In Episode 98, we welcome a true market veteran, Dr. Ed Yardeni.
The episode starts with a fun story about Ed’s school days, studying off Janet Yellen’s notes in James Tobin’s class. But Meb soon brings up Ed’s new book, Predicting the Markets. In it, he writes that if books had theme songs, the appropriate song for his would be the 80s hit, “Don’t Worry Be Happy.” Ed explains this is because, when looking back over the past 40 years, the market has been extraordinarily bullish as a whole. There were plenty of reason to worry along the way, but all in all, the market rewarded brave investors.
This eventually leads into a conversation about valuations today that appear somewhat grim, and what Ed’s thoughts are looking forward.
Ed tells us it’s okay to be bearish, but don’t forget to get back into the market. He says, “history shows the smartest thing to do is just to invest over the years as you’re getting old, keep putting more money into the markets…recognizing that sometimes you’re going to get bargains and sometimes you’re not.”
The conversation drifts toward making macro predictions and the effect of Washington DC on the market. Ed tells us we’re overwhelmed with information and news, which is all the more reason to try to find the fundamental truth that’s out there. Washington doesn’t matter as much as Washington likes to think it matters. Ed gives us more of his thoughts on the market response to Obama, Trump, and the Fed, as well as what he believes actually creates jobs.
The conversation turns toward bonds, with Meb asking why bond movements can be challenging to predict. Ed points toward inflation, taking us back to the 50s to discuss bond yields and how they’ve moved in the years since. He brings in nominal GDP and central bankers into the mix.
A conversation about negative yielding sovereigns brings various central bankers into the spotlight. Ed walks us through a look back at some of the effects of Fed involvement. He has some interesting thoughts on what the Fed does well – and not so well.
This is a great show, melding market history, implementable market wisdom, and Ed’s fascinating career. There’s way more, including where Ed sees the biggest changes coming in technology, and how it will affect markets… Ed’s favorite three indicators… which period over Ed’s 40-year career stands out the most… Ed’s movie reviews… and of course, his most memorable trade.
What are the details? Find out in Episode 98.
In Episode 97, we welcome one of the most successful syndicate leads in angel investing, Phil Nadel (he also happens to be Meb’s favorite syndicate lead on Angel List).
After Phil runs us through his background, Meb asks about Phil’s group, Forefront Venture Partners and its connection to Angel List. Phil gives us the run-through, noting how when Angel List announced its syndicate feature, he felt it was a great way for smaller angels to get involved, so he signed up. Today, he’s one of the largest/most active leads on Angel List.
Meb asks how the syndicate process works. Phil tells us that accredited investors can register and sign up with syndicate leads like Forefront. This enables them to see the deal-flow of the lead, and invest on same terms. There’s no management fee, instead, investors pay a 20% carry on the backend if there’s a profit. You can invest small amounts – sometimes as little as $1K, yet you get all the same due diligence and legal review as a big investor.
Meb notes how syndicates have removed so much of the hassle and made the entire process simpler – which is both good and bad.
Next, Meb asks about Phil’s syndicate and the average investor. Phil tells us the average investment in a company is roughly $300K. And they’ve invested in about 44 deals since inception. The average investment per person is around $4-5K. This dovetails into a conversation about how to approach angel investments. Phil tells us a “portfolio” approach is important. He’s against picking only a few companies, as most will go out of business. He tells us “if you try to pick winners, and you only invest in a handful of companies, odds are you’re going to lose your money.” Phil recommends picking companies diversified by industry and stage.
The conversation then drifts into timing. Do you invest all at once, or drip in over time? Phil gives us his thoughts. Then it’s Phil’s rule of thumb about success rates. He tells us that out of 100 investments, 70 will go out of business. About 20-30 will stagnate, or exit as a single to a triple. Maybe one or two will turn out to be home runs.
Meb asks how Phil finds his deals. Turns out, lots of referrals. The guys then dive into what Phil looks for in a company – it includes post-revenues and capital efficiency. But he’s industry and geography-agnostic. His sweet spot is a valuation in the $5-12M range.
Next up, the guys discuss KPIs, or “Key Performance Indicators.” Phil discusses burn and runway, then customer acquisition cost and lifetime value. Phil wants to see that the company knows how to acquire and monetize customers in an efficient and scalable way. He then also looks at margins.
There’s plenty more in this angel-themed episode: the extent of Phil’s involvement in a startup after funding… the critical role that updates from founders play in the startup process… some “bad investor behavior” which Phil has seen over the years… what Phil learned from Barbara Corcoran of the show, Sharktank… and of course, Phil’s most memorable trade.
What are the details? Find out in Episode 97.
In Episode 96, we welcome two of the brightest guys in real estate, Craig Leupold and Jim Sullivan of Green Street.
After touching on Craig’s and Jim’s backgrounds, the guys jump into real estate, with Meb asking about Green Street’s approach to the real estate markets (public and private) and how they think about valuation.
Craig gives us an overview, referencing Green Street’s REIT research (focusing on the public markets), their real estate analytics (focusing on private markets), and their advisory consulting group. Craig touches upon lots of ideas – understanding the value of the properties owned by the various companies… identifying the associated premiums or discounts at which the companies might be trading… a deeper dive into their real estate analytics lineup… looking at how to allocate capital…
Meb asks how the real estate world looks today, and what’s the outlook for 2018. Craig tells us that with the exception of retail real estate, most sectors are seeing increases in rents and occupancies. But fundamentals have moved from “great,” to “good,” to now, “okay.” He goes on to give us his growth forecast over the next four years, as well as what he expects for commercial pricing over the next 12 months.
When Meb brings up “returns,” the guys make the distinction between public and private markets and how there’s a divergence. Private real estate is generally fairly valued today, yet in the public market, REITs are trading at an 11% discount to their unleveraged asset value.
