Episode 91 is a radio show format.
We bounce around a bit in this one, starting with Meb’s most popular Tweet of all time. It involves a market record that people decided to politicize.
Next are some “signs of the top.” We discuss various indicators that support the general takeaway that (to no one’s surprise) we’re in a frothy market: US investor stock allocations are approaching the highest levels since 2000… Stocks as a percentage of household assets adjust for pensions funds are now the 2nd highest ever… The average expected return of state and local pension funds is 7.5%... The number of days the VIX has spent below “10” in 2017 was 52 (the combined amount for all years dating back to 1999? Less than “10”)…
We then discuss Meb’s upcoming personal portfolio rebalance. He publishes this each year, and he gives us the preview. Then there’s a discussion of Bitcoin, and Meb’s thoughts on how an investor might reasonably participate if so desired.
Then we hop into some listener/Twitter questions:
Plus, Meb is about to do some traveling overseas. Where’s he headed this time? Find out in Episode 91.
In Episode 90, we welcome Founder and Portfolio Manager of Verdad, Dan Rasmussen.
We start with a brief walk-through of Dan’s background. It involves a Harvard education, a New York Times best-selling book, a stint at Bridgewater, consulting work with Bain, then his own foray into private equity.
Turning to investments, Meb lays the groundwork by saying how many people misunderstand the private equity market in general (often confusing it for venture capital). He asks Dan for an overview, then some specifics on the state of the industry today.
Dan clarifies that when he references “private equity” (PE), he’s talking about the leveraged buyout industry – think “Barbarians at the Gate.” He tells us that PE has been considered the crown jewel of the alternative world, then provides a wonderful recap of its evolution – how this market outperformed for many years (think Mitt Romney in the 80s, when he was buying businesses for 4-6 times EBIT), yet its outsized returns led to endowments flooding the market with capital ($200 - $300 billion per year, which was close to triple the pre-Global Financial Crisis average), driving up valuations. Today, deals are getting done at valuations that are nowhere near as low as in the early days. And so, the outsized returns simply haven’t existed. Yet that hasn’t stopped institutional investors from believing they will. Dan tells us about a study highlighting by just how much institutional managers believe PE will outperform in coming years…yet according to Dan’s research, their number is way off.
Dan then delves into leverage and the value premium, telling us how important this interaction is. He gives us great details on the subject based on a study he was a part of while at Bain Consulting. The takeaway was that roughly 50% of deals done at multiples greater than 10x EBITDA posted 0% returns to investors, net of fees.
Meb asks about the response to this from the private equity powers that be… What is their perspective on adding value improvements, enabling a higher price? Dan gives us his thoughts, but the general take is that doing deals at 10x EBITDA is nuts.
Next, the guys delve into Dan’s strategy at Verdad. In essence, he’s taking the strategy that made PE so successful in the 80s and applying it to public markets. Specifically, he’s looking for microcap stocks, trading at sub-7 EBITDAs, that are 50%-60% levered. With this composition, this mirrors PE deals.
The guys then get neck-deep in all things private equity… control premiums, fees, and illiquidity… the real engine behind PE alpha… sector bets… portfolio weights…
Meb and Dan land on “debt” for a while. Dan tell us how value investors tend to have an aversion to debt. But if you’re buying cheap companies that are cash-flow generating, then having debt and paying it off is a good thing. Debt paydown is a better form of capital allocation than dividends or buybacks because it improves the health of the biz, leading to multiple expansion.
The guys cover so much ground in this episode, it’s hard to capture it all here: They discuss how to balance quantitative rules with a human element… The Japanese market today, and why it’s a great set-up for Dan’s PE strategy… Rules that should work across geography, asset classes, markets, and time… Currency hedging… And far more.
For the moment, we’re still ending shows with “your most memorable trade.” Dan’s involves a Japanese company that had been blemished by a corporate scandal. Did it turn out for or against him? Find out in Episode 90.
In Episode 89, we welcome legendary market veteran, Blair Hull.
We start per usual, with our guest’s background. In this case, long-time Meb Faber Show listeners may think they’ve heard it before. That’s because Blair’s background shares an interesting similarity with that of Ed Thorp – the card game, Blackjack.
It turns out Blair made a considerable sum of money playing Blackjack after reading Ed’s writings on the game. Blair tells us you needed an advantage, and then you need to stay in the game. That’s why he played with a team. More hands played according to their system tilted the odds in his favor. This is a fun part of the podcast you’ll want to listen to for all the details, including Meb’s foray into card counting with a partner that botched the system after drinking too many Bloody Mary’s.
Eventually, Blair took his winnings and used them to get a seat on the Pacific Exchange, where he became a market maker and began trading options. Blair tells us he was intrigued with market timing, resulting in a paper he wrote which concluded that you can time the market.
Meb asks about the genesis of Blair’s market timing strategies.
Blair points back to Blackjack – each different card provides an idea about the future. In a similar way, various indicators provide an idea about a market’s future. So, part of the challenge is which indicators do you consider and what weights do you put on them?
Next, Meb digs deeper, asking for more specifics of Blair’s strategy, inquiring about the indicators.
