Speaker 1: This is Masters in Business with Barry Riddholts on Bloomberg Radio.
Speaker 1: I'm Barry ridh Hoults. You're listening to Masters in Business
Speaker 1: on Bloomberg Radio. My guest today me Beine favor of
Speaker 1: Cumbria Investments. I know MEB for a long time. He
Speaker 1: does a lot of really really interesting things. And if
Speaker 1: you're a quant, if you're a little bit lanky, you
Speaker 1: probably know MEB for a very famous white paper he
Speaker 1: wrote back in oh five oh six called a Tactical
Speaker 1: Guide to Asset Allocation. And what's within this fairly simple
Speaker 1: but very powerful theme is the idea of let's look
Speaker 1: at allocating to various asset classes on a strictly tactical
Speaker 1: basis with a quantitative methodology. That is simply a ten
Speaker 1: month moving average when when any asset class breaks its
Speaker 1: ten month moving average, which looks similar to a two
Speaker 1: day moving average, but as a little little more sophisticated,
Speaker 1: it doesn't have as many signals, not as many whipsaws.
Speaker 1: You only get a signal once a month because it's
Speaker 1: a monthly not a daily moving average. That's a sign
Speaker 1: that markets are are in a significant down trend and
Speaker 1: usually suggest that there's more downside. That paper coming out
Speaker 1: as it did right before the financial crisis is one
Speaker 1: of the most downloaded papers um of the past decade
Speaker 1: in finance, and really uh turned a lot of people's
Speaker 1: heads about how simple a a tactical portfolio could be
Speaker 1: and yet still reduced volatility, reduced draw downs, and be
Speaker 1: very competitive with a benchmark. But what MEB does these
Speaker 1: days is essentially create new ideas for e t f
Speaker 1: s and he has had a number of these that
Speaker 1: have been very, very successful. The two we really spend
Speaker 1: a lot of show today talking about. The one is
Speaker 1: called shareholder value, and it's what happens if we sift
Speaker 1: through the universe of of domestic or global equities and
Speaker 1: evaluate them on the combination of dividend yields and stock
Speaker 1: share buy back. As it turns out, when you screen
Speaker 1: for those two factors, you eliminate a lot of junk.
Speaker 1: When you're issuing a dividends, you can't phony up your accounting.
Speaker 1: We've seen a lot of questionable accounting over the past
Speaker 1: couple of years and decades. Hey, that dividend check has
Speaker 1: to go out every quarter. There's no messing around with that.
Speaker 1: So dividend yield turns out to be a fairly good
Speaker 1: metric if you're looking for quality of earnings. There's no
Speaker 1: it's very hard to phony up dividend yield because you
Speaker 1: have to issue a check each quarter. And then the
Speaker 1: same thing with share by back UH stock share by
Speaker 1: back means that you're actually putting money to work buying
Speaker 1: shares back, reducing the float, and that actually makes your
Speaker 1: earnings on a per share basis look better. When you
Speaker 1: do both of those things, buy back shares and increase
Speaker 1: your divd ends, that tends to create a stock that
Speaker 1: does better than average. And so the idea behind this
Speaker 1: divon end slash share buy back e t F has
Speaker 1: been here's a way to get a form of quantitative
Speaker 1: management with a fairly low course ratio and not especially active.
Speaker 1: It gets rebalanced quarterly. I know there is some activity
Speaker 1: in it. I wouldn't call this a passive index, but
Speaker 1: it's done fairly well. It's attracted a decent amount of
Speaker 1: money in a fairly short period of time. UH. That
Speaker 1: was the e t F that MEB put out a
Speaker 1: couple of years ago. The most recent one he put out.
Speaker 1: UM is this global value asset allocation and what makes
Speaker 1: it fascinating is there is essentially zero fee associated with it.
Speaker 1: There's no internal expense ratio where almost a zero internal
Speaker 1: expense ratio, and there's no almost no close to buy it.
Speaker 1: That's very unusual in the world of ETFs. But the
Speaker 1: way MEB describes it, we're looking at a universe where
Speaker 1: costs are compress and there is a pernicious effect of
Speaker 1: costs over the long haul, and so that's why this
Speaker 1: is developed. I know MEB for a good couple of years.
Speaker 1: I find him to be as far as quants go,
Speaker 1: and he describes himself as a quant light, but I
Speaker 1: don't know if that's really accurate. As far as kuantsco,
Speaker 1: he's very articulate. He speaks English well, um live, he's
Speaker 1: a surfer dutey lives out in in California. And what
Speaker 1: I mean by speaks English well, speaks English good is
Speaker 1: that very often you get the mathematically minded people um
Speaker 1: who are very intelligent, very erudite, but they lack an
Speaker 1: ability to communicate on a simple basis with lay people
Speaker 1: who may not have PhDs in mathematics or economics, and
Speaker 1: and so you'll find his approach is very straightforward, fairly simple,
Speaker 1: completely rational, completely evidence based. I think if you have
Speaker 1: an interest in investing or the quantitative approach to to finance,
Speaker 1: you'll find this to be a fascinating conversation. Without any
Speaker 1: further ado, here is my interview with me Mand Fabor.
Speaker 1: This is Masters in Business with Barry Ridholds on Bloomberg Radio.
Speaker 1: My guest today is Meb Faber. He runs Cambria Investments.
Speaker 1: He's the chief investment officer and founder. He's also the
Speaker 1: author of a number of books, Shareholder Yield, The Ivy Portfolio,
Speaker 1: Global Value. Meb, Welcome to Masters in Business. Great to
Speaker 1: be here. Thanks so Meb and I know each other
Speaker 1: for a good couple of years. Um, I've been a
Speaker 1: fan of your research and writing for quite a while.
Speaker 1: A little background on who you are. You're live in
Speaker 1: Manhattan Beach in California, a little bit of an aspiring
Speaker 1: surfer dude. UM graduated from University of Virginia, double major
Speaker 1: engineering and biology. You're not the first double major we've
Speaker 1: had with some science and either mathematics or computer science
Speaker 1: or engineering. It's amongst the quants that seems to be
Speaker 1: a fairly popular combination. You know, it gives you the
Speaker 1: analytical background, right, or at least at least that's what
Speaker 1: approach to how do I make sense of all this data?
Speaker 1: How do I organize it? And what does it what
Speaker 1: does it mean going forward? You have hold both the
Speaker 1: Chartered Market Technician designation and the Chartered Alternative Investment Analysts.
Speaker 1: That's something that I don't see a lot of these days.
Speaker 1: I took him in the early days when the tests
Speaker 1: for a lot easier, So I don't know if I
Speaker 1: could pass them today, but both both good experiences. I
Speaker 1: say that about the bar exam. Back when I took it,
Speaker 1: it was, you know, a couple of drinks and and
Speaker 1: that was it. Now it's a real test. So you
Speaker 1: be let's talk a little bit about your background. What
Speaker 1: did you do before you started working on the street.
Speaker 1: So I was an engineer, you know, but by trade
Speaker 1: and as an undergrad, and it was really smitten with biotech.
Speaker 1: This is in the late nineties, so a lot of
Speaker 1: the sequencing of the genome was going on really fun time, right,
Speaker 1: and so I had take I was going to take
Speaker 1: a year off after college, so I've done a bunch
Speaker 1: of grad work as an undergrad, worked really hard and said,
Speaker 1: you know, what, I'm gonna take a year off make
Speaker 1: some money before I go back and back to grad school.
Speaker 1: And because it could be in the life sciences five six,
Speaker 1: who knows how many year process, right, So it took
Speaker 1: a year off, worked as a biotech analyst for a
Speaker 1: mutual fund that was called the Genomics Fund. Yeah, so
Speaker 1: basically your timing was fantastic. You started right in two thousands,
Speaker 1: and so this was what was so exciting. Look, the
Speaker 1: Internet bubble is peeking and popping, the biotech bubble, same thing.
Speaker 1: But I was working in d C and you had
Speaker 1: a lot of the n I H A lot of
Speaker 1: the stuff going on was right there, National Institute of Health.
Speaker 1: I was taking classes at Hopkins and it was just
Speaker 1: a really fun time. And so after that year and
Speaker 1: near the end of two thousand, stocks it's started creating, right,
Speaker 1: especially the biotech peaked in March of that year, and
Speaker 1: we're down more about half. Nasdaq was cut in half
Speaker 1: by the end of that year, more or less. And
Speaker 1: so I was fascinated about the investment side. I mean,
Speaker 1: the life science and size I love. But I said,
Speaker 1: you know what, I'm not quite ready to go back
Speaker 1: to grad school. I'm more interested in the investing world.
Speaker 1: I was always terrible in the lab anyway I'd come in,
Speaker 1: spill virus is everywhere, like just it was awful at it.
Speaker 1: So I said, you know what I'm gonna I'm gonna
Speaker 1: give this investing world a little more of a chance.
Speaker 1: And then just slowly kept gravitating away from the biotech
Speaker 1: and more towards the quant side of the world. And
Speaker 1: pretty soon, you know, my hobby became the career and
Speaker 1: vice versa. Not not a totally uncommon story. So as
Speaker 1: you're going through this process of morphing from a biotech
Speaker 1: and bioscience analysts to really a quant who your early influences,
Speaker 1: who affected your thinking about that space? You know, a
Speaker 1: lot of this was self taught in the sense that
Speaker 1: I went out and read everything I could possibly find.
Speaker 1: So what books really resonated with, what authors? You know,
Speaker 1: who stayed with you, Because look, everybody in this business
Speaker 1: has read, or at least people who are making an
Speaker 1: effort have read hundreds of books. But everybody has a
Speaker 1: short these dozen on my favorites. So there's the classics,
Speaker 1: right that, there's a reason there's classics. Reminiscence of stock operator, right,
Speaker 1: one of the best um, extraordinary popular delusions and madness
Speaker 1: of crowds. And so one of the most important things
Speaker 1: is trying to get a history of investing, so not
Speaker 1: just what's happened here in the last ten years, but
Speaker 1: what's happened the last hundred what's happened the last few
Speaker 1: hundred years elsewhere in the world, to really understand what's
Speaker 1: what's going on. My all time favorite investing book is
Speaker 1: Trying for the Optimists. You know, it's a big coffee
Speaker 1: table book, hundred dollars, but it's hundre and ten dollars
Speaker 1: at Amazon. It's actually sitting in the shrink wrap on
Speaker 1: my credenza in the office waiting for me to find
Speaker 1: a week to attack it. It's it's just such a
Speaker 1: great history of markets. What's happens. It will show you.
Speaker 1: For example, if you're an Austrian in the beginning of
Speaker 1: the twentieth century, you made no money on stocks, but hey,
Speaker 1: if you're a US investor, where you may have been
Speaker 1: domas out, you'd amazing returns. Just little things like this,
Speaker 1: markets that disappeared or you know, shut down completely, like Russia,
Speaker 1: just a great um starting point for investing. And so
Speaker 1: and of course, a lot of the market wizard style
Speaker 1: books right there, Some really just wonderful overviews of the personalities,
Speaker 1: and all sorts of different types of investing styles. Right.
Speaker 1: Some people were value guys, some people were momentum guys.
Speaker 1: But what you learn is there's no one approach, right,
Speaker 1: but many that people have perfected. Um that can that
Speaker 1: can all work. The fiftieth anniversary of the Buffet Letter
Speaker 1: came out, and the comments that some of us had was, hey,
Speaker 1: instead of trying to be like Buffett, uh and invest
Speaker 1: like Buffett, be like Buffett. Buffett found a formulation that
Speaker 1: works for him, putting on his suit, putting on his
Speaker 1: approach may not work for you, to thine own self
Speaker 1: be true? How did that sort of philosophy of finding
Speaker 1: what works for you end up pushing you where you
Speaker 1: are today? Well, so I traded all throughout college like
Speaker 1: a lot of people, right, I was making money hand
Speaker 1: over fist, trading these internet names that you'd come back
Speaker 1: from class and they would have doubled, right, you know,
Speaker 1: and so confusing a bullmarket with intelligence, right, So, and
Speaker 1: of course I blew up at some point. I learned
Speaker 1: a lot of things, but it what's really important is
Speaker 1: like you mentioned, understanding your own psychology. So I have
Speaker 1: all the behavioral biases. I'm overconfident, I'll take way too
Speaker 1: much risk, and so this is kind of the whole
Speaker 1: point of becoming a quant. And it took years and
Speaker 1: a lot of pain to learn this said. Look, I
Speaker 1: need to make rules for myself, otherwise I'll do the
Speaker 1: dumbest possible things you know out there, And but it's
Speaker 1: important finding a style that it resonates with you. I'm
Speaker 1: Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio.