Jim dives into greater detail on this topic, telling us how the average REIT should trade at a modest premium to NAV. The reason for this is that an investor should be willing to pay the fair market value for the property owned by the REIT, but then there’s the added benefit of the management team and the liquidity of the REIT structure; both deserve a premium. But again, today, we’re not seeing this premium today – quite the opposite, in fact.
Meb brings up valuation, asking about how to distinguish between buying opportunities and value traps. Jim tells us it’s situational, and depends on the property type. This dovetails into a discussion about pessimism in the mall sector.
Soon, the conversation turns toward rising rates. The common opinion is that rising rates are bad for real estate, but Jim tells us it’s more complicated than that. If rates are rising due to our economy accelerating, then that could be positive for commercial real estate, leading to higher occupancies and rising rents.
There’s far more in this episode: activism in the real estate space… how the real estate market looks around the world… the challenge of figuring out what risk-adjusted returns should be in different global locations… which geographies look particularly attractive today… farmland REITs… and Craig’s and Jim’s one piece of advice to investors looking to allocate to the REIT space.
All this, as well and Craig’s and Jim’s most memorable trades, in Episode 96.
Episode 95 is a radio show format. We start with a recap of Meb’s recent travels to Nicaragua and San Francisco, but then dive into a discussion about volatility. With the VIX spiking at the beginning of the month, some short-vol funds suffered massive losses. We discuss the short-vol trade, then the long-vol trade.
Next up, Meb gives us a quick (overdue) update on his trip to see Van Simmons, including which coins he purchased. But we quickly dive into a different topic – a recent offering from Wealthfront that’s raising some questions for Meb. The conversation touches upon a risk parity market approach, robo fees, and general transparency.
We then jump into listener Q&A. Some of the questions you’ll hear answered include:
All this and more in Episode 95.
In Episode 94, we welcome entrepreneur, author, and SEC filings expert, Michelle Leder.
We start with Michelle’s background. She was a business journalist – a self-professed “document geek.” She wrote the book Financial Fine Print: Uncovering a Company's True Value and decided to launch a website as an accompaniment to the book. Here we are, 15 years later.
Meb asks Michelle to give an overview of what she’s looking for in the various filings. She tells us that changes are important. She doesn’t necessarily look closely at the numbers because it’s more about the language. Also, the forward-looking statements can be big. Michelle mentions an example of one that used a significant amount of extra language.
This dovetails into a discussion about the process – is it a keyword search or is there software? Michelle uses both, as keywords alone don’t always work. She gives the example of when Goldman Sachs was subpoenaed, the language used to describe it in the filings was something like “an invitation to respond to the DOJ.”
Meb asks for examples of red flag behavior in the filings. Michelle looks for unusual compensation or stock grant amounts. Also, lots of extra language used to describe earnings or adjusted EBITDA. She mentions a company called GT Advanced Technology, which used to be an Apple supplier. In one particular filing, they added new disclosure language, identifying their dependence on Apple, and their vulnerability if that relationship soured. Some time thereafter, Apple ended the relationship.
Next, Meb and Michelle discuss the “Friday Night Dump.” This is the 90 minutes after market close on Friday, when there’s no major trading. Companies tend to dump all their bad info here. Michelle mentions recent examples using Tesla and Wynn. But her most memorable disclosure dump was Chesapeake Energy, revealing it had paid over $12M for a map collection.
Meb asks if Michelle has ever been contacted by a company she’s profiled, trying to defend or explain itself. She mentions Dell. Apparently, the company once purchased a company from Dell’s own brother and something seemed a tad off. After Michelle covered it, Dell reached out to tell her she had gotten it all wrong.
This is a fun episode with plenty more in it – what sort of time commitment this would take the average investor… the atmospheric changes Michelle has seen in the last 10-15 years… the story of Meb stealing someone else’s disclosure language for his own blog but forgetting to remove the other company’s name…
There’s even a discussion of something Twitter did recently that grabbed Michelle’s interest. If you’re a Twitter investor, you might want to listen.
All this and more in Episode 94.
In Episode 93, we welcome entrepreneur, author, and quant investor, John Reese.
We start with John’s background. When John was a child, his father was a subscriber to Value Line, and John related to the charts and numbers. Later, this love of numbers took him to MIT, where he researched how to take the wisdom from books and turn it into computer programs. Years later, when he sold his company to GE Capital, John needed to learn how to invest the proceeds. Yet, he wasn’t sure which investment guru to follow in doing this. He decided to study a handful of gurus, and was disappointed to find that there was no repeatability and sustainability of outperformance over multiple time periods.
However, John then came across Peter Lynch’s One Up On Wall Street. In the book, Lynch had provided enough detail about his strategy that John was able to translate it into a computer program designed to pick the stocks that Lynch might have chosen. The results were solid. John then moved on to Ben Graham, eventually codifying 12 different guru strategies. He then put his research up on a website, which eventually morphed into Validea.
Meb asks about the challenges of this – namely, many managers have a qualitative component to their stock selection as well quantitative. How did John account for this?
John tells us this was very challenging. He had to re-read the various books multiple times, determining whether the printed word actually matched what the guru did in the market, versus his actions revealing more information or biases. Meb asks about filtering the incredibly long list of potential gurus to follow, and John tells us the list actually wasn’t too long. Most gurus didn’t have a sufficiently-long track record of performance, or they didn’t describe their strategies in sufficient details as to be able to be codified.
Meb then asks how John determines when a period of underperformance reveals a manager has lost his touch, versus the manager’s style is simply out of favor.
John tells us that he first looks at the length of time in which the strategy worked. If it was long enough, he tends to believe that, at some point, the strategy will come back into favor. He goes on to tell us that in all of his research, he found that there was not one strategy that outperformed the market every single year. They were these periods of going-out-of-favor that paved the way for the outperformance that occurred when the style came back into favor.
The guys then jump into an actual example of how John’s guru quant strategies work, using Buffett. Be sure to listen to this part for all the details.
