. I'm Joel Weber and I'm Eric bel Tunis. Eric, 0:00:12.160 --> 0:00:14.640 how much do you know about black swan investing? Well, 0:00:14.680 --> 0:00:17.720 I know what a black swan is. Uh. It's a 0:00:17.840 --> 0:00:20.439 term for some kind of a risk that that you 0:00:20.480 --> 0:00:22.639 didn't really plan for, which they always seemed to be 0:00:22.640 --> 0:00:25.160 ones you didn't plan for. I think if you had 0:00:25.160 --> 0:00:29.160 asked people three or four years ago, uh, you know 0:00:29.200 --> 0:00:31.280 what the big risk was, I don't know, inflation would 0:00:31.280 --> 0:00:35.160 have been one of those on the top five even ten. 0:00:35.280 --> 0:00:38.800 In fact, we had Nick Majulian member and he said 0:00:38.800 --> 0:00:42.040 he actually wrote his whole book, um, just Keep Buying, 0:00:42.800 --> 0:00:44.320 and he got a lot of people saying, yeah, but 0:00:44.320 --> 0:00:47.400 you didn't include anything on inflation. And that's how he 0:00:47.440 --> 0:00:50.040 was saying, I that's how big of a black swan 0:00:50.200 --> 0:00:52.240 kind of risk that was, and that he didn't even 0:00:52.520 --> 0:00:54.600 sort of write about it in that book. And now 0:00:54.640 --> 0:00:57.400 it's all anybody can think about. And so that's how 0:00:57.440 --> 0:01:00.840 I interpret a black swan um event. And I think 0:01:00.920 --> 0:01:03.880 we had it because that inflation. What it did was 0:01:03.880 --> 0:01:06.199 it forced the FED to do a one eight and 0:01:06.520 --> 0:01:09.880 stop being a commendative and now it's antagonistic towards the markets, 0:01:09.880 --> 0:01:12.559 and now the sixty and the forty are both going down. 0:01:12.680 --> 0:01:17.040 So it's a mess, a mess, and and yet black 0:01:17.080 --> 0:01:21.319 swan strategies have been known to pay off. And what's 0:01:21.360 --> 0:01:23.760 interesting was we did this story in the pages of 0:01:23.760 --> 0:01:26.120 Bloomberg Business Week, which as you know I'm the editor of, 0:01:26.440 --> 0:01:29.840 called black Swan Hedge funds are growing business and scary times. 0:01:30.240 --> 0:01:33.319 That really caught my attention. We learned also in the 0:01:33.319 --> 0:01:36.200 process of doing that, there there's et F strategies out 0:01:36.240 --> 0:01:38.920 there that are touching this space, and that made me 0:01:39.000 --> 0:01:41.840 want to do this. Uh. And we're gonna have two guests. 0:01:41.880 --> 0:01:45.560 One is Danitza Sakova, who's a cross asset reporter with 0:01:45.560 --> 0:01:49.280 Bloomberg News. She wrote that article with our colleague Eric 0:01:49.320 --> 0:01:53.720 Shotzker and Meb Faber. Who's Meb Eric Oh. Meb's a 0:01:54.120 --> 0:01:57.320 e t F legend. He's been He's been around the 0:01:57.360 --> 0:02:00.400 business for a long time. He runs Cambria ea TS, 0:02:01.480 --> 0:02:05.320 which have a couple of billion in assets. Meb is 0:02:05.520 --> 0:02:08.320 Uh wrote one of a famous paper that a lot 0:02:08.360 --> 0:02:13.120 of people in quantitative people really look a look to. 0:02:13.240 --> 0:02:16.480 Is one of the best thinkers in the et F space. 0:02:16.520 --> 0:02:18.240 But he also has products, and one of his products 0:02:18.720 --> 0:02:21.320 it's called tail for tail risk, and that's why he 0:02:21.360 --> 0:02:23.160 was sort of including the article and in he's here 0:02:23.200 --> 0:02:32.639 today this time on Trillians black Swan investing. Danitza meb 0:02:32.960 --> 0:02:37.200 Welcome to trillions. Thanks for having great to be here, y'all. Okay, Danitza, 0:02:37.400 --> 0:02:40.320 can you tell us about your article? What did you 0:02:40.400 --> 0:02:43.000 learn in the process of of of doing this and 0:02:43.320 --> 0:02:46.440 what's new? Yeah, we learned a couple of things. So 0:02:46.800 --> 0:02:51.040 from institutional to small investors, there seems to be a 0:02:51.080 --> 0:02:56.959 big interest in those products. Uh, when we define those products, 0:02:56.960 --> 0:02:59.160 we have to go to the basic idea of this. 