Speaker 1: My guest today is meb Faber. He is a quant.
Speaker 1: He runs Cambrian Investments. You put out a kind of
Speaker 1: fascinating commentary of blog post that was headlined there's never
Speaker 1: been a better time to be an investor than today.
Speaker 1: Explain what you've had over the past thirty years, really
Speaker 1: since the forty years, actually since the first index funds
Speaker 1: started coming out, is an opportunity where the fees of investing,
Speaker 1: so even simple brokerage commissions. That was one of the
Speaker 1: first right Charles Schwab, the discount brokerage, the whole run
Speaker 1: of stuff in the seventies. They for people who aren't
Speaker 1: old enough to remember this. The commissions were fixed by regulation,
Speaker 1: and when that was deregulated, people could cut their rates
Speaker 1: from fairly high to much much less expensive. And now
Speaker 1: that that process has continued in the advent of mute
Speaker 1: real funds and now e t f s, in this
Speaker 1: competition between firms that have allowed fees. If you remember
Speaker 1: back to the seventies and eighties, I mean, the fees
Speaker 1: on these funds were just atrocious, right, five percent loads
Speaker 1: on the front and back end, twelve B one fees,
Speaker 1: annual management fees up north to three percent with standard right,
Speaker 1: But you have now this this move towards and vanguards
Speaker 1: certainly one of the pioneers, but a lot of following.
Speaker 1: You can gain access to an investing portfolio for a
Speaker 1: really cheap amount, right, And so you've had an advent,
Speaker 1: I know, you've been working this space to a lot
Speaker 1: of automated investment solutions for one, just things that can
Speaker 1: give people access to a global, diversified portfolio for really
Speaker 1: cheap and it's a wonderful thing. Now there's a lot
Speaker 1: the flip side of that is a lot of the
Speaker 1: access simply allows people to trade more, which isn't a
Speaker 1: good thing, right because usually there are their own worst enemy. Um,
Speaker 1: it's like giving a you know, a drug addict a
Speaker 1: bigger needle. But but overall it's been a vastly uh
Speaker 1: positive benefit to the to the individual in mester. So
Speaker 1: let's talk a little bit about quantitative investing. Uh. Some
Speaker 1: previous guests on the show of included Cliff Fastness of
Speaker 1: a q R, Jim O'Shaughnessy of osam Um rob are
Speaker 1: not of research affiliates. These are guys who are essentially
Speaker 1: legends in the industry. And you describe yourself as a
Speaker 1: quant for listeners who may not be familiar with what
Speaker 1: quantitative investing is, give us a quick description. I like
Speaker 1: to say I'm a quant light So I like to
Speaker 1: come up with approaches that work where you take a
Speaker 1: ten thousand foot view and say, look, here's some basic,
Speaker 1: simple rules. There's rules to sort investments, so say stocks,
Speaker 1: for example, to be able to say, look, we're gonna
Speaker 1: pick these stocks based on these rules for buying, these
Speaker 1: rules for selling. So that way you remove the emotions
Speaker 1: of saying, man, I really love apple products, we should
Speaker 1: be buying it, or I really hate the CEO and
Speaker 1: it gives it a foundation of logic, right, so it
Speaker 1: as opposed to emotion right, and it um it allows
Speaker 1: you to come up with the rules based process for
Speaker 1: any market environment or a style, and and and a
Speaker 1: big thing that can also be dangerous if people abuse it.
Speaker 1: It allows you to look back in history on how
Speaker 1: such a system would have performed, how that logic would
Speaker 1: have done in various market environments. So at least you
Speaker 1: have an idea of what's possible. So is that what
Speaker 1: attracted you to a client based investing being rules driven
Speaker 1: and objective as opposed to more intuitive and depending on
Speaker 1: whatever you had for for breakfast? I say, you remember,
Speaker 1: coming right out of college, I was doing biotech and
Speaker 1: it was long only, so it didn't matter if you
Speaker 1: pick the four or ten best biotech stocks out of
Speaker 1: the sector, they all went down sixty right, So wanting
Speaker 1: to understand that process which automatic leads you to become
Speaker 1: macro and the and the one of the fun and
Speaker 1: challenging things in our world is that these these market
Speaker 1: regimes can go on for years. Right there, there's how
Speaker 1: my mother grew up investing is totally different than the
Speaker 1: environment I grew up in, or a Japanese investor in
Speaker 1: the nineties. But those can last for years and decades,
Speaker 1: and it completely um excuse your your belief of what's happening.
Speaker 1: You know, like people in the nineties to believe a
Speaker 1: year it was reasonable for stocks, right, Whenever you have
Speaker 1: a big rally and U ask people, what are you expecting?
Speaker 1: We sort with house prices, we sort with equities, what
Speaker 1: are you expecting from this asset class in the coming year.
Speaker 1: It's always a reflection of of what just took place.
Speaker 1: It's pure recency effect and no recognition of the underlying
Speaker 1: long term averages. And you almost have to be a
Speaker 1: comedian or at least appreciate a with a little humor
Speaker 1: the possibilities of what can happen. Right, So it'll be
Speaker 1: able to look back to a nineteen eight seven style event,
Speaker 1: or be able to say, with two thoughts in your
Speaker 1: head that stocks could easily double from here or decline
Speaker 1: because both have happened in the past. But to be
Speaker 1: able to believe in that possibility, however rare is really challenging.
Speaker 1: But I think it's also important. So when you look
Speaker 1: at markets mathematically, what is it that you're actually looking at?
Speaker 1: So we believe there's two main sort of schools of
Speaker 1: thought in what works historically and investing, and it's rare
Speaker 1: to find someone that believes in both. It's kind of
Speaker 1: like talking about religion or politics. There's not a lot
Speaker 1: of people that are both Democrat and Republicans, right, So
Speaker 1: so my value and momentum or trend right, And usually
Speaker 1: those two styles and people that follow them don't believe
Speaker 1: in that in in each other. But it's true they
Speaker 1: both worked historically. Value buying stocks that are cheap, for example,
Speaker 1: whether it's by dividends or some other earnings metric, but
Speaker 1: also momentum and trend buying markets that are going up,
Speaker 1: but also importantly avoiding the ones that are going down.
Speaker 1: Both can work great. Our favorite setup is when they intersect,
Speaker 1: you know, when something is cheap and going up. But
Speaker 1: really those are the two main schools I thought we
Speaker 1: use when when we're applying the quantitative logic. It's funny
Speaker 1: you mentioned that because Cliff Astness talks about the advantage
Speaker 1: of purchasing value and the impact of momentum. And then
Speaker 1: somebody else who I really should get in here one
Speaker 1: of these days, I think you know Wes Gray of
Speaker 1: Alpha architect. His book Quantitative Value looks at the combination
Speaker 1: of less expensive stocks that are doing well or are
Speaker 1: trending upwards but are cheap to begin with. It's it's
Speaker 1: a fascinating combination. How a lot of different quants. You know,
Speaker 1: you have a parable of the six blind men um
Speaker 1: describing the elephant from John Goffrey Sachs's poem. I've used
Speaker 1: that metaphor many times, but it looks like a lot
Speaker 1: of quants are describing the same elephant. Yeah, and they
Speaker 1: apply different ways, of course, right, Some are doing it
Speaker 1: in the stock world, some are doing it sector rotation.
Speaker 1: Some you're doing it a cross countries or even across
Speaker 1: commodities and bonds in a in a multi asset class portfolio.
Speaker 1: There's a lot of different ways to attack the problem.
Speaker 1: Um in different ones work, you know, better and worse.
Speaker 1: But we are were firm believers there. I'm Barry rid Helt. She'
Speaker 1: listening to Master's Business on Bloomberg Radio. My guest today
Speaker 1: is me being Fabor. He's a quant and chief investment
Speaker 1: officer of Cambria Investments. He's also the author of a
Speaker 1: number of books. Will share some of the other ones later.
Speaker 1: What I want to talk about now, is the IVY portfolio,
Speaker 1: your analysis of some of the strategies the big uh
Speaker 1: endowments like Harvard and Yale put to work. If you
Speaker 1: look at back at the biggest endowments, so it's particularly
Speaker 1: Harvard Yale. They allocate their portfolio in a certain way
Speaker 1: and historically it's had a number of features. One, they
Speaker 1: have a true global focus, so they're not just investing
Speaker 1: in the US. A lot of American investors and this
Speaker 1: actually happens in every country the home country book to bias.
Speaker 1: In the US, they invest se of their equity exposure
Speaker 1: to US stocks. It's huge beat a minimum or maximum
Speaker 1: it should be fifty as as a percent. So they
Speaker 1: have a global focus. They allocate to real assets, so
Speaker 1: think about real estate and or commodity type of projects. Um.
Speaker 1: But but most of it is equity like assets, low
Speaker 1: amount of bonds with the long term time horizon, and
Speaker 1: so they do some weirder stuff to a lot of
Speaker 1: private vehicles like hedge funds and private equity, and so
Speaker 1: there's some benefits to that allocation over time. It's a
Speaker 1: great allocation, but it can run into a lot of
Speaker 1: trouble as markets Gyrade in the short term, which we
Speaker 1: saw in two thousand and eight, two thousand nine, many
Speaker 1: of these endowments on paper at least lost half at
Speaker 1: some point brush they really got shut. So let's talk
Speaker 1: a little bit about numbers. As of the most recent
Speaker 1: data we accessed. Harvard thirty six point four billion dollar endowment.
Speaker 1: Makes you wonder why anyone there even pays tuition, Yale
Speaker 1: twenty three point nine, Stanford one point four billion billion
Speaker 1: with a bat. These are enormous sums of money. What
Speaker 1: are these guys? You mentioned what they do? Right? Why
Speaker 1: did they run into so much trouble in O eight
Speaker 1: oh nine? It doesn't look like they've fully recovered. And
Speaker 1: here we are, jeez, it's seven years after that and
Speaker 1: they are whereas the US markets have gotten back to
Speaker 1: their pre O eight highs, and then some these guys
Speaker 1: are still pretty much under water from that. Two problems.
Speaker 1: One is that we talk a lot about looking at history.
Speaker 1: Oh eight O nine was not really an environment we've
Speaker 1: seen in the US since really the thirties, right where
Speaker 1: everything kind of went down and a lot of people
Speaker 1: that had been investing. It's almost like a deflationary shock
Speaker 1: where the real assets went down, All the equities went down.
Speaker 1: The only thing that did well was bonds, which they
Speaker 1: don't have much of. So that's one problem. Four kind
Speaker 1: of similar but more inflation area is opposed to right
Speaker 1: inflationary equity wise, almost the same fall over a long
Speaker 1: period of time. And the problem with having it's not problem,
Speaker 1: it's just a feature of having an equity heavy portfolio
Speaker 1: is that it's gonna get creamed. Right. So you go
Speaker 1: through these huge bearer markets and they say they have
Speaker 1: a time frame of you know, a hundred years or
Speaker 1: just forever, but they had a mismatch with their cash
Speaker 1: and liquidity needs. Right, So they're supposed to be paying
Speaker 1: for these buildings and a lot of these endowments are
Speaker 1: generating something like a third or half of the budget
Speaker 1: for the school, right, so they run into these huge
Speaker 1: liquidity crunch. So it's a mismatch. And in the private
Speaker 1: equity and hedge funds aren't liquid for the most part, right,
Speaker 1: So it was kind of a perfect storm. You know.