Moving on from Buffett, Meb asks if there are any common attributes to the models that tend to do the best – any broad takeaways.
John tells us that, over time, the more successful strategies tend to have a value orientation, some kind of debt criteria, and they’re all profitable.
Meb asks – “Okay, gun to your head, which strategy has outperformed?” I’m going to make you listen to find out John’s answer, but odds are you’ll be surprised.
Next, the guys turn to factors, with Meb asking if there are any combination of factors that John tends to prefer. John says he likes momentum and mean reversion. This leads into a conversation on timing factors.
As usual, there’s far more in this episode: practical guidelines for listeners looking to follow along… portfolio construction in today’s challenging environment… what John would have done differently if he could start over again on Day 1… a roboadvisor for income investors… and of course, John’s most memorable trade.
This one happened the day after Black Monday. What are the details? Find out in Episode 93.
In Episode 92, we welcome investor, author, and activist, Andrew Tobias.
Meb starts by asking Andy about his background and introduction to investing. Andy gives us his origin story, with highlights including collecting stamps, an early introduction to the stock market, a trip behind the Iron Curtain which led to a brief dalliance with Communism, then his becoming a paper millionaire due to some creative accounting (then those monies disappearing). It’s a fascinating look back.
Next, Meb recalls a survey we conducted some quarters ago, soliciting readers’ favorite investing books of all time. Andy’s book from 1978, The Only Investment Guide You’ll Ever Need, turned out to be high on that list. Meb asks Andy to explain the thesis of the original book, and whether there have been any significant changes in subsequent editions.
Andy tells us “There are just a few things you really need to know about investing, and they don’t ever change. The problem is it’s hard to get people to really grab onto them.” He goes on to say that investing isn’t like cooking or chess, where the more you read/learn, the better. Instead, with investing, the more you read, the more you can get yourself into trouble. He gives us an example using commodity speculating. Given that so much about investing remains constant, Andy’s revisions in subsequent editions haven’t been too substantial.
Meb pushes a bit more, asking if there’s any subject about which Andy has changed his mind since the original publication.
Andy tells us he’s become a bigger fan of special opportunity investing. Most people aren’t looking for this type of thing. So, Andy discusses putting 80% of your portfolio into inexpensive index funds, but spreading the remaining 20% over 5-6 really interesting, exciting speculations. Most will go to $0, but maybe you hit with one or two, and those proceeds offset the losses and more. Plus, this satisfies the need to have something more exciting to do with your money.
Meb agrees with this idea, and asks about Andy’s speculative process – is it rooted in quant or is there a discretionary component? Andy answers by giving us an example with Support.com.
Next, the guys discuss valuations, comparing where we are now to where we were back in the early ‘80s. It seems we’re flip-flopped a bit in terms of interest rates and equity valuations.
This segues into private investing, with Andy telling us about how came to own farmland. Turned out to be a great investment, buying at $500 an acre and selling years later at $3K an acre. Meb agrees farmland is a great asset class, but it’s hard to allocate toward.
This dovetails into a few other private investments in which Andy has participated, most notably “Honest Tea,” which was purchased by Coca Cola, as well as a small, musical comedy, which went on to play on multiple continents over many years.
The guys bounce around a bit here, discussing the need to spread your bets in private market investing… lockups… the benefit of illiquidity… binary thinking… Andy’s firsthand experience with selling way too early…
There’s plenty more in this episode, including Andy’s concerns for our existential future, his most memorable trade, and finally, a product he endorses which might help tackle dementia and improve reflexes. Apparently, Tom Brady swears by it.
What are the details? Find out in Episode 92.
Episode 91 is a radio show format.
We bounce around a bit in this one, starting with Meb’s most popular Tweet of all time. It involves a market record that people decided to politicize.
Next are some “signs of the top.” We discuss various indicators that support the general takeaway that (to no one’s surprise) we’re in a frothy market: US investor stock allocations are approaching the highest levels since 2000… Stocks as a percentage of household assets adjust for pensions funds are now the 2nd highest ever… The average expected return of state and local pension funds is 7.5%... The number of days the VIX has spent below “10” in 2017 was 52 (the combined amount for all years dating back to 1999? Less than “10”)…
We then discuss Meb’s upcoming personal portfolio rebalance. He publishes this each year, and he gives us the preview. Then there’s a discussion of Bitcoin, and Meb’s thoughts on how an investor might reasonably participate if so desired.
Then we hop into some listener/Twitter questions:
Plus, Meb is about to do some traveling overseas. Where’s he headed this time? Find out in Episode 91.
In Episode 90, we welcome Founder and Portfolio Manager of Verdad, Dan Rasmussen.
We start with a brief walk-through of Dan’s background. It involves a Harvard education, a New York Times best-selling book, a stint at Bridgewater, consulting work with Bain, then his own foray into private equity.
Turning to investments, Meb lays the groundwork by saying how many people misunderstand the private equity market in general (often confusing it for venture capital). He asks Dan for an overview, then some specifics on the state of the industry today.
Dan clarifies that when he references “private equity” (PE), he’s talking about the leveraged buyout industry – think “Barbarians at the Gate.” He tells us that PE has been considered the crown jewel of the alternative world, then provides a wonderful recap of its evolution – how this market outperformed for many years (think Mitt Romney in the 80s, when he was buying businesses for 4-6 times EBIT), yet its outsized returns led to endowments flooding the market with capital ($200 - $300 billion per year, which was close to triple the pre-Global Financial Crisis average), driving up valuations. Today, deals are getting done at valuations that are nowhere near as low as in the early days. And so, the outsized returns simply haven’t existed. Yet that hasn’t stopped institutional investors from believing they will. Dan tells us about a study highlighting by just how much institutional managers believe PE will outperform in coming years…yet according to Dan’s research, their number is way off.
