In Episode 113, we welcome entrepreneur and hedge fund expert, Stan Altshuller. Meb starts by asking Stan to give us his backstory, and how he came to co-found Novus Partners.
After Stan gives us his origin story, Meb asks about Stan’s broad approach to the markets. Stan tells us that at Novus, they start with data. This data encompasses everything from public data from regulatory filings, to private data from daily holdings reports. They bring it into an accessible, searchable database. Then engineers and programmers write various algorithms that capture and present the details of that data. This helps identify takeaways such as where the risks might be in a portfolio, and how various portfolios compare to others.
Meb asks about common takeaways from all this analysis. Stan points toward “diworsification.” As the name implies, too many investors have far too many holdings in their portfolio – from a diversification perspective, more than is needed or helpful. Stan tells us that 12 different investments is as beneficial as 100. Another takeaway Stan points toward is “conviction.” Are you truly adding value to your portfolio given your weighting decisions? Meb notes how you have to have greater position concentration to make a real difference in your portfolio. He then asks how Stan measures conviction.
Stan tells us that conviction can mean different things. For equities, the highest ROI comes from stocks with a 7.5% position or higher. But if your portfolio is highly diversified, you’re unlikely to have a single position of this size. Stan adds that, for an allocator, the threshold is about 5%.
Next, Meb asks about the state of active management. With so many headlines about flows going into passive, what are Stan’s thoughts?
Stan gives us a great synopsis, covering “dispersion” and “correlation.” The presence, or lack thereof, of these market characteristics can have much to do with the success of active managers. Overall, Stan says conditions are now setting up such that we’re seeing alpha being generated in the hedge fund space again. He tells us “I’m bullish on active management, but I think that you need a correction for people to remember why hedge funds exist in the first place.”
Meb asks about Stan’s process – what analytics help identify the good funds, what they look for, the red herrings… Stan says the first thing to do is ask whether the manager is telling you the same thing as what the data is telling you. You’re basically double-checking the manager’s stated skill set. Next, analyze whether the manager is truly going to add value to a portfolio. For instance, if you add another manager, how much diversification benefit will t actually provide? If not much, do you really want to pay their fee? Then you look at whether the manager is still generating alpha. Has there been style drift? Is he/she managing significantly more money now than in past years?
Meb hones in on one part of Stan’s comments – “performance as a metric.” This is a great part of the interview in which Stan really draws out the point that looking at performance alone isn’t necessarily all that helpful. You need to understand how a manager created his alpha. Unless you understand that, you’re a duck in the water. You cannot invest based on performance alone.
There’s so much more in this great interview: What percentage of managers are really adding value with their short book… Stan’s take on whether hedge fund managers truly deserve their fees… When is it time to give up on a manager if performance has been lagging… A major risk in today’s hedge fund space… And Stan’s most memorable trade…
This one involves Amazon and Google. Listen to Episode 113 for all the details.
In Episode 112, we welcome Professor Peter Ricchiuti. We start with Peter’s origin story, which includes his time in the investment world, then managing money for the state of Louisiana, then teaching at Tulane where he created, and now runs, the Burkenroad Reports program (a student stock research program).
Diving into investing, Meb asks Peter about his broad approach to the markets and the economy. Peter tells us that from an economist’s perspective, “labor” is a huge factor when evaluating economic conditions. And he believes the U.S. is facing challenges with its labor pool. From a narrower, equity-perspective, Peter tells us that right now things look perhaps a little too good. He notes “you’re better off investing when things look miserable.” At present, given so much market optimism, he’s pulling back.
The conversation turns toward the global market, and how interconnected we all are these days. Peter tells us that part of the reason we’ve done so well over the past several years is because so many countries were growing at a positive pace at the same time. This dovetails into a discussion about today’s elevated PEs. Peter believes that, here in the U.S., we’re on a “sugar high” from the tax cuts. Companies have been using that money to buy back stock or buy each other. But what they haven’t been doing as much is building for expansion. Peter believes companies haven’t been focusing as much on planning for future growth.