Speaker 1: We propose some ideas in the book of how people
Speaker 1: can replicate the endowments but also use things such as
Speaker 1: trend following to be able to move to cash during
Speaker 1: the long bear markets that we think we're great, but
Speaker 1: probably something that an endowment for various reasons can't or
Speaker 1: doesn't want to do um and they think you know
Speaker 1: that the biggest problem in eight o nine was the illiquidity.
Speaker 1: You had a paper that came out before the financial
Speaker 1: crisis titled Quantitative Approach to Tactical Tactical Asset Allocation, which
Speaker 1: essentially said, hey, this isn't rock and science science. Just
Speaker 1: use a ten month ten month moving average and that's
Speaker 1: your warning sign to get aggressively defensive. We could could
Speaker 1: big endowments actually follow that with their liquid investments, They
Speaker 1: could easy, and they could do it with futures. They
Speaker 1: don't because it's a philosophical and mindset. But it's also
Speaker 1: a big business career risk. Right. So if you're hedging
Speaker 1: and the hedging doesn't work, if you look at say
Speaker 1: since oh nine until about last year, a lot of
Speaker 1: the trend following programs really struggled. They've done great in
Speaker 1: the last year, right, But but it's it's a it
Speaker 1: takes a philosophical mindset to be able to look at it.
Speaker 1: I mean, the funny thing is, trendvolking is nothing new.
Speaker 1: It's been around over a hundred twenty years. Dow theory
Speaker 1: right was was people were talking about it in early
Speaker 1: twenties entry. But it works, and it doesn't work for
Speaker 1: usually the reasons people think, and that it's some massive
Speaker 1: return generating engine. It usually it works by reducing volatility,
Speaker 1: reducing draw down. But that's really the number one rule
Speaker 1: of investing or trading. It's to live, to to trade
Speaker 1: another day, to survive, right to not engage in behavior
Speaker 1: that either a destroys your capital um. The Bill Gross
Speaker 1: talked about, you know, the gamblers um risk that you
Speaker 1: can't completely destroy your your seed capital, and then of
Speaker 1: course you mentioned career risk and Paul Tutor Jones was
Speaker 1: listening to an interview with him where he said, if
Speaker 1: he had to use one indicator would be the two
Speaker 1: hunter day moving average, if you just had to look
Speaker 1: at one thing. And that's just a great example of
Speaker 1: how you know. It's a very simple indicator, but it
Speaker 1: can help you be on the right side of the
Speaker 1: market and certainly to to survive. I'm Barry rich Helps.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: guest today is Meba Burke. He's the c i O
Speaker 1: of Cambrian Investments. And before the break we talked a
Speaker 1: little bit about how the financial services industry is being disrupted.
Speaker 1: Let's let's discuss that a little bit. What do you
Speaker 1: see as the big disruptors. So we started out managing
Speaker 1: hedge funds at our firm back in oh seven and
Speaker 1: individual accounts, and we eventually moved into launching our own
Speaker 1: e t F s. And one of the reasons why
Speaker 1: we think it's a great structure for the individual and look,
Speaker 1: Wall Street's been selling various products forever, right, but this
Speaker 1: is one of the best and cleanest that doesn't have
Speaker 1: a lot of the baggage of old mutual funds that
Speaker 1: were sold to people, right. So a lot of the fees,
Speaker 1: the twelve B one fees, the various loads you know,
Speaker 1: aren't a part of the e t F structure. It's easy.
Speaker 1: Usually it's just a management fee. And so we started
Speaker 1: we thought it was a great way for people to
Speaker 1: be able to access the strategies, you know, we wanted
Speaker 1: to launch. Um. There's a lot of other great stuff
Speaker 1: going on. The automated investing solutions being put out by
Speaker 1: Vanguard or Swab or firms like yours, you know, are
Speaker 1: wonderful way is to be able for individuals to invest
Speaker 1: with with having a rules based approach and not being
Speaker 1: able to left to their own devices of being able
Speaker 1: to do the really dumb stuff that costs them a
Speaker 1: lot of money. So you're seeing a lot of different
Speaker 1: great things going on, uh that we're pretty excited about.
Speaker 1: We call that dumb stuff the behavior gap, and that
Speaker 1: shows up in all of the annual return data that
Speaker 1: shows how individuals radically under perform um even a simple
Speaker 1: sixty forty portfolio. They're not capable of keeping up with it.
Speaker 1: So you've cranked out a number of different ETFs. There
Speaker 1: are a few that are really interesting. Before we talk
Speaker 1: about the specific ETFs, let's talk about that process. What's
Speaker 1: it like creating and then getting an e t F
Speaker 1: approved in trading? So I have a couple of criteria
Speaker 1: that we we use when we launch an e t F.
Speaker 1: It has to be something I want to put my
Speaker 1: own money into, so I have of my net worth
Speaker 1: invested in these funds. That obviously has to be different
Speaker 1: than what's out there already. So Vanguard State Street, these
Speaker 1: guys can do and have launched hundreds of funds that
Speaker 1: are great for a certain asset class just an exposure,
Speaker 1: so we'll never copy cat that, right um. And it
Speaker 1: has to be something that people also want, right so
Speaker 1: there has to be a demand out there, and and
Speaker 1: and the biggest is it has to be something that
Speaker 1: we think works or is unique. So um, but the
Speaker 1: process you got you have to get SEC approval to
Speaker 1: be able to launch ETFs. I think this will change
Speaker 1: the company or no, across the board. You need to
Speaker 1: get an exemption to launch ETF and that tape. It
Speaker 1: took us about fourteen months, and it's it's expensive. That's
Speaker 1: just getting allowing you to play in the sandbox. Right.
Speaker 1: That will change at some point. I don't care how
Speaker 1: long it takes now because now that we have it,
Speaker 1: it's more of a mote, right like SCC can just
Speaker 1: continue to have a buck log. I don't care. But
Speaker 1: it's a shame they'll they'll figure it out eventually so
Speaker 1: that people can launch funds. It's more similar to to
Speaker 1: mutual funds and so um. Once you have that permission,
Speaker 1: then you can get a fund out if it's fairly
Speaker 1: plain vanilla, it's nothing crazy, triple leverage derivatives. And about
Speaker 1: three months so we've launched five. We have four more
Speaker 1: queued up that we'd like to get out. But we
Speaker 1: have a little bit different approach. You see, a lot
Speaker 1: of the E t F shops will do the shotgun.
Speaker 1: They'll throw everything against the wall, see what sticks, see
Speaker 1: what the market likes, and hopefully the people will chase returns.
Speaker 1: But but we like, I've watched the I've so let
Speaker 1: me jump in here. I've watched you launch ETFs. They
Speaker 1: invariably start with a white paper. Well, you describe philosophically
Speaker 1: and quantitatively what you're hoping to accomplish. Then the fund
Speaker 1: comes out, and then you uh do a follow up papers.
Speaker 1: So let's talk about one as an example. And I
Speaker 1: happen to have your book shareholder Yield here, so so
Speaker 1: let's begin with that. Tell what shareholder yield is and
Speaker 1: how that morphed into an E t F share Older
Speaker 1: yields a concept that people have been writing about for
Speaker 1: a long time, so it's it's nothing new. O'Shaughnessy mentioned
Speaker 1: his book He's Been He took the theory back to
Speaker 1: the twenties. But it basically says, look if companies can
Speaker 1: distribute their cash flow, which investors love, it makes no
Speaker 1: sense to just look at dividends or buy backs. Really,
Speaker 1: it's the holistic cross between the two. The investors care
Speaker 1: about is how much are you paying me? Because they're
Speaker 1: exactly they're the exact same thing. If a company is
Speaker 1: trading an intrinsic value, explain that how our dividends, which
Speaker 1: is a check I get quarterly, the same as a
Speaker 1: share by back, which I don't notice in my monthly portfolio. Right,
Speaker 1: So you end up owning a larger percentage of the company.
Speaker 1: It just it reduces the share account. You have a
Speaker 1: higher percent equity ownership and earnings per share than then
Speaker 1: go up. So the stock appears cheaper at that point.
Speaker 1: And so all the research has shown and what you
Speaker 1: what you find is there was a structural shift in
Speaker 1: the early eighties. Uh, there there were some tax law changes,
Speaker 1: there were some provisions that made it easier for companies
Speaker 1: to have safe harbor to buy back their own stock.
Speaker 1: So what you've seen since the eighties is each year
Speaker 1: more and more and that the kink was right around
Speaker 1: nineties seven where share buy backs constitute a higher percent
Speaker 1: payout than than dividends do. And so you have to
Speaker 1: look at it historical. We think looking at either dividends
Speaker 1: alone or buy backs. It's the same mistake. You need
Speaker 1: to look at both. Apple is a great example, right
Speaker 1: where they have a two percent dividend yield, but hey,
Speaker 1: they also have this buy back yield. And one of
Speaker 1: the problems with dividend investing, and there's a lot is
Speaker 1: that for for one example, you could have a company
Speaker 1: paying a two or three percent dividend yield, but they're
Speaker 1: also you know, picking your pocket by issuing three or
Speaker 1: four percent a year in new stock. A lot of
Speaker 1: tech companies do this, right, was notorious for this. The
Speaker 1: share account just crept up over the years, so that
Speaker 1: you're actually getting a negative yield if you think about correctly.
Speaker 1: So if you go back and back test it, that
Speaker 1: shows up the shareholder yield companies do much better, uh
Speaker 1: than than either dividends or buy backs alone. So we
Speaker 1: we've been writing about this since oh six, and it
Speaker 1: was shocked that no one had launched a fund and said, look,
Speaker 1: I really want to be able to invest in this.
Speaker 1: It doesn't exist. There's some mutual funds, but they're twice
Speaker 1: as expensive as what we do. She said, let's let's
Speaker 1: launch a simple fund, and so we put that out
Speaker 1: a couple of years ago. So let's let's mention it's
Speaker 1: the shareholder yield dt F is s y l D
Speaker 1: and then there's the foreign shareholder yield d t f
Speaker 1: F y l D. Does the math work the same
Speaker 1: for foreign companies as does for US? It works the same.
Speaker 1: There's not as much of a culture of buy backs
Speaker 1: yet in a lot of countries it's changing, right, more
Speaker 1: of a dividend culture. So for example, if you're doing
Speaker 1: a shareholder yield portfolio here in the US, you may
Speaker 1: end up with on aggregate, let's call it a two
Speaker 1: percent dividend yield, but maybe a six percent buy back yield.
Speaker 1: So you're getting up around a high single digit yield, right,
Speaker 1: that's great. If you look at the SMP right now,
Speaker 1: you're you have maybe a two percent you a little
Speaker 1: lower now, but no net buy back, so it's a
Speaker 1: six percent delta. That's amazing because there have been so
Speaker 1: many major you know, you see the big buybacks like
Speaker 1: the Apples and the Microsoft's and the Intel's, but you
Speaker 1: forget about everybody else's. And this is why the buy
Speaker 1: back indusseries and the shareholder yield have been creaming the
Speaker 1: dividend indusseries for the past couple of years is because
Speaker 1: the buy back yield amount is much higher than the
Speaker 1: dividend yield amount. And one really quick point is that
Speaker 1: any factor, so it's called dividends or buy backs, goes
Speaker 1: in and out of favor. So if you remember back
Speaker 1: to late nineties, no one wanted dividend stocks, right, You
Speaker 1: couldn't sell someone one that was the best fattest pitch
Speaker 1: to invest in dividend stocks. Ever, so what's happened since then? Right,
Speaker 1: people have flooded into dividend stocks in the search for yield,
Speaker 1: and dividends work historically because they traded a discount of value,
Speaker 1: discounted the overall market, but that varies. So in the
Speaker 1: highest it's ever been fifty percent discount of the overall
Speaker 1: market in two thousand seven, two thousand eight or its
Speaker 1: so maybe it's even more recent two thousand ten, two
Speaker 1: thousand eleven, dividends traded at a premium to the overall market,
Speaker 1: so you're getting these junkier companies, but now that are
Speaker 1: more expensive. And that's one of the reasons that if
Speaker 1: you look at any factor, sometimes it's great, sometimes it's terrible,
Speaker 1: and aggregate, it works out. But that's why dividends have
Speaker 1: really struggled the past couple of years. They simply got
Speaker 1: too expensive. If you look at the largest dividen in
Speaker 1: e t F has a lower yield than the SMP.