Dan then delves into leverage and the value premium, telling us how important this interaction is. He gives us great details on the subject based on a study he was a part of while at Bain Consulting. The takeaway was that roughly 50% of deals done at multiples greater than 10x EBITDA posted 0% returns to investors, net of fees.
Meb asks about the response to this from the private equity powers that be… What is their perspective on adding value improvements, enabling a higher price? Dan gives us his thoughts, but the general take is that doing deals at 10x EBITDA is nuts.
Next, the guys delve into Dan’s strategy at Verdad. In essence, he’s taking the strategy that made PE so successful in the 80s and applying it to public markets. Specifically, he’s looking for microcap stocks, trading at sub-7 EBITDAs, that are 50%-60% levered. With this composition, this mirrors PE deals.
The guys then get neck-deep in all things private equity… control premiums, fees, and illiquidity… the real engine behind PE alpha… sector bets… portfolio weights…
Meb and Dan land on “debt” for a while. Dan tell us how value investors tend to have an aversion to debt. But if you’re buying cheap companies that are cash-flow generating, then having debt and paying it off is a good thing. Debt paydown is a better form of capital allocation than dividends or buybacks because it improves the health of the biz, leading to multiple expansion.
The guys cover so much ground in this episode, it’s hard to capture it all here: They discuss how to balance quantitative rules with a human element… The Japanese market today, and why it’s a great set-up for Dan’s PE strategy… Rules that should work across geography, asset classes, markets, and time… Currency hedging… And far more.
For the moment, we’re still ending shows with “your most memorable trade.” Dan’s involves a Japanese company that had been blemished by a corporate scandal. Did it turn out for or against him? Find out in Episode 90.
In Episode 89, we welcome legendary market veteran, Blair Hull.
We start per usual, with our guest’s background. In this case, long-time Meb Faber Show listeners may think they’ve heard it before. That’s because Blair’s background shares an interesting similarity with that of Ed Thorp – the card game, Blackjack.
It turns out Blair made a considerable sum of money playing Blackjack after reading Ed’s writings on the game. Blair tells us you needed an advantage, and then you need to stay in the game. That’s why he played with a team. More hands played according to their system tilted the odds in his favor. This is a fun part of the podcast you’ll want to listen to for all the details, including Meb’s foray into card counting with a partner that botched the system after drinking too many Bloody Mary’s.
Eventually, Blair took his winnings and used them to get a seat on the Pacific Exchange, where he became a market maker and began trading options. Blair tells us he was intrigued with market timing, resulting in a paper he wrote which concluded that you can time the market.
Meb asks about the genesis of Blair’s market timing strategies.
Blair points back to Blackjack – each different card provides an idea about the future. In a similar way, various indicators provide an idea about a market’s future. So, part of the challenge is which indicators do you consider and what weights do you put on them?
Next, Meb digs deeper, asking for more specifics of Blair’s strategy, inquiring about the indicators.
Blair mentions one indicator that piqued his interest – the Federal Reserve Bank Loan Officer Survey. They found the correlations with 6-month returns was about 30%, which is a fairly high correlation for an indicator. He then took this indicator and combined it with a few others and ran a regression with no forward-looking bias to see if they could exceed the returns of the S&P. What were the results? You’ll have to listen.
The conversation bounces around a bit before Blair mentions how valuation is one of their key variables. He tells us his valuation method combines three different aspects: CAPE, cyclically adjusted dividend yield including buybacks, and book-to-price.
The guys spend a while discussing the various inputs in Blair’s model before discussing sentiment (which Meb calls “squishy). Both guys like sentiment, with Blair even having invested in two different firms that are using Twitter feeds so he can get a better handle on sentiment.
Next, Meb asks about AI, and how machines may affect investing going forward. Blair has a proprietary trading firm that operates on a high frequency basis, so he gives us his thoughts, noting that a key to maximizing wealth is to use an optimal-sized bet.
Meb changes direction, asking what Blair is excited about today.
It turns out Blair is focusing on the stigma of market timing. He believes it will be irresponsible not to be involved in market timing over the next 30 years. That’s because when we have correlations that really go to “1” when we have a disaster, getting an edge in the market is critical.
There are a couple quick questions – Blair’s favorite indicator, and Blair’s advice to young quants looking to get into quant finance today, but then we turn to Blair’s most memorable trade.
This is a great one involving the crash in ’87, when Blair was a market maker. Don’t miss it.
There’s plenty more in this great episode featuring a true market legend, including why Blair tells us “Emotions will kill you in this game.”
That and far more in Episode 89.
In Episode 88, we welcome portfolio manager, Eric Clark.
As usual, we start with Eric’s background, which spans 25 years in the investment industry. After working for an asset manager, Eric realized he wanted to do something passion-based – a “timeless equity strategy.” So, when he felt he had the answer, he created a suite of consumption-based brand strategies.
Meb asks about these brands and how they play a role in Eric’s portfolio construction.
Eric tells us he tasked himself with identifying some stable, persistent themes he could anchor to (for the purposes of building a portfolio). He tells us that “nothing is more persistent than a consumer’s propensity to spend.” With this in mind, he looked at the U.S. economy, and what drives it. Eric tells us that the consumption component of GDP has annualized at about 3.5% a year for 50 years. And of that, about 70% of our GDP is consumption. Now, take these two pieces together – “if consumption…is predictable then how do I build a strategy that taps into that?” The answer points toward buying great consumer brands.
Next, Meb asks about the framework. Eric says you need an index. Therefore, they created the Alpha Brands consumer spending index. The goal was a broad universe, tracking a lifetime of spending. For instance, a Millennial spends differently than someone from GenX. So, the idea was to create an index consisting of the most relevant and recognizable brands that track a lifetime of spending.
Meb asks how it works going forward? For instance, how would Eric see companies like GE and IBM? Are they great buying opportunities or dead brands?
