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The Meb Faber Show

Ready to grow your wealth through smarter investing decisions? With The Meb Faber Show, bestselling author, entrepreneur, and investment fund manager, Meb Faber, brings you insights on today’s markets and the art of investing. Featuring some of the top investment professionals in the world as his guests, Meb will help you interpret global equity, bond, and commodity markets just like the pros. Whether it’s smart beta, trend following, value investing, or any other timely market topic, each week you’ll hear real market wisdom from the smartest minds in investing today. Better investing starts here. For more information on Meb, please visit MebFaber.com. For more on Cambria Investment Management, visit CambriaInvestments.com. And to learn about Cambria’s suite of ETFs and other investment offerings, please visit CambriaFunds.com.
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Now displaying: October, 2017
Oct 25, 2017

In Episode 77, we welcome author and asset manager, Tobias “Toby” Carlisle.

After discussing Toby’s background, including his time as an M&A lawyer and what drew him to investing, we jump into his latest book, The Acquirer’s Multiple.

Toby tells us that the book describes a simple way to find undervalued companies. In essence, you’re trying to find a company trading below its intrinsic value. This is how to get a great price as a value investor. Of course, you get these prices because things don’t look too rosy with the stock – there’s usually a crisis or some hair on it, so to speak. Toby tells us “In order to find something that is genuinely undervalued…there’s always something that you don’t like.”

This leads into a great conversation about what Warren Buffett seeks in a company, versus what Toby, through the Acquirer’s Multiple, seeks. While Buffett looks for wonderful companies trading at fair prices, Toby seeks fair companies trading at wonderful prices.

Toby goes on to tell us that for a company, there are two sources of value – the assets it owns, and the business/operations itself. You have to look at both together. Buffett looks at wonderful companies at fair prices, and is willing to pay a premium to book value, but that’s generally because Buffett is able to ascertain that the stock is worth even more. Joel Greenblatt took this idea and ran with it in his book, The Little Book That Beats the Market. The idea relies on buying companies with high returns on investing capital (ROIC). But Toby thought “what if you can buy at the bottom of a business cycle?” You could likely get better returns by buying very, very cheap, hence his focus on fair companies at wonderful prices.  

The guys then discuss the merits of a high ROIC. Toby tells us that a high ROIC is meaningless absent a moat or competitive advantage. Don’t misunderstand – a high ROIC is incredibly valuable, but it has to be protected.  

This dovetails into a fun stretch of the interview when the guys discuss the old Longboard study about how only a handful of stocks truly outperform… a study from Michael Mauboussin, which points toward the power of “mean reversion”… how a historical backtest of “excellent” companies (high returns on equity, assets, and invested capital) actually underperformed “un-excellent” companies – which were generally defined as being incredibly cheap. The reason? Mean reversion.

Finally, we get to The Acquirer’s Multiple. Toby tell us you’re trying to find the real earnings of the business. The guys touch on lots of things here – why Buffett & Munger actually don’t prefer this multiple… a comparison between The Acquirer’s Multiple (AM) and Greenblatt’s Magic Formula… and an example from Toby about the power of the AM using the stock, Gilead.

The guys then discuss implementation, including how many stocks you should hold to be diversified. They also touch on the Kelly criterion – how much of your bankroll you should bet on any given stock or investment. This leads to an interesting story about how Ed Thorp showed that the Wall Street quants were using Kelly incorrectly. The guys agree that “half-Kelly” tends to work pretty well.

The conversation drifts toward valuations, with Meb feeling angst about how nearly all institutional investors believe future returns will be below-average. The contrarian in him is excited. Toby tells us that every metric he looks at says we’re overvalued. Therefore, we should be cautious, but then again, Japan got to a CAPE of 100 and the US has been to 44. You just don’t know when to get out, and there’s no right answer…

The guys hop back into The Acquirer’s Multiple, discussing how to avoid the value trap… marrying momentum to it… how value is sitting on about a decade’s worth of underperformance… and whether the AM works globally.

The guys eventually switch gears, and turn toward Toby’s private “special situations” fund. In essence, Toby looks for situations when there’s a corporate act, say, a board-level decision to buy or sell a company, or pay a special dividend, or buy back a material amount of stock. He then tries to arb it. He gives us any example of how he made money using the strategy back when Obama was attempted to stop corporate reverse-mergers. But in all cases, Toby is still looking for undervalued, cheap investments.

There’s tons more in this episode: the “broken leg” behavioral problem… how investors trying to improve upon the Magic Formula tend to vastly underperform the Magic Formula left alone… how professional investors tend to behave just as poorly as non-professionals… what Toby is working on/excited about right now… and of course, Toby’s most memorable trade. It involves a basket of net-cash biotechs. While he made over 200%, if he hadn’t tinkered, he could have made 750%.

What are the details? Find out in Episode 77.