Blair mentions one indicator that piqued his interest – the Federal Reserve Bank Loan Officer Survey. They found the correlations with 6-month returns was about 30%, which is a fairly high correlation for an indicator. He then took this indicator and combined it with a few others and ran a regression with no forward-looking bias to see if they could exceed the returns of the S&P. What were the results? You’ll have to listen.
The conversation bounces around a bit before Blair mentions how valuation is one of their key variables. He tells us his valuation method combines three different aspects: CAPE, cyclically adjusted dividend yield including buybacks, and book-to-price.
The guys spend a while discussing the various inputs in Blair’s model before discussing sentiment (which Meb calls “squishy). Both guys like sentiment, with Blair even having invested in two different firms that are using Twitter feeds so he can get a better handle on sentiment.
Next, Meb asks about AI, and how machines may affect investing going forward. Blair has a proprietary trading firm that operates on a high frequency basis, so he gives us his thoughts, noting that a key to maximizing wealth is to use an optimal-sized bet.
Meb changes direction, asking what Blair is excited about today.
It turns out Blair is focusing on the stigma of market timing. He believes it will be irresponsible not to be involved in market timing over the next 30 years. That’s because when we have correlations that really go to “1” when we have a disaster, getting an edge in the market is critical.
There are a couple quick questions – Blair’s favorite indicator, and Blair’s advice to young quants looking to get into quant finance today, but then we turn to Blair’s most memorable trade.
This is a great one involving the crash in ’87, when Blair was a market maker. Don’t miss it.
There’s plenty more in this great episode featuring a true market legend, including why Blair tells us “Emotions will kill you in this game.”
That and far more in Episode 89.
In Episode 88, we welcome portfolio manager, Eric Clark.
As usual, we start with Eric’s background, which spans 25 years in the investment industry. After working for an asset manager, Eric realized he wanted to do something passion-based – a “timeless equity strategy.” So, when he felt he had the answer, he created a suite of consumption-based brand strategies.
Meb asks about these brands and how they play a role in Eric’s portfolio construction.
Eric tells us he tasked himself with identifying some stable, persistent themes he could anchor to (for the purposes of building a portfolio). He tells us that “nothing is more persistent than a consumer’s propensity to spend.” With this in mind, he looked at the U.S. economy, and what drives it. Eric tells us that the consumption component of GDP has annualized at about 3.5% a year for 50 years. And of that, about 70% of our GDP is consumption. Now, take these two pieces together – “if consumption…is predictable then how do I build a strategy that taps into that?” The answer points toward buying great consumer brands.
Next, Meb asks about the framework. Eric says you need an index. Therefore, they created the Alpha Brands consumer spending index. The goal was a broad universe, tracking a lifetime of spending. For instance, a Millennial spends differently than someone from GenX. So, the idea was to create an index consisting of the most relevant and recognizable brands that track a lifetime of spending.
Meb asks how it works going forward? For instance, how would Eric see companies like GE and IBM? Are they great buying opportunities or dead brands?
Eric points toward IBM as a brand they’ll likely hold onto, as it’s still a powerful B-to-B brand. But he tells us the food packaging industry, for example, is coming under pressure. That’s because the type of food we buy is changing. He identifies Kellogg as a company facing challenges.
The conversation bounces around a bit, referencing valuation, where this brand-based type of investing fits into a broader portfolio, and how this type of strategy might be expected to hold up during a recession. Eric speaks to this last point by discussing consumer discretionary versus consumer staples, including the risk of rising rates.
There’s plenty more in this episode – where Eric believes the market is going in 2018 (he mentions some thoughts on earnings)… how international sales affect the brands-strategy… how the asset management industry seems to be moving toward the commoditization of portfolio construction, where advisors just want to own everything (in response, Eric tells us “I still believe that alpha is available and possible, and beating a benchmark is possible if you understand a bunch of things”).
We wrap up with Eric’s most memorable trade. It involves an ill-timed attempt to short banks in July ’09.
Hear all the details in Episode 88.
In Episode 87, we welcome market veteran and ETF expert, Mike Venuto.
Mike briefly walks us through his background, which includes a fun story about a baffling situation years ago when the gold mining company, Newmont Mining, was falling in price despite gold rising in price. Mike tells us the culprit turned out to be the new ETF “GLD” – Mike realized he needed to learn far more about ETFs.
Next, the guys dive into ETFs. Meb starts broadly, asking where we are in the ETF evolution.
Mike tells us we’re still quite early. The growth rate has been largely the same over the last 10 years (a little over 20%); but that growth rate is compounded over a larger base now, so it feels like the growth is greater. And in terms of where ETFs are going, free beta is getting saturated. The next move in ETFs will be people thoroughly detailing the differences between two ETFs that appear largely the same at first blush (nowadays, people tend to see similarly-themed ETFs as somewhat the same).
Meb pushes deeper on this idea, wanting to know more about this next evolution in ETFs. Mike tells us that myriad factors are a part of any given ETF beyond its expense ratio. For instance, there are the spreads, how well an ETF tracks its index, whether the ETF lends out its shares and what it does with that revenue, then there’s the share price itself. All these factors can make two ETFs that appear similar on the surface actually quite different.