Eric points toward IBM as a brand they’ll likely hold onto, as it’s still a powerful B-to-B brand. But he tells us the food packaging industry, for example, is coming under pressure. That’s because the type of food we buy is changing. He identifies Kellogg as a company facing challenges.
The conversation bounces around a bit, referencing valuation, where this brand-based type of investing fits into a broader portfolio, and how this type of strategy might be expected to hold up during a recession. Eric speaks to this last point by discussing consumer discretionary versus consumer staples, including the risk of rising rates.
There’s plenty more in this episode – where Eric believes the market is going in 2018 (he mentions some thoughts on earnings)… how international sales affect the brands-strategy… how the asset management industry seems to be moving toward the commoditization of portfolio construction, where advisors just want to own everything (in response, Eric tells us “I still believe that alpha is available and possible, and beating a benchmark is possible if you understand a bunch of things”).
We wrap up with Eric’s most memorable trade. It involves an ill-timed attempt to short banks in July ’09.
Hear all the details in Episode 88.
In Episode 87, we welcome market veteran and ETF expert, Mike Venuto.
Mike briefly walks us through his background, which includes a fun story about a baffling situation years ago when the gold mining company, Newmont Mining, was falling in price despite gold rising in price. Mike tells us the culprit turned out to be the new ETF “GLD” – Mike realized he needed to learn far more about ETFs.
Next, the guys dive into ETFs. Meb starts broadly, asking where we are in the ETF evolution.
Mike tells us we’re still quite early. The growth rate has been largely the same over the last 10 years (a little over 20%); but that growth rate is compounded over a larger base now, so it feels like the growth is greater. And in terms of where ETFs are going, free beta is getting saturated. The next move in ETFs will be people thoroughly detailing the differences between two ETFs that appear largely the same at first blush (nowadays, people tend to see similarly-themed ETFs as somewhat the same).
Meb pushes deeper on this idea, wanting to know more about this next evolution in ETFs. Mike tells us that myriad factors are a part of any given ETF beyond its expense ratio. For instance, there are the spreads, how well an ETF tracks its index, whether the ETF lends out its shares and what it does with that revenue, then there’s the share price itself. All these factors can make two ETFs that appear similar on the surface actually quite different.
This dovetails into the idea of “active share” – basically, the measure of an active ETF that differs from its index. Mike tells us about a tool at Toroso called Smart Cost that helps embrace ETF transparency. The tool helps answer the question “how much am I paying for the smart portion of an ETF?” Mike goes on to tell us that the overall expense ratio is not the most important cost consideration – instead, it’s how much am I paying for the smart portion? He gives us an example, comparing it to its benchmark, then calculate its “price per unit of difference.” The tool shows the amount of the ETF you’re buying that is different – and this helps determine the true value of any given ETF.
Meb echoes much of this, saying that in order to justify actively managed fees, an investor wants an ETF that looks truly different than its benchmark. Otherwise, you’re just paying top dollar for cheap beta.
The conversation bounces around a bit, including some other tools Mike uses, but eventually Meb asks about something Mike is doing that’s on the forefront of tracking the entire ETF space.
It turns out, Mike has created an index that enables investors to track the growth and exposure of the overall ETF ecosystem. This includes not just the issuers, but the exchanges, the data and index providers, the back-office companies, and so on – the entire overall ecosystem. So, Mike has created an index that tracks the growth of all these companies.
Next, the guys move into the “fringe ETF” space. Mike predicts we’re going to see more “characteristic” based indexes. Rather than capture a factor, they systemize how to target characteristics – e.g. a spin-off, or insiders buying a stock, or great brands. This leads into a conversation about “structural” factors, where you create a different form of behavior. An example would be a put-write fund.
The guys touch on a few topics before moving onto cryptos. They discuss whether crypto has any real legs, and what the potential could be. Mike has some interesting thoughts here.
As the interview begins to wind down, Meb asks for Mike’s favorite ideas going into 2018.
Mike tells over the next 10 years, it could prove difficult to achieve the type of beta returns we’ve enjoyed over the last 10 years, so he suggests seeking out high active, global growth themes. Find a PWC or McKinsey study about “things that are going to change the world” then invest in those industries (think robotics). Mike goes on to mention the Internet of Things and the electrification of cars.
Meb agrees on the potential for a challenging return environment. He walks us through why using the 60/40 portfolio with current bond yields, and what equities would have to return to keep us at “average” returns. Given our lofty valuations today, that seems tough.
There’s way more in this episode: The Permanent Portfolio… whether gold bugs should be concerned about the rise of crypto… how Meb has a new army of enemies in the form of Litecoin crypto investors… and how one of Mike’s friends bought a pizza years ago with Bitcoin – probably the most expensive pizza that friend will ever purchase. And of course, there’s Mike’s most memorable trade.
Hear about it in Episode 87.
Episode 85 is a radio show format. Meb starts with a recap of his latest travels – this time he was off to New York then Europe. Then, it’s onto Q&A. Some of the questions and topics you’ll hear are:
As usual with the radio show formats, there are plenty of rabbit holes including the Big Mac Index, why you shouldn’t go into a sauna in Zurich wearing clothes, Meb’s old econometric models, and why expectations for the traditional 60/40 appear unrealistic all around the globe.
All this and more in Episode 85.
Episode 86 is a solo-Meb show.
It’s been 10 years since Meb wrote “A Quantitative Approach to Tactical Asset Allocation” which is the top-downloaded paper of all time on SSRN. In the coming weeks, we’re going to publish a retrospective on that paper in the Journal of Portfolio Management. So Meb thought this episode would be a good opportunity to revisit the original paper and perform his 10-year post mortem.
Here’s the abstract of the new paper, and the backbone for what you’ll hear in this episode:
“In this article, the author revisits his seminal paper on tactical asset allocation published over 10 years ago. How well did the market strategy presented in the original paper – a simple quantitative method that improves the risk-adjusted returns across various asset classes – hold up since publication? Overall, the author finds that the model has performed well in real-time, achieving equity-like returns with bond-like volatility and drawdowns. The author also examines the effects of departures from the original system, including adding more asset classes, introducing various portfolio allocations, and implementing alternative cash management strategies.”