0:02:59.320 --> 0:03:02.560 So the very basic purity R risk or black Swan 0:03:03.480 --> 0:03:06.800 insurance is buying deep out of the money puts and 0:03:06.880 --> 0:03:11.280 protecting against the huge laws like thirty like something we 0:03:11.320 --> 0:03:15.840 saw uh during COVID, and then we're getting a huge payoff, 0:03:15.919 --> 0:03:18.480 which depending on what you've read, depending on the hedge 0:03:18.480 --> 0:03:21.680 fund or or the et F, where you're gonna see 0:03:22.160 --> 0:03:25.000 a huge return. But what we saw during the process 0:03:25.480 --> 0:03:29.120 is the biggest issue with those strategies is that they 0:03:29.120 --> 0:03:32.000 have negative carry, so for a very long time you 0:03:32.080 --> 0:03:34.440 may be in for big losses. This could be for 0:03:34.480 --> 0:03:37.480 a couple of years, maybe even a decade, but then 0:03:37.520 --> 0:03:41.240 eventually you promise the big payoff that is hopefully bigger 0:03:41.280 --> 0:03:43.760 than the losses. But what we're seeing is people are 0:03:43.800 --> 0:03:48.200 trying to diversify their moving into different assets. Uh, they're 0:03:48.240 --> 0:03:50.960 targeting a small market crash. So if it's not like 0:03:51.080 --> 0:03:53.880 thirty percent, say, you can be hedging against to any 0:03:53.920 --> 0:03:58.320 percent and all this is um in the purpose of 0:03:58.400 --> 0:04:00.800 making it cheaper and more, I suppose, But then it's 0:04:00.880 --> 0:04:06.320 kind of moving away from this huge three or four 0:04:06.360 --> 0:04:10.200 digit pay out um that is promised. But these are 0:04:10.320 --> 0:04:15.640 especially profitable and popular in now as in March they 0:04:15.720 --> 0:04:19.800 had some breaking news headlines about how huge the returns are. 0:04:20.200 --> 0:04:22.880 So it kind of makes sense that this year, with 0:04:23.040 --> 0:04:25.880 so much going on, investors are choosing them as an option. 0:04:26.520 --> 0:04:31.640 So so, in almost like uh greatly simplified terms, for 0:04:31.839 --> 0:04:36.200 a few pennies, I get an insurance policy effectively that 0:04:36.360 --> 0:04:39.680 might pay out should something really bad happen, and I 0:04:39.720 --> 0:04:43.520 find myself with a winning strategy in the event of 0:04:43.560 --> 0:04:49.320 something going completely catastrophic about right, No, those really? I mean, yeah, 0:04:49.360 --> 0:04:53.840 that's that would be that sounds great, right, Yeah, I 0:04:53.880 --> 0:04:57.360 would be great. But I'll correct, you onto a few pennies. 0:04:57.440 --> 0:05:00.840 It's more than a few pennies, okay, But this has 0:05:00.880 --> 0:05:03.960 long been something that institutional investors could do, right, And 0:05:04.000 --> 0:05:07.240 what's interesting in your story, what's stood out to me 0:05:07.360 --> 0:05:13.400 is that there's now this retail ability to do it exactly. Yeah, 0:05:13.560 --> 0:05:17.800 so what's happening there. So for institutional investors it makes 0:05:17.800 --> 0:05:20.480 a lot of sense because like a long term policy 0:05:20.680 --> 0:05:22.719 and then you held it for a very long time, 0:05:22.800 --> 0:05:25.200 and then when the big hit comes in and you 0:05:25.320 --> 0:05:27.960 lose on your equity part of your portfolio, here is 0:05:28.000 --> 0:05:31.120 the great terrorist insurance to protect you. But then for 0:05:31.400 --> 0:05:33.919 e t S it's a bit different because obviously, like 0:05:34.040 --> 0:05:37.520 people don't need two quarters to decide to implement it. 0:05:38.000 --> 0:05:39.919 They can use it in a lot of different ways, 0:05:39.960 --> 0:05:42.760 and there has been a lot of demand, uh for 0:05:42.920 --> 0:05:46.760 that type of protection. The biggest e t F is Cambria, 0:05:47.240 --> 0:05:50.400 and it's grown significantly in the last two years and 0:05:50.440 --> 0:05:53.640 even more so uh this year, even though it's down 0:05:53.800 --> 0:05:56.640 over the years. So there is an interest, maybe a 0:05:56.640 --> 0:06:00.040 strong belief that this potential market crash is coming in, 0:06:00.200 --> 0:06:02.679 but there is an interest even as the price continues 0:06:02.720 --> 0:06:06.000 to fall. Yeah, and um, let me bring meb in 0:06:06.080 --> 0:06:08.920 here because he is the maker of tail. There are 0:06:08.960 --> 0:06:11.160 a couple issuers and a couple of products that are 0:06:11.160 --> 0:06:14.240 people have been using this year to hedge. There's some 0:06:14.279 --> 0:06:17.400 stuff in the alternative space that's up doing well. People. 