This dovetails into the idea of “active share” – basically, the measure of an active ETF that differs from its index. Mike tells us about a tool at Toroso called Smart Cost that helps embrace ETF transparency. The tool helps answer the question “how much am I paying for the smart portion of an ETF?” Mike goes on to tell us that the overall expense ratio is not the most important cost consideration – instead, it’s how much am I paying for the smart portion? He gives us an example, comparing it to its benchmark, then calculate its “price per unit of difference.” The tool shows the amount of the ETF you’re buying that is different – and this helps determine the true value of any given ETF.
Meb echoes much of this, saying that in order to justify actively managed fees, an investor wants an ETF that looks truly different than its benchmark. Otherwise, you’re just paying top dollar for cheap beta.
The conversation bounces around a bit, including some other tools Mike uses, but eventually Meb asks about something Mike is doing that’s on the forefront of tracking the entire ETF space.
It turns out, Mike has created an index that enables investors to track the growth and exposure of the overall ETF ecosystem. This includes not just the issuers, but the exchanges, the data and index providers, the back-office companies, and so on – the entire overall ecosystem. So, Mike has created an index that tracks the growth of all these companies.
Next, the guys move into the “fringe ETF” space. Mike predicts we’re going to see more “characteristic” based indexes. Rather than capture a factor, they systemize how to target characteristics – e.g. a spin-off, or insiders buying a stock, or great brands. This leads into a conversation about “structural” factors, where you create a different form of behavior. An example would be a put-write fund.
The guys touch on a few topics before moving onto cryptos. They discuss whether crypto has any real legs, and what the potential could be. Mike has some interesting thoughts here.
As the interview begins to wind down, Meb asks for Mike’s favorite ideas going into 2018.
Mike tells over the next 10 years, it could prove difficult to achieve the type of beta returns we’ve enjoyed over the last 10 years, so he suggests seeking out high active, global growth themes. Find a PWC or McKinsey study about “things that are going to change the world” then invest in those industries (think robotics). Mike goes on to mention the Internet of Things and the electrification of cars.
Meb agrees on the potential for a challenging return environment. He walks us through why using the 60/40 portfolio with current bond yields, and what equities would have to return to keep us at “average” returns. Given our lofty valuations today, that seems tough.
There’s way more in this episode: The Permanent Portfolio… whether gold bugs should be concerned about the rise of crypto… how Meb has a new army of enemies in the form of Litecoin crypto investors… and how one of Mike’s friends bought a pizza years ago with Bitcoin – probably the most expensive pizza that friend will ever purchase. And of course, there’s Mike’s most memorable trade.
Hear about it in Episode 87.
Episode 85 is a radio show format. Meb starts with a recap of his latest travels – this time he was off to New York then Europe. Then, it’s onto Q&A. Some of the questions and topics you’ll hear are:
As usual with the radio show formats, there are plenty of rabbit holes including the Big Mac Index, why you shouldn’t go into a sauna in Zurich wearing clothes, Meb’s old econometric models, and why expectations for the traditional 60/40 appear unrealistic all around the globe.
All this and more in Episode 85.
Episode 86 is a solo-Meb show.
It’s been 10 years since Meb wrote “A Quantitative Approach to Tactical Asset Allocation” which is the top-downloaded paper of all time on SSRN. In the coming weeks, we’re going to publish a retrospective on that paper in the Journal of Portfolio Management. So Meb thought this episode would be a good opportunity to revisit the original paper and perform his 10-year post mortem.
Here’s the abstract of the new paper, and the backbone for what you’ll hear in this episode:
“In this article, the author revisits his seminal paper on tactical asset allocation published over 10 years ago. How well did the market strategy presented in the original paper – a simple quantitative method that improves the risk-adjusted returns across various asset classes – hold up since publication? Overall, the author finds that the model has performed well in real-time, achieving equity-like returns with bond-like volatility and drawdowns. The author also examines the effects of departures from the original system, including adding more asset classes, introducing various portfolio allocations, and implementing alternative cash management strategies.”
If you’re not familiar with Meb’s original “A Quantitative Approach to Tactical Asset Allocation” don’t miss Episode 86. In many ways, this paper is foundational to the various market approaches Meb has adopted since.
In Episode 84, we welcome investor and entrepreneur, Howard Lindzon.
Howard starts by giving us his background. He was a broker who felt the pain of the ’87 crash. In the aftermath, he got the angel investing and entrepreneurial bugs. He’s currently an investor in Robinhood, and he started StockTwits – which you might think of as Twitter-for-finance. He also runs a fund, Social Leverage.
Given that Howard has spent plenty of time in the public markets, Meb starts by asking about his public market framework, and how he approaches markets today.
Howard tells us that he likes to see which investments are doing well, then try to join in – in his words “classic trend following.” He uses the analogy of the great white shark and the pilot fish. Howard is a pilot fish, following the great white. He likes this approach as “there’s so many ways the markets are rigged that I think it’s best to just follow along the trends.” Howard believes this approach of following the great whites also works in the private markets.
