In Episode 60, we welcome the great William (Bill) Bernstein.
Bill starts by giving us some background on how he evolved from medicine to finance. In short, faced with his own retirement, he knew he had to learn to invest. So he studied, which shaped own thoughts on the matter, which led to him writing investing books, which resulted in interest from the press and retail investors, which steered him into money management.
After this background info, Meb jumps in, using one of Bill's books "If You Can" as a framework. Meb chose this as it starts with a quote Meb loves: "Would you believe me if I told you that there's an investment strategy that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90 percent of financial professionals in the long run, and make you a millionaire over time?"
The challenge is the "If" in the title. Of course, there are several hurdles to "if" which Meb uses as the backbone of the interview.
Hurdle 1: "People spend too much money." Bill gives us his thoughts on how it's very hard for a large portion of the population to save. We live in a consumerist, debt-ridden culture that makes savings challenging. Meb and Bill discuss debt, the "latte theory," and the stat about how roughly half of the population couldn't get their hands on $500 for an emergency.
Hurdle 2: "You need an adequate understanding of what finance is all about." Bill talks about the Gordon Equation, and how investors need an understanding of what they can realistically expect from stocks and bonds - in essence, you really need to understand the risks.
Meb steers the conversation toward investor expectations - referencing polls on expected returns, which are usually pegged around 10%. Using the Gordon Equation, Bill's forecast comes in well-below this (you'll have to listen to see how low). The takeaway? Savings are all the more important since future returns are likely to be lower.
This leads to a great conversation on valuation and bubbles. You might be surprised at how Bill views equity valuations here in the U.S. in the context of historical valuation levels. Bill tells us to look around: Is everyone talking about making fortunes in stocks? Or quitting good jobs to day trade? We don't see any of these things right now. He's not terribly concerned about valuations.
Hurdle 3: "Learning the basics of financial and market history." Meb asks which market our current one resembles most from the past. Bill tells us it's a bit of a blend of two periods. This leads to a good discussion on how higher returns are more likely to be coming from emerging markets than the U.S.
Hurdle 4: "Overcoming your biggest enemy - the face in the mirror." It's pretty common knowledge we're not wired to be good investors. So Meb asks the simple question why? And are there any hacks for overcoming it? Or must we all learn the hard way?
Unfortunately, Bill thinks we just have to learn the hard way. He tells us "The more comfortable you are buying something, in general, the worse the investment it's going to be."
Bill goes on to discuss the challenge of overconfidence and the Dunning-Kruger effect (there's an inverse correlation between competence and belief one has in their competence). Meb asks if there's one behavioral bias that's the most destructive. Bill answers with overestimating your own risk tolerance. You can model your portfolio dropping 30% and think you can handle it, but in when it's happening in real time, it feels 100% worse than how you anticipated it would.
Hurdle 5: "Recognize the monsters that populate the financial industry." Basically, watch out for all the financial leeches who exist to separate you from your money. Bill tells us a great story about being on hold with a big brokerage, and the "financial porn" to which he was subjected as he waited.
There's way more in this episode: Bill's thoughts on robos... What Bill thinks about any strategy that moves away from market cap weighting (Bill thinks "smart beta" is basically "smart marketing")... How buying a home really may not be a great investment after all... Cryptocurrencies... and even Meb's "secret weapon" of investing.
All this and more in Episode 60.
Episode 59 is a radio show format. This week we're diving into some of the recent market stories which Meb has found most interesting. We also bring back some listener Q&A.
We start with a Tweet from Cliff Asness, in which he rebuffs a Bloomberg article titled, "The Death of Value Investing." The article states that value isn't working. Sticking to that approach has resulted in a cumulative loss of 15 percent over the past decade, according to a Goldman Sachs Group Inc. report. During roughly the same period, the S&P 500 Index has almost doubled."
So is value investing dead? Meb gives us his thoughts. We discuss its underperformance, mean reversion, and factor-crowding.
Next up is a New York Times article referencing a recent stance-reversal from Burt Malkiel, a passive investing legend. He's now saying he recognizes where active investing can exploit certain market inefficiencies. The same article has some great quotes from Rob Arnott on the topic of factor investing, and the danger in tons of quants all looking at the same data and trading on it. Meb gives us his thoughts on factor timing and rotation, using trend with factors, and the behavioral challenges involved in both.
Another Arnott quote steers the conversation toward backtesting - the pitfalls to avoid when backtesting, so you don't create a strategy that looks brilliant in hindsight, but is hideous going forward.
Next up are some listener questions:
There's plenty more - including our new partnership with Riskalyze, which enables advisors to allocate client assets into Trinity portfolios. But the more interesting story is how Meb gave his wife food-poisoning the other night. How'd he do it?
Find out in Episode 59.
In Episode 58, we welcome Axel Merk from Merk Investments. After a bit on Axel's background, the guys jump in, discussing the Fed's decision to raise interest rates today (recorded on Wed 6/14/17).
Axel discusses how the Fed has announced the normalization of its balance sheet and the pace at which it would like to do so - but they've left out lots of details. He likens it to driving into a tunnel with no lights on. In essence, the Fed doesn't know where it wants to go.
Axel's response touches upon our current low volatility. Meb hones in on this, asking if the low volatility is in part due to actions from the Fed.
Axel believes this to be the case (central banks in general, not just the Fed). Yet there's plenty more, involving how central bank activity has fueled this up, up, up market, with investors piling into risk assets. But Axel thinks asset prices are likely to come down from here. He says "A lot of that (rising asset prices) has been induced by central banks. The unwinding of that is going to be, at the very least, let's put it in quotes "'interesting.'"
Meb then focuses the conversation on equities. He says how here in the U.S. they're expensive. So what does Axel see as the opportunity set in equities around the globe?
You'll need to listen for the details, but Axel likes a pairs trade, going long France and short the S&P. Of course, he is quick to say he could be wrong on both legs.
Meb segues to China, as Axel had mentioned it earlier. If you're a regular Meb Faber Show listener who heard Steve Sjuggerud and Jason Hsu's thoughts on China, you'll want to hear Axel's thoughts for a different take. He's not nearly as bullish. He concludes by saying "I happen to think that if you want to be looking at the one risk event that's out there, that's going to get people's attention, China is certainly at the very top of the list."
Since Axel is a currency guy, Meb then brings currencies into the conversation, asking how investors might think about them in a broader portfolio context.
Axel gives us a great overview of different currency markets, with additional detail on the Dollar vs Euro. Overall, he sees the Dollar toward the top of its cycle, and the Euro toward its bottom. He concludes by predicting that the Euro will be substantially stronger a year from now.
There's a great deal more in this episode: whether retail investors should be following an endowment allocation... how holding cash is not necessarily a bad investment choice... a great discussion on gold, and how it fits into a portfolio... even Axel's thoughts on cryptocurrencies and Bitcoin.
And of course, we get Axel's one piece of investment advice for listeners, as well as his most memorable trade (Hint - he bought Apple early).
Find out all the details in Episode 58.
Episode 57 is another "radio show" format, yet this one is different than our others.
In this episode, Meb discusses his 17 different "million-dollar" fintech ideas. In essence, Meb has had various business ideas over the years which he's wanted to pursue, but hasn't had the time. Some he's tweeted about, some he's blogged about, others he's kept to himself. But in Episode 57, he'll run through all 17, diving into more detail.
Can a listener take one and run with it? Sure. Let us know how it works out! Or work on it with us. We're open to ideas.
Either way, here are the 17 concepts:
Are all of these ideas good? (We have our doubts...)
But find out for yourself in Episode 57.
In Episode 56, we welcome Meb's good friend, and CEO of ETF.com, Dave Nadig. Per usual, we start with some background information. Dave tells us about his early days in the investment industry, starting a consulting firm that was working on a then-new idea: fee-only financial advising. His first client was a little shop that went on to become none other than BlackRock. After some professional twists and turns, including running money for a while, Dave ended up at ETF.com.
Meb then dives in by referencing an article Dave wrote toward the end of last year, called "Outlook for ETFs in 2017." There were several key points in the article which Meb thinks can help provide a general, 30-thousand-foot overview of the ETF space. The first point - ETF flows.