Next, Meb asks a question that he admits hating to get himself – what causes this bull market run to end? What are the main risk factors?
Peter points toward higher interest rates. He believes we’re going to see Treasuries at 3.5%. Plus, earnings growth will begin to slow. He tells us that the economy is at or close to its peak right now – it could last longer, but as far as the peak goes, we’re in that general area now.
The conversation turns toward the Burkenroad program, bouncing around a bit: An interesting takeaway from a lunch with a small-cap company’s CEO… the attributes that Peter and his students look for in the companies they vet… the illiquidity advantage over institutions… even one great find through the program – a stock that went from $0.72 to about $150.
Meb asks which mistakes the students make repeatedly. Peter points toward looking at the past more so than evaluating the future. One manifestation of this is paying more attention to past earnings than the prospect of future earnings. Also, many of the students lack patience.
There’s way more in this fun episode: The recent Buffett op-ed piece on short-termism and Peter’s take on how to teach students to focus on the long-term… How Peter’s approach to markets has changed through his experiences running the program… The actual Burkenroad Fund, which has been around about 17 years and outperformed boatloads of competition… And of course, Peter’s most memorable trade.
Get all the details in Episode 112.
Episode 111 has a radio show format. In this one, we cover numerous Tweets of the Week from Meb, as well as some write-in questions.
Before jumping in, a few housekeeping items… Meb discusses a proxy campaign with which we need your help, an award Cambria just received, Meb’s new Office Hours, when the Trinity ETF will launch, a new webinar we’re going to put on later this summer, and more.
We start with some of Meb’s Tweets of the Week. We discuss a WSJ op ed piece penned by Jamie Dimon and Warren Buffett, in which they suggest short-termism is harming the economy. Specifically, they believe public companies should reduce or eliminate the practice of estimating quarterly earnings.
Next, there’s a quote from Jim O’Shaughnessy: “Money is like manure; if you pile it up it stinks to high heaven, but if you spread it around, it does a lot of good.” This is a springboard into a conversation about the role of cash in a portfolio, especially in today’s market.
This segues into the next subject – how Americans are reaching retirement age in worse financial shape than the prior generation, for the first time since Harry Truman was president. This leads to a conversation about starting investing early, but also focusing on active income and delaying the retirement age.
Next, there’s a tweet about early stage private investing. We use this as an opportunity to catch up on Meb’s private investments.
Other topics are fund-flow differentials between ETFs and mutual funds, as well as Meb’s dissection of Wealthfront’s latest fee structure. If you’re a Wealthfront client, you’ll want to listen to this.
We then get into listener Q&A. Some that you’ll hear Meb address include:
All this and plenty of other rabbit holes in Episode 111.
In Episode 110, we welcome author and market data expert, Dr. Bryan Taylor.
Meb begins by asking how Bryan built the massive financial database that is Global Financial Data. Bryan walks us through how the database developed over time.
The conversation soon turns to Bryan’s book, Debts, Defaults, Depression and Other Delightful Ditties from the Dismal Science. Bryan tells us this is actually the first of two books. It includes stories about the past that people might find interesting – some of the crazy things that have happened in the financial markets, as well as an inference about what that might mean for the future. The follow-up book will focus on a number of specific cases, from The East India Company, all the way up to some of Trump’s companies.
Next, Meb changes gears – there are a few contenders getting close to becoming the first $1T company. Meb uses this as a chance to look back at the first $1B company.
Bryan tells us that title goes to Standard Oil. He then walks us through its history, including its practice of pushing prices down to drive competitors into bankruptcy, the Sherman Anti-trust Act, the break-up of Standard Oil, and the effect on shareholders.
This conversation dovetails into a conversation about which company today – Apple, Amazon, Facebook, or Google – is more likely to face a threat from government oversight. Listen in to get Bryan’s thoughts.