Meb asks about something Howard wrote in regards to learning to invest – it was something along the lines of “open an account, lose money, get a mentor.” Howard expounds on that, focusing on how everyone needs a mentor. Howard wants to help other investors through his own writing and advice. He references Millennials, and how he wants to use tools to help them.
Meb asks Howard’s advice for people who want to learn to be better investors, and how to find a mentor. This leads to a conversation about Howard’s site, StockTwits. Whereas Wall Street felt that people wouldn’t share quality investment information (just keep it to yourself so only you can benefit), Howard felt that many people would want to share their good ideas. Many of these people do exactly that on StockTwits. So, Howard suggests finding someone there that matches your own investing style and temperament, who has a consistent, good track record, and just follow along.
Meb asks which gurus Howard suggests following these days in order to get great information. Be sure to listen to this part to get the specific names.
Next, Meb transitions the guys toward private investing. He asks for an overview on the blurring of the lines between private and public markets, and the development of the seed stage being open to individuals.
Howard tells us things changed in 2007/2008 – it was “the cloud” that was the catalyst, bringing down the costs of starting a company. He says now we’re in a transition stage where many private companies are actually staying private for too long. He references Uber, saying how it feels a bit late for it to go public, but it’s too big to be private.
Meb asks about the realities of private market investing for listeners, noting how some of our pasts guests have had different opinions. Howard has some helpful thoughts you’ll want to hear, but he notes that to be a great angel investor, you need to invest over multiple generations – 20 years or so. You need this time to see an overall crop of investments work out.
This leads into a discussion of Howard’s fund, Social Leverage. Howard gives us the details as to what they’re looking for, as well as the fund goals.
As always, there’s plenty more, including a discussion of when Bitcoin was less than $1, Howard’s publication, The Peloton, and, of course, his most memorable trade. Not investing in Twitter and Zynga when he had the chance comes to mind.
Hear all the details in Episode 84.
In Episode 83, we welcome fund manager, Randy Swan, who’s calling in from the Bahamas after being displaced from Puerto Rico by Hurricane Maria.
The guys start with Randy’s backstory, which leads into why he started Swan Global Investments. In part due to his background in managing liability risk at KPMG, Randy was interested in a way to diversify away market risk. This led him to develop an option-based market approach called the Swan Defined Risk Strategy (DRS), which might be summarized with Randy’s phrase “always invested, always hedged.”
Randy walks us through his DRS methodology, which relies on asset diversification and the purchase of puts to protect against market drawdowns. He gives us more info on the duration of the puts, generally how far out of the money the system targets, and other trade specifics. This dovetails into a discussion of selling options as opposed to buying them. Randy uses selling strategies in an effort to generate positive returns on an annual basis.
Meb asks about the general response from investors, and how they view buying this type of portfolio “insurance.” Randy tells us most people think it makes sense, they just haven’t really been exposed to the idea. Rather, most people are used to hearing only about diversification.
The guys then discuss low volatility in the market. Randy gives us his thoughts, mentioning how now is a great time to hedge a portfolio given the low VIX. The conversation touches on whether you can still sell options in this low-VIX market. After all, it might be dangerous if volatility spikes. Plus, with so many investors having adopted a selling strategy in an effort to generate income, is this space crowded? Does it still work? You might be surprised to hear Randy’s take on it.
This is a great episode for options-fans and investors wondering how to stay in this market while adding some protection to their portfolios. You’ll hear more on volatility skew… the active versus passive debate (and how it misses the point)… Randy’s broad advice for listeners interested in implementing an options strategy… and of course, Randy’s most memorable trade.
Get all the details in Episode 83.
In Episode 82, we welcome trader, fund manager, and author, Vineer Bhansali.
Per usual, we start with Vineer’s backstory. It involves his physicist-origins, an unexpected move to an assortment of trading desks, and a run-in with the great, Fischer Black.
Meb soon dives in, asking about main strategies Vineer uses with his group, Longtail Alpha. Meb reads a quote from LongTail’s website…
“LongTail Alpha’s sole focus is to find value in the tails of financial asset return distributions. Either in the left tail as a risk mitigation hedge on multi-asset portfolios, in the right tail to add convexity to an investor’s risk exposures, or in both the right and left tails to produce alpha from convexity and volatility opportunities in a hedge fund structure.”
Meb asks Vineer to use this as a jumping off point, explaining his framework, and how he thinks about tail strategies.
Vineer tells us that, at LongTail, they believe the probability distribution of returns for asset classes and multi-asset portfolios is actually not bell-shaped. Rather, there are many imperfections and anomalies in the market. And the tails of the distribution are quite different than the central part. While the central part of the curve tends to have many, smaller moves, the tails tend to be dominated by infrequent, large events. With this in mind, the goal is to implement various options strategies to help you position yourself for these tail vents. Keep in mind, there are left tail and right tail events (and a hedged strategy in the middle). Vineer references them all.
Meb mentions how, right now, most investors are more concerned with the left tail events. So how should an investor think about implementing a tail strategy? And is it even necessary, given Vineer’s statement in a recent Forbes article:
“…people generally feel better when they believe that they have portfolios with built-in insurance, i.e. protection against losses, even though the expectation (or average return) of a portfolio with or without such insurance is the same.”