0:06:17.440 --> 0:06:20.600 Sometimes we'll use an inverse fund, but MEB and also 0:06:20.640 --> 0:06:25.359 I think simplify and innovator use options, right, and I 0:06:25.400 --> 0:06:28.280 want to just go into that that idea and and 0:06:28.320 --> 0:06:32.000 just let's just break down tail um. Sometimes when I 0:06:32.000 --> 0:06:34.560 think of these hedged e t f s, I think of, okay, 0:06:34.600 --> 0:06:37.080 you take the SMP five hundred and you add in 0:06:37.160 --> 0:06:41.560 put options or the VIX. But then what happened over 0:06:41.560 --> 0:06:43.280 the past decade is a lot of times you would 0:06:43.279 --> 0:06:47.640 give up so much of the upside that they didn't 0:06:47.640 --> 0:06:50.840 get a lot of love. So I guess knowing that 0:06:50.960 --> 0:06:53.919 was the sort of history of these hedge gtfs. But 0:06:54.000 --> 0:06:57.719 now we're in an error where people want some protection. Um, 0:06:57.760 --> 0:07:02.880 you know, how does tail fit into that? So um, 0:07:02.920 --> 0:07:05.839 there's really two questions that comes to this is you know, 0:07:05.920 --> 0:07:10.200 to someone need tail risk and then do they need 0:07:10.240 --> 0:07:11.840 it right now? And those and those are sort of 0:07:11.840 --> 0:07:13.760 two different questions. And we can talk about the ladder 0:07:13.840 --> 0:07:17.760 in a medics. I think it's particularly insightful. But a 0:07:17.840 --> 0:07:19.800 number of years ago, let's call it six years ago. 0:07:20.480 --> 0:07:22.880 You know, Cambria is both an issuer of ETFs we 0:07:22.920 --> 0:07:26.560 have twelve, but also a consumer user of ETFs, and 0:07:26.600 --> 0:07:30.360 so for a lot of our allocation and strategies, we 0:07:30.440 --> 0:07:33.480 want certain exposures. And despite there being tens of thousands 0:07:33.480 --> 0:07:36.440 of funds out there available to purchase, often we look 0:07:36.480 --> 0:07:39.960 around and we just kind of say huh or yuck 0:07:40.160 --> 0:07:42.640 in the case of the inverse category. So we were 0:07:42.640 --> 0:07:45.680 looking for some inverse style funds to use, and the 0:07:45.760 --> 0:07:47.880 challenge with most of the category was that it was 0:07:47.920 --> 0:07:54.440 either a really complicated be really confusing, like it was 0:07:54.480 --> 0:07:57.400 hard to even read the perspectives, or lastly, really expensive. 0:07:57.600 --> 0:08:00.480 You know, many of these were very expensive products make 0:08:00.560 --> 0:08:03.600 you know, kind of two and twenty blush and so um, 0:08:03.720 --> 0:08:05.800 we said, can we come up with something that is 0:08:05.840 --> 0:08:10.160 more palatable? That's common sense I got explained to you know, 0:08:10.240 --> 0:08:13.200 my nieces or nephews or someone, um, just on on 0:08:13.240 --> 0:08:15.520 a basic level. And so we wrote a white paper, 0:08:15.680 --> 0:08:17.640 as we are usually want to do. It was called 0:08:17.680 --> 0:08:19.880 worried about the market. Maybe it's time for the strategy 0:08:20.240 --> 0:08:25.560 in which we outlined the theory behind tail and we said, okay, 0:08:25.600 --> 0:08:30.600 what does well when US stock market pukes? Well, the 0:08:30.680 --> 0:08:34.360 things you would not expect to do well don't historically, 0:08:34.440 --> 0:08:39.199 So foreign stocks don't help. Um, real estate doesn't help. 0:08:39.880 --> 0:08:45.840 Commodities usually don't help. Gold like crazy cousin Eddie like 0:08:45.840 --> 0:08:47.680 shows up. You don't