The guys then get into inflation. It turns out, the 20th Century had the highest inflation ever. What might be in store for us in the 21st Century? Bryan and Meb discuss this, touching on various governments’ ability to pay debt, growth rates, Bryan’s red-flag metric (when the interest coverage ratio to GDP exceeds 5%), as well as the most likely path for US and global interest rates.
Meb then uses his recent trip to Greece as a springboard for a discussion about the future of the EU. Bryan tells us it’s an all-or-nothing situation. And the concern now isn’t over Greece, it’s over Italy. It might be the first country to drop out of the Euro. If so, it will face severe consequences in trying to be independent. Plus, it could have a domino effect, leading to other countries leaving and the entire system falling apart. He concludes by telling us that “at some point, the stresses are going to be so great that some of the countries (in the European Union) are eventually forced to leave.”
Next, Meb moves toward Asia. He brings up a quote from Bryan about the future market-cap of Asian stock markets (as the biggest in the world) and asks if this is a no-brainer “buy Asia” right now. Bryan gives us his thoughts but notes that Asia has lots of internal issues that need solving before they can challenge the US as the primary engine of returns going forward.
Next up is an interesting discussion of what investing used to be like, how it changed, and how it might change for us going forward. The conversation touches on investing in the 1800s, how World War I flipped everything on its head, and the current concern of nationalism.
There’s plenty more in this episode – the need to be conscious of how integrated global markets are these days… the historical period that most closely resembles today’s investing climate… what Bryan is working on now… And Bryan’s most memorable trade.
Get all the details in Episode 110.
In Episode 109, we welcome ETF and crypto expert, Matt Hougan.
After a quick, fun story about Matt’s first job…as a 9-foot tall seal mascot for a minor league baseball team…Meb asks about the state of the ETF industry – where we are today, and where we’re going.
Matt tells us that ETFs have become a dominant force in investing. Since the financial crisis, some $2 trillion of capital has flowed into ETFs. In comparison, the mutual fund industry has seen $0 inflows during that time. In terms of issues that are shaping ETFs and will continue to do so over the coming years, Matt points toward fee wars, distribution networks, and the growing reality that it’s getting harder for smaller companies to get a foothold within the ETF space. Overall, Matt believes the days of fastest ETF growth are in front of us.
Referencing back to the capital flows differential between ETFs and mutual funds since 2008, Meb asks if there will there be a Netflix/Blockbuster moment when the lion’s share of assets leaves mutual funds and flows into ETFs.
Matt believes the stream of asset migration will become a flood in the next bear market. He tells us the only thing that has kept mutual fund asset levels up is the bull market of the last decade. That’s created lots of embedded capital gains which many investors haven’t wanted to realize. Yet when a bear market finally hits… Matt believes we’ll see accelerated flows out of mutual funds when we suffer our next 20% market drop.
Next, Meb brings up something which Matt has tracked for since 2008 – the world’s lowest cost ETF portfolio. He started by taking the lowest-cost ETFs representing six major global asset classes. He was curious how much it would cost in order to get full global exposure. In 2008, the combined, blended fee to own the world was 16 basis points. Today, it’s down to just five basis points. Matt and Meb agree this is a great time to be an investor.
This bleeds into a discussion of direct index investing, which, Matt tell us, might be the next evolution of investing beyond ETFs. If you’re less familiar with direct index investing, it’s a way to own indexes, yet without paying a fund management fee, while enjoying the potential benefits of tax loss harvesting. This leads to an interesting discussion about implementing direct investing via robos, as well as the tradeoff between tracking risk and the potential for tax alpha.
The guys touch on a few more ETF ideas – broad concerns about the ETF market, active versus passive ETFs, and the use of artificial intelligence in replacing discretionary managers – but it’s not long before Meb switches the conversation to crypto.
Though ETFs are Matt’s first love, he’s long been interested in cryptocurrencies, so he was excited at the chance to join Bitwise, creator of the first currency index. Giving us an overview of the crypto world, Matt tells us “an index-based approach is the only sensible approach to the crypto market, because anyone who tells you they know what’s going to happen in crypto is probably lying to you.”