Vineer discusses the difference between “volatility” and “permanent loss of capital.” What you want from a left-tail paradigm is a methodology that keeps you in assets, serving your long-term benefit. Generally, you want to be invested in the stock market. Vineer tells us the name of the game is to be able to survive the relatively short-but-harsh pullbacks, and even accumulate more assets during those times. Given this, Vineer has a 4-lever framework he uses to help create a robust left-side portfolio. You won’t want to miss this part of the discussion.
As the conversation unfolds, you’ll hear the guys discuss how, even though there is some concern about a correction now, the markets are still severely undervaluing the price of a sharp downturn. And option premia are incredibly cheap by historical standards.
Meb then asks for more details about actually implementing a left tail strategy.
Vineer’s answer touches on understanding and identifying how much exposure one wants to equity risk and inflation risk. Then, there’s the need to understand one’s risk threshold tolerance – the “attachment point” at which you cry uncle, whether that’s being down 10%, 15%, 25% or more. Given this attachment point, an investor could then go to the options market and buy “insurance” at this level, for a duration of time suitable to the investor.
This leads Meb to wonder why people think of portfolio insurance differently than life, car, or home insurance. We all pay those insurance premiums without thinking much about it, but there’s so much resistance to paying for portfolio insurance.
Vineer actually wrote a paper on this challenge. He tells us part of the issue is an aggregation, disaggregation problem. The right thing to do would be to lump the cost of insurance into the portfolio and look at the overall portfolio returns. But people fixate on the “lost” cost of insurance when option premiums expire worthless.
Next up, the guys discuss the current volatility environment. Vineer address two questions from Meb: “why is volatility so low?” And “is there a sweet spot on the option scale (how far out of the money) for investors looking to purchase portfolio protection?”
There’s way more in this episode: option selling strategies (instead of buying insurance, you’re the one selling it in order to generate yield)… A great piece from Vineer about selling bonds as a way to hedge your portfolio… How the traditional inverse relationship between market direction and volatility might not be holding up as much (look at Japan recently – surging markets and volatility together)… Vineer’s thoughts on artificial intelligence and “how to beat the machines”… And of course, his most memorable trade.
All this and more in Episode 82.
In Episode 80, we welcome commodities and gold expert, Claude Erb.
As usual, we start with Claude’s back-story, but it’s not long before the guys jump into investing, with Meb asking about Claude’s general framework and view of the markets.
Claude tells us there are three concepts that guide his broad investing thinking: first, framing investment opportunities in terms of price/value relationships; second, the concept that no one gives away anything of value for free; and third, the idea that there really is no difference between a successful traditional fundamental approach to investing and a successful quantitative approach to investing.
This leads into a quick conversation about how market wisdom compounds over the years, but it’s not long before the guys jump into the topic of “gold.” Claude and his writing partner, Campbell Harvey, wrote the seminal paper, “The Golden Constant”, which explored the possible relationship between the real, inflation-adjusted price of gold and future real gold returns. Meb mentions how gold elicits far more emotion in investors than nearly any other asset, with different investors having an array of reasons or themes as to why they own gold.
Clause gives us some great commentary on the link between fear and gold, touching upon VIX contracts, volatility, and even Buffett’s and Dalio’s take on gold. The guys continue with the gold discussion, with Claude referencing some of the concepts from “The Golden Constant”. All you gold bugs (and historians, for that matter) won’t want to miss this.
There’s way more in this episode, including a discussion of commodities, various practical takeaways, and Claude’s thoughts on something called “the sequence of returns.” And of course, there’s Claude’s most memorable trade. What are the details? Find out in Episode 80.
Episode 81 is a radio show format. Meb starts with a note of thanks to listeners. It involves a milestone Cambria just passed as a company.
Next, Meb walks us through the common themes he’s hearing from his office hours. In short, all listeners are generally making the same investing mistakes (though everyone seems to believe his/her situation is unique). Meb tells us what everyone is doing.
Then, it’s on to listener Q&A. Some of the questions and topics you’ll hear are:
As usual with the radio show formats, there are plenty of rabbit holes. Plus, Meb is about to do some travelling overseas. Where’s he headed? Find out in Episode 81.
In Episode 79, we welcome Jason Goepfert, founder of SentimenTrader.
Per usual, we start with Jason’s background. It involves listening to margin calls, when “real emotion” would come out. Jason tells us anger and panic were what you would hear, and that people are not necessarily rational.
These experiences and others eventually led Jason to launch Sentimentrader which is, according to its website: “an independent investment research firm dedicated to the application of mass psychology to the financial markets… Our focus is not market timing per se, but rather risk management. That may be a distinction without a difference, but it's how we approach the markets. We study signs that suggest it is time to raise or lower market exposure as a function of risk relative to probable reward. It is all about risk-adjusted expectations given existing evidence.”
The guys discuss some of the mechanics of Sentimentrader – the time-frames of the various models, the inputs, and how most people want just one indicator (but that’s not the best way).