Dave tells us "this is a big year for ETFs." He then takes us through a quick recap of the evolution of ETFs, going from a purely institutional product back in its early days, to something embraced by investment advisors, to an investment vehicle for retail investors. And here we are now, somewhat full circle, with ETFs even more embraced by institutions (think endowments), only now, they're no longer held as fringe investments, but as core holdings.
Meb asks at what point ETF assets will surpass mutual fund assets. Meb had predicted within about 10 years back in 2013. Dave tells us there will always be a demand for mutual funds - that said, he believes the cross will happen around 2025, with asset levels around $14 trillion.
Meb asks if the evolution in the ETF space today is primarily a movement from higher fee to lower fee. David believes this is the case. Most of the new flows are going toward low-cost vanilla products. Dave thinks the whole active/passive debate misses the point - it's really about cost. This dovetails into another business/investment idea Meb has that he's offering to any listener willing to pursue it.
Next, Meb brings us back to Dave's 2017 Outlook piece, this time bringing up "ESG."(This stands for "environmental, social and governance" for anyone unaware.). Dave believes that we're near/in the greatest intergenerational wealth transfer in history. And the 40-year-olds that are inheriting, say, a $5M portfolio from their 70-80-year-old parents have different desires about what to do with that money. Dave tells us that this younger generation wants their money to do something - and this usually gets labeled ESG. So Dave believes we'll see more funds targeting this wealth transfer.
After some conversation about industry regulatory issues and Bitcoin, the guys jump into Dave's recent visit to "The Money Show" â€“ a place Meb describes as the "Wild West" of individual investors. One of the biggest things attendees of the show were asking Dave about was ETF liquidity. Is there reason for concern? How illiquid can you go? Dave gives us the key takeaways: 1) remember good trading hygiene. In essence, don't be an idiot. Use limit orders, assess fair value if you can, and so on. 2) In responding to "how illiquid is too illiquid" Dave says it's not that simple, because liquidity is a moving target. He tells us about "the liquidity barbell." If you're worried about this topic, you'll want to be sure to listen to this section.
Meb then asks about a fear the media loves to play up: "Will ETFs bring about stock market Armageddon?" Meb goes on to say how a USA Today article blames ETFs for exacerbating bad investing habits.
Dave says you can't blame ETFs for bad investor timing. That's just how we're wired. But he goes on to say that many of the arguments against ETFs can be traced back to the old guard - people who are trying to defend active management shops that are underperforming, or defend the lack of transparency in their investing process. But their main argument is worth understanding - namely, the indexing problem; the idea is that if everyone owned index funds, then price discovery would be impossible. But Dave says we're a long way from having this problem.
As usual, there's plenty more in the episode: exchange traded notes... the regulatory change Dave would like to see... buying ETFs at NAV... Dave's one piece of advice offered to help listeners the most... and Dave's answer to a new question: since Dave is a big "game" lover, Meb asks which three games are his top 3 of all time.
What are they? Find out in Episode 56.
In Episode 55, we welcome Ed Easterling. Meb starts by referencing a survey he just conducted, asking readers’ opinions as to the single best investing book out there. It turns out that Ed’s book, Unexpected Returns, made the top 50 list, so Meb offers Ed a kudos.
But the guys hop into market discussions quickly. Ed tells us that the stock market is not driven by randomness. It’s predictable in the long run, driven by three components: 1) earnings growth, 2) dividend yield, and 3) the change in valuation level. Stock market returns over the short-term are unpredictable, but over the longer-term they’re highly predictable. And the key driver is the starting level valuation.
Meb brings up how numerous investors are currently expecting 10% returns (based on long-term averages). He asks Ed if that’s warranted.
It turns out, we need to distinguish between long-term returns (say, 100 years) and a return-period that’s more relevant to the average investor (say, 10 or 20 years). This is because changes in PE levels are much more significant for returns over 10-20 year periods for individual investors, more so than over 100 years.
Meb asks if Ed has a favorite PE ratio. Ed likes Shiller’s CAPE and the Crestmont PE – which is driven by GDP and EPS. Ed finds value in comparing the two. They have similar results yet have different approaches.
All the talk of valuation leads the guys into a discussion of secular versus cyclical markets. Ed offers some general context for secular versus cyclical, then says we’re definitely in a secular bear market. He offers up some great details here, factoring in valuations and the inflation rate.
Meb asks what will make the cyclical bear end? Ed says the PE has to get low enough where it can double or triple. So, starting out in the high 20s right now, the PE would need to get down to at least the mid-teens, if not the low-teens.
Soon, the conversation gravitates toward “volatility gremlins,” with Meb asking Ed to define the term and explain.
There are two volatility gremlins that compromise the compounded returns investors receive: 1) the effect of losses – Ed gives us example of the math behind wins and losses; 2) the dispersion of returns – steady returns yield the best compounding, but when returns are more dispersed, it adversely affects the compounding. Meb asks, “what then?” How does one build a portfolio knowing this? Ed answers by giving us a great analogy involving rowing and sailing.
Next, the guys touch on volatility and what will be the trigger that moves us from this mellow inflation environment. Ed says that volatility is a reflection of the movement of the markets, which also reflects investor sentiment and complacency. By one of the measures of volatility that Ed tracks, he says we’re well-into the lowest 3% or 4% of all periods since 1950. The other volatility measure is the VIX, which is settling again, back around 10. Do you know how many days since 1990 the VIX has dipped below 10? Ed tells us, and yes, we’re flirting with a sub-10 level right now.
There’s far much more in this episode: Where Ed would point a new investor starting in this environment… The biggest investing misconception Ed sees from his students… Ed’s favorite investing styles/strategies within the hedge fund space… And advice for retirees and/or income investors.
What is it? Find out in Episode 55.
In Episode 54, we welcome Elizabeth “Liz” Dunn, author of the book, “Happy Money: The Science of Happier Spending”.
Meb suggests they walk through the book using its five broad takeaways as their outline. But before they dive in, he asks Liz about her inspiration for writing the book.
Liz tells us that when she began making a “real, grown up” salary, she wasn’t entirely certain what to do with it. She was curious how to use it most effectively to promote her own happiness. Interestingly enough, there wasn’t a great deal of research on the topic.
Next, Meb asks Liz to discuss her first main finding (and likely the best-known finding) – our happiness tends to increase when we spend money on experiences rather than things. Liz gives us the key takeaways, after which Meb asks why buying experiences over things is hard for us, when we know that’s what we should do.
The problem is we’re bombarded with opportunities to buy things. And it’s easy to see the differences between, say, Liz’s Honda and Meb’s Ferrari (no, Meb doesn’t own a Ferrari). With this comparison, Meb would feel great. But it cuts both ways – it’s also very easy for Meb to see someone else’s far more expensive Bentley, therein making him feel less satisfied with his Ferrari. Conversely, it’s more challenging to compare experiences. Each experience is somewhat unique, therein reducing the tendency to compare. Liz gives us an example using a safari she went on.
Meb and Liz soon move on to the second takeaway from the book: “make it a treat.” One of the greatest misunderstandings of happiness is the idea that if something makes us happy, then more of it should make us even happier. Apparently, that’s not the case. Whether we’re talking someone’s salary or a little luxury like “avocado toast” (Meb and Liz are both big fans), when we have more of it, this can erode our capacity to appreciate it.
This dovetails into the discussion of the salary “line in the sand” above which added dollars has diminishing impact on real happiness. Liz tells us that in the U.S., this figure is about $75K. But she mentions it with an interesting context…
There are two “flavors” to happiness: 1) the kind that comes when you evaluate a question like “am I living the kind of life I want to live?” and 2) the kind that comes when you ask “did I laugh or smile yesterday?”
If you’re making more money – well beyond $75K, you’re more likely to answer #1 in an affirmative way. Sure, as you jet off to Bora Bora and evaluate your life, you’re likely to feel good about having the wealth to enable such a trip. However, it turns out this added wealth has very little effect on the second type of happiness – day-to-day happiness.