At Meb’s request, Matt then describes how to put together a crypto index. Matt tells us the goal is to capture the broad-base crypto market. There are 1,500 cryptos out there, but most of the market cap is concentrated in the top 10-15 currencies. There are many challenges to creating an index, including such basics as “how many Bitcoin are there?” (Do you the current number, or what the number will be x years in the future?) Matt goes into interesting detail for us.
What follows is a great conversation for any listener curious to learn more about the crypto world. You’ll hear about Matt’s ideas for other crypto indexes and ways to approach the market… how Meb got in hot water with crypto investors… what the future may be for crypto and its related technologies… the growing institutional interest… when we’ll see a crypto ETF… where crypto fits into a traditional asset allocation… the impact of government regulation… and why cryptos won’t go the way of the tulip bulb.
Finally, you’ll hear Matt’s answer to “if you had to buy one crypto and not touch it for 10 years, what would it be?” And of course, there’s Matt’s most memorable trade. This one lost him about 90%.
What are the details? Find out in Episode 109.
Episode 108 has a radio show format. In this one, we cover some of Meb’s Tweets of the Week and various write-in questions.
After giving us the overview of his upcoming travel, Meb shares his thoughts on our recent episode with James Montier. It evolves into a conversation about the importance of “process” in investing.
Next, we talk about a Tweet from Meb which evaluated what matters more – your savings rate or your rate of return. As you might guess, in the early years, savings trumps, but for longer investment horizons, rate of return is far more influential.
It’s not long before we jump into listener questions. Some that you’ll hear Meb address include:
There’s plenty more in this episode including data mining, trend following time-frames, and what Meb’s thoughts are on ramping up equity exposure in a portfolio to offset the effects of living longer. All this and more in Episode 108.
In Episode 107 we welcome the great James Montier. The chat starts on the topic of James’ questionable sartorial choices. He tells us he’s “always been a fan of dressing badly.” But the guys quickly jump in with Meb noting how James has generally been seeing the world as expensive over the last few years. Has anything changed today?
James tells us no; by in large, we’re still trapped in this world where, frankly, you’re reduced to this game of “picking the tallest dwarf.” In general, every asset is expensive compared to normal. He summarizes, telling us “there really is a serious challenge to try to put together an investment portfolio that’s going to generate half-decent returns on a forward-looking basis.”
Meb digs into, focusing on James’ framework for thinking about valuation, specifically, as a process.
James starts from accounting identities. There are essentially four ways you get paid for owning an equity: a change in valuation, a change in profitability, some growth, and some yield. James fleshes out the details for us, discussing time-horizons of these identities. One of the takeaways is that we’re looking at pretty miserable returns for U.S. equities.
James notes that we now have the second highest CAPE reading ever. Or you could look at the median price of the average stock – the price-to-sales ratio has never been higher. Overall, the point is to look at many valuation metrics and triangulate, so to speak. When you do, they’re all pretty much saying the same thing. James finishes by telling us that from his perspective, U.S. equities appear obscenely expensive.
Meb takes the counter position, asking if there’s any good argument for this elevated market. Is there any explanation that would justify the high values and continued investment?
James spends much time performing this exact exercise, looking for holes. He tells us that most people point toward “low interest rates” as a reason why this valuation is justified. But James takes issue with this. From a dividend discount model perspective, James doesn’t think the discount rate and the growth rate are independent. He suggests growth will be lower along with lower rates. He goes on to discuss various permutations of PE and other models, noting that there’s no historical relationship between the Shiller PE and interest rates.
Meb comments how so many famous investors echo “low rates allow valuations to be high.” But this wasn’t the case in Japan. Meb then steers the conversation toward advisors who agree that U.S. stocks are expensive yet remain invested. Why?