know who you're gonna get. Sometimes 0:08:47.720 --> 0:08:50.880 it helps, sometimes it doesn't. Can't count on it. Bonds 0:08:51.920 --> 0:08:55.200 have often helped, but they've helped more in the latter 0:08:55.280 --> 0:08:58.000 half of the twentieth century, not in the beginning, but 0:08:58.160 --> 0:09:02.320 usually they help, right, so um. And then obviously there's 0:09:02.320 --> 0:09:05.000 things act of strategies like trend following that usually does 0:09:05.000 --> 0:09:08.240 a great job, but you can't say guaranteed in our 0:09:08.280 --> 0:09:12.199 world almost guaranteed. The one thing that really is almost 0:09:12.200 --> 0:09:14.520 guaranteed to do well when stocks have a really terrible 0:09:14.520 --> 0:09:18.080 outcome is buying puts. Of course, what's the problem with 0:09:18.120 --> 0:09:21.800 buying puts that was mentioned earlier. They're expensive, right, it's 0:09:21.840 --> 0:09:24.400 a big cost. And so we said, how can we 0:09:24.440 --> 0:09:26.800 come up with a strategy that puts A and B 0:09:26.960 --> 0:09:29.320 together and come up with something is palatable. So the 0:09:29.400 --> 0:09:33.199 vast majority of the fund hangs out in tenure government bonds. 0:09:34.000 --> 0:09:36.280 UH so generates some income a little more than it 0:09:36.360 --> 0:09:38.440 was a year or two ago, but historically you know 0:09:38.520 --> 0:09:42.120 that's four or five. You also get a potential capital 0:09:42.160 --> 0:09:45.840 gains when things hit the fan and bonds perform okay 0:09:45.960 --> 0:09:49.000 or great, and then you buy a ladder of puts 0:09:49.000 --> 0:09:52.120 on the stock market and that has the effect we 0:09:52.200 --> 0:09:55.640 believe of uh not costing as much in the good 0:09:55.679 --> 0:09:57.400 times when stocks are going up. That's what you want 0:09:57.400 --> 0:09:58.800 to be. You want to be an owner. Remember, like 0:09:58.840 --> 0:10:00.440 the whole part of do you need tail risk because 0:10:00.679 --> 0:10:02.840 you want to remain mostly invested most of the time, 0:10:04.000 --> 0:10:06.360 but also do a good job hedging when it hits 0:10:06.360 --> 0:10:09.360 the fan. And so has mentioned earlier as a great example, 0:10:09.440 --> 0:10:11.680 because all the inverse funds did great in Q one, 0:10:12.360 --> 0:10:14.200 but then many am ended up down on the year 0:10:14.280 --> 0:10:18.560 like or something and eventually use like nine percent any money, 0:10:18.559 --> 0:10:21.920 and clients hate that. They hate that bleed. So hopefully 0:10:21.960 --> 0:10:23.240 we think and by the way, we have to to 0:10:23.400 --> 0:10:26.360 tail rest funds tail and fail failed doing much better 0:10:26.400 --> 0:10:28.960 this year. It's on it's on the foreign stocks. But 0:10:29.040 --> 0:10:34.040 it's also not surprising our smallest fund those are amazing tickers. 0:10:34.080 --> 0:10:36.719 By the way props on those. You said something there 0:10:36.760 --> 0:10:39.000 I just want to ask about, which is a ladder 0:10:39.040 --> 0:10:42.120 of puts? What what does that mean? As most people know, 0:10:42.440 --> 0:10:44.880 puts kind of fall off a cliff, lose a lot 0:10:44.880 --> 0:10:47.240 of value time decay in the last month or two 0:10:47.440 --> 0:10:50.920 till expiration. Uh So we like to hang out and 0:10:50.960 --> 0:10:54.480 sort of that three to fifteen month time horizon. So 0:10:54.520 --> 0:10:59.160 we're sort of consistently rolling that sort of expiration and 0:10:59.360 --> 0:11:03.880 target maturity for these options we just want and they're 0:11:03.920 --> 0:11:06.640 slightly out of the money. You know, we're targeting when 0:11:06.720 --> 0:11:09.679 things go bad. So if we wake up tomorrow stock 0:11:09.760 --> 0:11:12.760 markets downten, we would expect this fund to be up 0:11:12.800 --> 0:11:18.160 around um. But the hope is if the markets up 0:11:18.200 --> 0:11:20.600 ten percent or is up ten percent over the next year, 0:11:21.120 --> 0:11:23.160 that this fund doesn't lose a ton of