The third takeaway is “buying time.” What are we actually doing with the minutes of our lives? Is there a way to trade our money for more time? Liz and Meb discuss spending an hour commuting to work every day, and how miserable that makes people. Wherever appropriate, it makes sense to spend money on things/services/people that can give us back our time, which we can then spend with loved ones or volunteering, etc.
Meb makes the point “show me your calendar and checkbook and I’ll show you what you care about.” While Liz agrees to an extent, she points out that many times the calendar and checkbook DON’T align with things we truly care about because we get into habits – say, mowing the lawn even though we have enough money to pay someone else to do it for us. So part of our challenge is to sniff out where our priorities are out of alignment with where we’re actually spending our time/money, then look to shift out of that mindset.
The fourth takeaway is “pay now, consume later.” This is hardly the way our culture does things, with its credit card mentality. Unfortunately, consuming first and paying later is exactly the wrong thing for happiness. Liz and Meb discuss this in detail, dovetailing into the toxic effects of debt.
The final takeaway is “invest in other people.” Liz has found that we tend to be happier when we spend our money on other people, more so than ourselves. In supporting this takeaway, she tells us of her study in which she gave people either a $5 or $20 bill, and asked them to spend it by the end of the day – the caveat was that some people were asked to spend it on themselves, while others were asked to spend it on other people. Liz’s team followed up at the end of the day, calling the participants, and found that those who spent the money on others reported feeling happier than the people who’d spent it on themselves.
After finishing discussing the book, Liz and Meb go over a paper Liz just published. It’s a fascinating look into what motivates wealthier people to give more to charity. In short, people with lots of money tend to focus on personal achievement more so than the communal “group achievement.” As such, a messaging strategy that reframes the wealthy individual as the hero or standout tends to result in more charitable donations as compared to a communal message.
There’s plenty more in this episode, including Liz’s next research project, discussion of Syrian refugees, what prompted a classic Meb-meltdown as a child, and finally, Meb’s pointed question to Liz: If I put you on the spot and asked you to give us one single piece of advice for achieving more happiness, what would it be?
What’s Liz’s answer? Find out in Episode 54.
Episode 53 is another “radio show” format. This means we tackle a handful of topics from Meb’s blog and tweets.
TOPIC 1 – VALUATIONS
3 DIFFERENT TAKES ON CURRENT VALUE PICTURE:
Meb’s recent blog post “A Bar Too High” indicated that for stocks to meet expectations over next 10 years, valuations must rise to highest they’ve ever been in history. With a current CAPE ratio of 29, that means the stock market multiple needs to INCREASE to all-time 1999 bubble highs to meet investor expectations. He thinks tepid growth is more realistic.
On the other hand, James Montier, member of the asset allocation team at the Boston-based asset manager GMO, is convinced that the US stock market is in bubble territory. However, European equities aren’t particularly cheap, either. Only emerging markets value-stocks appear vaguely attractive to him. Investors should be patient and hold a lot of cash in their portfolios in order to be able to buy when markets are correcting.
What would make the US equity market attractive again – how much would it have to correct? To get back to our sense of fair value tomorrow, it would have to fall by more than 50%. Then we would be on average valuation, which again we estimate based on profitability going back to normal.
A third option from a reader question: “Lately there seems to be a lot of talk about CAPE measure not being as meaningful as many seem to think that it is because the very low yields on bonds and full pricing of bonds are basically changing the overall risk adjusted returns landscape. I think the point people are making is that stocks are fairly priced for current overall market conditions, despite many indicators which suggest that prices are historically high.”
Three viewpoints – how does Meb see them all? You’ll hear his take.
TOPIC 2 – INVEST IN SINGLE STOCKS AT YOUR PERIL
A new study by finance professor Hendrik Bessembinder, called “Do Stocks Outperform Treasury Bills?” found that while investing in the overall stock market makes sense, individual stocks resemble lottery tickets: A very small percentage of winning stocks have done splendidly, but when gains and losses are tallied up over their lifetimes, most stocks haven’t earned any money at all. What’s more, 58 percent of individual stocks since 1926 have failed to outperform one-month Treasury bills over their lifetimes.
Professor Bessembinder found that a mere 4 percent of the stocks in the entire market — headed by Exxon Mobil and followed by Apple, General Electric, Microsoft and IBM — accounted for all of the net market returns from 1926 through 2015. By contrast, the most common single result for an individual stock over that period was a return of nearly negative 100 percent — almost a total loss.
Given all this, what reason is there for the average retail investor to be in specific equities instead of broader sector and index ETFs?
TOPIC 3 – VOLATILITY
We'll post a chart about our current low volatility – actual U.S. stock market volatility going to back 1928 has only been lower about 3% of trading days.
How does Meb interpret this – do these low readings mean a reversion is likely? Or is it the opposite – more of a trend approach where objects in motion tend to stay in motion?
Also, how would an investor act upon this using a tail-risk hedging strategy involving puts?
There’s plenty more and a handful of rabbit holes in this radio show episode, including investor sentiment, the name of Meb’s new child, how to avoid value traps, and yes, as the title suggests, the cheapest countries in the market today.
What are they? Find out in Episode 53.
In Episode 52, we welcome Jason Hsu, joining us all the way from Taipei. We start with a bit of background on Jason and his company, Rayliant, which is a spinoff off Research Affiliates. Listeners might recognize the name Research Affiliates, as it was co-founded with another Meb Faber Show guest, Rob Arnott. Rob and Jason decided to spin off Rayliant to enable Jason to focus on his investing passion, China.
As the conversation naturally led to China, Meb decides to run with it. He brings up how a prior Meb Faber Show guest (Steve Sjuggerud) is incredibly bullish on China. Meb asks Jason for a “boots on the ground” perspective. Does Jason agree with Steve’s bullishness?
In short, absolutely. Jason has two hypotheses as he evaluates China: One, as China continues moving toward, and eventually becomes, the world’s largest economy, investors will realize they’re underexposed to this market. Given this, there will be major rebalancing into Chinese equities; Two, Jason tells us that approximately 80-90% of Chinese daily trade flow comes from retail investors (here in the U.S. this percentage is significantly lower). This means more market inefficiencies, so the probability for “alpha” for managers is greater. Both these factors make China a market that should be on investors’ radars.
The China discussion dovetails into investor sentiment on China, and how emotionally-driven we are, which typically ends in underperformance. This leads Meb to ask pointedly, why are people so bad at investing?
Jason gives us his thoughts, which tend to reduce to “flow chases short-term performance.” He goes on to say how oftentimes, investors get crushed as they buy in at the peak of a style or asset class cycle.
Meb asks how investors should combat this. Jason has a classic response: “Whatever you think is a good idea… do the opposite and you’re going to be more successful.” The reason this tends to work is because “This is a market where the average human tendencies are precisely the wrong thing to do.”
This prompts Meb to bring up a study idea he wants a listener to undertake for him regarding historical news headlines and investor sentiment. Listen for the details. Anyone up for the project?
The guys stay on the topic of behavioral challenges, with Meb pointing toward one of Jason’s papers about how investors prefer complexity to simplicity. It’s a fascinating look into our wiring as humans and why investing is such a challenge for us.
Next, the guys move on to smart beta and factor investing. Meb asks Jason to provide an overview, and any main takeaways for investors implementing smart beta strategies.
Jason gives us his thoughts, including revealing his personal favorite factor: value. This leads the guys into a discussion of Warren Buffett and his true alpha being his ability to stick to his style and not abandon it at precisely the wrong time, as most of us do. The guys then discuss manager performance and underperformance, and the tendency to always be chasing.
There’s far more in this episode: Meb’s “forever fund” idea (which most people he’s discussed it with actually hate)… Why hedge fund lockups and opaqueness can actually be a good thing… The unique “values” which Jason created for Rayliant, and how they’re so different than those of most other money managers… Jason’s most memorable trade… And lastly, his final takeaway for listeners looking for better market performance.
What is it? Find out in Episode 52.
In Episode 51, we welcome Mark Kritzman. Per usual, we start with Mark’s background. He tells us a bit about his 40-year career in investing, leading to Windham, where he focuses on asset allocation and risk premia strategies.