What follows is a great discussion about what James calls the “Cynical Bubble.” People know they shouldn’t be investing because U.S. stocks are expensive, but investors feel they must invest. If you believe you can stay in this market and sell out before it turns, you’re playing the greater fool game. James tells us about a game involving expectations – it’s a fun part of the show you’ll want to listen to, with the takeaway being how hard it is to be one step ahead of everyone else.
The conversation bounces around a bit before Meb steers it toward how we respond to this challenging market. What’s the answer?
James tells us there are really four options, yet not all have equal merit:
1) Concentrate. In essence, you own the market about which you’re most optimistic. For him, that would be emerging market value stocks. Of course, buying and holding here will be hard to do.
2) Use leverage. Just lever up the portfolio to reach your target return. The problem here is this is incompatible with a valuation-based approach. Using leverage implies you know something about the path that the asset will take back to fair value – yet it may not go that route. You may end up needing very deep pockets – perhaps deeper than you have.
3) Seek alternatives like private equity and private debt. The problem here is most are not genuinely alternative. They’re not uncorrelated sources of return. James tell us that alternatives are actually just different ways of owning standard risk.
4) The last option is James’ preferred choice. Quoting Winnie the Pooh: “Never underestimate the power of doing nothing.”
Next, Meb brings up “process” as James has written much about it. James tells us that process is key. Professional athletes don’t focus on winning – they focus on process, which is the only thing they can control. This is a great part of the interview which delves into process details, behavioral biases, how to challenge your own views, and far more. James concludes saying “Process is vitally important because it’s the one thing an investor can control, and really help them admit that their own worst enemy might be themselves.”
There’s plenty more in this great episode: James’s answer to whether we’re in a bubble, and if so, what type… market myths that people get wrong involving government debt… and of course, James’ most memorable trade. This one was a loser that got halved…then halved again…then again…then again…
How did James get it so wrong? Find out in Episode 107.
In Episode 106 we welcome market vet, Brian Singer. Meb dives right now, asking Brian for his general approach to the markets.
Brian tells us it’s fundamental in nature. They look at about 100 different asset markets, trading the broad markets rather than individual equities or bonds. They look for mis-pricings, then when one has been identified, they dig in, running both quantitative and qualitative analyses. They follow this with various risk management strategies. The overall portfolios are both long and short.
As Brian often writes about macro factors that affect asset prices, Meb asks which macro factors are influential today. Brian gives us his thoughts – not just on macro factors, but game theaters as well. He talks about populism, energy (which ties into the Middle East game theater), and Chinese growth. Additional game theaters beyond the Middle East he discusses are the European Union and Asia.
Next, Meb asks about Brian’s process. How does it really work when you’re putting together a portfolio?
Brian starts with valuation work. Specifically, they focus on the present value of future cash flows. They then assess things from a qualitative perspective – for instance, how might a certain government policy affect markets? They don’t look at markets on a company-by-company basis. It’s a macro approach, with fundamental value being a critical component. All of this is the “where” stage in Brian’s process. Next is the “why?” For instance, why does an asset mis-pricing exist? This eventually leads to game theory and an assessment of market turbulence and fragility.
Meb brings up Brian’s portfolio and asks about his current positioning. In general, Brian is cautiously optimistic on some equity markets, but generally against bonds. What he finds attractive right now from an equity perspective are Emerging Markets and some European markets. He’s especially attracted to Greece, Brazil, Argentina, and India; and to a lesser degree, China, Indonesia, and Malaysia. Brian talks more about Italy, Spain, and the UK.
Brian tells us most bond markets are unattractive. He gets into more detail regarding investment grade bonds, sovereigns, and junk.
Soon, the guys dive into currencies. Though most investors tend to think “it’ll all net out in the long run,” Brian takes a more active approach. The specific currencies he finds attractive right now include the Swedish Krona, Indian Rupee, Russian Ruble, Philippine Peso, and Turkish Lira. As to overvalued currencies, he points toward the U.S. Dollar, the Euro, the Swiss Franc, the Thai Baht, and the Israeli Shekel.