money. It's 0:11:23.160 --> 0:11:25.360 more of like an insurance premium you're paying, and so 0:11:25.480 --> 0:11:27.560 we hope it's a little more palatable in the in 0:11:27.640 --> 0:11:31.240 the good times. We had a conversation about this and 0:11:31.280 --> 0:11:34.320 you said a lot of people use it tactically as 0:11:34.360 --> 0:11:38.760 a short term trait, but me diving deep into terrorists, 0:11:38.800 --> 0:11:41.480 like the whole philosophy of it is holding it for 0:11:41.520 --> 0:11:44.559 a very long time and hoping, not hoping, but eventually 0:11:44.600 --> 0:11:48.319 it pays off. How do those two work together? Is 0:11:48.440 --> 0:11:51.400 Tales supposed to be this long term hedge or is 0:11:51.440 --> 0:11:55.240 it at timing the right time to buy it. I'm 0:11:55.240 --> 0:11:58.400 gonna make a comment that is almost like sacrilege from 0:11:58.400 --> 0:12:01.720 a money manager. I'm not speaking my book. Here is 0:12:01.840 --> 0:12:03.480 if you were to ask me, most people ask me, 0:12:03.559 --> 0:12:06.760 do I need a tail risk fund or strategy? The 0:12:06.800 --> 0:12:11.120 answer is probably no. Now most people don't have a 0:12:11.160 --> 0:12:14.760 diversified portfolio. So I'm talking if if your foundation is 0:12:14.840 --> 0:12:17.280 U S stocks and bonds, global stocks and bonds, a 0:12:17.320 --> 0:12:19.880 bunch of real assets, tilt towards value and momentum, and 0:12:19.920 --> 0:12:22.320 even some trend following sprinkled in. You do all those 0:12:22.360 --> 0:12:25.800 things you have written investing plan, low cost, low taxes, boom, 0:12:26.160 --> 0:12:29.960 do you probably need tail risks? Probably not. However, let 0:12:30.040 --> 0:12:34.280 me give you a good example of why right now matters. Um. 0:12:34.320 --> 0:12:36.720 There was an author that wrote a great book recently 0:12:36.760 --> 0:12:40.200 about Jack Bogel, and I can't remember who the author was, 0:12:40.720 --> 0:12:43.440 but it was a fantastic book. I know, I know, 0:12:43.520 --> 0:12:48.760 I know it talked about Bogel, and you know he's 0:12:48.800 --> 0:12:52.120 the goat I love him to death. Um he built 0:12:52.200 --> 0:12:55.120 Vanguard on this buyinghole mentality. But but even you know 0:12:55.160 --> 0:12:58.520 Bogel's disclosed many times and talking about markets, you know, 0:12:58.800 --> 0:13:01.720 um they go easy sometimes and and trying to use 0:13:01.760 --> 0:13:04.920 some common sense and thinking about valuations and expectations. And 0:13:05.040 --> 0:13:07.920 he famously talked in late nineties about how stocks were 0:13:08.000 --> 0:13:11.960 crazy expensive and and trimming and rebouncing or even hey, 0:13:12.000 --> 0:13:14.680 it's not crazy to move from sixty forty to forty sixty, 0:13:14.720 --> 0:13:18.160 for example. Well, right now is another one of those times. 0:13:18.200 --> 0:13:21.360 So U S stocks hit a tenure cape ratio peak 0:13:21.760 --> 0:13:25.679 in ninety nine, December ninety nine of almost forty five. 0:13:25.840 --> 0:13:28.520 You know historically that they're down around eighteen to twenty two, 0:13:29.080 --> 0:13:31.600 low inflationy times around twenty two. We just hit a 0:13:31.600 --> 0:13:36.720 peak recently in this last UM upthrust of forty. You know, 0:13:36.800 --> 0:13:40.440 we're down since then because the markets down. But you 0:13:40.520 --> 0:13:43.600 combine this scenario where U stocks are a expensive and 0:13:43.679 --> 0:13:46.800 B now in a downtrend, and historically that's a terrible 0:13:46.840 --> 0:13:49.319 place to be. Now the problem is for a lot 0:13:49.360 --> 0:13:52.600 of people that had this sixty forty or whatever their 0:13:52.600 --> 0:13:55.679 allocation was. U S stocks are romped for the last 0:13:55.720 --> 0:14:01.400 decade and so that's sixty forty. You may now be seventy, right, 0:14:01.840 --> 0:14:04.760 and they don't want to sell those because of capital 0:14:04.800 --> 0:14:08.400 gains or taxes or other reasons. And so a tail 0:14:08.559 --> 0:14:11.360 is