Speaker 1: Welcome to Trilliance. I'm Joel Weber and I'm Eric bel Tunis. Eric,
Speaker 1: how much do you know about black swan investing? Well,
Speaker 1: I know what a black swan is. Uh. It's a
Speaker 1: term for some kind of a risk that that you
Speaker 1: didn't really plan for, which they always seemed to be
Speaker 1: ones you didn't plan for. I think if you had
Speaker 1: asked people three or four years ago, uh, you know
Speaker 1: what the big risk was, I don't know, inflation would
Speaker 1: have been one of those on the top five even ten.
Speaker 1: In fact, we had Nick Majulian member and he said
Speaker 1: he actually wrote his whole book, um, just Keep Buying,
Speaker 1: and he got a lot of people saying, yeah, but
Speaker 1: you didn't include anything on inflation. And that's how he
Speaker 1: was saying, I that's how big of a black swan
Speaker 1: kind of risk that was, and that he didn't even
Speaker 1: sort of write about it in that book. And now
Speaker 1: it's all anybody can think about. And so that's how
Speaker 1: I interpret a black swan um event. And I think
Speaker 1: we had it because that inflation. What it did was
Speaker 1: it forced the FED to do a one eight and
Speaker 1: stop being a commendative and now it's antagonistic towards the markets,
Speaker 1: and now the sixty and the forty are both going down.
Speaker 1: So it's a mess, a mess, and and yet black
Speaker 1: swan strategies have been known to pay off. And what's
Speaker 1: interesting was we did this story in the pages of
Speaker 1: Bloomberg Business Week, which as you know I'm the editor of,
Speaker 1: called black Swan Hedge funds are growing business and scary times.
Speaker 1: That really caught my attention. We learned also in the
Speaker 1: process of doing that, there there's et F strategies out
Speaker 1: there that are touching this space, and that made me
Speaker 1: want to do this. Uh. And we're gonna have two guests.
Speaker 1: One is Danitza Sakova, who's a cross asset reporter with
Speaker 1: Bloomberg News. She wrote that article with our colleague Eric
Speaker 1: Shotzker and Meb Faber. Who's Meb Eric Oh. Meb's a
Speaker 1: e t F legend. He's been He's been around the
Speaker 1: business for a long time. He runs Cambria ea TS,
Speaker 1: which have a couple of billion in assets. Meb is
Speaker 1: Uh wrote one of a famous paper that a lot
Speaker 1: of people in quantitative people really look a look to.
Speaker 1: Is one of the best thinkers in the et F space.
Speaker 1: But he also has products, and one of his products
Speaker 1: it's called tail for tail risk, and that's why he
Speaker 1: was sort of including the article and in he's here
Speaker 1: today this time on Trillians black Swan investing. Danitza meb
Speaker 1: Welcome to trillions. Thanks for having great to be here, y'all. Okay, Danitza,
Speaker 1: can you tell us about your article? What did you
Speaker 1: learn in the process of of of doing this and
Speaker 1: what's new? Yeah, we learned a couple of things. So
Speaker 1: from institutional to small investors, there seems to be a
Speaker 1: big interest in those products. Uh, when we define those products,
Speaker 1: we have to go to the basic idea of this.
Speaker 1: So the very basic purity R risk or black Swan
Speaker 1: insurance is buying deep out of the money puts and
Speaker 1: protecting against the huge laws like thirty like something we
Speaker 1: saw uh during COVID, and then we're getting a huge payoff,
Speaker 1: which depending on what you've read, depending on the hedge
Speaker 1: fund or or the et F, where you're gonna see
Speaker 1: a huge return. But what we saw during the process
Speaker 1: is the biggest issue with those strategies is that they
Speaker 1: have negative carry, so for a very long time you
Speaker 1: may be in for big losses. This could be for
Speaker 1: a couple of years, maybe even a decade, but then
Speaker 1: eventually you promise the big payoff that is hopefully bigger
Speaker 1: than the losses. But what we're seeing is people are
Speaker 1: trying to diversify their moving into different assets. Uh, they're
Speaker 1: targeting a small market crash. So if it's not like
Speaker 1: thirty percent, say, you can be hedging against to any
Speaker 1: percent and all this is um in the purpose of
Speaker 1: making it cheaper and more, I suppose, But then it's
Speaker 1: kind of moving away from this huge three or four
Speaker 1: digit pay out um that is promised. But these are
Speaker 1: especially profitable and popular in now as in March they
Speaker 1: had some breaking news headlines about how huge the returns are.
Speaker 1: So it kind of makes sense that this year, with
Speaker 1: so much going on, investors are choosing them as an option.
Speaker 1: So so, in almost like uh greatly simplified terms, for
Speaker 1: a few pennies, I get an insurance policy effectively that
Speaker 1: might pay out should something really bad happen, and I
Speaker 1: find myself with a winning strategy in the event of
Speaker 1: something going completely catastrophic about right, No, those really? I mean, yeah,
Speaker 1: that's that would be that sounds great, right, Yeah, I
Speaker 1: would be great. But I'll correct, you onto a few pennies.
Speaker 1: It's more than a few pennies, okay, But this has
Speaker 1: long been something that institutional investors could do, right, And
Speaker 1: what's interesting in your story, what's stood out to me
Speaker 1: is that there's now this retail ability to do it exactly. Yeah,
Speaker 1: so what's happening there. So for institutional investors it makes
Speaker 1: a lot of sense because like a long term policy
Speaker 1: and then you held it for a very long time,
Speaker 1: and then when the big hit comes in and you
Speaker 1: lose on your equity part of your portfolio, here is
Speaker 1: the great terrorist insurance to protect you. But then for
Speaker 1: e t S it's a bit different because obviously, like
Speaker 1: people don't need two quarters to decide to implement it.