But it’s not long before the guys jump in, starting with Mark’s 7th book, A Practitioner’s Guide to Asset Allocation, which will be coming out soon. Mark describes the process of asset allocation, starting with the basics, then taking us a layer deeper, discussing asset allocation as a way to balance the goal of increasing wealth while minimizing drawdowns. In essence, you need to identify the asset classes you want, evaluate their expected, long-term returns, then estimate the volatility of each and – just as importantly – estimate the correlation between the asset classes. With all this, you then find the particular allocations that give you the highest return for the same level of risk – the efficient frontier.
Next, the conversation takes a turn toward investing fallacies, including the idea that asset allocation drives more than 90% of performance. Mark tells us there are some flaws with this idea, then explains in detail. Another fallacy discussed is that of time-diversification – the assumption that investing over the long-term is safer than investing over shorter periods. Again, Mark provides details that call into question this belief.
The guys then get into investing in illiquid assets, and how to appropriately structure them in an asset allocation. It can be hard to maintain a balanced portfolio consisting of illiquid assets. Mark’s approach is to treat liquidity as a shadow investment. In essence, you attach a shadow asset as well as a shadow liability to the appropriate parts of the portfolio. You’ll want to listen to this part of the episode for all the details.
This dovetails into hedge funds, since hedge fund investing can also be illiquid. Meb asks how Mark thinks about hedge fund investing, and given limited information, is an investor’s only recourse to be able to pick the best managers? And if one doesn’t have that ability, should he/she just stick with investing in the S&P?
Mark has a great answer about how most of the historical premium of private equity over public equity can be attributed to the sector exposures of private equity funds. So investors can build a portfolio of public sector ETFs in a way that can approximate much of the hedge fund sector allocation. You’re probably going to be surprised at just how much of the premium of private equity over public equity doing this which would have delivered to an investor.
As usual, there’s plenty more in this episode: the role of fees and taxes… the concept of “turbulence”… the absorption ratio, and how we can use it to evaluate risk… and lastly, what Mark’s most useful idea is for listeners.
What is it? Find out in Episode 51.
Episode 50 is a return to our “radio show” format, in which we discuss current market news, Tweets Meb finds interesting, various research papers of note, and anything else on Meb’s mind.
But first things first: A huge congratulations to new father, Meb Faber. His “spin-off” came in the early morning hours just a few days ago. In fact, this episode was recorded with Meb calling in from a spare room at the hospital.
The Meb Faber Show also just passed the one-million downloads mark. So a huge thank-you to everyone who has tuned in, listened, and recommended us to your friends. We’re genuinely grateful to everyone for giving us their time each week.
Diving into the financial content, we start with Meb discussing the need for investment literacy with kids and new investors. The problem is that most of us learn to invest incorrectly – generally, we learn about single stock valuation. As Meb tells us, the problem is that far more historical context is needed before even getting to this point. What have equity and bond investments averaged over the years? How cyclical are the markets? What does a bubble look like and how to you avoid one? In essence, there’s so much to learn in order to be an informed investor before diving into the details of, say, a cash flow statement or a price-to-earnings ratio.
This ties into a conversation about expected returns going forward. Turns out, a recent source indicated that some investors are still expecting to make 8.5% per year going forward. Is this realistic? Not if you go by Bogle’s formula. Meb explains in detail.
Next, Meb made a recent change to his personal investment portfolio. Since he believes it to be important to be transparent about how he invests, he publishes this online. Meb tells us about his recent change, in which he added a tail risk hedging component. He expects it to be a drag on portfolio returns under normal circumstances, but it should provide him some protection if the U.S. equity market spikes lower. This bleeds into a discussion on bonds, and where they might going, since roughly 90% of Meb’s new hedge investment actually is invested in 10-year Treasuries.
Next up is a quote from John Bogle which Meb recently Tweeted. It’s about risk, valuations, and indexing. It leads into a discussion about whether there’s a valuation at which the risk of owning stocks outweighs the potential reward of remaining invested. We discuss market timing, and the possibility of exiting stocks due to absurd valuations – and potentially missing great gains as the market climbs higher, indifferent to your opinion that it was too overvalued.
The conversation takes another shift, gravitating toward active versus passive funds, the toxic effect of fees when buying active funds, and the problem of “active share.” Active share references the degree to which a fund in which you’re invested differs from its benchmark. If you want to invest in a smart beta fund, typically you want to see high active share (lots of difference) compared to a vanilla index fund – especially if the fund fees are high. Unfortunately, there are lots of funds out there claiming to be different, but they’re actually “closet indexing.” All you’re doing is paying through the teeth for something you could buy much more cheaply. Meb discusses in detail.
There’s lots more in this episode, including a “coffee can” portfolio… the challenges of “looking different” when the market and/or your neighbors are doing better (even though over a longer investing horizon, you’re positioned to be in better shape)… “over-rebalancing” toward global markets these days… why Europe has been a horrible investment for a decade and what its prospects might be going forward…
What are Meb’s thoughts? Find out in Episode 50.
In Episode 49, we welcome Dr. Steve Sjuggerud. The conversation begins with Meb and Steve reminiscing about the origin of their friendship, which dates back some 10 years. This leads the guys into Steve’s background, and how he transitioned from being a broker into being the highly-popular investment newsletter writer he is today.
Meb asks Steve to describe his investing framework. Similar to Meb, Steve likes both value and trend. Specifically, he looks for 3 things: assets that are “cheap,” “hated,” and “in an uptrend.” This methodology applies to all sorts of asset classes. The guys dig deeper into value and trend, leading to Steve ultimately to say, “If I had to choose between one or the other, I would actually choose momentum over value.” Meb agrees.
Next, Meb asks how the world looks to Steve today. Is he buying? Defensive? Where’s he looking? And so on…
Steve tells there are always reasons to sell or stay out of the market. Despite this, Steve’s thesis is that interest rates will stay lower than you can imagine, longer than you can imagine. And this will drive asset classes higher than we can imagine. We’re still not at absurd equity levels yet here in the U.S. – Steve says we’re maybe around the 7th or 8th inning of this bull market. But the biggest gains can often come at the end of a bull market, so there’s potentially more significant room to run.
As the guys discuss this, the conversation tilts toward investor sentiment. They agree that irrational exuberance for this bull market simply doesn’t exist right now. There’s no euphoria. Steve sums it up simply: “This is not what the peak of a bull market looks like.”
Yeah, valuations are high, but interest rates are near historic lows. Relative to bond yields, the equity values are far more reasonable. Investors need to compare returns to what you can get through other asset classes.
The guys jump around a bit, touching upon the warning signs Steve will look for to tip him off as to when to bail on U.S. stocks, a discussion of the Commitment of Traders report and how to use it, and then a discussion of U.S. housing and how it’s a solid investment right now because housing starts are nowhere near what they need to be to equalize supply and demand.
The guys then turn toward foreign equities, where it appears that value and trend are lining up. Foreign has been cheap for a while, but it’s been underperforming. And now that appears to be changing. Meb asks Steve to tell us what he’s seeing – it generally boils down to one big thing: China.
You’ll definitely want to listen to this part of the discussion, as Steve tells us about a revolution in mobile payments that’s already happened in China (and will likely happen here in the U.S.). But beyond that, Chinese stocks as a whole are now incredibly cheap. Even better, there are going to be tailwinds of adding Chinese stocks to a major index. I won’t get into the details here, but the analogy the guys use is having the teacher’s manual of a high school textbook with all the answers ahead of time. Best of all, Steve gives us the names of some actual ETFs that may benefit from this trend.
There’s much more in this value-packed episode: gold and gold mining stocks… Steve’s investment in St. Gaudens coins… Steve’s surfboard and vintage guitar collections (including the story of a $30K guitar he bought and later sold for $72K)… And of course, Steve’s most memorable trade – which involved a painful 50% loss for Steve and his subscribers, all stemming from the lie of a certain global politician.
Which politician and which lie? Find out in Episode 49.
In Episode 48, we break new ground for The Meb Faber Show. Departing from our usual world of stocks and bonds, we welcome expert numismatist, Van Simmons. For anyone unfamiliar with the word, a “numismatist” is a rare coin collector.