Next, Meb asks what is keeping Brian up at night as he looks at the markets today. Brian points toward four major concerns: monetary policy, rules-based strategies such as smart beta, the Volcker Rule, and circuit breaker inconsistency. He dives into tons of great detail that supports the notion for some concern, concluding “We don’t know what will trigger the decline, but when it happens, our fear is that it’s sharper and deeper than investors would otherwise expect.”
There’s plenty more in this episode: Brian’s thoughts on what steps can be taken to help protect against a declining market… his stance on cash in a portfolio… whether the 10-year bond will ever get back to 4%-5%... and finally, Brian’s most memorable trade.
This one involves Black Monday. Hear all the details in Episode 106.
Episode 105 is a wholly unique show. In this episode, we depart from traditional investment themes, and instead, bring you an episode featuring Meb’s second professional love, biology. Specifically, we welcome the renowned evolutionary biologist and writer, Olivia Judson.
It turns out Olivia wrote for The Economist in her early years. Meb asks how a scientist got started writing for a business magazine. Olivia tells us of the progression that led from one article submission to several other articles, to a staff job.
Next, Meb asks about the genesis for writing Dr. Tatiana's Sex Advice to All Creation. (For anyone unaware, the book is written in the style of a sex-advice column to animals. It details the variety of sexual practices in the natural world and provides the reader with an overview of the evolutionary biology of sex.) Olivia tells us one of her early articles was the inspiration, though she’d been studying and researching the topic for years. She thought the book would take her only six months to write so she quit her job…she finally finished it four years later.
Meb notes how much of the book identifies a power struggle between males and females, and how this shapes evolutionary dynamics. Olivia expounds, telling us how sometimes what the male wants is not in the interest of the female (and vice versa). These differences create the tensions which affect evolutionary direction.
This leads to a conversation about Bateman’s Principle, namely, the general idea that females are pillars of virtue, while males are cads. Olivia’s book suggested this isn’t necessarily true. Meb asks for more details. Olivia starts by redefining the term “promiscuous,” digging deeper into the word in light of the term “choosy.” It turns out certain females can benefit from having multiple partners, though the reasons can vary. In any case, this awareness is much more prevalent than thought 40 years ago.
A bit later, Meb asks about homosexuality in the animal world, including questions regarding procreation and genes. Olivia gives us a fascinating answer that includes the concepts of “genetic component,” “exclusivity,” and “commonality” and how these factors might affect homosexual genes remaining in the population.
There’s way more in this fun, totally different episode: A dating party where women smelled men’s T-shirts to determine which scent they found most appealing… the male Australian Redback Spider, who actually tries to get eaten by the female during sex… Meb’s surprising discovery from his 22 and Me test that he has more Neanderthal genes than 95% of the population… Olivia’s views on gene editing… Camping on the side of a volcano in Antarctica… and whether we’ll find life beyond our world.
We end with asking Olivia about her most memorable experience in all of her research. What is it? Find out in Episode 105.
In Episode 104, we welcome the legendary, Ken Fisher.
Meb starts with a quick word of congratulations to Ken, as his firm just passed $100B in assets under management. The guys then discuss Ken’s interest in fishing with a bow and arrow, which eventually morphs into a conversation about a millionaire who allegedly hid a million dollars somewhere in the Rockies, leaving clues to treasure-hunters searching for it.
The guys then jump into investing, discussing Ken’s early days in launching Fisher Investments. They touch upon one of Ken’s early claims to fame, championing the price-to-sales ratio. This leads to a conversation about being factor agnostic, which includes some interesting takeaways from Ken on capital pricing.
Soon, Meb brings up Ken’s book, Debunkery, and asks about one of its points: namely, the misbelief by so many investors that bonds are safer than stocks. What follows is a great commentary by Ken about short-term volatility risk versus opportunity cost risk. When you look at longer, rolling time periods, it becomes clear that stocks are far less risky than bonds. And in the long term, stocks are less risky than cash. Ken tells us that in his business, it’s his job to focus his clients on the longer-term.