If you’re not familiar with Meb’s original “A Quantitative Approach to Tactical Asset Allocation” don’t miss Episode 86. In many ways, this paper is foundational to the various market approaches Meb has adopted since.
In Episode 84, we welcome investor and entrepreneur, Howard Lindzon.
Howard starts by giving us his background. He was a broker who felt the pain of the ’87 crash. In the aftermath, he got the angel investing and entrepreneurial bugs. He’s currently an investor in Robinhood, and he started StockTwits – which you might think of as Twitter-for-finance. He also runs a fund, Social Leverage.
Given that Howard has spent plenty of time in the public markets, Meb starts by asking about his public market framework, and how he approaches markets today.
Howard tells us that he likes to see which investments are doing well, then try to join in – in his words “classic trend following.” He uses the analogy of the great white shark and the pilot fish. Howard is a pilot fish, following the great white. He likes this approach as “there’s so many ways the markets are rigged that I think it’s best to just follow along the trends.” Howard believes this approach of following the great whites also works in the private markets.
Meb asks about something Howard wrote in regards to learning to invest – it was something along the lines of “open an account, lose money, get a mentor.” Howard expounds on that, focusing on how everyone needs a mentor. Howard wants to help other investors through his own writing and advice. He references Millennials, and how he wants to use tools to help them.
Meb asks Howard’s advice for people who want to learn to be better investors, and how to find a mentor. This leads to a conversation about Howard’s site, StockTwits. Whereas Wall Street felt that people wouldn’t share quality investment information (just keep it to yourself so only you can benefit), Howard felt that many people would want to share their good ideas. Many of these people do exactly that on StockTwits. So, Howard suggests finding someone there that matches your own investing style and temperament, who has a consistent, good track record, and just follow along.
Meb asks which gurus Howard suggests following these days in order to get great information. Be sure to listen to this part to get the specific names.
Next, Meb transitions the guys toward private investing. He asks for an overview on the blurring of the lines between private and public markets, and the development of the seed stage being open to individuals.
Howard tells us things changed in 2007/2008 – it was “the cloud” that was the catalyst, bringing down the costs of starting a company. He says now we’re in a transition stage where many private companies are actually staying private for too long. He references Uber, saying how it feels a bit late for it to go public, but it’s too big to be private.
Meb asks about the realities of private market investing for listeners, noting how some of our pasts guests have had different opinions. Howard has some helpful thoughts you’ll want to hear, but he notes that to be a great angel investor, you need to invest over multiple generations – 20 years or so. You need this time to see an overall crop of investments work out.
This leads into a discussion of Howard’s fund, Social Leverage. Howard gives us the details as to what they’re looking for, as well as the fund goals.
As always, there’s plenty more, including a discussion of when Bitcoin was less than $1, Howard’s publication, The Peloton, and, of course, his most memorable trade. Not investing in Twitter and Zynga when he had the chance comes to mind.
Hear all the details in Episode 84.
In Episode 83, we welcome fund manager, Randy Swan, who’s calling in from the Bahamas after being displaced from Puerto Rico by Hurricane Maria.
The guys start with Randy’s backstory, which leads into why he started Swan Global Investments. In part due to his background in managing liability risk at KPMG, Randy was interested in a way to diversify away market risk. This led him to develop an option-based market approach called the Swan Defined Risk Strategy (DRS), which might be summarized with Randy’s phrase “always invested, always hedged.”
Randy walks us through his DRS methodology, which relies on asset diversification and the purchase of puts to protect against market drawdowns. He gives us more info on the duration of the puts, generally how far out of the money the system targets, and other trade specifics. This dovetails into a discussion of selling options as opposed to buying them. Randy uses selling strategies in an effort to generate positive returns on an annual basis.
Meb asks about the general response from investors, and how they view buying this type of portfolio “insurance.” Randy tells us most people think it makes sense, they just haven’t really been exposed to the idea. Rather, most people are used to hearing only about diversification.
The guys then discuss low volatility in the market. Randy gives us his thoughts, mentioning how now is a great time to hedge a portfolio given the low VIX. The conversation touches on whether you can still sell options in this low-VIX market. After all, it might be dangerous if volatility spikes. Plus, with so many investors having adopted a selling strategy in an effort to generate income, is this space crowded? Does it still work? You might be surprised to hear Randy’s take on it.
This is a great episode for options-fans and investors wondering how to stay in this market while adding some protection to their portfolios. You’ll hear more on volatility skew… the active versus passive debate (and how it misses the point)… Randy’s broad advice for listeners interested in implementing an options strategy… and of course, Randy’s most memorable trade.
Get all the details in Episode 83.
In Episode 82, we welcome trader, fund manager, and author, Vineer Bhansali.
Per usual, we start with Vineer’s backstory. It involves his physicist-origins, an unexpected move to an assortment of trading desks, and a run-in with the great, Fischer Black.
Meb soon dives in, asking about main strategies Vineer uses with his group, Longtail Alpha. Meb reads a quote from LongTail’s website…
“LongTail Alpha’s sole focus is to find value in the tails of financial asset return distributions. Either in the left tail as a risk mitigation hedge on multi-asset portfolios, in the right tail to add convexity to an investor’s risk exposures, or in both the right and left tails to produce alpha from convexity and volatility opportunities in a hedge fund structure.”
Meb asks Vineer to use this as a jumping off point, explaining his framework, and how he thinks about tail strategies.
Vineer tells us that, at LongTail, they believe the probability distribution of returns for asset classes and multi-asset portfolios is actually not bell-shaped. Rather, there are many imperfections and anomalies in the market. And the tails of the distribution are quite different than the central part. While the central part of the curve tends to have many, smaller moves, the tails tend to be dominated by infrequent, large events. With this in mind, the goal is to implement various options strategies to help you position yourself for these tail vents. Keep in mind, there are left tail and right tail events (and a hedged strategy in the middle). Vineer references them all.