We start where we usually do – with a bit of background on our guest. Van gives us a quick overview on how he got into his line of work. But it’s not long before the guys jump into the world of rare coins, with Meb asking Van to provide a general, contextual overview.
Van’s description of the world steers the conversation toward perhaps one of Van’s biggest contributions to the coin collecting community – the creation of an innovative coin grading standard. Meb believes this grading standard was huge, as “not getting screwed” is such a concern for all sorts of investors.
Next, the guys cover a few, quick questions – how has coin space evolved over the years… what were the biggest seismic changes… and which demographic Van sees as the most active in this space. But they dig deeper when the conversation turns toward international demand – specifically from China.
Van tells us how he bought two high-grade Chinese silver dollars in the late 90s. He found them in his safe two and a half years ago, and wondered what they were worth. He called an auction company and was told that he could have sold them at their last auction about four months earlier for $60-70K a coin (Van actually sold the coins some months later at a hefty price, though not quite this high). And what had Van paid for those coins? $600 for one and $900 for the other.
Meb brings the conversation back to U.S. market, asking Van if there is a most famous or most traded coin – in essence, is there a “blue chip” coin?
Van tells us one of them would be a 1907 twenty-dollar high relief (a $20 Saint Gaudens). He follows up with more color on the coin’s origin, dating back to President Roosevelt, as well as some interesting trivia on it relating to its high-relief profile. Other coins Van mentions are the 1804 Silver Dollar and the 1913 Liberty Nickel.
Next, Meb asks how a new coin investor with a long time-horizon could get started with $10K. Meb reveals this is not an academic question – he actually intends to have Van build him a portfolio with a $10K seed. Meb’s criteria are: one, spread his money around as much as possible, say, up to 5-10 coins; two, he wants to tilt toward beautiful coins; and three, Meb wants coins that have some historical significance. Van gives us his thoughts.
The guys jump around a bit before getting onto the topic of counterfeiters. Unfortunately, this can be a problem. Van tells us a story illustrating the danger before the guys discuss how to avoid getting ripped off.
This leads into the topic of common mistakes that new coin collectors make. Van tells us that the biggest mistake is buying everything. The hardest thing to do is find someone you trust who will steer you toward great pieces that will hold value.
Next, Van and Meb branch out, discussing other collectibles. There’s talk of pocket knives, Native American artifacts, baseball/basketball cards – even a great story involving Meb’s mom and a Michael Jordan rookie basketball card.
Meb asks Van as technology improves, at what point does grading become software based, with optical recognition?
Turns out, this technology has already been here – and Van was a big part of its creation. But the collecting community preferred human-graders. It’s a fascinating story you’ll want to hear.
There’s lots more in this episode: a Mickey Mantle card worth $5M… Milton Friedman (one of Van’s clients) discussing the inevitable demise of the U.S. dollar… and of course, Van’s most memorable story related to collecting. This one involves a long-lost coin that turned out to be very valuable.
What are the details? Find out in Episode 48.
In Episode 47, we welcome New York Times bestselling author, Ric Edelman.
We start with some quick background on Ric, but then jump into the main topic: the future of technology and how it will affect our lives.
In essence, the future is going to look far different than what we’ve known. The tendency is to believe that the future will be similar to what our parents and grandparents experienced as they aged. A linear progression – school, work, retirement, death.
Ric tells us this is going to change. The linear lifeline is going away. It will more resemble school, work, back to school, a new, different career, then a sabbatical, more school, and so on… Think of a lifeline that’s more cyclical.
What’s the reason? Well, we’re going to be living far longer. Technological and health care advances mean we’re going to be far more vibrant much later in life, so this will change everything we know about retirement and our traditional life-paths.
The guys then dig into the role that technology and robots will play in all this. Robots are going to eliminate numerous existing occupations. On the other hand, new jobs and skill sets will be created, but we’ll have to go back to school to learn them.
Meb ask Ric to dive deeper into this “loss of jobs” forecast, as it’s a common source of concern for many people.
Because of computers’ increased capacity, robots will be able to do jobs that humans do – and not just “factory line” type jobs. Any jobs that are repetitive in nature are at risk – which means white collar jobs too; for example, certain types of legal work. As another example, did you know that computers are already writing news articles? There’s a program that currently writes sports stories, and apparently, readers can’t tell the difference between a human and computer author.
Ric tells us “According to Oxford University, 47% of the occupations in America will be gone within 15 years.”
So what can you do to protect yourself from being replaced by a robot?
There are 4 skill sets that will give you an edge: thinking, managing, creating, and communicating. These four things will be the most difficult for computers to do.
The conversation bounces around a bit before the guys dig deeper into how working has changed over the years – and how it will continue to change. This leads into a conversation contrasting the “New York model” with the “Hollywood model.”
In essence, the New York model is “one job.” You do a given thing with same people for the same customers for decades. With the Hollywood model, you have a group of people who come together for one project, though they’re likely working on multiple projects at the same time. You’re using your skills in a wide variety of activities at the same time. We’re moving toward a Hollywood model.
Meb asks how this view of the future impacts asset allocation.
There are two big ways: One, we need to increase our allocation to stocks far more, and maintain it for much longer. Most peoples’ asset allocation models are flawed in this manner.
Two, we need to re-think the types of companies that are in our portfolios. Most of these businesses were likely built for the 20th century – and if so, they’re at risk of failing in the 21st century. As an example, think Kodak that went bankrupt when it couldn’t transition and monetize newer technologies. Ric mentions Tesla and AirBnB as two examples of 21st century companies.
This leads into a discussion about an ETF that targets only 21st Century companies. You’ll want to hear this topic.
There’s way more in this episode: behavioral challenges for investors and the role that an advisor should play in helping… an irrevocable trust, created by Ric, that’s helping parents save money for their children… the challenges facing Social Security given our much longer life-spans… Even why personal finance isn’t taught in schools, despite being one of the most critical skills our kids should learn.
So why isn’t it taught? Hear Ric’s thoughts in Episode 47.
In Episode 46, we welcome Real Vision TV co-founder, Raoul Pal. The guys start by going over a bit of Raoul’s background.
Raoul started his career by running equity and equity derivatives at Goldman Sachs. Through this, he learned the macro investing world. He then joined a hedge fund, managing its global macro fund before retiring at 36 on the coast of Spain. But it was then that Raoul decided to start a research service, the Global Macro Investor, aimed at large, institutional players.
However, in 2008, Raoul realized the ordinary investor had been let down by the system and financial media. So, in an effort to help, Raoul founded Real Vision TV with Grant Williams. Real Vision features the smartest guys in the world teaching you how to invest, what their best ideas are, and so on…
After this background, the guys jump in, with Meb asking Raoul about his overall investing framework. Raoul tells us this whole game is about probabilities. To invest successfully, we look for times when the odds are in our favor. So, to look for these times, Raoul developed a system based on the business cycle – with a focus on GDP, as asset prices are moved by economic growth. The model relies heavily on findings from ISM reports (Institute for Supply Management). Raoul tells us that when looking at ISM numbers, it’s not just the level that counts, but also the rate of change of those levels. Overall, this model helps forecast S&P levels, bond yields, inflation, world trade… basically everything!
So, what is it saying now?
“We’ve got to expect a recession this year or next year, or if we’re at the wild extremes, the year after that.”
Meb brings up stats from Ned Davis, tying ISM levels to market returns. He says how last year, it appeared that ISM levels were rolling over, but then they steadied and now are a bit high. He asks Raoul what it means for us now.
You’ll want to hear Raoul’s response, which includes the possibility that asset prices may weaken soon – while bond yields may suffer significantly.
Meb then points to Raoul’s call of a potential short trade in oil. Raoul tell us that this is the largest speculation in oil – ever. Way too many people went long, and this speculative positioning is too far ahead of the actual business cycle. He says oil is maybe $10-$15 too high right now. It’s coming close to being a perfect trade setup. Oil could hit as low as $30.
Next, the guys discuss great opportunities around the globe. Raoul points to Cypress. Greek stocks are still hammered too. He says the upside could be huge – potentially 10x your money. Meb agrees, mentioning his own study about markets that have gone down big, or stayed down for many years. The upside is often spectacular.