Next, the conversation takes an interesting turn, touching upon the explosion of tech science, and how it’s affecting our lives, as well as the capital markets. It bleeds into Meb suggesting that older investors tend to become more conservative or pessimistic, and so they tilt away from equities, and whether that’s a behavioral challenge Ken has to address with his clients. Ken gives us his thoughts, concluding with that idea that people need to be relatively comfortable in capital markets with things that are generally uncomfortable.
The conversation then veers into politics and the effects on the market. Ken tell us that when you look at presidents and market history, our system gives presidents much less power to affect markets than most people believe.
Meb jumps to Twitter questions, bringing up one that wonders how to position yourself in the end of a bull market. Ken gives us a fascinating answer which I’m going to make you listen to in order to hear, but it tends to focus on large cap and quality.
There’s way more in this great episode: capital preservation and growth… volatility (a great quote from Ken “volatility is your friend, it’s not your enemy, if you use it correctly”)… the media’s impact on investor perception… the Fed and sovereign balance sheets… the senate bill trying to eliminate the ability of public companies buying back their own stock in the marketplace… housing (and the need to account for the full housing costs when calculating returns)… and of course, Ken’s most memorable trade.
What are the details? Find out in Episode 104.
Episode 103 is a solo-Meb show.
We just finished a short paper that references the old nutritional “Food Pyramid” published by the FDA a couple decades ago. Given what we’ve learned about health-conscious eating in the years since, that old guideline now seems a bit off-base. In the same way, the investing wisdom of yesteryear now seems similarly misguided. Meb walks us through the white paper that delves into these ideas in this short, just-Meb episode, identifying how his “Investment Pyramid” looks today.
Also, most of Meb’s books are now free! Just click here.
Get all the details in Episode 103.
Episode 102 has a radio show format. In this one, we cover Meb’s Tweets of the Week, some write-in questions, Twitter questions, and our first-ever call-in question.
We discuss the “Stay Rich” portfolio, and the unfortunate reality that even the safest portfolios can suffer ~25% drawdowns.
Next, there’s discussion of stock buybacks and a recent push from Senator Tammy Baldwin to introduce a bill that would prohibit companies from repurchasing their own shares (she claims it’s exacerbating the wealth gap).
Then, with volatility showing some life in the market, there’s discussion of volatility clustering. Next up is the investing service, Robinhood, which is now referring to calls and puts as “going up” and “going down.” Also, an ETF for companion pets filed by Gabelli.
We then dive into questions. Some that you’ll hear Meb address include:
All this and more in Episode 102.
In Episode 101, we welcome the great educator, Paul Merriman.
We start with Paul’s background; specifically, the story of an early trading experience with commodities. He doubled his money in days…and then lost everything on the very next trade.
Then the guys dive in, with Meb bringing up something Paul wrote called “The Ultimate Buy & Hold Portfolio” and asking for more detail. Paul starts with the S&P which, even with all its up-and-downs, has done great over the years. But then he walks us through some tweaks – adding large cap, then small cap – he notes the various percentage returns added by each, as well as the effect on volatility. He eventually arrives at a final portfolio, showing us the power of this diversification.
Meb points the conversation toward the behavioral benefit of diversification and says how some listeners will wonder how much money to put into each of the asset classes Paul had identified. Paul tells us he originally put 10% into 10 different asset classes – after all, if each asset class is worthy, then he wants it to be in his portfolio; especially because there’s no way to be certain which one(s) will shine going forward.
Agreeing, Meb touches on being “asset class agnostic” and notes that the problem with being, say, a “gold guy” or any die-hard type of investor, is you get wedded to that asset class. This emotional bond can lead to bad behavior. This leads to a discussion about implementation and the challenges of emotional investing. Paul tells us “I don’t want my emotions to have anything to do with how (my) money is managed.”