Speaker 1: We're speaking with Med favor of Cambrian Investments about some
Speaker 1: of the e t f s. His firm has created
Speaker 1: what's the typical number of holdings in these domestic and
Speaker 1: overseas UH divon and yielding e t shareholder deal So
Speaker 1: it's a hundred stocks in each. Yeah, And so like
Speaker 1: Cliff talked about in one of your your earlier podcasts,
Speaker 1: is that you know quantz love breadth diversification, right, but
Speaker 1: but it's a fine line between wanting to be concentrated
Speaker 1: enough to be different so to allow potential out performance
Speaker 1: over the market cap benchmark, but also diversified enough that
Speaker 1: you are getting um some diverstication across sectors and companies
Speaker 1: in any one company doing poorly, and I would imagine
Speaker 1: this sort of e t F has been doing well
Speaker 1: and attracting assets that it's technically the largest active equity
Speaker 1: e t F out there. It's an active fund. May
Speaker 1: mean that's kind of like saying you're the best. You
Speaker 1: have the home run record for trip you know, single
Speaker 1: a baseball, right, But um, but it yeah, it's it's
Speaker 1: it's a clean, basic strategy that we think has a
Speaker 1: lot of appeals. Certainly certainly right now, how how often
Speaker 1: do the constituents change within the e t F? You
Speaker 1: don't want a quarter? Oh so it's it's active, but
Speaker 1: not hyperactive. And let's talk about Um, you recently came
Speaker 1: out with an e t F that has no internal
Speaker 1: fee structure. But before we talk about that, what's the
Speaker 1: internal expenses on the domestic and overseas e t s?
Speaker 1: We we try to get most of them right around
Speaker 1: the average et F expense ratio, which is around point
Speaker 1: five nine the foreign or a little more for holding
Speaker 1: fees point six nine. But that's that's the highest you'll
Speaker 1: ever see out of us. But now, how the people
Speaker 1: don't see that? It just comes out of the total return.
Speaker 1: But you produced a new globally TF that has no
Speaker 1: internal expense ratio. Tell us about that. You know, Look,
Speaker 1: we said, and I've been writing about this since oh
Speaker 1: six or seven, and said, look, I have no problem
Speaker 1: with buy and hold investing. We talked about it in
Speaker 1: the Ivy portfolio. It's a great way to invest if
Speaker 1: that's how your emotional makeup is set. So we looked
Speaker 1: at fifteen at the best guru portfolios around the world
Speaker 1: and found that even though they're really different, shockingly the
Speaker 1: performance over the last forty years is pretty close to
Speaker 1: each other, mainly because they all had a little of
Speaker 1: each and so we wanted to say, look, we'll offer
Speaker 1: the global portfolio but for zero percent management fee. We
Speaker 1: end up making a little because it owns some of
Speaker 1: our own at F, but the total expense ratio is
Speaker 1: it's the cheapest acid out case ETF out there is
Speaker 1: zero point two. That's that's amazing. We've been speaking with
Speaker 1: me being favor of Cambrian investments. If you enjoy this conversation,
Speaker 1: be sure to check out the rest of it. You
Speaker 1: can find that podcast on Bloomberg dot com or at
Speaker 1: Apple iTunes. Be sure and check out my daily column
Speaker 1: on Bloomberg View dot com or follow me on Twitter
Speaker 1: at rid Halts. I'm Barry RIDH Halts. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio. Welcome back to the show.
Speaker 1: This is the podcast portion of our interview where we
Speaker 1: let our hair down a little bit and have some
Speaker 1: fun with our guests before we continue on with our questions.
Speaker 1: I really have to, you know, let people know MEB
Speaker 1: and I know each other for um a good couple
Speaker 1: of years. We've we've wreaked some havoc in some restaurants
Speaker 1: and bars. Uh in l a As and and not
Speaker 1: too long ago here in New York. Um. Somebody described
Speaker 1: our last outing as the Justice League of Finance. Who
Speaker 1: is you me? Um Patrick O'Shaughnessy of of oh Sam
Speaker 1: Josh Brown reform broker, Um, Mike Batnick irrelevant investor J C.
Speaker 1: Perette's of All Star Charts. That were about a dozen
Speaker 1: people out. I'm drown a blank on the guy's name
Speaker 1: from from Wisdom, Jeremy Schwartz, Jeremy really nice guy, really
Speaker 1: interesting stuff. Morgan Houseel of Motley Fool and the Wall
Speaker 1: Street General was at with us. It was really a
Speaker 1: lot of fun and that ran h. I understand. People
Speaker 1: went out after I went home. People went out to
Speaker 1: dinner and stayed out pretty late, having a little bit
Speaker 1: of ongoing financial debate. If if I had known you
Speaker 1: were buying the Happy Hour, I probably would have had
Speaker 1: a few more beers than than I did. But but
Speaker 1: it's it's good that at least the comments weren't that
Speaker 1: we were the supervillains of finance. That's right. And and
Speaker 1: by the way, the secret to picking up the tab
Speaker 1: at happy hour is just not to tell any then
Speaker 1: when the check comes it's actually fairly h fairly reasonable.
Speaker 1: So early on you described when you were doing um
Speaker 1: bio and biotech work that you were slowly attracted to finance.
Speaker 1: How did that transition happen? What What was it about
Speaker 1: money and the management of money that made you say, well,
Speaker 1: biotech is fascinating, but really the asset management side is intriguing,
Speaker 1: you know. I mean, like many investors, I grew up
Speaker 1: chatting with my father and my mom about investing, and
Speaker 1: both had very different styles. Right you look at moms
Speaker 1: she said meb you just buy and hold and hold forever.
Speaker 1: And in retrospect, looking back now, I said, well, of
Speaker 1: course that makes sense. You're investing career was mostly in
Speaker 1: the eighties and nineties, right, it made sense to just
Speaker 1: buy and hold and forget it. If she was a
Speaker 1: housewife in Japan, and she probably wouldn't have had that
Speaker 1: same philosophy, not at all. And so you know, so
Speaker 1: she uh, and not to mention her father worked at R. J. Reynolds,
Speaker 1: one of the best performing stocks of our generation. And
Speaker 1: my father was an aerospace guy, so his was a
Speaker 1: little more specific. He tried to do domain knowledge in
Speaker 1: the areas he knew about. But but like I mentioned earlier,
Speaker 1: had many of the same um but different behavioral biases.
Speaker 1: He would never sell so often, for example, things would
Speaker 1: you know, watch it go all the way? So had
Speaker 1: a culture of learning about investing growing up and then
Speaker 1: started to do it on your own. And the lesson
Speaker 1: that many traders learn at some point and hopefully early
Speaker 1: when they don't have much money is blowing up at
Speaker 1: some point, you know, losing all your money. And that's
Speaker 1: a very painful but beneficial process. And as we see
Speaker 1: this year six seven bullmarket coming and there's so many
Speaker 1: people out there who have never lived through one. You know,
Speaker 1: the pain of losing money is very real. It's it's
Speaker 1: a very physical pain, especially um when you have a
Speaker 1: big loss thirty fifty um. But until you live through it,
Speaker 1: it's hard to describe that as someone the line I
Speaker 1: began on a trading desk, and the thing that I
Speaker 1: used to hear all the time was about new traders. Oh,
Speaker 1: the worst thing that can happen to him as he
Speaker 1: makes money, Suddenly you think it's easy. And I started
Speaker 1: in the mid nineties, and if you want putting up
Speaker 1: fifty year numbers, you were a bump and people thought
Speaker 1: that was normal. When you ask people what are you
Speaker 1: looking for next year? I'm looking to double my money. Really,
Speaker 1: what are the odds that you're going to do that well?
Speaker 1: And people we talked about this in one of our
Speaker 1: first papers. They use a different part of the brain
Speaker 1: when they're making money and losing money. You're making money,
Speaker 1: you're thinking about your vacations, how smart you are, can't
Speaker 1: wait to tell your friends you're checking your balance ten
Speaker 1: times a day on online. When you're losing money, you
Speaker 1: don't open your account statements in the mail, You're so
Speaker 1: angry at your neighbor broker for recommending that app company.
Speaker 1: You know you It's it's the flight response, right, So
Speaker 1: it's a totally different It's emotional, so so is the
Speaker 1: making money, but it's more of the neo cortex. The
Speaker 1: limbic system is the law system, which is I think
Speaker 1: you gave a speech to uh A Google Talk. Is
Speaker 1: that right? And you talk about a lot of the
Speaker 1: same um behavioral economics and neurofinance stuff I to talk
Speaker 1: about what kept you alive on the savannah doesn't help
Speaker 1: you in in identifying risk and managing losses at all.
Speaker 1: If anything, it sends you running in the wrong direction.
Speaker 1: And it creates opportunities. Of course, it makes markets that
Speaker 1: you know, create bubbles, which I love from a from
Speaker 1: a standpoint of an asset manager. You did a white
Speaker 1: paper on bubbles. What was the title of that, Learning
Speaker 1: to Love Investment Bubbles, which was which is actually a
Speaker 1: fun white paper a phrase that's not spoken off and
Speaker 1: the subtitle what if Sir Isaac Newton would was a
Speaker 1: trend follower. But what you find in bubbles across history
Speaker 1: is that they've been happening forever, and we go back
Speaker 1: a couple hundred years and you find them in various places.
Speaker 1: You know, the past decade has created the vernacular bubble.
Speaker 1: Everyone talks about bubbles now, bubble bubbles. They're pretty rare, right,
Speaker 1: you know, we had talked a lot about bitcoin, for
Speaker 1: example recently being having a lot of bubble type of behavior,
Speaker 1: specular behavior. But one of the things if you apply
Speaker 1: trend following methodology and look at them historically. It's great
Speaker 1: because it has an exit that allows you to hopefully
Speaker 1: live to play another day, right, instead of the psychological
Speaker 1: and real pain of losing in a in a draw
Speaker 1: down in a bubble. But what you find is that
Speaker 1: as people lose money when they're below the trend, volatility
Speaker 1: is so much higher, right, So volatility explodes to the
Speaker 1: both up and downside. So all of the best and
Speaker 1: worst days occur, not all, but two thirds occur after
Speaker 1: markets have already been declining. And that's simply because they're
Speaker 1: more volatile. So if you can avoid those periods by
Speaker 1: having a trend falling approach, it makes life a lot easier.
Speaker 1: And and here's a little bit of an anecdotal data
Speaker 1: point that I'd love to do some deep research on.
Speaker 1: I can't help but notice that when entire sectors fall
Speaker 1: about eight or so, that's a pretty attractive entry point.
Speaker 1: You look at the NASDAC dot com bubble fell, you
Speaker 1: look at the real estate bubble, the public trade it
Speaker 1: stocks dropped about that much, and then you look at
Speaker 1: the banks in that space. I'm not suggesting you try
Speaker 1: and catch anyone falling knife. But buying a whole sector
Speaker 1: that's down, just so long as it's not your leather
Speaker 1: belt and steam sector um isn't a bad entry point.
Speaker 1: So we've actually run some studies on that, and the
Speaker 1: empirical data shows that an actual ad yes it usually
Speaker 1: is a pretty great idea. The challenge, of course, you
Speaker 1: can't do this with an individual stock because they can
Speaker 1: go to zero, right, But because we've seen old too
Speaker 1: many times, if you buy a big enough basket of
Speaker 1: whether it's a sector or a country in general, yes,
Speaker 1: it's a great time to be buying it, the further
Speaker 1: it goes down. But there's you go back to the
Speaker 1: old famous investing joke, what do you call something down?