The conversation then steers toward one the biggest emerging macro story in the world – India. You’re going to want to hear this one. It’s a fascinating story, and Raoul gives us actionable investment ideas.
Next up – Bitcoin. Raoul gives us a quick primer on Bitcoin and blockchain technology. He tells us that many people are confused as to what, exactly, it is – currency? Investment? Raoul gives us his thoughts.
There’s way more, as this episode is packed with great content. The guys talk about Google’s and IBM’s prospects as investments… artificial intelligence… making money entrepreneurially rather than through investing… and Raoul’s most memorable trade – it’s fascinating story involving the South African Rand that you don’t want to miss.
What are the details? Find out in Episode 46.
In Episode 45, we welcome one of the most often-requested guests for our podcast, Gary Antonacci.
After a few minutes on Gary’s background, the guys dive into Gary’s “Dual Momentum” research. To make sure everyone is on the same page, Meb asks for definitions before theory. “Relative momentum” compares one asset to another. “Absolute momentum” compares performance to its own track record over time, also called time-series momentum. Gary uses a 12-month lookback, and compares his results to the S&P and other global markets. In essence, you’re combining these two types of momentum for outperformance.
The guys talk a bit about using just one of the types of momentum versus combining them, but Gary tells us “You get a synergy that happens when you use (Dual Momentum).” The compound annual growth rate applied to the indices is 16.2% dating back to 1971, compared to the S&P’s 10.5%. And the reduction in volatility and drawdown is under 20% compared to 51% for the S&P.
With the basics of Gary’s Dual Momentum out of the way, Meb decides to go down some rabbit holes. He asks about the various extensions on Dual Momentum. It turns out, Gary says you can introduce some additional granularity, but not a lot. Almost nothing really improves the current version of Dual Momentum substantially. (And in case you’re wondering, you can go to Optimalmomentum.com to track Gary’s performance.)
Meb then brings up questions that came in via Twitter. The first: “What sort of evidence would be required to convince Gary that Dual Momentum won’t work in the future?”
Gary tells us that because the evidence for Dual Momentum is so strong, the evidence against it would have to be strong. We would need more than a few years of underperformance, and instead, a full market cycle of underperformance. But more importantly, he’d want to understand why it would underperform – for instance, perhaps everyone decided to become a trend follower, squeezing out the alpha? Gary quickly ads that such a scenario will likely never happen due to our behavioral tendencies as investors.
The next Twitter question: “What are your thoughts on doing something alpha oriented versus just dropping into cash and bonds when you’re in a downtrend?”
Gary says shorting doesn’t work because of an upward bias to stocks. Meb agrees, saying that shorting actually amps up risk and volatility, but doesn’t really add to risk-adjusted returns.
Next, Meb brings up a post Gary wrote about commodities – are they still a good diversifier? The idea is that markets and their participants change over time. Gary thinks passive commodities have changed over time. And while they were a good diversifier to a stock/bond portfolio before, everyone has started doing it, which changed the nature of the market, reducing the benefit.
Gary also mentions the risk of others front-running you. Meb chimes in, agreeing – you’re going to want to hear this back-and-forth.
There’s tons more in this episode: moving away from market cap weighting when using Dual Momentum… Dual Momentum applied to sector rotation… sports gambling… our tendencies to stray from our investment plans… and Gary’s most memorable trade – hint: it involves an options blow-up.
What are the details? Find out in Episode 45.
Last week’s solo “Mebisode” was met with lots of positive feedback, so we’re going to do one more in this format before we return to interviewing guests. Therefore, in Episode 44, Meb walks us through his book, “Invest with the House, Hacking the Top Hedge Funds.”
Picking stocks is hard—and competitive. The most talented investors in the world play this game, and if you try to compete against them, it’s like playing against the house in a casino. Luck can be your friend for a while, but eventually the house wins. But what if you could lay down your bets with the house instead of against it?
In the stock market, the most successful large investors—particularly hedge fund managers—represent the house. These managers like to refer to their top investments as their “best ideas.” In today’s podcast, you will learn how to farm the best ideas of the world’s top hedge fund managers. Meb tells us who they are, how to track their funds and stock picks, and how to use that information to help guide your own portfolio. In essence, you will learn how to play more like the house in a casino and less like the sucker relying on dumb luck.
So how do you do it? Find out in Episode 44.
Episode 43 finds us revisiting the “solo Meb” show. This time, he walks us through his research paper, Learning to Play Offense and Defense: Combining Value and Momentum from the Bottom Up, and the Top Down. If you’re on-the-go, then this episode is perfect for you as it’s a bit shorter.
Sorting stocks based on value and momentum factors historically has led to outperformance over the broad U.S. stock market. However, any long-only strategy is subject to similar volatility and drawdowns as the S&P 500. And as we all know, drawdowns of 50%, 60%, or even 90% make a buy-and-hold stock strategy incredibly challenging. Is there a way not only to add value on your stock selection, but also to reduce volatility and drawdowns of a long only strategy with hedging techniques?
In Episode 43, Meb examines how we might combine aggressive offense and smart defense to target outsized returns with manageable risk and drawdowns.
Episode 42 is a remote podcast with Meb calling in from Hawaii. Fortunately, the roosters in the background aren’t loud enough to interfere...
Though this is a Q&A episode, it’s slightly different in nature. Rather than discuss listener questions, we’re experimenting with using some of Meb’s “tweets of the week” as our topics of conversation. It’s a way of getting inside Meb’s head a bit more. We’d love your feedback, so love it or hate it, let us know how we can make this format (or any, for that matter) better and more beneficial for you.
Some topics you’ll hear covered in this episode include:
- How do you know when your market strategy has lost its efficacy, versus when it’s simply having a rough stretch, yet will rebound?
Details: One of Meb’s tweets suggested “After you read Buffett’s new letter to investors, read this,” which pointed toward his post about how Buffett’s long-term returns have crushed those of nearly everyone else, though he’s underperformed the market in 7 of the last 9 years. This brought to mind a question which Meb asked Ed Thorp: “When do you know when a strategy has failed, versus when it is time to remain faithful, as reversion to the mean is likely about to happen?” The Thorp answer was generally, “Do your homework so you know whether your drawdown is within the normal range of probabilities, or something unique” We push Meb on how a retail investor is supposed to do that.
- With the VIX hovering around 11, is Meb considering buying LEAPS?
Details: If you’re not an options guy, don’t worry. Meb takes this question in a slightly different direction, discussing low volatility and options more in a “portfolio insurance” type of way. You buy insurance on your home and car, right? Buying puts at these low volatility levels has some similarities to buying portfolio insurance.
- The last time stock market newsletters were this bullish was Jan. 1987. To what extent does this level of ubiquitous optimism get Meb nervous?
Details: Lots of indicators seems to be suggesting we’re far closer to the end of this bull market than the beginning. Of course, that doesn’t mean it’s going to happen tomorrow. You’ll hear Meb’s take on various indicators and what he’s taking away from them right now.
- Newfound did a study, finding that the 60/40 model is predicting 0% through 2025. What are Meb’s thoughts in general?
Details: Meb is not surprised by this prediction. He’s discussed future returns based on starting valuations for a long time. But if you’re somewhat new to the podcast, this is a great primer on how Meb views potential returns of various asset classes going forward.
There’s plenty more, including something Cliff Asness referred to as “deeply irrelevant,” how advisers can excel as robos continue changing the investment landscape, Meb’s experience at a recent Charlie Munger speech, and Meb’s issue with Tony Robbins.
What is it? Find out in Episode 42.
In Episode 41, we welcome Doug Ramsey from Leuthold. Meb is especially excited about this, as Leuthold publishes his favorite, monthly research piece, the Green Book.
After getting a recap of Doug’s background, Meb dives in. Given that we’re in the Dow’s second longest bull run in history, Meb asks how Doug sees market valuation right now.
Doug’s response? “Well, that’s a good place to start cause we’ll get the worst news out of the way first...”
As will surprise no one, Doug sees high valuations – believing that trailing earnings-based metrics might actually be underestimating the valuation risk.