fund. For example, Um, let's say you're up to 0:14:11.400 --> 0:14:13.960 eight D twenty. Well, you can do a bond replacement, 0:14:14.040 --> 0:14:15.840 so you can take out the bonds because this fund 0:14:15.880 --> 0:14:18.880 gives you the bonds back. Um, and then you get 0:14:18.920 --> 0:14:22.320 this overlay of inverse exposure to stocks. If you want 0:14:22.320 --> 0:14:24.160 to balance it out, you can take an outright bears 0:14:24.240 --> 0:14:27.120 view on or non so to to us, there's a 0:14:27.160 --> 0:14:29.480 lot of people that use it as an altar bucket 0:14:30.160 --> 0:14:32.400 or as a bond replacement, and there's some people that 0:14:32.480 --> 0:14:34.480 uses it all the time insurance just as something to 0:14:34.520 --> 0:14:37.000 talk to the clients when it really hits the fan, 0:14:37.400 --> 0:14:40.560 at least something is probably up. So there's all the time, 0:14:40.600 --> 0:14:42.920 and there's right now. Um. But I think that's a 0:14:43.800 --> 0:14:46.280 here in. That's a good example of why you might 0:14:46.360 --> 0:14:57.960 want to use it tactically. Well, how is this most effective? 0:14:58.040 --> 0:15:00.040 Is it sort of a buy and hold when I 0:15:00.160 --> 0:15:03.160 think things might get spicy, or because you know the 0:15:03.200 --> 0:15:06.280 other thing about black swan events and and we wrote 0:15:06.280 --> 0:15:08.000 about this in the article is sort of they're they're 0:15:08.040 --> 0:15:11.720 well known for sharp drops rather than sort of prolong 0:15:11.880 --> 0:15:16.600 fall offs. Right. So, um, if you were to ask, 0:15:16.760 --> 0:15:18.440 if you were to pull investors and say do you 0:15:18.440 --> 0:15:20.920 have a written invest written investment plan, there's about five 0:15:20.960 --> 0:15:23.360 percent to say yes, okay, And so most people are 0:15:23.360 --> 0:15:25.800 flying by the sea of their pants anyway. And so 0:15:25.840 --> 0:15:27.920 this is a problem for everything. It's a problem for 0:15:28.160 --> 0:15:30.640 what happens when inflations at nine percent, What happens if 0:15:30.680 --> 0:15:33.960 gold goes to four thousand or four hundred, what happens 0:15:33.960 --> 0:15:36.000 if bitcoin goes to a million or zero? You know, 0:15:36.320 --> 0:15:39.400 people struggle with not having a plan. So this applies 0:15:39.440 --> 0:15:42.480 equally well to everything as well as uh this tail 0:15:42.560 --> 0:15:46.680 of strategy. So when you make an investment or a 0:15:46.760 --> 0:15:49.800 trade and no one does this, but you should, you 0:15:49.800 --> 0:15:53.120 should write down or establish the criteria. Why would I 0:15:53.160 --> 0:15:55.760 sell this position? When would I sell this position? Because 0:15:55.760 --> 0:15:58.160 you know what, you can hit pause on this recording, 0:15:58.200 --> 0:16:00.400 go out and look in your garage and see all 0:16:00.440 --> 0:16:02.600 the junk in there. No one you buy all these stuff? 0:16:02.600 --> 0:16:03.800 Is like when am I gonna get rid of it? No? 0:16:03.880 --> 0:16:06.360 You just accumulate and you get an emotional attachment, right, 0:16:06.440 --> 0:16:09.120 the endowment effect. And so you look at this tail 0:16:09.200 --> 0:16:11.600 risk position, say okay, when am I gonna let this go? 0:16:11.760 --> 0:16:13.080 Or when am I gonna add to it? And a 0:16:13.160 --> 0:16:16.600 totally reasonable response would be something like, look, I'm going 0:16:16.640 --> 0:16:19.680 to sell this position. And we have half of Cambria 0:16:19.840 --> 0:16:22.960 are our company's balance sheet in this fund, by the way, 0:16:22.960 --> 0:16:26.200 our cash account half as in Trinity strategy, half as 0:16:26.240 --> 0:16:28.120 in tail risk, and so but we have a set 0:16:28.160 --> 0:16:31.240 up say look, we're gonna sell this as valuations come 0:16:31.280 --> 0:16:35.120 back down to reasonable levels. Okay, so's cape ratio, let's 0:16:35.120 --> 0:16:37.160 call it thirty. Let's say we're gonna sell someone when 0:16:37.160 --> 0:16:43.760 