Meb asks for an example of one of Jason’s favorite indicators – it turns out to be the VIX, sometimes known as the market’s “fear gauge.” As of the time of the podcast, the VIX is quite low. One might assume this means it’s about to pop, but Jason tells us nothing works 100% of the time, with Meb noting it can stay low for a long while.
Meb asks how investors – specifically long-term investors – should use indicators like the VIX. Should they pay attention at all? Jason tells us you can use these indicators for color.
Meb throws in a funny aside about a “seafood tower” indicator – the idea being when times are bad, no one orders the seafood tower, but when times are good, towers are stacked at all the tables. And it just so happens, Meb recently had a meal out in which the table wanted a seafood tower…as did at least three other tables at the restaurant that night.
The conversation bounces around a bit, with interesting back-and-forths about the AAII and Investor Intelligence surveys, the potential for “observer effect” to be skewing some results, and how every bull/bear cycle is different and people put too much weight on the market event that’s just happened. Jason tells us that many investors are now saying, “well, stocks probably aren’t going to peak because we’re not seeing the same kind of optimism we saw in 2007.” But 2007 was probably a once-in-a-lifetime type of a peak (and 2009 was a once-in-a-lifetime type of a bottom) – so we shouldn’t expect to see the same readings at those turning points.
The guys breeze through a fun topic next: whether Twitter should be considered a useful sentiment indicator. Jason tells us it’s wonderful and horrible. The problem is we self-select and tend to follow people with a similar mentality as our own. So, we’re largely just in a bit of an echo chamber of our own opinion.
Meb and Jason go on to cover margin levels and the commitment of traders before discussing the contrary indicator of magazine covers. It turns out magazine covers are not the great contra-indicator they’re purported to be.
Finally, the guys turn to today’s markets, with Meb asking how the world looks to Jason given his experience with sentiment. Jason tells us U.S. equities are optimistic, but not necessarily overly optimistic, and bonds and gold are both “meh,” neither registering any extreme sentiment readings.
Meb asks which asset classes around the globe are, in fact, registering extreme readings. Jason tells us we’re seeing some extreme readings in cocoa, coffee, and grains – the soft commodity complex. He actually provides the name of a specific fund if you’re interested in playing this as an investment.
There’s tons more in this great episode: how today’s cryptos are resembling the internet stocks of the late 90s… why it’s hard to buy, even when the sentiment indicators are signaling you should do so… and the time when sentiment called the markets nearly perfectly.
And of course, there’s Jason’s most memorable trade. It involves a times when all the sentiment indicators were lining up together nearly perfectly. So Jason went in big…and lost big when things didn’t play out as he expected.
What are the details? Find out in Episode 79.
In Episode 78, we welcome angel investor, Alex Rubalcava. As Meb and Alex are friends, we start with Meb recalling the first time he met Alex over some egg tacos. Alex goes on to give us more about his background, which took him from pension funds, to dot.coms to VC investing.
Meb asks for more information on Alex’s group, Stage Venture Partners. Alex tells us that Stage is a classic seed venture fund. They invest in enterprise software companies that are about a year or two old. They look for companies that have a product in the market and are generating some early revenues. This dovetails into a broader discussion of how Alex landed on being a seed-stage investor, and the VC climate here in L.A. The guys talk about what Alex looks for, the size of the investment in a typical round for him, and where good ideas come from.
It's not long before Meb references our podcast with angel investor, Jason Calacanis. We received a great deal of feedback after that show from listeners eager to start angel-investing. But Meb juxtaposes that interest with William Bernstein’s idea that most people shouldn’t invest their own money. Meb asks Alex if seed investing is harder than the way it’s presented.
Alex responds with some interesting points about seeing the deal, understanding the deal, and winning the deal. In short, to see the right deals, you have to be in the right places, actively participating in the community. If not, you’ll never see the next Uber. To understand the deal, you must recognize what you’re seeing. Lots of people passed on Facebook, AirBnB, and Uber, because they didn’t have the vision to see what it could be. And in terms of winning the deal, often, the really great startups are oversubscribed, meaning they might need $2M of funding, but have $20M worth of interest. So it can be a challenge to convey your value to a startup to win a seat at the table.
The guys then discuss how most of Alex’s deal flow comes across his desk. They discuss incubators, accelerators, going to conferences, calling people, you name it. But at the end of the day, Alex tells us he’ll look at about 1,000 start-ups this year, but will only make eight-to-ten investments.
This bleeds into a conversation about the attrition rate as startups move throughout the funding process. As you’d guess, there’s a huge failure rate. The guys discuss the drop-offs through the various rounds, as well as the major reasons for them. Meb also asks when to double down on your bets?
As part of this conversation, Alex tells us how attrition rates really vary by sectors. He discusses how investors in the consumer-based sector who didn’t get in on the big dogs like Facebook, Twitter, and Snapchat didn’t see anywhere near the returns that they would have otherwise. Meanwhile, other sectors have far more companies with successful exits (just not as monstrous as the Facebooks et al) – as Meb says, “more singles, doubles, and triples.”