Speaker 1: They can use it in a lot of different ways,
Speaker 1: and there has been a lot of demand, uh for
Speaker 1: that type of protection. The biggest e t F is Cambria,
Speaker 1: and it's grown significantly in the last two years and
Speaker 1: even more so uh this year, even though it's down
Speaker 1: over the years. So there is an interest, maybe a
Speaker 1: strong belief that this potential market crash is coming in,
Speaker 1: but there is an interest even as the price continues
Speaker 1: to fall. Yeah, and um, let me bring meb in
Speaker 1: here because he is the maker of tail. There are
Speaker 1: a couple issuers and a couple of products that are
Speaker 1: people have been using this year to hedge. There's some
Speaker 1: stuff in the alternative space that's up doing well. People.
Speaker 1: Sometimes we'll use an inverse fund, but MEB and also
Speaker 1: I think simplify and innovator use options, right, and I
Speaker 1: want to just go into that that idea and and
Speaker 1: just let's just break down tail um. Sometimes when I
Speaker 1: think of these hedged e t f s, I think of, okay,
Speaker 1: you take the SMP five hundred and you add in
Speaker 1: put options or the VIX. But then what happened over
Speaker 1: the past decade is a lot of times you would
Speaker 1: give up so much of the upside that they didn't
Speaker 1: get a lot of love. So I guess knowing that
Speaker 1: was the sort of history of these hedge gtfs. But
Speaker 1: now we're in an error where people want some protection. Um,
Speaker 1: you know, how does tail fit into that? So um,
Speaker 1: there's really two questions that comes to this is you know,
Speaker 1: to someone need tail risk and then do they need
Speaker 1: it right now? And those and those are sort of
Speaker 1: two different questions. And we can talk about the ladder
Speaker 1: in a medics. I think it's particularly insightful. But a
Speaker 1: number of years ago, let's call it six years ago.
Speaker 1: You know, Cambria is both an issuer of ETFs we
Speaker 1: have twelve, but also a consumer user of ETFs, and
Speaker 1: so for a lot of our allocation and strategies, we
Speaker 1: want certain exposures. And despite there being tens of thousands
Speaker 1: of funds out there available to purchase, often we look
Speaker 1: around and we just kind of say huh or yuck
Speaker 1: in the case of the inverse category. So we were
Speaker 1: looking for some inverse style funds to use, and the
Speaker 1: challenge with most of the category was that it was
Speaker 1: either a really complicated be really confusing, like it was
Speaker 1: hard to even read the perspectives, or lastly, really expensive.
Speaker 1: You know, many of these were very expensive products make
Speaker 1: you know, kind of two and twenty blush and so um,
Speaker 1: we said, can we come up with something that is
Speaker 1: more palatable? That's common sense I got explained to you know,
Speaker 1: my nieces or nephews or someone, um, just on on
Speaker 1: a basic level. And so we wrote a white paper,
Speaker 1: as we are usually want to do. It was called
Speaker 1: worried about the market. Maybe it's time for the strategy
Speaker 1: in which we outlined the theory behind tail and we said, okay,
Speaker 1: what does well when US stock market pukes? Well, the
Speaker 1: things you would not expect to do well don't historically,
Speaker 1: So foreign stocks don't help. Um, real estate doesn't help.
Speaker 1: Commodities usually don't help. Gold like crazy cousin Eddie like
Speaker 1: shows up. You don't know who you're gonna get. Sometimes
Speaker 1: it helps, sometimes it doesn't. Can't count on it. Bonds
Speaker 1: have often helped, but they've helped more in the latter
Speaker 1: half of the twentieth century, not in the beginning, but
Speaker 1: usually they help, right, so um. And then obviously there's
Speaker 1: things act of strategies like trend following that usually does
Speaker 1: a great job, but you can't say guaranteed in our
Speaker 1: world almost guaranteed. The one thing that really is almost
Speaker 1: guaranteed to do well when stocks have a really terrible
Speaker 1: outcome is buying puts. Of course, what's the problem with
Speaker 1: buying puts that was mentioned earlier. They're expensive, right, it's
Speaker 1: a big cost. And so we said, how can we
Speaker 1: come up with a strategy that puts A and B
Speaker 1: together and come up with something is palatable. So the
Speaker 1: vast majority of the fund hangs out in tenure government bonds.
Speaker 1: UH so generates some income a little more than it
Speaker 1: was a year or two ago, but historically you know
Speaker 1: that's four or five. You also get a potential capital
Speaker 1: gains when things hit the fan and bonds perform okay
Speaker 1: or great, and then you buy a ladder of puts
Speaker 1: on the stock market and that has the effect we
Speaker 1: believe of uh not costing as much in the good
Speaker 1: times when stocks are going up. That's what you want
Speaker 1: to be. You want to be an owner. Remember, like
Speaker 1: the whole part of do you need tail risk because
Speaker 1: you want to remain mostly invested most of the time,
Speaker 1: but also do a good job hedging when it hits
Speaker 1: the fan. And so has mentioned earlier as a great example,
Speaker 1: because all the inverse funds did great in Q one,
Speaker 1: but then many am ended up down on the year
Speaker 1: like or something and eventually use like nine percent any money,
Speaker 1: and clients hate that. They hate that bleed. So hopefully
Speaker 1: we think and by the way, we have to to
Speaker 1: tail rest funds tail and fail failed doing much better
Speaker 1: this year. It's on it's on the foreign stocks. But
Speaker 1: it's also not surprising our smallest fund those are amazing tickers.