This prompts Meb to bring up Leuthold’s “downside risk” tables. In general, they’re showing that we’re about 30% overvalued. Across no measure does it show we’re fairly valued or cheap.
Doug agrees, but tells us about a little experiment he ran, based on the question “what if the S&P were to revert to its all-time high valuation, which was on 3/24/2000?” That would mean our further upside would stretch to about 3,400, and we’re a little under 2,400 today. Doug summarizes by telling us that if this market is destined to melt up, there’s room to run.
Meb agrees, and makes the point that all investors have to consider the alternate perspective. While most people believe that the markets are substantially overvalued, that doesn’t mean we’re standing on the edge of a drawdown. As we all know, markets can keep rising, defying expectations.
The conversation then drifts into the topic of how each bull market has different characteristics. Meb wants to know how Doug would describe the current one. Doug tells us the mania in this bull market has been in safety, low volatility, and dividends. Overall, this cycle has been characterized by fear – play it conservative.
The guys then bounce around across several topics: small cap versus large cap and where these values are now… sentiment, and what a difference a year makes (Doug says it’s the most optimistic sentiment he’s seen in the last 8 years)… even “stock market returns relative to the Presidential political party” (historically, democratic Presidents have started office at a valuation of 15.5, leading to average returns of 48%, while republicans have taken over at a valuation of 19, which has dragged returns down to 25%). The bad news? Trump is starting at very high valuations.
Next, the guys get into the biggest problem with indexing – market cap weighting. Leuthold looked at what happens to equities once they hit 4% of their index. The result? It becomes incredibly hard to perform going forward. It’s just near impossible to stay up in those rarified market cap tiers. So what’s the takeaway? Well, Doug tell us that he’d bet on the 96% of other stocks in the S&P outperforming Apple over next 10 years.
This episode is packed with additional content: foreign stock valuations… value, momentum, and trend… the Coppock Curve (with a takeaway that might surprise you – higher prices are predicted for the next 12-24 months!)… The best sectors and industries to be in now… Why 2016 was the 2nd worst year in the past 89 years for momentum…
Finally, for you listeners who have requested we pin our guests down on more “implementable” advice, Meb directly asks what allocation Doug would recommend for retail investors right now.
What’s his answer? Find out in Episode 41.
We’ve had some great guests recently, and have many more coming up, so we decided to slip in a quick Q&A episode. No significant, recent travel for Meb, so we dive into questions quickly. A few you’ll hear tackled are:
- Some folks talk about how the inflation numbers are manipulated by the government, and how the calculations have changed. Is there any merit to this?
- What is your opinion on market neutral strategies? If you had to build a market neutral ETF, what strategy would you use?
- Your buddy, Josh Brown, indicates that a significant portion of valuations, specifically CAPE, are the confidence in the stability of the stock market, which will justify high valuations here in the U.S. This makes intuitive sense, but I’d like your thoughts.
- Have you given any thought to the application of a trend following approach over a lifetime? Specially, use buy-and-hold when younger, but move to trend as one approaches retirement?
- Based on your whitepapers, you’ve indicated that trend following is not designed to increase returns, but rather, to limit/protect your portfolio from drawdowns. If this is the case, how does an increase in the allocation toward trend in your Trinity portfolios correlate to a more aggressive portfolio? It seems if “more trend” is supposed to reduce drawdowns, it should be found in Trinity 1 instead of Trinity 6.
- Have you done any research on earnings growth rates compared with CAPE to get a more accurate indicator of expected returns? For example, while the CAPE for many countries in Europe is low, their growth rates are also considerably lower than the U.S., which could justify the lower CAPE as compared with the U.S. Your thoughts?
- Does your “down 5 years in a row” rule apply to uranium, or is it too small?
As usual, there’s plenty more, including a listener wondering why Meb didn’t challenge Rob Arnott on a discussion topic during Rob’s episode, why Meb is in a cranky mood (involves auditing), and a request for more gifts of tequila from listeners. All this and more in Episode 40.
In Episode 39, we welcome the legendary Ed Thorp. Ed is a self-made man after having been a child of The Depression. He’s a professor, a renowned mathematician, a fund manager who’s posted one of the lengthiest and best investment track records in all of finance, a best-selling author (his most recent book is A Man for All Markets), the creator of the first wearable computer, and finally, the individual responsible for “counting cards.”
Meb begins the episode in the same place as does Ed in his new book, the Depression. Meb asks how that experience shaped Ed’s world view. Ed tells us about being very poor, and how it forced him to think for himself, as well as teach himself. In fact, Ed even taught himself how to make his own gunpowder and nitroglycerine.
This dovetails into the various pranks that Ed played as a mischievous youth. Ed tells us the story of dying a public pool blood-red, resulting in a general panic.
It’s not long before we talk about Ed’s first Las Vegas gambling experience. He had heard of a blackjack system developed by some quants, that was supposed to give the player a slight mathematical advantage. So Ed hit the tables with a strategy-card based on that system. At first, his decisions caused other players at the table to ridicule him. But when Ed’s strategy ended up causing him to hit “21” after drawing 7 cards, the players’ opinions instantly changed from ridicule to respect.
This was the basis from which Ed would create his own counting cards system. Meb asks for a summary of how it works. Ed gives us the highlights, which involve a number count that helps a player identify when to bet big or small.
Meb then asks why Ed decided to publish his system in academic journals instead of keeping it hush-hush and making himself a fortune. Ed tells us that he was academically-oriented, and the spirit of science is to share.
The conversation turns toward the behavioral side of gambling (and investing). Once we move from theory to practice, the impact of emotions plays a huge role. There’s a psychic burden on morale when you’re losing. Meb asks how Ed handled this.
Ed tells us that his early days spent gambling in the casinos were a great training ground for later, when he would be “gambling” with tens of millions of dollars in the stock market. He said his strategy was to start small, so he could handle the emotions of losing. As he became more comfortable with his level of risk, he would scale his bets to the next level, grow comfortable, then move up again from there. In essence, don’t bet too much too fast.
This dovetails into the topic of how to manage money using the Kelly Criterion, which is a system for deciding the amount to bet in a favorable situation. Ed explains that if you bet too small, won’t make much money, even if you win. However, “if you bet too much, you’ll almost certainly be ruined.” The Kelly Criterion helps you determine the appropriate middle ground for position sizing using probabilities.
It turns out that Ed was so successful with his methods, that Vegas changed the rules and eventually banned Ed from their casinos. To continue playing, Ed turned to disguises, and tells a fun story about growing a beard and using contact lenses to avoid identification.
Meb tells us about one of his own card-counting experiences, which was foiled by his partner’s excessive Bloody Mary consumption.
Next, we move to Wall Street. Meb brings up Ed’s performance record, which boasts one of the highest risk-adjusted returns of all time – in 230 months of investing, Ed had just 3 down months, and all were 1% or less. Annualized, his performance was over 19%.
Ed achieved this remarkable record by hedging securities that were mispriced – using convertible bond and options from the same company. There was also some index arbitraging. Overall, Ed’s strategy was to hedge away as much risk as possible, then let a diversified portfolio of smaller bets play out.
Meb asks, when you have a system that has an edge, yet its returns begin to erode, how do you know when it’s time to give up the strategy, versus when to invest more (banking on mean reversion of the strategy). Ed tells us that he asks himself, “Did the system work in the past, is it working now, and do I believe it will it in the future?” Also “What is the mechanism that’s driving it?” You need to understand whether the less-than-desired current returns are outside the range of usual fluctuation. If you don’t know this, then you won’t know whether you’re experiencing bad luck (yet within statistical reason) or if something has truly changed and your “bad luck” is actually abnormal and concerning.
Next, Meb asks about Ed’s most memorable trade. You’ll want to hear this one for yourself, but it involves buying warrants for $0.27, and the stock price eventually rising to $180.
There’s plenty more in this fantastic episode, including why Ed told his wife that Warren Buffett would be the richest man in America one day (said back in 1968)… What piece of investing advice Ed would give to the average investor today… Ed’s interest in being cryogenically frozen… And finally, Ed’s thoughts on the source of real life-happiness, and how money fits in.