Speaker 1: That's something that was down then went down another fift
Speaker 1: in half, So you can. And the reason we talk
Speaker 1: a lot about this is because the drawdowns often correlate
Speaker 1: very highly with value. Value is nothing more in most
Speaker 1: cases than something that's just already gone down fIF So
Speaker 1: if you look at the way the world exists today,
Speaker 1: there's a lot of countries out there that are cheap,
Speaker 1: but they're cheap like Greece or Russia or you know,
Speaker 1: getting cheaper and get so one there's a lot of
Speaker 1: risk because they can get cheaper. But to uh, they're
Speaker 1: simply cheap because the P and the pe right, it's
Speaker 1: not the earnings that's changing, it's the price, and so
Speaker 1: they've already declined fifties. But that's what generates a lot
Speaker 1: of opportunity. That's that's really interesting when you look around
Speaker 1: the world. Let's talk a little bit about valuation um
Speaker 1: because by many measures, stocks in the US if it
Speaker 1: depending on what you want to use as a as
Speaker 1: a valuation tool, you could cherry pick valuations that say
Speaker 1: stocks are cheap. You can certainly charity pick valuations that
Speaker 1: say stocks are expensive. Merrill Lynch puts out a whole
Speaker 1: spectrum of valuation analysis, and it's hard to look at
Speaker 1: that and not say stocks at best aren't fully valued
Speaker 1: in the US. Here's the challenge with the Meryoral Report,
Speaker 1: and I've seen that is that you have to have
Speaker 1: a consistent start period that's long enough for enough history.
Speaker 1: None of them are more than twenty years. And in
Speaker 1: the Meryal Report compares many certain indicators which i haven't
Speaker 1: existed for a long time, so it ticket for you know,
Speaker 1: grain of salt, but some haven't have only existed since
Speaker 1: two thousand or nineteen ninety, well, the majority of that
Speaker 1: period has been been very bubblicious, right, So it's like
Speaker 1: an example, if you're only looking at Japan from nineteen
Speaker 1: seventy to nineteen ninety or two thousand, well, almost entire
Speaker 1: period was the biggest bubble we've ever seen. So if
Speaker 1: you take any value in and value indicators their blunt tools, right,
Speaker 1: in general, you want them to line up on the
Speaker 1: same side. So usually they say the same thing. It
Speaker 1: doesn't matter if you use Schiller's ten year pe ratio
Speaker 1: so CAPE, or whether you use you know, market cap
Speaker 1: to GDP or Tobin's Q. We tweeted out a stat
Speaker 1: the other day that the median stock and the SMP
Speaker 1: five hundred back to nineteen sixty is the highest price
Speaker 1: of sales ratio it's ever been. It's like two point one, right,
Speaker 1: the average over time is point nine. So in my
Speaker 1: belief is that I think U S docks are expensive.
Speaker 1: I don't think it's a raging bubble. But being a
Speaker 1: quant the boring thing to say is that, well, it
Speaker 1: just means future returns are going to be lower. Expected
Speaker 1: returns are going to be below average expect you we
Speaker 1: look at it like low single digits. I don't think
Speaker 1: they're negative yet. And with the point they go negative,
Speaker 1: that's what I start to call bubble. But that's really
Speaker 1: for Cape. For example, I love, I love, I have
Speaker 1: to interrupt you. I love cliff Assness is definition of
Speaker 1: a bubble, which I'm going to paraphrase, which is, there
Speaker 1: is no reasonable or reasonably foreseeable course of events that
Speaker 1: generate a positive return from these price levels. And the
Speaker 1: key is reasonable. And that's great because if you look
Speaker 1: at history, let's say historical CAPE ratio seventeen to twenty,
Speaker 1: it's been as high as forty five. In the US,
Speaker 1: it's been as low as five. So you can make
Speaker 1: the case that, hey, look, stocks could easily double from here,
Speaker 1: and the only reason is because that's what people are
Speaker 1: willing to pay. Who knows Elon Musk could invent cold fusion?
Speaker 1: You know, I make lots of things like what could happen?
Speaker 1: Who knows? To be quiet? So you know, But in
Speaker 1: Japan they hit a ratio of almost a hundred. But
Speaker 1: that's it's simply one hundred. The CAPE ratio of the
Speaker 1: highest we've ever seen. Rights amazing and there's a reason
Speaker 1: that there's been lost decades. People are always saying, no,
Speaker 1: it's because they're not competitive, or that you know, the
Speaker 1: demographics were bad. Well, yes, it was all true, But
Speaker 1: it's because they're working off the largest bubble we've ever seen,
Speaker 1: which the bigger it is, the longer it takes takes
Speaker 1: bubbles all. What all that bubbles do is they pull
Speaker 1: forward future years and decades of returns. So after the
Speaker 1: bubble collapses, hey, you've already gotten the past ten years
Speaker 1: of games. You just have to get through that before
Speaker 1: you're even starting to unline. So in the US it
Speaker 1: took from the bubble, it took two o eight to
Speaker 1: get back to even so eight years, but Japan took,
Speaker 1: you know, decades, right, And the irony is they finally
Speaker 1: got to a cheap valuation a couple of years ago.
Speaker 1: And what happened they were the best performing at creating
Speaker 1: market in the world. Right. So, but but here's my
Speaker 1: whole takeaway. So that's the bad news. The US is expensive, um,
Speaker 1: but the good news is most of the world is cheap,
Speaker 1: and Europe fairly cheap, and much of the world is
Speaker 1: incredibly cheap. So so even just buying emerging or developed markets.
Speaker 1: You're getting evaluation ratio of around fifteen US is seven, right,
Speaker 1: so and half the world by market caps foreign of
Speaker 1: the world by GDP is foreign. So at a minimum
Speaker 1: you should have fifty and form. But if you want
Speaker 1: to get really interesting, you know, we go and buy
Speaker 1: the cheapest eleven countries in the world, but you're buying
Speaker 1: the junkiest of the junk. You're buying Russia, Brazil and
Speaker 1: then almost all of Europe, right, you know, Poland, Czech Republic, Yeah, Greece, Italy, Spain,
Speaker 1: and at some point with valuations, cheap gets too cheap.
Speaker 1: But but here's the funny thing is that the geopolitics
Speaker 1: and the news flow is always terrible. And but the
Speaker 1: name's change. And if you go back a few years,
Speaker 1: you know Norway was going through a banking crisis late nineties, yeah, right,
Speaker 1: so late nineties it was um the Asian countries and
Speaker 1: early eighties was the US. So the name has kind
Speaker 1: of come in and out of favor. It's a tough
Speaker 1: strategy for me Emotionally, I'm not built to be a
Speaker 1: great deep value guy, so I allocate to it knowing
Speaker 1: that hey, this only rebounce is once a year, right,
Speaker 1: you could even rebalance it once every two years. Because
Speaker 1: these deep value strategies like the one you mentioned earlier
Speaker 1: about stuff that's down, those are usually great buying opportunities,
Speaker 1: but you gotta give him time to work. You know,
Speaker 1: it's funny you mentioned the rebalancing. We've done a lot
Speaker 1: of work on that and shifted from a more frequent
Speaker 1: rebalancing to a less frequent because we found that the
Speaker 1: rebalancing clearly generates net positive returns over time, but the
Speaker 1: tax implications and the costs of rebalancing aren't worth to
Speaker 1: do it as as there are people rebalance flee quarterly.
Speaker 1: We looked at a number of different things and pretty
Speaker 1: much came up randomly rebalancing once a year based on
Speaker 1: either a fixed time in the year or win a
Speaker 1: specific account was opened and money was deployed. Seems to
Speaker 1: be the most efficient effective way we We've always said,
Speaker 1: and it matters even less the more assets you have
Speaker 1: that that don't correlate, but say a great global portfolio,
Speaker 1: we always say, look, you should rebalance. It's important. But
Speaker 1: at some point you can even rebalance every three or
Speaker 1: five years and it's not going to make much of
Speaker 1: a difference. One year is great because it gives you
Speaker 1: one of the better tax treatment for long term holdings.
Speaker 1: But also it's nice to have sort of a one
Speaker 1: year review. Right, So hey, we can go do this,
Speaker 1: but you can do it based on tolerance bans. We
Speaker 1: always tell people if it's in a taxable account, hey,
Speaker 1: rebalance into you get some money or a bonus or salary,
Speaker 1: put it into the stuff that's down the most. You
Speaker 1: gotta take money out for a house, take it out
Speaker 1: of what's appreciated the most. But yeah, it doesn't matter
Speaker 1: that much as long as you do it at some
Speaker 1: point makes a lot of sense. You know you mentioned
Speaker 1: the news flow. Um, I'm pretty sure you know who
Speaker 1: Las Law Borrini is. His firm puts together a book
Speaker 1: every quarter of all the major media stories about markets, stocks,
Speaker 1: major news items, the economy, and when you read them
Speaker 1: with the benefit of hindsight, they're utterly hilarious. You go
Speaker 1: through the screaming headlines, these front page stories, and you
Speaker 1: could see in hindsight how people make bad emotional decisions.
Speaker 1: They what looks like the most important thing ever turns
Speaker 1: out to be an irrelevant blip three months later. Well,
Speaker 1: it's hard because when you look back at some of
Speaker 1: the academic studies where they sort countries into you know,
Speaker 1: trailing GDP, and ironically, you want the countries that have
Speaker 1: the worst GDP trailing. So you're investing in stuff that
Speaker 1: looks the most miserable but has already become the most inexpensive.
Speaker 1: So you know, same thing, you want the ones with
Speaker 1: the worst currency returns, and and those are things you don't.
Speaker 1: I mean, it's hard to invest in things that are
Speaker 1: doing terrible. It's much easier to invest in the company
Speaker 1: you know that's beating earnings and that's that's doing one
Speaker 1: feels much better, right, But it's it's harder to do.
Speaker 1: And you know, I give these talks where I say, look,
Speaker 1: you know the biggest problem. You listen to this and
Speaker 1: then want to go by Russia or Greece while Russia's
Speaker 1: invading the Ukraine, while Greece is talking about leaving the
Speaker 1: Euro everything that's going on, um, and then you go
Speaker 1: tell your husband or wife or your client, Hey, I
Speaker 1: got this great idea. This is what we're gonna do.
Speaker 1: Massive career risk, right because if it goes down, you know,
Speaker 1: and they do worse, you're gonna get fired. If they
Speaker 1: do a little bit better, okay, great, but it's it's
Speaker 1: it's a challenging and one of the reasons it works.
Speaker 1: If you look at Russia, one of the best performing
Speaker 1: equity markets in the world, that you're now that they
Speaker 1: were probably the worst last year. But it's it's tough.
Speaker 1: It's always tough to be you know. One of our
Speaker 1: favorite Um Templeton quotes was always that he said, don't
Speaker 1: tell me where things look the best. Tell me where
Speaker 1: things that's the wrong question. Tell me where things look
Speaker 1: the most miserable. Well that's I call that the earth factor.
Speaker 1: And I tell stories about Apple. In the early two thousands,
Speaker 1: I got my hands on one of the I apologized
Speaker 1: to listeners. They've heard the story before. I was a
Speaker 1: Mac fan boy for many years. I got invited to
Speaker 1: an Apple event where they were rolling out This is
Speaker 1: before Apple events were events. They're rolling out this new
Speaker 1: fangled iPod and I missed it, and so I contact
Speaker 1: somebody I knew it Apple, and I get an obnoxious
Speaker 1: email back from the PR department. We're not giving any
Speaker 1: press iPod reviews. A I'm not a member of the press,
Speaker 1: or certainly wasn't at the time and be I just
Speaker 1: want to know where I could go see this, and
Speaker 1: they write me back, you could go to the Apple store.