Speaker 1: By the way props on those. You said something there
Speaker 1: I just want to ask about, which is a ladder
Speaker 1: of puts? What what does that mean? As most people know,
Speaker 1: puts kind of fall off a cliff, lose a lot
Speaker 1: of value time decay in the last month or two
Speaker 1: till expiration. Uh So we like to hang out and
Speaker 1: sort of that three to fifteen month time horizon. So
Speaker 1: we're sort of consistently rolling that sort of expiration and
Speaker 1: target maturity for these options we just want and they're
Speaker 1: slightly out of the money. You know, we're targeting when
Speaker 1: things go bad. So if we wake up tomorrow stock
Speaker 1: markets downten, we would expect this fund to be up
Speaker 1: around um. But the hope is if the markets up
Speaker 1: ten percent or is up ten percent over the next year,
Speaker 1: that this fund doesn't lose a ton of money. It's
Speaker 1: more of like an insurance premium you're paying, and so
Speaker 1: we hope it's a little more palatable in the in
Speaker 1: the good times. We had a conversation about this and
Speaker 1: you said a lot of people use it tactically as
Speaker 1: a short term trait, but me diving deep into terrorists,
Speaker 1: like the whole philosophy of it is holding it for
Speaker 1: a very long time and hoping, not hoping, but eventually
Speaker 1: it pays off. How do those two work together? Is
Speaker 1: Tales supposed to be this long term hedge or is
Speaker 1: it at timing the right time to buy it. I'm
Speaker 1: gonna make a comment that is almost like sacrilege from
Speaker 1: a money manager. I'm not speaking my book. Here is
Speaker 1: if you were to ask me, most people ask me,
Speaker 1: do I need a tail risk fund or strategy? The
Speaker 1: answer is probably no. Now most people don't have a
Speaker 1: diversified portfolio. So I'm talking if if your foundation is
Speaker 1: U S stocks and bonds, global stocks and bonds, a
Speaker 1: bunch of real assets, tilt towards value and momentum, and
Speaker 1: even some trend following sprinkled in. You do all those
Speaker 1: things you have written investing plan, low cost, low taxes, boom,
Speaker 1: do you probably need tail risks? Probably not. However, let
Speaker 1: me give you a good example of why right now matters. Um.
Speaker 1: There was an author that wrote a great book recently
Speaker 1: about Jack Bogel, and I can't remember who the author was,
Speaker 1: but it was a fantastic book. I know, I know,
Speaker 1: I know it talked about Bogel, and you know he's
Speaker 1: the goat I love him to death. Um he built
Speaker 1: Vanguard on this buyinghole mentality. But but even you know
Speaker 1: Bogel's disclosed many times and talking about markets, you know,
Speaker 1: um they go easy sometimes and and trying to use
Speaker 1: some common sense and thinking about valuations and expectations. And
Speaker 1: he famously talked in late nineties about how stocks were
Speaker 1: crazy expensive and and trimming and rebouncing or even hey,
Speaker 1: it's not crazy to move from sixty forty to forty sixty,
Speaker 1: for example. Well, right now is another one of those times.
Speaker 1: So U S stocks hit a tenure cape ratio peak
Speaker 1: in ninety nine, December ninety nine of almost forty five.
Speaker 1: You know historically that they're down around eighteen to twenty two,
Speaker 1: low inflationy times around twenty two. We just hit a
Speaker 1: peak recently in this last UM upthrust of forty. You know,
Speaker 1: we're down since then because the markets down. But you
Speaker 1: combine this scenario where U stocks are a expensive and
Speaker 1: B now in a downtrend, and historically that's a terrible
Speaker 1: place to be. Now the problem is for a lot
Speaker 1: of people that had this sixty forty or whatever their
Speaker 1: allocation was. U S stocks are romped for the last
Speaker 1: decade and so that's sixty forty. You may now be seventy, right,
Speaker 1: and they don't want to sell those because of capital
Speaker 1: gains or taxes or other reasons. And so a tail
Speaker 1: is fund. For example, Um, let's say you're up to
Speaker 1: eight D twenty. Well, you can do a bond replacement,
Speaker 1: so you can take out the bonds because this fund
Speaker 1: gives you the bonds back. Um, and then you get
Speaker 1: this overlay of inverse exposure to stocks. If you want
Speaker 1: to balance it out, you can take an outright bears
Speaker 1: view on or non so to to us, there's a
Speaker 1: lot of people that use it as an altar bucket
Speaker 1: or as a bond replacement, and there's some people that
Speaker 1: uses it all the time insurance just as something to
Speaker 1: talk to the clients when it really hits the fan,
Speaker 1: at least something is probably up. So there's all the time,
Speaker 1: and there's right now. Um. But I think that's a
Speaker 1: here in. That's a good example of why you might
Speaker 1: want to use it tactically. Well, how is this most effective?
Speaker 1: Is it sort of a buy and hold when I
Speaker 1: think things might get spicy, or because you know the
Speaker 1: other thing about black swan events and and we wrote
Speaker 1: about this in the article is sort of they're they're
Speaker 1: well known for sharp drops rather than sort of prolong
Speaker 1: fall offs. Right. So, um, if you were to ask,
Speaker 1: if you were to pull investors and say do you
Speaker 1: have a written invest written investment plan, there's about five
Speaker 1: percent to say yes, okay, And so most people are
Speaker 1: flying by the sea of their pants anyway. And so
Speaker 1: this is a problem for everything. It's a problem for
Speaker 1: what happens when inflations at nine percent, What happens if
Speaker 1: gold goes to four thousand or four hundred, what happens
Speaker 1: if bitcoin goes to a million or zero? You know,
Speaker 1: people struggle with not having a plan. So this applies
Speaker 1: equally well to everything as well as uh this tail
Speaker 1: of strategy. So when you make an investment or a
Speaker 1: trade and no one does this, but you should, you
Speaker 1: should write down or establish the criteria. Why would I
Speaker 1: sell this position? When would I sell this position? Because
Speaker 1: you know what, you can hit pause on this recording,
Speaker 1: go out and look in your garage and see all
Speaker 1: the junk in there. No one you buy all these stuff?