A bit later, the guys discuss the idea of “why now?” When Alex is considering an investment, the founder must be able to effectively answer “why now?” Many times, the idea is there, but the timing isn’t, perhaps due to cost, or the market simply isn’t ready. This eventually morphs into a conversation about the three biggest risks that a founder faces when starting a company: building the product, hiring the right people, and getting the customer.
Meb switches gears, asking about about syndicates and funds. Are they right for investors looking to get exposure to angel investing?
You’ll want to hear Alex’s perspective on this. He tells us that “If you’re going to be an angel investor…you have to be devoting significant time to it.” He goes further, saying that unless it’s close to your job, angel investing isn’t likely to be great for most people – yet investing in angel funds might be a good answer. Alex goes on to give us his reasons, and tells us there are some great angel investing funds that are worthy of consideration. He even mentions specifics.
There’s way more in this episode, including the little-known angel-investing tax benefit that can save you millions – literally… Where Artificial Intelligence and Machine Learning are likely headed… A mnemonic Alex uses to sort through the hype… And of course, Alex’s most memorable trade. All of you would-be angel-investors will be feeling the FOMO (“fear of missing out”).
What are the details? Find out in Episode 78.
In Episode 77, we welcome author and asset manager, Tobias “Toby” Carlisle.
After discussing Toby’s background, including his time as an M&A lawyer and what drew him to investing, we jump into his latest book, The Acquirer’s Multiple.
Toby tells us that the book describes a simple way to find undervalued companies. In essence, you’re trying to find a company trading below its intrinsic value. This is how to get a great price as a value investor. Of course, you get these prices because things don’t look too rosy with the stock – there’s usually a crisis or some hair on it, so to speak. Toby tells us “In order to find something that is genuinely undervalued…there’s always something that you don’t like.”
This leads into a great conversation about what Warren Buffett seeks in a company, versus what Toby, through the Acquirer’s Multiple, seeks. While Buffett looks for wonderful companies trading at fair prices, Toby seeks fair companies trading at wonderful prices.
Toby goes on to tell us that for a company, there are two sources of value – the assets it owns, and the business/operations itself. You have to look at both together. Buffett looks at wonderful companies at fair prices, and is willing to pay a premium to book value, but that’s generally because Buffett is able to ascertain that the stock is worth even more. Joel Greenblatt took this idea and ran with it in his book, The Little Book That Beats the Market. The idea relies on buying companies with high returns on investing capital (ROIC). But Toby thought “what if you can buy at the bottom of a business cycle?” You could likely get better returns by buying very, very cheap, hence his focus on fair companies at wonderful prices.
The guys then discuss the merits of a high ROIC. Toby tells us that a high ROIC is meaningless absent a moat or competitive advantage. Don’t misunderstand – a high ROIC is incredibly valuable, but it has to be protected.
This dovetails into a fun stretch of the interview when the guys discuss the old Longboard study about how only a handful of stocks truly outperform… a study from Michael Mauboussin, which points toward the power of “mean reversion”… how a historical backtest of “excellent” companies (high returns on equity, assets, and invested capital) actually underperformed “un-excellent” companies – which were generally defined as being incredibly cheap. The reason? Mean reversion.
Finally, we get to The Acquirer’s Multiple. Toby tell us you’re trying to find the real earnings of the business. The guys touch on lots of things here – why Buffett & Munger actually don’t prefer this multiple… a comparison between The Acquirer’s Multiple (AM) and Greenblatt’s Magic Formula… and an example from Toby about the power of the AM using the stock, Gilead.
The guys then discuss implementation, including how many stocks you should hold to be diversified. They also touch on the Kelly criterion – how much of your bankroll you should bet on any given stock or investment. This leads to an interesting story about how Ed Thorp showed that the Wall Street quants were using Kelly incorrectly. The guys agree that “half-Kelly” tends to work pretty well.
The conversation drifts toward valuations, with Meb feeling angst about how nearly all institutional investors believe future returns will be below-average. The contrarian in him is excited. Toby tells us that every metric he looks at says we’re overvalued. Therefore, we should be cautious, but then again, Japan got to a CAPE of 100 and the US has been to 44. You just don’t know when to get out, and there’s no right answer…
The guys hop back into The Acquirer’s Multiple, discussing how to avoid the value trap… marrying momentum to it… how value is sitting on about a decade’s worth of underperformance… and whether the AM works globally.
The guys eventually switch gears, and turn toward Toby’s private “special situations” fund. In essence, Toby looks for situations when there’s a corporate act, say, a board-level decision to buy or sell a company, or pay a special dividend, or buy back a material amount of stock. He then tries to arb it. He gives us any example of how he made money using the strategy back when Obama was attempted to stop corporate reverse-mergers. But in all cases, Toby is still looking for undervalued, cheap investments.
There’s tons more in this episode: the “broken leg” behavioral problem… how investors trying to improve upon the Magic Formula tend to vastly underperform the Magic Formula left alone… how professional investors tend to behave just as poorly as non-professionals… what Toby is working on/excited about right now… and of course, Toby’s most memorable trade. It involves a basket of net-cash biotechs. While he made over 200%, if he hadn’t tinkered, he could have made 750%.
What are the details? Find out in Episode 77.