Meb mentions how, right now, most investors are more concerned with the left tail events. So how should an investor think about implementing a tail strategy? And is it even necessary, given Vineer’s statement in a recent Forbes article:
“…people generally feel better when they believe that they have portfolios with built-in insurance, i.e. protection against losses, even though the expectation (or average return) of a portfolio with or without such insurance is the same.”
Vineer discusses the difference between “volatility” and “permanent loss of capital.” What you want from a left-tail paradigm is a methodology that keeps you in assets, serving your long-term benefit. Generally, you want to be invested in the stock market. Vineer tells us the name of the game is to be able to survive the relatively short-but-harsh pullbacks, and even accumulate more assets during those times. Given this, Vineer has a 4-lever framework he uses to help create a robust left-side portfolio. You won’t want to miss this part of the discussion.
As the conversation unfolds, you’ll hear the guys discuss how, even though there is some concern about a correction now, the markets are still severely undervaluing the price of a sharp downturn. And option premia are incredibly cheap by historical standards.
Meb then asks for more details about actually implementing a left tail strategy.
Vineer’s answer touches on understanding and identifying how much exposure one wants to equity risk and inflation risk. Then, there’s the need to understand one’s risk threshold tolerance – the “attachment point” at which you cry uncle, whether that’s being down 10%, 15%, 25% or more. Given this attachment point, an investor could then go to the options market and buy “insurance” at this level, for a duration of time suitable to the investor.
This leads Meb to wonder why people think of portfolio insurance differently than life, car, or home insurance. We all pay those insurance premiums without thinking much about it, but there’s so much resistance to paying for portfolio insurance.
Vineer actually wrote a paper on this challenge. He tells us part of the issue is an aggregation, disaggregation problem. The right thing to do would be to lump the cost of insurance into the portfolio and look at the overall portfolio returns. But people fixate on the “lost” cost of insurance when option premiums expire worthless.
Next up, the guys discuss the current volatility environment. Vineer address two questions from Meb: “why is volatility so low?” And “is there a sweet spot on the option scale (how far out of the money) for investors looking to purchase portfolio protection?”
There’s way more in this episode: option selling strategies (instead of buying insurance, you’re the one selling it in order to generate yield)… A great piece from Vineer about selling bonds as a way to hedge your portfolio… How the traditional inverse relationship between market direction and volatility might not be holding up as much (look at Japan recently – surging markets and volatility together)… Vineer’s thoughts on artificial intelligence and “how to beat the machines”… And of course, his most memorable trade.
All this and more in Episode 82.
In Episode 80, we welcome commodities and gold expert, Claude Erb.
As usual, we start with Claude’s back-story, but it’s not long before the guys jump into investing, with Meb asking about Claude’s general framework and view of the markets.
Claude tells us there are three concepts that guide his broad investing thinking: first, framing investment opportunities in terms of price/value relationships; second, the concept that no one gives away anything of value for free; and third, the idea that there really is no difference between a successful traditional fundamental approach to investing and a successful quantitative approach to investing.
This leads into a quick conversation about how market wisdom compounds over the years, but it’s not long before the guys jump into the topic of “gold.” Claude and his writing partner, Campbell Harvey, wrote the seminal paper, “The Golden Constant”, which explored the possible relationship between the real, inflation-adjusted price of gold and future real gold returns. Meb mentions how gold elicits far more emotion in investors than nearly any other asset, with different investors having an array of reasons or themes as to why they own gold.
Clause gives us some great commentary on the link between fear and gold, touching upon VIX contracts, volatility, and even Buffett’s and Dalio’s take on gold. The guys continue with the gold discussion, with Claude referencing some of the concepts from “The Golden Constant”. All you gold bugs (and historians, for that matter) won’t want to miss this.
There’s way more in this episode, including a discussion of commodities, various practical takeaways, and Claude’s thoughts on something called “the sequence of returns.” And of course, there’s Claude’s most memorable trade. What are the details? Find out in Episode 80.
Episode 81 is a radio show format. Meb starts with a note of thanks to listeners. It involves a milestone Cambria just passed as a company.
Next, Meb walks us through the common themes he’s hearing from his office hours. In short, all listeners are generally making the same investing mistakes (though everyone seems to believe his/her situation is unique). Meb tells us what everyone is doing.
Then, it’s on to listener Q&A. Some of the questions and topics you’ll hear are:
As usual with the radio show formats, there are plenty of rabbit holes. Plus, Meb is about to do some travelling overseas. Where’s he headed? Find out in Episode 81.
In Episode 79, we welcome Jason Goepfert, founder of SentimenTrader.
Per usual, we start with Jason’s background. It involves listening to margin calls, when “real emotion” would come out. Jason tells us anger and panic were what you would hear, and that people are not necessarily rational.
These experiences and others eventually led Jason to launch Sentimentrader which is, according to its website: “an independent investment research firm dedicated to the application of mass psychology to the financial markets… Our focus is not market timing per se, but rather risk management. That may be a distinction without a difference, but it's how we approach the markets. We study signs that suggest it is time to raise or lower market exposure as a function of risk relative to probable reward. It is all about risk-adjusted expectations given existing evidence.”
The guys discuss some of the mechanics of Sentimentrader – the time-frames of the various models, the inputs, and how most people want just one indicator (but that’s not the best way).
Meb asks for an example of one of Jason’s favorite indicators – it turns out to be the VIX, sometimes known as the market’s “fear gauge.” As of the time of the podcast, the VIX is quite low. One might assume this means it’s about to pop, but Jason tells us nothing works 100% of the time, with Meb noting it can stay low for a long while.