Speaker 1: Is like when am I gonna get rid of it? No?
Speaker 1: You just accumulate and you get an emotional attachment, right,
Speaker 1: the endowment effect. And so you look at this tail
Speaker 1: risk position, say okay, when am I gonna let this go?
Speaker 1: Or when am I gonna add to it? And a
Speaker 1: totally reasonable response would be something like, look, I'm going
Speaker 1: to sell this position. And we have half of Cambria
Speaker 1: are our company's balance sheet in this fund, by the way,
Speaker 1: our cash account half as in Trinity strategy, half as
Speaker 1: in tail risk, and so but we have a set
Speaker 1: up say look, we're gonna sell this as valuations come
Speaker 1: back down to reasonable levels. Okay, so's cape ratio, let's
Speaker 1: call it thirty. Let's say we're gonna sell someone when
Speaker 1: it hits twenty. Hopefully it doesn't go eighteen six, ten five, right, Um,
Speaker 1: But it's happened in the past. And by the way,
Speaker 1: you mentioned inflation in the beginning. The two periods most
Speaker 1: similar to where we are nineteen seventies and particularly the
Speaker 1: nineteen forties. Guess what valuations hit single digit levels, So
Speaker 1: not without not out of the realm of possibility. So
Speaker 1: established the criteria ahead of time. Someone else could say,
Speaker 1: you know what, I'm a trend guy, trend GAO, I'm
Speaker 1: going to invest in have full exposure stocks in an
Speaker 1: up trend, but when it rolls over to a downtrend,
Speaker 1: I'm gonna buy tail risk fund or something similar, but
Speaker 1: I'm gonna exit when it goes back up because most
Speaker 1: people don't have that criteria. How many people who have
Speaker 1: you guys talked to, friends, family, sold in two thousand nine,
Speaker 1: can't take anymore March two thousand nine. But the problem
Speaker 1: is they never got back in right like that, there's
Speaker 1: no the next book, like, just keep buying like that.
Speaker 1: You need to have the criteria ahead of time. Otherwise,
Speaker 1: guess what, We're all emotional and that that usually doesn't
Speaker 1: work out. Um. Okay, so this this fund has the
Speaker 1: bond exposure, so I see, so you're to date. Um,
Speaker 1: I think it's down a four point eight. But that's
Speaker 1: obviously better than stocks and better than bonds. Um, but
Speaker 1: that bond exposure, the bonds went down. Now you said
Speaker 1: at the beginning, obviously hindsight, but typically bonds do provide
Speaker 1: a hedge. They aren't this year because the Fed is
Speaker 1: obviously raising rates rate in their face. What are your
Speaker 1: thoughts on that? Like, you make this product and is
Speaker 1: it frustrating when the bonds aren't like giving you a
Speaker 1: little more of a hedge because the puts are obviously working. Um,
Speaker 1: and have you ever thought about just taking the bond
Speaker 1: side out or moving out of bonds or something like that?
Speaker 1: Given the new you know, the bond issue is that
Speaker 1: the FED is again purposely decreasing their value because they're
Speaker 1: raising rates. We have twelve funds, so something is always
Speaker 1: disappointing me. Like it's it's like having a bunch of children.
Speaker 1: It's like one of you is always going to be
Speaker 1: a disappointment. But the good news is something is usually
Speaker 1: doing well too. So um, a couple of things. So uh,
Speaker 1: it's funny what's going on in the cycle. Because back
Speaker 1: when bond yields were bumping down near zero in the
Speaker 1: US negative in the rest of the world, the question
Speaker 1: wasn't meb why aren't why are you using tenure bonds?
Speaker 1: The question was why aren't you using thirty year bonds
Speaker 1: and zero coupon bonds because those would do much better
Speaker 1: when interest rates are going down. And of course now
Speaker 1: people say, um, why aren't using T bills? Or uh?
Speaker 1: If gold was doing better, people would probably say why
Speaker 1: didn't you include gold in this allocation? And so the
Speaker 1: challenge with designing a product is there's limitless permutations of
Speaker 1: a way to build it. And if you had said
Speaker 1: and if you look at the fail ETF, it actually
Speaker 1: has a diversified bond exposure, including foreign bonds, emerging market
Speaker 1: bonds tips, because it's hedging a different sort of risk
Speaker 1: and it's up on the ear but it's hedging foreign
Speaker 1: stocks with a different bond component. But if you're saying, MEB,
Speaker 1: does this sound reasonable quarter each in tips, tenure t bills,
Speaker 1: and gold as that's that sounds totally reasonable, MEB, would
Speaker 1: you should you do a two x exposure too? And
Speaker 1: by the way, one additional feat or this fund is
Speaker 1: that when it rebounces, it's buying one percent of a
Speaker 1: U M and premium per month. So that has the
Speaker 1: feature that when VIX is up at sixty or something,
Speaker 1: it's not loading up on on puts because you don't
Speaker 1: want to buy it after the tail events happened. But
Speaker 1: when VIX is down at eight or twelve or fifteen,
Speaker 1: as it's been over the past few years, you're loading
Speaker 1: up on a lot more so as a natural mean reversion.
Speaker 1: But but on the collateral component, this applies actually to
Speaker 1: a lot of things applies to managed futures, That applies
Speaker 1: to any strategy using drivatives for exposure. UM, I think
Speaker 1: for me, at the end of the day, it's like,
Speaker 1: what is the balance, what do you want to invest in?