The conversation drifts toward the benefits of investing early, yet the challenges of educating young people as to its importance, as well as different investing needs over a lifetime. The guys note how the best thing for a young person would be the markets tanking for 10 years. Of course, that would be terrible for an older investor in/near retirement. This bleeds into a conversation about formally educating the younger generation about investing.
A bit later, Meb asks about the older investor who might have been burned in ’08, is now near retirement, thinks the U.S. market is expensive, yet needs results. What about him? Paul walks us through the realities of losses and gives us his overall thoughts. This morphs into a common question we get – invest everything at once, or drip it in over time? Paul has some thoughts on how to do this in a way that balances math and emotions.
There’s tons more in this episode (it’s one of our longest to date): the challenge of investing in the “shiny object”… how to avoid getting screwed by your advisor… investment newsletters… buy-and-hold versus market timing… the critical nature of understanding past performance… giving money to grandkids… and of course, Paul’s most memorable trade; his involves the ’87 crash.
What are the details? Find out in Episode 101.
To celebrate the milestone of reaching 100 episodes, we’re thrilled to welcome Professor Elroy Dimson, author of Meb’s favorite investing book of all time, Triumph of the Optimists.
Per Meb’s request, Elroy starts by giving us a summation of his research history which led to Triumph of the Optimists. He had a heritage in producing indexes and began reaching out to researchers across the globe in hopes of accessing different data sets. Looking at all the aggregated data, it became clear that from a long-term perspective, people who had invested in risky securities at the beginning of the century had done very well. People who had bought bonds and T-bills had not performed as well. The optimists had triumphed.
Next, Meb brings up a quote from Elroy about a controversial finding regarding the lack of correlation between economic growth and stock market performance. If anything, the relationship was reverse. Elroy expounds upon this, telling us that if it’s obvious that a market is growing, that’s public information. You can’t trade that since everyone else knows too. So, if you investing in countries where GDP has been growing, that could mean you’re too late.
Meb steers the conversation toward valuation, market cap weightings, and home country bias. Elroy walks us through the market cap concept, touching on the historical Austrian empire as well as the Japanese bubble. This leads to a lesson in finance, which includes real yields today, the Gordon Model, the multiple people are willing to pay today (which is higher), and the takeaway that “high valuations don’t necessarily mean that we’re going to see asset prices collapse” – they’re a reflection of the low interest rates we have today.
Meb asks about bonds, and whether Elroy has seen another historical period of negative yielding sovereigns. When you look at real rates, how does it play out for future returns?
Elroy tells us that real (inflation adjusted) rates are better to consider than nominal rates. And it turns out, real rates have been lower. Negative real rates are not all that rare – what is rare is so many countries experiencing them at the same time. This dovetails into a conversation about inflation and currency hedging. Elroy provides some color on currency issues but notes that hedging is not required if you’re a long-term investor.
There’s plenty more in this centennial episode: factors… growth stocks versus value stocks… historical returns of housing… even stamps, musical instruments and the investment returns of a good Bordeaux.
How does it compare to that of equities? Find out in Episode 100.
Episode 99 is a radio show format. We start discussing some of Meb’s “Tweets of the Week.” The first involves a presentation from Rob Arnott at Research Affiliates, which Meb considered “required reading for financial advisors everywhere.” It involves the amount of extra alpha you’d need to generate in order to offset taxes given various market approaches.
Next, we discuss another Tweet from Meb in which he asked readers to guess at the largest drawdown in US bonds in real terms between 1900 and 2010. Turns out, the majority of respondents were far off. Meb gives us the results and takeaways.
Then there’s a discussion of taxes in light of crypto gains (and losses). It seems lots of people may not be factoring tax payments into the equation. Not sure the IRS is going to look favorably on that…
We then jump into listener Q&A. Some of the questions you’ll hear answered include:
There’s plenty more, including why Meb is still very bullish on emerging markets, the realities of mutual fund investing with fees/taxes included, and Meb’s upcoming travel plans.
Check it all out in Episode 99.
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.