Meb asks how investors – specifically long-term investors – should use indicators like the VIX. Should they pay attention at all? Jason tells us you can use these indicators for color.
Meb throws in a funny aside about a “seafood tower” indicator – the idea being when times are bad, no one orders the seafood tower, but when times are good, towers are stacked at all the tables. And it just so happens, Meb recently had a meal out in which the table wanted a seafood tower…as did at least three other tables at the restaurant that night.
The conversation bounces around a bit, with interesting back-and-forths about the AAII and Investor Intelligence surveys, the potential for “observer effect” to be skewing some results, and how every bull/bear cycle is different and people put too much weight on the market event that’s just happened. Jason tells us that many investors are now saying, “well, stocks probably aren’t going to peak because we’re not seeing the same kind of optimism we saw in 2007.” But 2007 was probably a once-in-a-lifetime type of a peak (and 2009 was a once-in-a-lifetime type of a bottom) – so we shouldn’t expect to see the same readings at those turning points.
The guys breeze through a fun topic next: whether Twitter should be considered a useful sentiment indicator. Jason tells us it’s wonderful and horrible. The problem is we self-select and tend to follow people with a similar mentality as our own. So, we’re largely just in a bit of an echo chamber of our own opinion.
Meb and Jason go on to cover margin levels and the commitment of traders before discussing the contrary indicator of magazine covers. It turns out magazine covers are not the great contra-indicator they’re purported to be.
Finally, the guys turn to today’s markets, with Meb asking how the world looks to Jason given his experience with sentiment. Jason tells us U.S. equities are optimistic, but not necessarily overly optimistic, and bonds and gold are both “meh,” neither registering any extreme sentiment readings.
Meb asks which asset classes around the globe are, in fact, registering extreme readings. Jason tells us we’re seeing some extreme readings in cocoa, coffee, and grains – the soft commodity complex. He actually provides the name of a specific fund if you’re interested in playing this as an investment.
There’s tons more in this great episode: how today’s cryptos are resembling the internet stocks of the late 90s… why it’s hard to buy, even when the sentiment indicators are signaling you should do so… and the time when sentiment called the markets nearly perfectly.
And of course, there’s Jason’s most memorable trade. It involves a times when all the sentiment indicators were lining up together nearly perfectly. So Jason went in big…and lost big when things didn’t play out as he expected.
What are the details? Find out in Episode 79.
In Episode 78, we welcome angel investor, Alex Rubalcava. As Meb and Alex are friends, we start with Meb recalling the first time he met Alex over some egg tacos. Alex goes on to give us more about his background, which took him from pension funds, to dot.coms to VC investing.
Meb asks for more information on Alex’s group, Stage Venture Partners. Alex tells us that Stage is a classic seed venture fund. They invest in enterprise software companies that are about a year or two old. They look for companies that have a product in the market and are generating some early revenues. This dovetails into a broader discussion of how Alex landed on being a seed-stage investor, and the VC climate here in L.A. The guys talk about what Alex looks for, the size of the investment in a typical round for him, and where good ideas come from.
It's not long before Meb references our podcast with angel investor, Jason Calacanis. We received a great deal of feedback after that show from listeners eager to start angel-investing. But Meb juxtaposes that interest with William Bernstein’s idea that most people shouldn’t invest their own money. Meb asks Alex if seed investing is harder than the way it’s presented.
Alex responds with some interesting points about seeing the deal, understanding the deal, and winning the deal. In short, to see the right deals, you have to be in the right places, actively participating in the community. If not, you’ll never see the next Uber. To understand the deal, you must recognize what you’re seeing. Lots of people passed on Facebook, AirBnB, and Uber, because they didn’t have the vision to see what it could be. And in terms of winning the deal, often, the really great startups are oversubscribed, meaning they might need $2M of funding, but have $20M worth of interest. So it can be a challenge to convey your value to a startup to win a seat at the table.
The guys then discuss how most of Alex’s deal flow comes across his desk. They discuss incubators, accelerators, going to conferences, calling people, you name it. But at the end of the day, Alex tells us he’ll look at about 1,000 start-ups this year, but will only make eight-to-ten investments.
This bleeds into a conversation about the attrition rate as startups move throughout the funding process. As you’d guess, there’s a huge failure rate. The guys discuss the drop-offs through the various rounds, as well as the major reasons for them. Meb also asks when to double down on your bets?
As part of this conversation, Alex tells us how attrition rates really vary by sectors. He discusses how investors in the consumer-based sector who didn’t get in on the big dogs like Facebook, Twitter, and Snapchat didn’t see anywhere near the returns that they would have otherwise. Meanwhile, other sectors have far more companies with successful exits (just not as monstrous as the Facebooks et al) – as Meb says, “more singles, doubles, and triples.”
A bit later, the guys discuss the idea of “why now?” When Alex is considering an investment, the founder must be able to effectively answer “why now?” Many times, the idea is there, but the timing isn’t, perhaps due to cost, or the market simply isn’t ready. This eventually morphs into a conversation about the three biggest risks that a founder faces when starting a company: building the product, hiring the right people, and getting the customer.
Meb switches gears, asking about about syndicates and funds. Are they right for investors looking to get exposure to angel investing?
You’ll want to hear Alex’s perspective on this. He tells us that “If you’re going to be an angel investor…you have to be devoting significant time to it.” He goes further, saying that unless it’s close to your job, angel investing isn’t likely to be great for most people – yet investing in angel funds might be a good answer. Alex goes on to give us his reasons, and tells us there are some great angel investing funds that are worthy of consideration. He even mentions specifics.
There’s way more in this episode, including the little-known angel-investing tax benefit that can save you millions – literally… Where Artificial Intelligence and Machine Learning are likely headed… A mnemonic Alex uses to sort through the hype… And of course, Alex’s most memorable trade. All of you would-be angel-investors will be feeling the FOMO (“fear of missing out”).
What are the details? Find out in Episode 78.
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.
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.
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:
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.