Speaker 1: And for us, like I said, we're I personally invest
Speaker 1: a lot in this fund or firm invest what do
Speaker 1: I think the best exposure is if I could magically
Speaker 1: come up with a I said this on Twitter the
Speaker 1: other day, said, who's got the cojones to be buying
Speaker 1: zero coupon bonds? Here? They're down fifty percent. We're reaching
Speaker 1: near all time levels on bond draw downs right now.
Speaker 1: Now the optist optimist and me would say, well, the
Speaker 1: good news is you now have some income in this
Speaker 1: fun because bonds are much higher yield they've reset. So
Speaker 1: when we have the crisis this fall, I hope not.
Speaker 1: I just want six months of quiet, by the way,
Speaker 1: just nice piece and quiet markets. But if you have
Speaker 1: a crisis bond, the good news is the bond yields
Speaker 1: are much higher, so they have the room for the
Speaker 1: capital gains. So, UM, it's a question that I think
Speaker 1: you could design it ten different ways and I'd probably
Speaker 1: be okay with and this is where we sort of
Speaker 1: settled on as a finale. But you guys want to
Speaker 1: give me a hundred million dollars, we'll talk, we'll do
Speaker 1: We'll do a gold gold bitcoin variant for you. Well,
Speaker 1: we'll see on that. But I kind of want to
Speaker 1: go back to that question, like it's we've we've seen
Speaker 1: a bear market. We've seen so many events that people say,
Speaker 1: this could be a terrorist event, this could be you know,
Speaker 1: inflation that the recession worries. And yet obviously it's over
Speaker 1: outperforming this and p but the performance is still negative.
Speaker 1: And there are there are some strategies not to name names,
Speaker 1: but like c t as for example, that are still
Speaker 1: doing quite well. There are a lot of other defensis
Speaker 1: strategies that are doing quite well. Do you think that
Speaker 1: this performance is making the case for tertiariance stale risk
Speaker 1: insurance weaker because this is not much twenty, We're not
Speaker 1: seeing any big games. Yeah. I think I'm gonna make
Speaker 1: two comments. One is um I think our firm has
Speaker 1: the highest percentage of ETF that are up on the
Speaker 1: year of anyone. So there's a handful of funds that
Speaker 1: are doing well. But the good news about any t
Speaker 1: F you can always short it too. And I love
Speaker 1: to say this to like the people who come you know,
Speaker 1: are talking to me me on Twitter or something. I say, Well,
Speaker 1: the good news is if you don't like this fun
Speaker 1: free alpha baby, go short it, and then you get
Speaker 1: the inverse exposure you get instead of buying puts, you
Speaker 1: get selling options and then you get inverse bonds too,
Speaker 1: And so it's a tradable um. But but to be
Speaker 1: serious for a second, you know, um, the vast majority
Speaker 1: of what people consider to be tail risks or even
Speaker 1: disappointments and markets are neither. Um. It's it's I would
Speaker 1: I would say it's like not having a full appreciation
Speaker 1: of the arc of history and so looking at what's
Speaker 1: happened the past. Because normal market returns are extreme. You know,
Speaker 1: almost never does the stock market return ten percent a year.
Speaker 1: It's up twenty, flat, down, up for up fifty. You know,
Speaker 1: it's all over the place. And this applies to days, months,
Speaker 1: years as well. Um, But it also applies to correlations.
Speaker 1: You know, there's so many people that assume things like
Speaker 1: stock bond correlation and bonds will always do well when
Speaker 1: stocks don't, and that's not the case. It's particularly not
Speaker 1: the case when bond yields were at zero, right, And
Speaker 1: so I think this all comes down to an expectations
Speaker 1: and alignment. The beginning of last year, you at you
Speaker 1: poll investors what they expect stocks to do, and most
Speaker 1: of the most fifteen to sev and that has no
Speaker 1: foundation in reality whatsoever. So I don't expect bonds to
Speaker 1: always help. In fact, as you see this year, they somewhat, uh,
Speaker 1: they somewhat have hurt. Now do you want to know
Speaker 1: the saddest thing. I'm gonna tell you the saddest thing.
Speaker 1: We have a suite of tail risk funds, a few
Speaker 1: that are not filed, and now one that probably will
Speaker 1: never get filed. But the third in this series was Bail,
Speaker 1: which was bond tail risk, which was going to be
Speaker 1: buying a ton of puts on the thirty year bond.
Speaker 1: And so as interest rates have screamed up, this fund
Speaker 1: would probably be like a ten billion dollar fund at
Speaker 1: this point. So that's so sad. But Bail never made
Speaker 1: it the light, um, but talk about doing well in
Speaker 1: this environment, that would have been the king. Um. So uh,
Speaker 1: the long winded answered your question. You know it fits
Speaker 1: my expectations, Like this is fully within the realm um
Speaker 1: what I wish it would be up thirty this year. Sure,
Speaker 1: but um I think uh sadly Morning Star has done
Speaker 1: away with the ratings in this category. But um tail,
Speaker 1: I'm not you guys have to check me on this.
Speaker 1: It used to be the cheapest fund in the entire category.
Speaker 1: I think it's still in the top two or three. Um.
Speaker 1: But and this is like not a badge of honor
Speaker 1: because um it it for a long time was one
Speaker 1: of the very best performers. But that is simply because
Speaker 1: it loses less. It's not because it particularly makes any money.