Speaker 1: There's one in Albany. That's how long ago. This was.
Speaker 1: The closest Apple store was three hours away from New
Speaker 1: York City. So I knew people there and I responded
Speaker 1: to them and beat a bunch of people I knew. Hey, listen,
Speaker 1: I want to review the product. I'll mail it back
Speaker 1: to you. Just get me one. And the next day
Speaker 1: of fed xbox arrived and I had it, and at
Speaker 1: the time pre not counting splits, and there have been
Speaker 1: two for one and seven for one. At the time
Speaker 1: it was fifteen dollars with thirteen cash. Hey, this is
Speaker 1: the new Sony Waffman for the next generation. I remember
Speaker 1: saying this to people, you're risking two dollars. They have
Speaker 1: thirteen cash. It's fifteen bucks or really about two dollars,
Speaker 1: you know, or dollar with after pre split. And the
Speaker 1: response universally was the same response you get about I
Speaker 1: want to put money into Russia. I want to put
Speaker 1: money into Greece. Uh, And I catch myself doing it.
Speaker 1: Someone said to me not too long ago, hey, you
Speaker 1: should buy some Dell down here it's cheap. And my
Speaker 1: response was, oh, wait, usually is a good thing. Let
Speaker 1: me take a look at it. And apples interesting because, um,
Speaker 1: you almost have the opposite scenario now, and it's maybe
Speaker 1: not the best example because it's still cheap, and it's
Speaker 1: because it's because it's cheap and a ton of cash
Speaker 1: and it's distributing it. So the full disclosure, you know,
Speaker 1: we own it. But however, you look at the historical studies.
Speaker 1: You had Rob on the show where his firm says, look,
Speaker 1: the biggest company in the SMP five hundred underperforms that
Speaker 1: index for the next ten years by about three percent
Speaker 1: a year. Same thing happens in sectors, and that's just capitalism, right,
Speaker 1: although that hasn't been true the past two years since
Speaker 1: it became the biggest, right. So you know, Apple is
Speaker 1: now up to four percent of the SMP five hundred,
Speaker 1: and usually that's been a graveyard for other companies once
Speaker 1: they hit that four percent mark, because what happens. You know,
Speaker 1: there's companies and ages that you know, what, we're gonna
Speaker 1: make phones too and come off, and that's what they're
Speaker 1: doing here and and so historically, but it's just creative destruction. Right,
Speaker 1: it's capitalism and that's the beauty of it. But but
Speaker 1: it's funny because if you look at Apple right now,
Speaker 1: it's the exact flip side of when you saw it.
Speaker 1: So right, it's it's there's no reasons almost not to
Speaker 1: invest in Apple, right. It's they're coming out the world
Speaker 1: changing products I own. I'm looking at my iPhone I own,
Speaker 1: you know, probably half a dozen different Apple things. Um,
Speaker 1: but it's it's much or you know, maybe probably you know.
Speaker 1: I'm a gadget NERD so I'm an early adopter, but
Speaker 1: I'm I'm not a huge watch guy. So the thought
Speaker 1: of having to charge it every day, um, I'll end
Speaker 1: up losing it. So if I do, I'll get the
Speaker 1: whatever the cheapest version is. See I I've learned to
Speaker 1: get the second generation everything. Um, to say the least.
Speaker 1: But I had worked with a technician many years ago
Speaker 1: who used to say to me, beware of three things.
Speaker 1: Be aware of a stock that's had an enormous run,
Speaker 1: that has huge institutional ownership, and has tremendous analysts strong
Speaker 1: by coverage, and that probably is described Apple for for
Speaker 1: quite some time. The question is they disrupted music, they
Speaker 1: disrupted the computer space with tablets, they disrupted the phone
Speaker 1: space with the iPhone, They've disrupted a number of industries.
Speaker 1: Will the watch be disruptive for where bulls and everything else?
Speaker 1: Or is it going to be really a peripheral product
Speaker 1: that isn't Look, you know, the phone itself is bigger
Speaker 1: than the SMPI companies, just the revenue for the iPhone,
Speaker 1: and people talk about the iPad as it's fading, it's
Speaker 1: not selling as strong as it's a twenty seven billion
Speaker 1: dollar product. How many companies generate twenty seven billion a
Speaker 1: year in sales even like their weakest product is a monster.
Speaker 1: Can they continue doing it? Is really the key question.
Speaker 1: And there's a great chart that shows that if you
Speaker 1: just buy the biggest company in the SMP versus the
Speaker 1: SMP you know, back to the seventies that Nett Davis
Speaker 1: puts it out and it's a massive underperformance. But you know,
Speaker 1: it's had all the names walmartsof Exon over time, and
Speaker 1: it's usually been a terrible thing to do, but but
Speaker 1: not always. Did Cisco ever make its biggest in I
Speaker 1: remember when we were talking about Cisco. This is in
Speaker 1: the late nineties, the first trillion dollar company. Well, It's
Speaker 1: funny because if you look at the composition of markets,
Speaker 1: you know, the late nineties bear market, or so early
Speaker 1: two thousands bearer market, it was a very different bear
Speaker 1: market than the two thousand and eight two thousand nine
Speaker 1: because it was a very concentrated market cap bubble in
Speaker 1: the most expensive tech names. Right, so if you had
Speaker 1: the average stock or even dividend stocks, many didn't even
Speaker 1: have a bear market two thousand, two thousand three, But
Speaker 1: market cap waited, so the SMP did because that had
Speaker 1: so much And this is one of the problems in
Speaker 1: market cap waiting. Why it's so, I mean, it's a
Speaker 1: great first you know, invention, but it's not the best
Speaker 1: way to wait an index, and so you could wait
Speaker 1: it by almost anything else and you end up with
Speaker 1: a better portfolio. So that that's really that's really robbed.
Speaker 1: Are not philosophy. I'm gonna do this by memory, so
Speaker 1: I'm sure these numbers are wrong. Two thousand, we saw
Speaker 1: the NASTAC full just under I want to say seven.
Speaker 1: The SMP five hundred, which had a lot in the
Speaker 1: Nastack stocks ended up dropping about thirty five, and I
Speaker 1: think the DOW was about But that's just by memory,
Speaker 1: there was a huge gap between the broad market and
Speaker 1: the sectors that was tech, telecom, um and and online.
Speaker 1: But let's talk a little bit about what you just
Speaker 1: mentioned in terms of waiting portfolios not by the size
Speaker 1: of the market cap, but by some other fundamental factor.
Speaker 1: What are not does it? Raffie is come up with
Speaker 1: a variety of different ways to wait a portfolio. And
Speaker 1: for those of you who haven't listened to the are
Speaker 1: Not podcast, take a look at four inches below this one.
Speaker 1: You should absolutely um download that and listen to it.
Speaker 1: He talks about using factors like earnings, like sales growth,
Speaker 1: like book value, and putting them into the context of
Speaker 1: what is the footprint of this company within the broad economy.
Speaker 1: And he had a great paper that not only said
Speaker 1: if you take these metrics that are not cap but
Speaker 1: sales divin and yield revenue growth go down the whole
Speaker 1: whole run of this profitability. Not only is that a
Speaker 1: better way to create an index than a than a
Speaker 1: market cap, but the inverse of those turn out to
Speaker 1: be better than market cap. Well, that's the thing, is
Speaker 1: almost anything other than market cap works fine? Right, So
Speaker 1: there was the joke someone made. It may be Robert
Speaker 1: can't remembers it like you could sort it by the
Speaker 1: CEOs that wear ties or bow ties, and that will
Speaker 1: I'll perform the SMP. So anything equal waiting. You know,
Speaker 1: obviously we like shareholder yield, But any way you wait,
Speaker 1: it will beat the SMP by let's call it one
Speaker 1: or two percent historically because you're not overweighting the expensive stuff.
Speaker 1: And so at the end of that cycle, at the
Speaker 1: end of the run. By the way Patrick O'Shaughnessy put
Speaker 1: a portfolio together, he said, only picked companies that begin
Speaker 1: with the letter C, and it beats market cap. And
Speaker 1: you can actually pick any letter and it still beats marketing.
Speaker 1: And this is a there's a great example of US
Speaker 1: right now, not in the US, because what's happened in
Speaker 1: the US is the spread evaluations have condensed. So small
Speaker 1: caps last year got to one of the most expensive
Speaker 1: they've ever been relative to large caps. But that's come
Speaker 1: in they had a terrible year last year relative to
Speaker 1: large cap, so that spread is narrowed. But you've had
Speaker 1: the all of the US market get more expensive, so
Speaker 1: it doesn't have the huge range like but what you
Speaker 1: do have you look at the global market cap portfolio,
Speaker 1: the largest chunk is the US at half. Well, what's
Speaker 1: one of the most expensive. It's the US. So it's
Speaker 1: the same sort of phenomenon, but now on a global stage.
Speaker 1: So art thesis is you could wait the global portfolio
Speaker 1: by anything as long as you're moving away from the US,
Speaker 1: and it will likely outperform in the coming years. Um.
Speaker 1: But it doesn't even matter how But so that's the
Speaker 1: problem with market cap by definition is what's getting more
Speaker 1: expensive because the price is going up, is going to
Speaker 1: be the biggest chunk of that of that portfolio you mentioned.
Speaker 1: UM career risk, we run a broad asset allocation that's
Speaker 1: global in nature. And every year for the past three years,
Speaker 1: the conversation goes something like like this, So here's our
Speaker 1: our portfolio, and here's how it's done. It's done pretty
Speaker 1: well versus its benchmark. It's a pretty typical seventy portfolio. Uh,
Speaker 1: what's done really well has been the U S stocks
Speaker 1: and oh, look at the bonds. They've done really well.
Speaker 1: Corporates have done well, Treasures have done well. Now let's
Speaker 1: talk a little bit about our emerging market holdings and
Speaker 1: our develop nation holdings. They continue to lag and it's
Speaker 1: an annual conversation, and it always ends with, Look, all
Speaker 1: we can do is rely on history, and history says
Speaker 1: over time they're gonna reverse. But how long can we
Speaker 1: continue to have this conversation with clients before they go
Speaker 1: that's in I'm all in on the SP five. I
Speaker 1: don't want to own anything else. That'll probably be right.
Speaker 1: And there's that classic chart where the periodic table and
Speaker 1: investing returns right where each year you show how everything
Speaker 1: bounces around. But right there in the middle is is
Speaker 1: the aust allocation portfolio. Never the best, never the worst,
Speaker 1: but kind of right there in the middle. And kind
Speaker 1: of like we mentioned before, it doesn't even matter how
Speaker 1: much of the dials. I mean, when we looked at
Speaker 1: these in our new book, fifteen different portfolio is based
Speaker 1: on the most famous investors. And if you exclude permanent
Speaker 1: portfolio because that's got a lot, it's got twenty percent
Speaker 1: cash allocation, so it's lower volatility, right. So but if
Speaker 1: you look at the other fifteen it's you know, portfolios
Speaker 1: by dahlio By are not all these recommendations over the years,
Speaker 1: Mark faber Um, they cluster, They're all within about a
Speaker 1: percent and a half of each other. Right. So they
Speaker 1: now some do much better in various mark environments. So
Speaker 1: the ones that had a huge allocation to inflationary type
Speaker 1: of assets real assets in the seventies, So like Mark
Speaker 1: Faber in gold, that's gonna do much better in the seventies,
Speaker 1: but much worse in the eighties and nineties. Right, So
Speaker 1: they typically balance the two thousands and terrible this decade.
Speaker 1: So they typically balance out over time. Because but that's
Speaker 1: the point of an asset ation is you want asset
Speaker 1: classes that balance each other out in any market environment.
Speaker 1: So whether we have deflation, inflation, disinflation, growth recessions going forward,
Speaker 1: you want something that that the mix will balance that out.