it hits twenty. Hopefully it doesn't go eighteen six, ten five, right, Um, 0:16:43.800 --> 0:16:46.640 But it's happened in the past. And by the way, 0:16:46.640 --> 0:16:49.000 you mentioned inflation in the beginning. The two periods most 0:16:49.040 --> 0:16:52.080 similar to where we are nineteen seventies and particularly the 0:16:52.160 --> 0:16:56.680 nineteen forties. Guess what valuations hit single digit levels, So 0:16:57.200 --> 0:17:00.640 not without not out of the realm of possibility. So 0:17:00.760 --> 0:17:03.160 established the criteria ahead of time. Someone else could say, 0:17:03.160 --> 0:17:05.800 you know what, I'm a trend guy, trend GAO, I'm 0:17:05.800 --> 0:17:08.119 going to invest in have full exposure stocks in an 0:17:08.200 --> 0:17:09.920 up trend, but when it rolls over to a downtrend, 0:17:09.960 --> 0:17:13.000 I'm gonna buy tail risk fund or something similar, but 0:17:13.040 --> 0:17:15.240 I'm gonna exit when it goes back up because most 0:17:15.240 --> 0:17:17.240 people don't have that criteria. How many people who have 0:17:17.280 --> 0:17:20.800 you guys talked to, friends, family, sold in two thousand nine, 0:17:20.880 --> 0:17:24.400 can't take anymore March two thousand nine. But the problem 0:17:24.440 --> 0:17:26.359 is they never got back in right like that, there's 0:17:26.400 --> 0:17:29.240 no the next book, like, just keep buying like that. 0:17:29.440 --> 0:17:32.639 You need to have the criteria ahead of time. Otherwise, 0:17:32.680 --> 0:17:35.560 guess what, We're all emotional and that that usually doesn't 0:17:35.560 --> 0:17:40.679 work out. Um. Okay, so this this fund has the 0:17:40.720 --> 0:17:45.200 bond exposure, so I see, so you're to date. Um, 0:17:45.240 --> 0:17:49.200 I think it's down a four point eight. But that's 0:17:49.240 --> 0:17:52.800 obviously better than stocks and better than bonds. Um, but 0:17:52.880 --> 0:17:55.360 that bond exposure, the bonds went down. Now you said 0:17:55.400 --> 0:18:01.240 at the beginning, obviously hindsight, but typically bonds do provide 0:18:01.280 --> 0:18:04.240 a hedge. They aren't this year because the Fed is 0:18:04.440 --> 0:18:07.600 obviously raising rates rate in their face. What are your 0:18:07.640 --> 0:18:10.879 thoughts on that? Like, you make this product and is 0:18:10.920 --> 0:18:15.040 it frustrating when the bonds aren't like giving you a 0:18:15.040 --> 0:18:19.320 little more of a hedge because the puts are obviously working. Um, 0:18:19.440 --> 0:18:21.520 and have you ever thought about just taking the bond 0:18:21.560 --> 0:18:25.080 side out or moving out of bonds or something like that? 0:18:25.280 --> 0:18:28.639 Given the new you know, the bond issue is that 0:18:28.720 --> 0:18:33.400 the FED is again purposely decreasing their value because they're 0:18:33.440 --> 0:18:37.160 raising rates. We have twelve funds, so something is always 0:18:37.200 --> 0:18:39.879 disappointing me. Like it's it's like having a bunch of children. 0:18:39.960 --> 0:18:41.600 It's like one of you is always going to be 0:18:41.640 --> 0:18:44.520 a disappointment. But the good news is something is usually 0:18:44.520 --> 0:18:50.679 doing well too. So um, a couple of things. So uh, 0:18:50.920 --> 0:18:53.640 it's funny what's going on in the cycle. Because back 0:18:53.680 --> 0:18:58.199 when bond yields were bumping down near zero in the 0:18:58.280 --> 0:19:00.960 US negative in the rest of the world, the question 0:19:01.080 --> 0:19:04.719 wasn't meb why aren't why are you using tenure bonds? 