Speaker 1: It's because it loses less than all the all the
Speaker 1: other funds. Um. And at the beginning of the conversation,
Speaker 1: you mentioned in for CTFs, and you do speak very
Speaker 1: fondly of them, but I want to get them back
Speaker 1: in the conversation, how do you think, um, this product
Speaker 1: is better than two times leverage bed against. I don't
Speaker 1: know what the people why? Why? Why this product is
Speaker 1: so much better we we have I think currently a
Speaker 1: little over investors. And you chat with investors of any
Speaker 1: stripe and almost always you know what they hate is
Speaker 1: they hate positions that consistently lose money and and tailors
Speaker 1: in that category, which is a good thing, right for
Speaker 1: most insurance vehicles. Your house didn't burn down, are you
Speaker 1: complaining about the insurance on your house now? But they
Speaker 1: don't like to see the red every month. Now the
Speaker 1: question becomes is is that read half a percent or
Speaker 1: is it five? And the problem with a lot of
Speaker 1: the inverse funds you get these volatility grimlin's, particularly when
Speaker 1: they're leveraged, and you look pull up an equity curve
Speaker 1: and after a few years they're down, and that's really
Speaker 1: hard to keep reupping. You talk to a client say, hey,
Speaker 1: good news is portfolio is doing all right, but we're
Speaker 1: gonna double down in Martin Gale and buy more of
Speaker 1: this losing fund. I think I think it's really hard
Speaker 1: from a behavioral standpoint, And again going back to the
Speaker 1: completing the circle in this entire discussion, I don't think
Speaker 1: most investors need tail risks, but one of the biggest
Speaker 1: benefits is the behavioral side. You know, most advisors that
Speaker 1: have been around long enough they look at a client's
Speaker 1: portfolio and say, look, I'm not optimizing on that sharp
Speaker 1: ratio to the second decimal point. I'm not optimizing on
Speaker 1: this perfect fit. I just want them to survive and
Speaker 1: not do something really dumb, like I want to get
Speaker 1: them to the finish line. So if there's this fund
Speaker 1: that may not be optimal, but it helps them get
Speaker 1: there and survives sort of the path, UM, perhaps it's
Speaker 1: worth an allocation. And so you know, I think you
Speaker 1: mentioned C T A S by the way, one of
Speaker 1: my favorites. We have a higher allocation to trend than
Speaker 1: I think any investor that I know of professional in
Speaker 1: this country which are default is UM. So that is
Speaker 1: also having a great year, but was been a period
Speaker 1: of fallow for a very long time before this. You
Speaker 1: talk about struggling through tail risk, my goodness, trying to
Speaker 1: be a trend follower. I think it's even harder. I
Speaker 1: want to shift to one of your other products. It's
Speaker 1: really the fun that I know you for and I
Speaker 1: want you to go into this concept because I like it. UM.
Speaker 1: It just makes sense, like it's one of those things
Speaker 1: you read about and you're like, yeah, I get it. UM.
Speaker 1: And this is actually your best inflowing fund this year,
Speaker 1: even more than tail, which is s y l D,
Speaker 1: which is sort of the it's your flagship fund, right,
Speaker 1: your shareholder yield. I mean, if you had a flagship,
Speaker 1: this would be it. I'm guessing it just explained what
Speaker 1: shareholder yield is. And I do notice this thing is
Speaker 1: down seven point six percent, which is way better than
Speaker 1: the market. And what's what's going on in there that's
Speaker 1: helped that's helping it. Sure, So if you were to
Speaker 1: try and to find something that's diametrically opposed to tail risk, uh,
Speaker 1: it's long U S stocks. And if you go to
Speaker 1: first principles, which was sort of the phrase of and say, hey,
Speaker 1: I want to build an investment portfolio, what are the
Speaker 1: criteria should use help out? We want to invest in
Speaker 1: CEOs that treat the shareholders fairly and with respect. They're
Speaker 1: not paying themselves some egregious you know, compensation and options. Um,
Speaker 1: they're returning cash to shareholders. They the stock trades at
Speaker 1: a discount to intrinsic value. They're not um paying out
Speaker 1: these payments through massive leverage and taking on a ton
Speaker 1: of debt. All these metrics. It's it's basically like a
Speaker 1: Berkshire buffet one oh one style strategy. And we wrote
Speaker 1: a book on this topic. It's free to download online
Speaker 1: called Shareholder Yield and the theory goes back a hundred years.
Speaker 1: You know you can you can simulate this concept, which
Speaker 1: is at its core combining the philosophy of dividends and
Speaker 1: at stock buy backs. So really starting the eighties but
Speaker 1: amping up and increasing the nineties, companies started buying back
Speaker 1: a lot more stock in any given year. Over the
Speaker 1: past twenty companies actually buy back more stock than they
Speaker 1: patent dividends. Now, this is a rabbit hole of disinformation
Speaker 1: and investors really struggle with this topic. UM, but buy
Speaker 1: backs at their core when a stocks trading and intrinsic
Speaker 1: value are the exact same thing as dividends, and people
Speaker 1: lose their mind about this, their brains start to misfire.
Speaker 1: I don't know why, UM, and I think buy backs
Speaker 1: just simply have bad marketing. You could call them cash
Speaker 1: or tax efficient dividends, and people may change their mind
Speaker 1: about it. So looking holistically, because you have companies that
Speaker 1: say we're not going to pay any dividends, but we're
Speaker 1: gonna do eight percent per year buy back program. Now,
Speaker 1: it's important to use net buy backs because uh, a
Speaker 1: lot of companies do share issuance. We mentioned options for executives. Uh,
Speaker 1: so you have to be careful on the total shares
Speaker 1: outstanding UM. Some companies will do no dividends, eight percent
Speaker 1: buy backs. Some companies will do five percent dividends, no
Speaker 1: buy backs. Companies like Apple, which is a great case
Speaker 1: study because we owned Apple from this e t f
Speaker 1: S launch in the year all the way to the
Speaker 1: beginning of you know what is that eight plus years
Speaker 1: owning this company UM. But they're a great case study
Speaker 1: because they do both. And so usually if you say
Speaker 1: have a three percent of it in yield three percent
Speaker 1: buy back yield, it may not show up on either screen.