Speaker 1: And it shockingly doesn't matter that much what the percentages
Speaker 1: are um of the allocation, but rather that you stick
Speaker 1: to it, don't pay huge amounts of fees. Those are
Speaker 1: the two big ones you talk about that periodic table
Speaker 1: of asset classes. Howard Mark says something really fascinating about
Speaker 1: not trying to be in the top ten percent or
Speaker 1: even top two. He said his goal is to be
Speaker 1: in the top forty on paraphrasing, somewhere in the top
Speaker 1: and if you do that consistently over time, you end
Speaker 1: up in the top decile, because the guys who are
Speaker 1: top decile any given year are usually shooting the lights out,
Speaker 1: and that means the year before and the year after
Speaker 1: they're getting shell act because often they're exp opposed to
Speaker 1: either some sort of factor or some sort of style
Speaker 1: that will have those years of runs or or bad
Speaker 1: good performance and bad. I mean, if you look at
Speaker 1: the dollar weighted returns of mutual funds versus the time
Speaker 1: weighted by morning Star, and they show this every year
Speaker 1: where because people chase the performance of the good funds
Speaker 1: and then they get out after they do very poorly,
Speaker 1: they always lag the actual returns of the managers. I
Speaker 1: think the best performing manager in the nineties was maybe
Speaker 1: Ken Heabner's fund c GM, right, and so, but if
Speaker 1: you look at the dollar weighted returns when people came in,
Speaker 1: they came in after he had, you know, a sixty
Speaker 1: seventy percent year run. Then he has a sixty seventy
Speaker 1: draw down. Everyone pukes it back up, they get out
Speaker 1: of it, and the up is at a hundred million
Speaker 1: and the down is a two billion. And so if
Speaker 1: you look at over the whole period, yeah, he actually
Speaker 1: had great returns. One of the better managers. But if
Speaker 1: you look at the returns of the investors, it's horrific, right,
Speaker 1: because they came in at the wrong points. But but
Speaker 1: that's the challenge, right, One of the lessons will oft
Speaker 1: until investors say, look, all right, I want you to
Speaker 1: look back in the last three and five years pick
Speaker 1: the worst performing asset classes. That's probably where we want
Speaker 1: to be tilting. Think about how bad that feels, like,
Speaker 1: oh my god. The last thing I want to be
Speaker 1: investing in is commodities and emerging markets right now. But
Speaker 1: historically that's been one of the better places to be.
Speaker 1: But that's why it's so hard, right, No one wants
Speaker 1: to invest in the manager that's that's really or the
Speaker 1: style or the asset class that's really struggling. You much
Speaker 1: rather be investing in things that are hitting all new
Speaker 1: time highs. You know, I was at a conference at
Speaker 1: the Kennedy School. It was the Houser Institute for Responsible Investing,
Speaker 1: And I apologize to whoever I'm stealing this from, maybe
Speaker 1: with Simon lack Um who wrote a book called the
Speaker 1: Hedge Fund Mirage, but he talked about or whoever this
Speaker 1: person was talked about dollar weighted returns versus um the
Speaker 1: annual raided returns. And I think the person he used
Speaker 1: as an example was the John Paulson Fund. Now Paulson
Speaker 1: is famous for a phenomenal bet during the financial crisis
Speaker 1: against mortgages that netted him five billion dollars personally. But
Speaker 1: when he began that process, he was a relatively small firm.
Speaker 1: By the time he came out of the financial crisis,
Speaker 1: um he was a pretty decent sized firm, and a
Speaker 1: few years later he was like a thirty five or
Speaker 1: forty five billion dollar firm. And at that point, at
Speaker 1: forty five billion dollars, he loses one of his funds
Speaker 1: loses thirty percent, which is more than he made um previously.
Speaker 1: So when you look at it on a dollar weighted average,
Speaker 1: it's a debacle. When you look at it at a
Speaker 1: return weighted average, oh well, this was just a bad year.
Speaker 1: And this is you know, goes to show that institutions
Speaker 1: are no better than individuals when it comes to emotions
Speaker 1: and and who they allocate to often in their process
Speaker 1: for it. You know, hedge funds in general have the
Speaker 1: biggest problem being they charge a lot the two and
Speaker 1: twenty fees that that's a heavy, heavy bogey to overcome
Speaker 1: so many of the hedge fund what's beautiful about where
Speaker 1: we're investing now? Many of the hedge fund style strategies
Speaker 1: you can now allocate to an e t F form
Speaker 1: or mutual mutual fund form. You know, one of my
Speaker 1: all time favorite strategies, you know, managed futures trend following
Speaker 1: type of strategy. UH. I think if you were to
Speaker 1: put together for portfolio most people, that's the biggest part
Speaker 1: that's missing, is a trend following or managed future style allocation.
Speaker 1: But the problem is most of those guys charge so much, right,
Speaker 1: So if you can get that allocation at all, at
Speaker 1: all lower cost, I think it's a beautiful, beautiful UM
Speaker 1: active strategy that has worked great. His story. How does
Speaker 1: someone get exposure to that via an e t F? UM?
Speaker 1: When when is your ETF for that coming out? Well,
Speaker 1: we may file from one, not because I want to UM,
Speaker 1: because there's there's no better choices currently. UM. You know,
Speaker 1: there's a couple of e t f s out there.
Speaker 1: They're all based on the same index, and the index
Speaker 1: is really suboptimal. For example, it doesn't short energy. So
Speaker 1: let's think about that for a minute. It's long short
Speaker 1: everything but except for energy, because when they is that,
Speaker 1: that's kind of crazy. I'll tell you why. It's the
Speaker 1: number one classic mistake that quantum back testers should make,
Speaker 1: which is fitting it to the period. So when the
Speaker 1: index came out, oil is it what fifty right? So
Speaker 1: it's only gone one direction. So they said we're not
Speaker 1: going to short oil because of geopolitics, Well, of course,
Speaker 1: what happens Oil is now down to fifty right, you know,
Speaker 1: two thirds drop and so managed future is the whole
Speaker 1: point is that it's a strategy that will help protect
Speaker 1: you in various market environments, inflation or deflation. It's done
Speaker 1: great for the past year, now horrible three or four
Speaker 1: years before that. One of the few asset classes that
Speaker 1: really outperforms during big bear markets, like a OAIT. So
Speaker 1: the E t f s are not ideal. There's some
Speaker 1: mutual funds that do it. Um there's a couple of
Speaker 1: good options, but it's still they're on the expensive side.
Speaker 1: A q R and PIMCO both have fun out there
Speaker 1: that that we think are are probably pretty good ideas.
Speaker 1: But but in general, this trend following approach, we think
Speaker 1: there's a lot of merit either whether you do it
Speaker 1: on your own or allocate to a trend style fun.
Speaker 1: So let me ask you the last few couple of
Speaker 1: questions that I have before we uh have to send
Speaker 1: you back to California. UM, who are some of your
Speaker 1: favorite quants? Who do you who do you read? Who
Speaker 1: do you like? Who do you admire their approach to investing? UM?
Speaker 1: A lot of the ones we were probably a happy
Speaker 1: hour with last night or you've had on this show.
Speaker 1: One of my all time favorite quotes that I put
Speaker 1: I tweeted about this the other day was actually from
Speaker 1: a U one of the most famous quants of all time.
Speaker 1: You know, Jim Simons, professor Stony brook you know, mathematical
Speaker 1: genius runs Renaissance technologies, right breaker, and he's a he's
Speaker 1: an older fellow. Actually ran across him randomly on a
Speaker 1: hike in the woods in the island. I was at
Speaker 1: a wedding. UM it was near Stony Brooks, and you know,
Speaker 1: I I nudge my girlfriend, I said, I can't believe
Speaker 1: we saw She's who's that? You know, who's that older guy?
Speaker 1: And I said, you know, Jim Simon. She's like, who's that? Right?
Speaker 1: And I was like, She's like go talk to him
Speaker 1: like one of the world. Am I gonna talk to
Speaker 1: him about in the woods? But but he has a
Speaker 1: quote in this speech that has permeated a lot of
Speaker 1: my life and thinking about investing where at you know,
Speaker 1: near the end of the speech, someone says, hey, you know,
Speaker 1: I want some advice. Do you think and I think
Speaker 1: they were talking about mathematics, But do you think I
Speaker 1: should study math in a very specific niche so focus
Speaker 1: intensely laser like in this one area, or should I
Speaker 1: study a much broader perspective to be able to come
Speaker 1: up with, you know, a more of a ten thousand
Speaker 1: foot view and be able to apply to any sort
Speaker 1: of discipline? He says, you know what, I can make
Speaker 1: the cliche either way, so meaning like I could show
Speaker 1: that either case would work out, you know, good or bad.
Speaker 1: And so often when talking about people where people were
Speaker 1: giving advice or thinking about investing, you know, I often
Speaker 1: go back to this and say, hey, look, I can
Speaker 1: make this example work out almost either the way. It's
Speaker 1: neither are certain. All can do has come up with,
Speaker 1: you know, tilt towards expected realities and bets that are
Speaker 1: on your side. So in that same vein you know
Speaker 1: Ed Thorpe classic the Dealer, the dealer beat the market.
Speaker 1: You know, one of the true um one of the
Speaker 1: most amazing fun performances for many years. Princeton Newport his fund.
Speaker 1: And you know a true quant I mean it's convertible,
Speaker 1: are but I think so a lot of those classic
Speaker 1: old school guys. And then there's a lot of people
Speaker 1: that you know are quant like but you wouldn't necessarily
Speaker 1: think about as quants. So, um, those are those are
Speaker 1: a lot of good ones. So for people who don't
Speaker 1: know who Jim Simons is, um, he's now sort of retired.
Speaker 1: He was the code breaker in World War Two, sort
Speaker 1: of the American version of Alan turing Um. He was
Speaker 1: the chairman of the mathematics department at stony Brook And
Speaker 1: had you met him, I was applied mathematics and physics
Speaker 1: undergrad at stony Brook. He is the outgoing math chairman,
Speaker 1: as I was the incoming student. And if you met him,
Speaker 1: you wouldn't want to give him a dime. You would
Speaker 1: say scraggy bear, chain smoking, you would you would last
Speaker 1: personal world you would give money to. By most measures,
Speaker 1: the most successful hedge fund of all time was the
Speaker 1: Medallion Fund of renaissance so successful that after a number
Speaker 1: of years they said to their outside investors, here, take
Speaker 1: your money back. We don't have enough space for you.
Speaker 1: It's just gonna be our money. And and that was
Speaker 1: after a four and forty fee four percent a year
Speaker 1: management fee performance, right, and they still outperformed everybody. And
Speaker 1: he had actually a great quote early in his career
Speaker 1: where he said something to the effect of, you know,
Speaker 1: I started you hear some crazy quotes where people are like,
Speaker 1: I've never met a rich technician or essentially in my mind,
Speaker 1: a rich quant right, which is which is kind of insane.
Speaker 1: It's insane because he says, look, I used to trade
Speaker 1: on you know, fundamentals. It gave me ulcers and we
Speaker 1: eventually you know, quantified everything. And that was that. But
Speaker 1: but you know, it goes to show, look, if you
Speaker 1: have an edge, it's it's you can you know, print
Speaker 1: money and whatever that edge. Maybe go down the list
Speaker 1: of quants. John Henry rob are not cliff ass nous.
Speaker 1: These guys are all uber successful billionaires or near billionaires,
Speaker 1: and their funds and their investors have done exceedingly well.
Speaker 1: The hard part, it's easy to look back after forty
Speaker 1: years and say, hey, Renaissance was great, but you go
Speaker 1: back to who's going to give money to this guy?
Speaker 1: It is so much harder to pick the emerging managers
Speaker 1: than people realize. Hindsight is in the beginning. It's an
Speaker 1: emotional thing. And you know, quants aren't necessarily the most
Speaker 1: expressive articulate people. They tend to be math people in
Speaker 1: that language. But I think both are not and as
Speaker 1: a really exceptions that they're both unusually arctic of lit
Speaker 1: and have a way with words. I'm both of them
Speaker 1: right fairly regularly, and they're both really really good writers.