0:19:04.720 --> 0:19:08.320 The question was why aren't you using thirty year bonds 0:19:08.320 --> 0:19:11.040 and zero coupon bonds because those would do much better 0:19:11.160 --> 0:19:13.480 when interest rates are going down. And of course now 0:19:13.520 --> 0:19:17.679 people say, um, why aren't using T bills? Or uh? 0:19:17.720 --> 0:19:19.800 If gold was doing better, people would probably say why 0:19:19.840 --> 0:19:23.320 didn't you include gold in this allocation? And so the 0:19:23.400 --> 0:19:27.600 challenge with designing a product is there's limitless permutations of 0:19:27.640 --> 0:19:29.280 a way to build it. And if you had said 0:19:29.320 --> 0:19:31.160 and if you look at the fail ETF, it actually 0:19:31.240 --> 0:19:36.359 has a diversified bond exposure, including foreign bonds, emerging market 0:19:36.359 --> 0:19:40.640 bonds tips, because it's hedging a different sort of risk 0:19:40.680 --> 0:19:42.879 and it's up on the ear but it's hedging foreign 0:19:42.920 --> 0:19:45.960 stocks with a different bond component. But if you're saying, MEB, 0:19:46.119 --> 0:19:51.200 does this sound reasonable quarter each in tips, tenure t bills, 0:19:51.320 --> 0:19:55.520 and gold as that's that sounds totally reasonable, MEB, would 0:19:55.520 --> 0:19:58.960 you should you do a two x exposure too? And 0:19:58.960 --> 0:20:00.760 by the way, one additional feat or this fund is 0:20:00.800 --> 0:20:03.879 that when it rebounces, it's buying one percent of a 0:20:04.000 --> 0:20:07.440 U M and premium per month. So that has the 0:20:07.480 --> 0:20:11.000 feature that when VIX is up at sixty or something, 0:20:11.880 --> 0:20:15.040 it's not loading up on on puts because you don't 0:20:15.119 --> 0:20:18.240 want to buy it after the tail events happened. But 0:20:18.320 --> 0:20:21.160 when VIX is down at eight or twelve or fifteen, 0:20:21.320 --> 0:20:23.720 as it's been over the past few years, you're loading 0:20:23.800 --> 0:20:25.840 up on a lot more so as a natural mean reversion. 0:20:26.240 --> 0:20:28.720 But but on the collateral component, this applies actually to 0:20:28.760 --> 0:20:30.760 a lot of things applies to managed futures, That applies 0:20:30.760 --> 0:20:37.040 to any strategy using drivatives for exposure. UM, I think 0:20:37.080 --> 0:20:38.760 for me, at the end of the day, it's like, 0:20:38.880 --> 0:20:42.119 what is the balance, what do you want to invest in? 0:20:42.320 --> 0:20:44.480 And for us, like I said, we're I personally invest 0:20:44.480 --> 0:20:47.560 a lot in this fund or firm invest what do 0:20:47.600 --> 0:20:49.960 I think the best exposure is if I could magically 0:20:50.000 --> 0:20:52.199 come up with a I said this on Twitter the 0:20:52.200 --> 0:20:55.280 other day, said, who's got the cojones to be buying 0:20:55.400 --> 0:20:59.200 zero coupon bonds? Here? They're down fifty percent. We're reaching 0:20:59.480 --> 0:21:03.200 near all time levels on bond draw downs right now. 0:21:03.880 --> 0:21:06.159 Now the optist optimist and me would say, well, the 0:21:06.160 --> 0:21:08.119 good news is you now have some income in this 0:21:08.240 --> 0:21:11.639 fun because bonds are much higher yield they've reset. So 0:21:11.680 --> 0:21:13.919 when we have the crisis this fall, I hope not. 0:21:14.080 --> 0:21:15.720 I just want six months of quiet, by the way, 0:21:15.840 --> 0:21:19.399 just nice piece and quiet markets. But if you have 0:21:19.440 --> 0:21:21.640 a crisis bond, the good news is the bond yields 0:21:21.640 --> 0:21:23.240 are much higher, so they have the room for the 0:21:23.280 --> 0:21:26.640 capital gains. So, UM, it's a question that I think 0:21:26.640 --> 0:21:28.680 you could design it ten different ways and I'd probably 0:21:28.680 --> 0:21:31.560 be okay with and this is where we sort of 0:21:31.560 --> 0:21:34.680 settled on as a finale. But you guys want to 0:21:34.680 --> 0:21:36.720 give me a hundred million dollars, we'll talk, we'll do 0:21:36.760 --> 0:21:41.000 We'll do a gold gold bitcoin variant for you. Well, 0:21:41.119 --> 0:21:43.840 we'll see on that. But I kind of want to 0:21:43.880 --> 0:21:48.160 go back to that question, like it's we've we've seen 0:21:48.200 --> 0:21:51.640 a bear market. We've seen so many events that people say, 0:21:51.680 --> 0:21:54.199 this could be a terrorist event, this could be you know, 0:21:54.320 --> 0:21:59.800 inflation that the recession worries. And yet obviously it's over 0:22:00.000 --> 0:22:02.800