Speaker 1: So doing buy backs alone is just as crazy as
Speaker 1: just doing dividends two sides of the same coin. So
Speaker 1: what you're looking for is is high payout and then
Speaker 1: of course you want the stocks to be cheap. Buffet says,
Speaker 1: there's no better use of cash when a stock is
Speaker 1: trading low and strinsic value than buying back their own chairs,
Speaker 1: and you don't want them to do with a ton
Speaker 1: of debt. So S y l D is the U
Speaker 1: S version of that. We actually have a foreign and
Speaker 1: emerging F y l D and E y l D.
Speaker 1: There's a slight cultural difference between the US and abroad
Speaker 1: based on how they appro its buy box. It's changing.
Speaker 1: Traditionally foreign markets are more dividend focused, but you can
Speaker 1: see this in Japan and other countries as well. That's
Speaker 1: starting to move as well. But this philosophy, I think,
Speaker 1: is one that if you find me any dividend strategy modeling, historically,
Speaker 1: it beats all of them, whether it's high yield or
Speaker 1: whether it's dividend growth. Because if I think this focus
Speaker 1: on treating shareholders fairly, this makes a lot of sense
Speaker 1: to me. I think anybody listening probably like, yeah, you know,
Speaker 1: this is pretty logical. Um, the performance I didn't realize this.
Speaker 1: I've just pulled this up and I was like, my
Speaker 1: guess is it's probably lagging the S and P since inception,
Speaker 1: so it's almost ten years, because well you go for
Speaker 1: companies that have a lower pe and that trade was
Speaker 1: really rough for a decade. Yes, it's working now, but
Speaker 1: I thought, but it's still outperforming. It looks like this
Speaker 1: recent the the recent year or in a half has
Speaker 1: elevated it past the SMP for lifetime, not a lot,
Speaker 1: only six percentage points. But um, that's not easy to do.
Speaker 1: Almost nothing beats the SMP. So um when growth was crazy.
Speaker 1: This thing got burned a little bit, but then when
Speaker 1: it went out of vogue, you made up for it.
Speaker 1: Me um, let me give you a fun listeners, a
Speaker 1: fun homework project. You can go and type any symbol
Speaker 1: and deer Bloomberg terminal in the Morning Star for a
Speaker 1: lot of the ETFs out there and get an X
Speaker 1: ray of the valuation metrics of these underlying funds. And
Speaker 1: often investors are shocked and surprised when they type in
Speaker 1: a big dived in e t F for other funds
Speaker 1: um spy for an example, and how expensive the underlying
Speaker 1: metrics of their holdings are and have been. They're less
Speaker 1: expensive now, but but the beginning of year even more expensive.
Speaker 1: And part of that is what you're talking about. This
Speaker 1: really peaked the craziness in February March of last year.
Speaker 1: But value has struggled, and you've seen this out performance
Speaker 1: of value. The inflection I think really started in but
Speaker 1: but gained force over the past year. But it hasn't
Speaker 1: even begun to have its moment yet. If you look
Speaker 1: at most you talked to most of the quants, most
Speaker 1: of the people in my world, and you look at
Speaker 1: a lot of the value spreads both within the US
Speaker 1: but also international. Uh, a lot of foreign developed and
Speaker 1: particularly emerging markets. You know, some of these funds out
Speaker 1: there on just the divn in yield a loan or
Speaker 1: yielding north of six seven. The valuations are often screaming
Speaker 1: cheap spread versus the expensive stuff. So to despite the
Speaker 1: performance of value as a strategy, I think it's got
Speaker 1: its best days ahead of it. And you remember, you know,
Speaker 1: back in two thousand, two thousand three, small cap value
Speaker 1: outperformed the SMP by a hundred and fifty percentage points
Speaker 1: over three years, just absolutely monster out performance. And so, uh,
Speaker 1: you haven't got me started on broad market valuations because
Speaker 1: we need other hour for that. But that's my least
Speaker 1: popular probably topic is. So let's say I'm a person
Speaker 1: and I'm looking through here, and I'm like, I get
Speaker 1: it that the numbers are good, the yield is pretty good,
Speaker 1: returns obviously it's beating the SMP lifetime. But then I
Speaker 1: look at some of the stocks and I'm like Dillard's, um,
Speaker 1: you know, uh, looks like there's some oil companies in here. Um.
Speaker 1: And then you've got like Whirlpool, um, Macy's. You could
Speaker 1: see someone going at you know, are these really good stocks?
Speaker 1: I would I would frame it even worse. I would
Speaker 1: say they're often nausea inducing, you know. Um, that's the
Speaker 1: beauty of being a quant is you pick up that
Speaker 1: nausea premium by saying I don't even know what I
Speaker 1: own looking at the names. Uh, and then I never
Speaker 1: would buy these? Are you crazy on my own? But um,
Speaker 1: but it's interesting, Like you mentioned, there's a lot of
Speaker 1: materials and energy, which in a higher inflationary world is
Speaker 1: pretty beneficial. But it's but it's curious because if you
Speaker 1: actually look at the foreign and tech is a small
Speaker 1: allocation in this fund, but if you look at the
Speaker 1: foreign and particularly emerging market versions of this, you end
Speaker 1: up with a different, different sectoral composition. Now, materials and
Speaker 1: energy are still high because they've we see the headlines,
Speaker 1: they're printing money in this environment, but you see tech
Speaker 1: being a big allocation and emerging markets, which is not
Speaker 1: in the US. So it's curious to see how this
Speaker 1: changes over time. Their cap agnostics, so they could be
Speaker 1: big cap, they could be small cap. Um and and
Speaker 1: the sectors is allowed to sort of wax and wane.