Speaker 1: Most most of us are all just a bunch of nerds.
Speaker 1: And I can say that because I was an engineer.
Speaker 1: I can say that because I'm a quant But yeah,
Speaker 1: but I agree that the challenge by far the biggest
Speaker 1: in quant is is trying to get come up with
Speaker 1: something long term capital classic example, right like a bunch
Speaker 1: of Nobel Laurets, but overfitting their system, over starting to
Speaker 1: believe too much in their own um you know abilities,
Speaker 1: where the employees there were taking out loans to then
Speaker 1: invest in the company at whatever the leverage one one
Speaker 1: what what could really go wrong at a hundred to
Speaker 1: one investing in in obscure paper issued by Russian oligarch's
Speaker 1: it's almost did that possibly blow almost always if you
Speaker 1: look back at a lot of the and there they
Speaker 1: weren't frauds, they were just over leverage. But problems in
Speaker 1: financial and investing it it leveraged somehow and high fees
Speaker 1: that are almost always permeate permeate the problem. So yeah,
Speaker 1: it's stay away, stay away hundred one um to say
Speaker 1: the least. Next question, what don't people understand about bonds
Speaker 1: and fixed income that you think they need to know? Um,
Speaker 1: what you've heard over the last five years certainly is
Speaker 1: there's a lot of misinformation. People are always saying bonds
Speaker 1: are in a bubble. And one of your pals, Rosenberg,
Speaker 1: I remember hearing. I was at a breakfast and he's like,
Speaker 1: you know, it's David Rosenberg, former chief economist in Maryland.
Speaker 1: He Um. He had a great quote where he said
Speaker 1: something extent of Hey, it's really hard for me to
Speaker 1: believe in a bubble when every it's universally despised, when
Speaker 1: everyone hates this asset class. Right, bubble usually involves people
Speaker 1: clamoring hand over fist to invest in something so so
Speaker 1: so bonds. It's it's a challenging asset class. You know,
Speaker 1: we think it's a uh we look historical when we
Speaker 1: have what's called a five to one rule. So this
Speaker 1: is net of inflation ten dollusand foot view. That's how
Speaker 1: much stocks bonds in short term. You know, bills have
Speaker 1: earned over history across all the money five percent on
Speaker 1: global stocks. You know, the US was higher, of course,
Speaker 1: but it was one of the best performing markets of
Speaker 1: the twentieth century. Bonds, it's really like one and a half.
Speaker 1: But I'm rounding and then bills maybe you know you'll
Speaker 1: break even or get you know, half a percent term papers,
Speaker 1: but and and people so when they're thinking about currencies
Speaker 1: and bonds and what happens, I mean, one of the
Speaker 1: biggest misinformation is also on the other side, bonds have
Speaker 1: declined by fifty in the US on a real basis though,
Speaker 1: so their losses are more the slow bleed of inflation
Speaker 1: rather than the equities, which is usually a very sharp
Speaker 1: long price move of you know, one to three years. Bonds,
Speaker 1: you have to look at real returns, not nominal return
Speaker 1: and what we call that in our new book is
Speaker 1: returns you can eat. But that's really all that matters
Speaker 1: because it's it's inflation inflation adjusted, I mean inflation returns
Speaker 1: are are just it's meaningless, right, So, um, So looking
Speaker 1: at bonds from that standpoint, you know they've had is
Speaker 1: as big boss is almost as an equities UK bonds
Speaker 1: of declient on a real basis. However, usually they kind
Speaker 1: of zig and zag against a stock portfolio. It's not
Speaker 1: always the case. It's the correlation changes, you know, depending
Speaker 1: on where interest rates are. But um, it's a big
Speaker 1: part of a um of a good asset allocation portfolio,
Speaker 1: and not just US bonds. We think forn it's it's
Speaker 1: surprised a lot of people, but the world's largest asset
Speaker 1: class is non US bonds, right, so the biggest asset
Speaker 1: cause there's other foreign country bonds, and so we think
Speaker 1: it's it's an important part of an allocation. It's just
Speaker 1: it's hard to get really excited about them in a
Speaker 1: world where I mean, look at Europe, I mean half
Speaker 1: a percent and negative you have actually negative yields in
Speaker 1: a lot of the Swiss and German bonds over the
Speaker 1: past month. I've been here. I'll give you this money,
Speaker 1: give me most of it back. When you're done. And
Speaker 1: so we've looked at sovereign bonds going back historically, and
Speaker 1: if you actually sort them based on yield, so the
Speaker 1: top maybe twenty or actually do quite a bit better
Speaker 1: than the broad universe. Now it ends up being a
Speaker 1: little more volatile. Draw downs are comparable or even a
Speaker 1: little worse. But you end up adding some you know,
Speaker 1: two percent a year by investing in the high yield.
Speaker 1: The problem is, of course, it's the same thing with
Speaker 1: the problem the cheap country equity markets we're talking about earlier,
Speaker 1: is you end up in you know, really weird places
Speaker 1: that are. But you can end up with a seven
Speaker 1: percent yield, eight percent yield right now, but you're gonna
Speaker 1: have to close your eyes and hold your nose and
Speaker 1: go by you know, Brazilian Pakistani type of bonds that
Speaker 1: are that are yielding a little more. So let me
Speaker 1: ask you now come to my last question. Tell us
Speaker 1: what you know today that you wish you knew ten
Speaker 1: or twenty years ago, that you wish you knew when
Speaker 1: you started out in the business. Well, this is always
Speaker 1: an interesting question and it applies personally too, as you
Speaker 1: look back at the times of say hardship, right, So
Speaker 1: I said, man, I really would love to have not
Speaker 1: bought that option and straddle on a biotech stock, you know,
Speaker 1: waiting for phase to approval, and then lost all my
Speaker 1: money when it happened, but you know, then went right
Speaker 1: back to the strike price. Like I would love to
Speaker 1: have not lost all that money. But however, how much
Speaker 1: of the drive and interest and nights spent reading books
Speaker 1: to learn was driven by that pain, right, So part
Speaker 1: of the journey, part of the journey. And so I
Speaker 1: always look back and say, you know, I value the difficulties.
Speaker 1: I value the good and the bad times because they're
Speaker 1: learning expenses, and wouldn't want to you know, probably color
Speaker 1: it any other way. There's a lot of lessons that
Speaker 1: I'm glad to have learned. That's a big one, such
Speaker 1: as what what lessons other than avoiding butterfly straddle? The
Speaker 1: pain of the pain of losing is certainly one. Not
Speaker 1: putting all your eggs in one basket and risking everything.
Speaker 1: That's a huge one. To be able to play another day,
Speaker 1: uh not? You know, um, people often the overconfidence and
Speaker 1: understanding your own biases. You know, we every time I
Speaker 1: give a speech, now we'll talk about you know, around
Speaker 1: and sign a piece of paper. How much do you
Speaker 1: have in US stocks? Every single one in the past
Speaker 1: fifteen times it's around and that's home country by so,
Speaker 1: and you could go to any country in the world,
Speaker 1: even like the UK. Who's it's one thing where the
Speaker 1: US is fifty of global market gap, but the UK
Speaker 1: is something like six or five percent, and it's the
Speaker 1: same because it's what's comfortable. You know. I'm a Denver
Speaker 1: Broncos fan. I grew up Colorado, so I was in
Speaker 1: North Carolina, but I was always you know, you invest
Speaker 1: in your home team, your cheer for him. So that's
Speaker 1: the reason most Italians are investing in Italian stocks. Most
Speaker 1: AUSSI is the same thing. But that can be a
Speaker 1: very insidious problem when you have a massive bear market
Speaker 1: in that country. Look at Greece, right or look at
Speaker 1: Greece as a Greek investor. It's painful, right so, But
Speaker 1: but most important, and this is challenging for people because
Speaker 1: they don't always know ahead of time. They take the
Speaker 1: risk surveys, they say, this is what I think my
Speaker 1: risk tolerances, and then what's the famous quote the Mike Tyson, Right,
Speaker 1: you you have a plan until everybody has a plan.
Speaker 1: It's they get punched in the face, right and so
Speaker 1: but but that's a lesson. It's hard to teach someone
Speaker 1: and it's hard to give the expectations. So but that's
Speaker 1: when you learn and and and it's a part of
Speaker 1: the maturation process of becoming an investor is learning what's comfortable.
Speaker 1: I mean, I'm a trend fall at heart. Half of
Speaker 1: my portfolio is in tactical strategies, right because I know
Speaker 1: that that's the way that it's easier for me to
Speaker 1: sleep at night. And that's always the biggest takeaway. I
Speaker 1: sleep great. But it uh, it's saying, you know what,
Speaker 1: what can you go to bed with each night and
Speaker 1: not have to worry and not worry about it and
Speaker 1: move on to the you know, we talked so much
Speaker 1: on these you know, interviews and everything about how to
Speaker 1: make money, how to invest, But there's the flip side too,
Speaker 1: and it's what how do you use that money? You know,
Speaker 1: how do you spend it in such a way that
Speaker 1: you know drives your happiness and and um, you know
Speaker 1: your goals in life and what you do with it,
Speaker 1: and a lot of people that is as emotionally challenging
Speaker 1: as well. Mab thank you so much for spending so
Speaker 1: much time with us. Uh, give us a list of
Speaker 1: how people can find you, follow you on Twitter, see
Speaker 1: your research, give us your rundown of of websites and
Speaker 1: and Twitter handles. We'll tell you what. If there's listeners
Speaker 1: that have made it all the way through this entire podcast,
Speaker 1: email me, I'll shoot you a free book or to
Speaker 1: go to free book dot meb favorite dot com and
Speaker 1: I'll send you your choice. Uh, that's my blog web
Speaker 1: Favorite dot com over articles on their um plenty of
Speaker 1: plenty of work to put you to sleep at night.
Speaker 1: It lists are white papers. There's about a half dozen
Speaker 1: we got. Our fourth book just came out. And then
Speaker 1: book is Global Asset Allocation, a survey of the world's
Speaker 1: that's the third one. I know I got the third
Speaker 1: one in the second one, I don't have the fourth one.
Speaker 1: Give me the full title of that. Global Asset Allocation
Speaker 1: is Survey of the world's top investing strategies. And your
Speaker 1: Twitter handle meb favor And then for work you can
Speaker 1: go to Cambria Funds. That's got fact sheets on all
Speaker 1: the all the funds we run. And what about idea farm?
Speaker 1: Is that the idea farm. Yeah, that's that's geared towards
Speaker 1: the professionals. But we send out kind of curated the
Speaker 1: top two or three research pieces we come across each week,
Speaker 1: and it's it's geared a little more towards you know
Speaker 1: what I find interesting. But what's the u r L
Speaker 1: for that? The idea of farm dot com. The idea
Speaker 1: farm dot com. We have been speaking. Thank you so much.
Speaker 1: This was great. This was really a lot of fun. Um.
Speaker 1: We've been speaking with me Bane Favor, meb Favor of
Speaker 1: Cambrian Investments, author of Shareholder Yield and Global Value and
Speaker 1: the IVY Portfolio, and the new one is Global Asset
Speaker 1: Global Asset Allocation. If you enjoy these podcasts, and you
Speaker 1: at this point ninety minutes in you probably do, I
Speaker 1: would tell you look an incha above or below this
Speaker 1: and you'll see the other thirty nine or so podcasts
Speaker 1: that we've um done so far. They they're always with fascinating,
Speaker 1: interesting people like Meb. And if you're looking for an education, um,
Speaker 1: you could do a lot worse than listening to some
Speaker 1: of these. I have to give thanks to my producer
Speaker 1: Charlie Vohmer, to my engineer Matt Ryan, and to my
Speaker 1: head of research, Matt Baton Michael bat Nick for helping
Speaker 1: me put this together. I'm Barry rid Helts. You've been
Speaker 1: listening to Masters in Business on Bloomberg Radio.