Oct 18, 2017

In Episode 76, we welcome Phil DeMuth. We start with Phil’s background. It’s a fun recap, involving Phil’s clinical psychology roots, his move to LA to be a screenwriter, his experiences in the Dot Com boom with friend, Ben Stein, which led to the writing of his first investment book, which eventually resulted in his managing money.

Meb dives into investing, asking for an overview of the framework Phil uses with clients.

Phil seeks to construct a portfolio that matches each individual’s situation, so it’s largely bespoke. That said, in general, he starts with a global market portfolio, then adds various factors – for example small value, or momentum, or low beta… Then he’ll add bonds, some alternatives, gold, and so on – again, all relative to the individual’s needs and goals.  

This leads into a great conversation on the idea of a person’s “personal beta.” This dovetails into the concept of a person’s human capital. Meb believes that adjusting a portfolio to reflect a person’s human capital is something advisors do well, giving them an advantage over robos. Phil thinks there are ways the robos can catch up here.

Next up, the guys discuss the various types of investing clients – doctors, engineers, celebrities, and so on – and whether any specific type is better or worse suited for investing. Meb’s opinion is that many doctors and engineers can be challenging clients because they’re brilliant and love to tinker. They can also have some hubris – an element of “I can do better than buy-and-hold”.

Phil agrees that doctors and engineers should be excellent investors. They’re so smart that they can do it all; yet in practice, they tend to stumble.

This leads the guys to the takeaway that, in investing, there’s not a linear correlation between time/effort and returns. Phil notes the correlation could even be negative!

Next up, Meb asks how the world looks to Phil today. Phil tells us “Everything looks expensive. It’s just a question of what looks more expensive than others.” That said “Nothing in my global outlook is telling me it’s time to pull up the anchor and set sail,” even though there seems to be 10 articles each day claiming the sky is falling.

This dovetails into an interesting conversation about how nearly no one believes there will be strong U.S. equity returns over the next decade or so. But what is the psychological impact of everyone believing that? Especially in light of how terrible humans tend to be at these kinds of predictions.

From this, Meb brings up alternatives. Phil has been delving deeper into alts since ’08, when all his assets sank together. Phil tells us he’s been looking for alts that have have zero correlation to the stock market, reasonable expenses, and should have positive expected returns.

Meb switches to psychology, asking about the most insidious behavioral issues facing investors, and how to protect against them. The guys discuss our shortcomings, including a trick Phil uses with his clients that tends to help them avoid some of the damage.

Meb transitions to Phil’s newest book, which is one of Meb’s favorites: The Overtaxed Investor: Slash Your Tax Bill & Be A Tax Alpha Dog. The guys discuss how implementing effective tax strategies in investing is one of the biggest, yet underused, sources of alpha around. Phil notes that any savings in this area goes straight to the bottom line.

Meb asks for specific tax strategies. You’ll want to listen to this section, which dives into some of the details of parking the right kind of assets into the right kind of accounts. This dovetails into an idea Meb loves: (and the topic of a soon-to-be-released whited paper) avoiding dividends.

Phil tells us he hated the taxes he was paying on dividends and capital gains, so he got rid of everything issuing him dividends and distributions, and instead, sought quality investments that wouldn’t pay a dividend. He goes on to say how dividends are great for retirees who are intentionally spending the money, but if you’re earlier in your working career, and the government is taking 30% of your income via taxes, that’s not good at all! So, Phil wondered how he could get the dividend benefit, without the dividend.

It was this idea that led Meb to do his own research on the topic (the subject of the forthcoming white paper). So Meb thanks Phil for the inspiration, then takes the handoff and discusses what he found through his own research. If you’re a dividend investor, you won’t want to miss Meb’s conclusion.  

There’s way more in this great episode: additional tax tips… ETNs… tax loss harvesting… donating stocks with huge capital gains to charities rather than donating cash… wills… how Meb wants a Viking funeral (yes, you read that right)… Meb’s unexpected bill from the IRS… And of course, Phil’s most memorable trade – it involves an investment that turned out to be somewhat less liquid than Phil had anticipated.

What are the details? Find out in Episode 76.

Oct 11, 2017

In Episode 75, we welcome Mike McDaniel, CIO and co-founder of Riskalyze. It’s a special episode, being recorded at the Riskalyze Fearless Investment Summit in Lake Tahoe.

Per usual, we start with Mike’s origin story, but it’s not long before the guys dive into investments. Meb asks about Mike’s investment framework – how does he think about the world as a practitioner.

Mike tells us he tries to let the market do as much as possible. One of the biggest things that will lead to success is simply being investing. And because our emotions can trip us up so much, by quantifying risk and then having a better idea of what to expect, we stand a better chance of success.

This concept is what lead to the Riskalyze Risk Number. Meb asks for an overview of what this number is and how it works.