Speaker 1: But it's always curious to me because I mean think
Speaker 1: back two years ago, no one in the world want
Speaker 1: an energy. Energy as a sector went from a peak
Speaker 1: of thirty in the SMP five to a bottom I
Speaker 1: think of two at the bottom, and now it's up
Speaker 1: a little bit, but still nowhere near historical averages. And
Speaker 1: you look at tech over time has is oscillated as well.
Speaker 1: So what becomes a favor what seems uh totally nausea inducing.
Speaker 1: But the nausea inducing the good news is also it's
Speaker 1: that for a reason, it's super cheap and generating lots
Speaker 1: and lots and and bags of cash flow. So uh yeah,
Speaker 1: just so to do me a favor, go shopping at
Speaker 1: dealers this weekend and buy some pleaded Khakis and you'll
Speaker 1: help our your help our share price pleaded for sure.
Speaker 1: I think they're coming back, by the way, they are
Speaker 1: not coming years. They're not coming back. Somehow we've managed
Speaker 1: to go from black swan investing to pleaded khakis. Um,
Speaker 1: but I want to ask, um and fascinating stuff all
Speaker 1: in between. But but no, but I want to ask,
Speaker 1: is there anything else that investors aren't talking enough of
Speaker 1: about right now that that you think they should be
Speaker 1: thinking about more? I have a threat on Twitter. That's
Speaker 1: called something like what do I believe that the vast
Speaker 1: majority of my professional peers meaning don't believe. And that's it.
Speaker 1: That's its seventeen items and counting um. This again goes
Speaker 1: back to the author we're talking about earlier. You know,
Speaker 1: investors in general don't um don't focus on fees and
Speaker 1: expenses enough. So all twelve of our funds are cheaper
Speaker 1: than the category average, and a couple of cheapest in
Speaker 1: the entire category. That's usually because Vanguard is not in
Speaker 1: the category by the way, but um, but but still
Speaker 1: a nice badge of honor. I think fees and expenses
Speaker 1: really matter. But but what what investors the big mistakes
Speaker 1: they're making right now? Almost always US investors put way
Speaker 1: too much in their home market, so U s stocks
Speaker 1: and bonds. And that's fine normally, and it's fine over
Speaker 1: long time horizons twenty years plus. It's not fine right now.
Speaker 1: And it's not fine right now. You're seeing this is
Speaker 1: one of the worst starts ever for sixty And we
Speaker 1: did a pull on Twitter. We said at the time
Speaker 1: was down or something. I said, what do you think
Speaker 1: the biggest draw down in sixty was? Historically? And most
Speaker 1: people assume it was like, it's over fifty, right, And
Speaker 1: so investors really struggle with this concept of how bad
Speaker 1: can it get? And so what do you do again?
Speaker 1: They're not diversified enough, they don't own enough foreign stocks,
Speaker 1: they don't own enough emerging market stocks. Almost no one
Speaker 1: with the accept exception of Canadians and Australians own any
Speaker 1: natural resources. So commodity real assets like real estate, reads, tips,
Speaker 1: that should be a big percentage of the portfolio. And
Speaker 1: then as you go down this sort of investing pyramid
Speaker 1: of what matters. You know, we also think valuations always matter. Now,
Speaker 1: the good news is most of the rest of the
Speaker 1: world is totally reasonable to cheap to screaming cheap. It's
Speaker 1: just not the US. And lastly, we love trend following,
Speaker 1: but that's the that's the topic for a whole another show. Okay,
Speaker 1: last question, favorite e g F ticker other than your own.
Speaker 1: You know, I actually tweeted this the other day. I
Speaker 1: have a fondness for certain tickers that have hit the
Speaker 1: ticker graveyard, and um, there was a couple where I said, well,
Speaker 1: I wish these still existed. Should I just relaunched them
Speaker 1: with the exact same ticker is that bad form? And
Speaker 1: as my buddy yawn over at Van Neck, they closed
Speaker 1: the coal et F and I said k O L
Speaker 1: And I was like, should we just relaunched this as Cambria?
Speaker 1: Cole now is there? That's gonna email John and be like, yo, man,
Speaker 1: what are you doing? Because here's what's missed, you know,
Speaker 1: the coal. We talked about this earlier with tail, but
Speaker 1: in E t F, regardless of the longside ownership, it
Speaker 1: gives you the opportunity to x that out. Like if
Speaker 1: you got a portfolio and you want to get rid
Speaker 1: of the coal companies, you can short it. There's a
Speaker 1: lot of been a lot of discussion and Cliff and
Speaker 1: others about E s G and thinking about how to
Speaker 1: net out you know, long versus short, and so ko
Speaker 1: L was up there. Um barn would be another one.
Speaker 1: I think that was global X. That was a great
Speaker 1: ticker that also in the grave hard F. That's deep Cole.
Speaker 1: By the way, Cole is one of those classic stories
Speaker 1: of whe the E t F tries to hang around
Speaker 1: for it hanks out for eight nine years and it
Speaker 1: just throws in the towel like six months before its
Speaker 1: moment of Yeah, it's to see it. Yeah, alright, Danitza
Speaker 1: MeV thanks so much for joining us on Trillions Blast.
Speaker 1: Thanks guys, thanks for having us, Thanks for listening to
Speaker 1: Trillions until next time. You can find us on the
Speaker 1: Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify, and wherever
Speaker 1: else you like to listen. We'd love to hear from you.
Speaker 1: We're on Twitter, I'm at Joel Webber Show. He's at
Speaker 1: Eric Faltriness. This episode of Trillions was produced by Stacey
Speaker 1: Wong Bye Ter