The show ends with Meb revealing that he has bought Ed and himself two lottery Powerball tickets, and provides Ed the numbers. Will Ed win this bet? The drawing is soon, so we’ll see.
All this and more in Episode 39.
In honor of this Sunday’s Super Bowl, Episode 38 is a special, bonus “gambling” podcast. We welcome mystery guest, E.V. Better, which is an alias for “Expected Value Better.”
Meb starts by asking E.V. how he got to this point in his career. E.V. had a traditional finance background, working at a long/short hedge fund for 5 years, but realized he could apply certain predictive analytics that work in the financial world to the sports betting world. He helped create a basketball model at Dr. Bob Sports and enjoyed it so much that he made the jump from traditional finance.
Next, Meb requests a quick primer for the non-gamblers out there; for instance, how the various types of bets works, the “lines,” the most popular bets, and so on. E.V. gives us the breakdown.
The conversation then drifts toward examples of “factors” when it comes to gambling (such as “value” or “momentum” is in the stock market). E.V. tells us there are really two schools of thought in traditional investing – fundamental and technical investing. When it comes to gambling, there are similarly two schools of thought; you have the strength of a team that’s measured by traditional stats (for example, net yards per pass) or technical factors (having been on the road for 14 days…having suffered 3 straight blow-out losses). When you combine these two factors, you better a better idea of which way to go with your wager.
These leads to two questions from Meb: One, how many inputs go into a multi-factor model? And, two, how do you replace older factors that don’t have as much influence or predictive power as they used to? E.V. gives us his thoughts.
Meb asks about “weird” or interesting factors that are effective. E.V. points toward “travel distance,” though the effect has diminished over time as travel has become easier. He also points toward “field type.” This leads into a discussion about betting against the consensus (contrarian investor, anyone?). And this leads into a common investing mistake – recency bias. For example, because the Broncos won the Super Bowl last year, people expected them to be great again this year…and they didn’t even make the playoffs (Meb is still bitter).
Meb steers the direction away from the NFL. Whether basketball, baseball, or whatever other sport, you’re simply trying to find an edge over the house. Meb brings up “variability” (the more games the better if you have a slight edge), and asks how this changes over different sports.
E.V. says duration of season is a huge factor. Also, the level of data available for analysis is key (for example, the amount of data in baseball is amazing). But overall, E.V. says the goal is reduce the variance to make thing as simple and predictive as possible to find your edge.
Meb asks about underrepresented sports (curling, or NASCAR) offering more, or better opportunities (think “small caps” versus the “Apples” of the investing world). E.V. says the issue is finding a counter-party. You might be a great curling modeler, but have fewer market participants from which to profit.
This leads into how to quantify an edge, and what a good edge value should be. E.V. says a 10%+ edge would be fantastic, but it’s important to be conservative in your estimate of just how big your edge is. After all, you won’t have a consistent edge every game. Meb makes an interesting correlation to investing you’ll want to hear.
Next, Meb asks about gambling as an asset class. Where would gambling fit into a portfolio and how would it work together? E.V. says sports is a unique alternative asset class that’s uncorrelated to other markets. This quality makes gambling an interesting addition to a portfolio.
Next, Meb moves to “quick hits” – shorter questions, many of which came from listeners via Twitter.
- What’s the worst bad beat you’ve seen?
- Have you looked at “intra-game” gambling, or do you only focus on full-game bets?
- How does a sport with a small dispersion in scoring (like soccer) affect how you bet versus a high-scoring sport (like basketball)?
- Have you thought about any lines that change over the course of a day based on the concept of betters losing in the morning and becoming increasingly aggressive in the afternoon (going on tilt, trying to win back money).
- What do you think about “the hot hand”?
You’ll want to hear E.V.’s answers.
Finally, we get to the topic du jour – the Super Bowl. Meb asks E.V. directly, “Who do you like with New England at -3?” If you’re thinking about betting this Sunday, don’t miss it.
There’s far more in this bonus episode, including discussion of betting on the results of the Super Bowl’s coin toss… How long it will take for Luke Bryan to sing the National Anthem… How many times will “Gronkowski” will be said by the commentators during the Super Bowl broadcast… Want to put the odds in your favor? Then join us for Episode 38.
In Episode 37, we welcome John Bollinger, creator of Bollinger Bands, one of the most widely-used analytical tools in investing.
As John is also a market historian, Meb start by asking him about his historical influences – those individuals who helped shape John’s perspectives on the markets and trading. John gives us his thoughts, identifying who he believes is one of the most important figures in technical analysis. This leads to an often-forgotten takeaway – that many of the most effective market concepts have been around for a long time. Some very profitable strategies that still work today were being explored 100 years ago.
Meb redirects, asking John about his background. It turns out, John was in the film business as a cameraman. But by a few twists of fate, he ended up in front of the camera, providing technical commentary on markets for a fledgling financial broadcast network.
This leads into a discussion of John’s famous “Bollinger Bands.” He gives us an overview of the tool, and how he came to establish it. In essence, Bollinger Bands can help investors identify relative market bottoms and tops, helping find direction for profitable trades.
Meb then asks if John’s thinking on Bollinger Bands have changed since the early days. John tells us that the core concept stands the test of time, though he has added some extra indicators.
Next, Meb asks about combining two types of analysis – technical and fundamental – something John calls “rational analysis.” For many people, you fall into one camp or the other. But John was able to find overlap between them. He tells us how, and even ropes in two additional types of analysis to include – quantitative and behavioral. He thinks combing all four works better than using any single one. Meb asks how you actually use them all together, to which John gives us his thoughts.
Meb then asks which sector John is currently identifying as a good source of potential trading profits – but he immediately discounts the validity of his own question. You’ll want to hear why. This leads into a great takeaway – using the right charts for entry/exit in a trade. Specifically, a trader may use a short-term chart to initiate a position, but then not move to a medium-term chart to help him navigate how long to hold the position. Instead, he keeps looking at the short-term chart, which obviously will oscillate, and potentially scare the investor out of the trade. John says “People have this time frame confusion that I think does a huge amount of damage.”
Meb then asks about trade management. John says the most neglected issue is position sizing. People need to know how much capital to commit to their strategy, and there is a mathematical “optimal” answer. In essence, the problem is “betting too large.”
This leads John to reference the trading concept of “regret” – the percentage of time you’re in a drawdown. Turns out it’s about 80% or 90% of the time you’re invested. The only times you’re not in a drawdown are when you’re setting new highs, and that’s pretty rare. But most investors hate drawdowns and just don’t do well with this reality (part of the reason why investing is so hard for most of us).
There’s far more in the episode, including the most influential books John has read, Bitcoin, currencies, how to trade volatility, and John’s most memorable trades (good and bad). What were they? Find out in Episode 37.
We’re back with the first Q&A episode of 2017.
We start by discussing the “Zero Budget Portfolio,” about which Meb wrote a recent blog post. The quick idea is that when considering your portfolio, you should start from scratch, or “zero.” Imagine your perfect portfolio – which markets you’d like to own, which assets, tilts, etc.
Now compare that perfect, hypothetical portfolio to your actual portfolio. To the extent that your real, owned assets have a place in your perfect portfolio, you’ll continue owning them. Any assets that don’t fit, you sell immediately.
But it’s not long before we dive into listener questions. A few you’ll hear tackled are:
- How do I decide whether I should use a robo-service or manage my portfolio myself? How likely am I to underperform a robo?
- We know that value can lag market returns, but should lead over time. What is the time horizon by which you determine whether a strategy like value is successful?
- Are there are country ETFs that you would not trade in a global, low-CAPE portfolio because of country risk?
- How has your timing model performed since you introduced it a decade ago?
- Will you discuss momentum investing versus chasing performance? It seems that a long-only momentum portfolio basically chases what has already gone up.
- Given real world tax issues, is active investing still a better strategy than buy-and-hold?
- Given that 44% of the S&P 500 revenue and profit comes from overseas, is there really a home country bias if you are invested in the S&P? And with this in mind, what is the right allocation to Emerging Markets?
As usual, there are plenty of additional rabbit holes, including options, currencies, and even the Baltic Dry Index. What’s Meb’s take on it? Find out in Episode 36.