Mike gives us a great overview of its background and how Riskalyze seeks to quantify risk on a scale of 0-100. (Basically “cash” to a “single stock.”) The conversation morphs into how the Risk Number has been further refined over the years, including the amount of historical data included.

Next, Meb brings up something Mike once said in an interview, about the two reasons why investing is broken. He asks him to expound. Mike tells us these factors are 1) the psychological pitfalls facing the mom ‘n pop investor, and 2) the complex nature of the investing environment (so many products available to the investor).

It’s not long before Meb brings up a current reality facing advisors: With asset allocation being largely commoditized with a low fee attached, where is the main “value add” for advisors these days?

Mike believes that the advisor’s role is to be the behavioral coach. He has multiple stories about the power of using data and analytics to keeping the investor invested. This leads into the most common mistakes Mike sees that many investors continue to make.

It’s not long before Meb turns the mic over to the audience (remember, this was recorded in front of a live audience in Lake Tahoe). You’ll hear:

  • Have Riskalyze numbers proven to be helpful when facing an SEC audit?
  • What will be the impetus that gets advisors to enter into the 401k space?
  • Most investors have traditionally relied on bonds to be a stabilizing effect on portfolios, but is the market we’re in likely to play that role? Given this, how does Riskalyze think about alternative asset classes?
  • In a world of low expected returns, how does an advisors balance business risk versus the client’s investment risk?

There’s plenty more in this episode, including Meb’s discussion of the impact of fees on various global asset allocations… home country bias… the challenges of trend-following… and of course, Mike’s most memorable trade. It turns out, he has two, the latter of which is what led to the creation of the Riskalyze concept.

What were the trades? Find out in Episode 75.

Oct 4, 2017

In Episode 74, we welcome Jeffrey Sherman from DoubleLine. We start with Jeff’s background – it’s a fun recap, including stories of running the scoreboard for The Stockton Ports… being a bank teller… earning graduate degrees… there’s a brief aside into catastrophe bonds which is a good primer if you’re less familiar with them… then back into Jeff’s background with DoubleLine.

This dovetails into Meb asking about the type of shop DoubleLine is, as well as its overall investing framework. We learn that DoubleLine will go into whatever market it finds interesting. They’re also a macro shop, which led them to fixed income. After all, Jeff tells us “If you want to know what’s going on in the world macroeconomically, the bond market tells you.”

Next, Meb asks how the world looks to Jeff today.

Everything is growing, but it’s not the same old growth. The difference is debt.  Overall, it has been a positive environment for investing; inflation is low, but the price of assets now reflects this good environment and people are projecting that forward – but it’s not realistic. Many assets are expensive now. Jeff puts a point on the situation by saying “There’s this ‘buy-the-dip’ mentality… Do you play in it or just shake your head?”

The guys cover lots of ground here: Prices in the bond market have gotten ridiculous… Policy mistakes from the Fed… How this is “The Jay Cutler bull market” meaning it’s very “ho-hum”... how Europe is growing at the same rate as the U.S., yet they are continuing to do QE, while we’ve hiked rates four times… we’re talking about unwinding bonds while they’re buying – there’s a disconnect. And we don’t truly know what unwinding is going to look like.

This leads into a great discussion of bonds and how they respond to a rising rate environment. As Meb notes, most people hear “interest rates are going up” and they think “bond prices must be going down.” But that doesn’t have to be the case. Jeff dives into some great detail here on the math behind bond returns and rising rates. If you’re a bond guy, make sure to catch this part of the episode.

A few twists and turns later, Meb brings up a DoubleLine fund that combines U.S. equities in various sectors, paired with a fixed income component. He asks how is it designed, the benefit, and so on.

Amongst other details Jeff tells us, we learn that the fund applies a sector rotation strategy based on Professor Shiller’s CAPE ratio. Historically, people have used CAPE to evaluate markets. Jeff wondered why one couldn’t apply it to smaller subsets of the markets – sectors. For instance, utilities and tech have different profiles re: beta and whatnot. So why not take each sector’s CAPE and compare it to its own CAPE history? You then look for the cheapest sectors of the market. And you can avoid buying a value trap by apply momentum (in Jeff’s strategy, they throw away the worst one-year momentum sector).

Meb asks which sectors look good from a CAPE perspective now. Jeff tells us he’s looking at technology, consumer discretionary, consumer staples, and health care. He was looking at energy, but he booted it due to its bad momentum. He tells us another high flier is the financial sector. Up 35% or so since the election.

Meb asks a Twitter question next – how much does DoubleLine incorporate technicals into their process? Jeff tells us that he uses technical more on trade implementation and things that are hard to value like FX.

There’s so much more in this episode: sentiment… Trump, and the D.C. status quo… commodities… the “Four Asset” portfolio… More write-in questions from Twitter… a quick descent into a crypto-rant… the biggest mistakes Jeff is seeing investors make… and of course, his most memorable trade.

What were the details? Find out in Episode 74.

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