In Episode 76, we welcome Phil DeMuth. We start with Phil’s background. It’s a fun recap, involving Phil’s clinical psychology roots, his move to LA to be a screenwriter, his experiences in the Dot Com boom with friend, Ben Stein, which led to the writing of his first investment book, which eventually resulted in his managing money.
Meb dives into investing, asking for an overview of the framework Phil uses with clients.
Phil seeks to construct a portfolio that matches each individual’s situation, so it’s largely bespoke. That said, in general, he starts with a global market portfolio, then adds various factors – for example small value, or momentum, or low beta… Then he’ll add bonds, some alternatives, gold, and so on – again, all relative to the individual’s needs and goals.
This leads into a great conversation on the idea of a person’s “personal beta.” This dovetails into the concept of a person’s human capital. Meb believes that adjusting a portfolio to reflect a person’s human capital is something advisors do well, giving them an advantage over robos. Phil thinks there are ways the robos can catch up here.
Next up, the guys discuss the various types of investing clients – doctors, engineers, celebrities, and so on – and whether any specific type is better or worse suited for investing. Meb’s opinion is that many doctors and engineers can be challenging clients because they’re brilliant and love to tinker. They can also have some hubris – an element of “I can do better than buy-and-hold”.
Phil agrees that doctors and engineers should be excellent investors. They’re so smart that they can do it all; yet in practice, they tend to stumble.
This leads the guys to the takeaway that, in investing, there’s not a linear correlation between time/effort and returns. Phil notes the correlation could even be negative!
Next up, Meb asks how the world looks to Phil today. Phil tells us “Everything looks expensive. It’s just a question of what looks more expensive than others.” That said “Nothing in my global outlook is telling me it’s time to pull up the anchor and set sail,” even though there seems to be 10 articles each day claiming the sky is falling.
This dovetails into an interesting conversation about how nearly no one believes there will be strong U.S. equity returns over the next decade or so. But what is the psychological impact of everyone believing that? Especially in light of how terrible humans tend to be at these kinds of predictions.
From this, Meb brings up alternatives. Phil has been delving deeper into alts since ’08, when all his assets sank together. Phil tells us he’s been looking for alts that have have zero correlation to the stock market, reasonable expenses, and should have positive expected returns.
Meb switches to psychology, asking about the most insidious behavioral issues facing investors, and how to protect against them. The guys discuss our shortcomings, including a trick Phil uses with his clients that tends to help them avoid some of the damage.
Meb transitions to Phil’s newest book, which is one of Meb’s favorites: The Overtaxed Investor: Slash Your Tax Bill & Be A Tax Alpha Dog. The guys discuss how implementing effective tax strategies in investing is one of the biggest, yet underused, sources of alpha around. Phil notes that any savings in this area goes straight to the bottom line.
Meb asks for specific tax strategies. You’ll want to listen to this section, which dives into some of the details of parking the right kind of assets into the right kind of accounts. This dovetails into an idea Meb loves: (and the topic of a soon-to-be-released whited paper) avoiding dividends.
Phil tells us he hated the taxes he was paying on dividends and capital gains, so he got rid of everything issuing him dividends and distributions, and instead, sought quality investments that wouldn’t pay a dividend. He goes on to say how dividends are great for retirees who are intentionally spending the money, but if you’re earlier in your working career, and the government is taking 30% of your income via taxes, that’s not good at all! So, Phil wondered how he could get the dividend benefit, without the dividend.
It was this idea that led Meb to do his own research on the topic (the subject of the forthcoming white paper). So Meb thanks Phil for the inspiration, then takes the handoff and discusses what he found through his own research. If you’re a dividend investor, you won’t want to miss Meb’s conclusion.
There’s way more in this great episode: additional tax tips… ETNs… tax loss harvesting… donating stocks with huge capital gains to charities rather than donating cash… wills… how Meb wants a Viking funeral (yes, you read that right)… Meb’s unexpected bill from the IRS… And of course, Phil’s most memorable trade – it involves an investment that turned out to be somewhat less liquid than Phil had anticipated.
What are the details? Find out in Episode 76.
In Episode 75, we welcome Mike McDaniel, CIO and co-founder of Riskalyze. It’s a special episode, being recorded at the Riskalyze Fearless Investment Summit in Lake Tahoe.
Per usual, we start with Mike’s origin story, but it’s not long before the guys dive into investments. Meb asks about Mike’s investment framework – how does he think about the world as a practitioner.
Mike tells us he tries to let the market do as much as possible. One of the biggest things that will lead to success is simply being investing. And because our emotions can trip us up so much, by quantifying risk and then having a better idea of what to expect, we stand a better chance of success.
This concept is what lead to the Riskalyze Risk Number. Meb asks for an overview of what this number is and how it works.
Mike gives us a great overview of its background and how Riskalyze seeks to quantify risk on a scale of 0-100. (Basically “cash” to a “single stock.”) The conversation morphs into how the Risk Number has been further refined over the years, including the amount of historical data included.
Next, Meb brings up something Mike once said in an interview, about the two reasons why investing is broken. He asks him to expound. Mike tells us these factors are 1) the psychological pitfalls facing the mom ‘n pop investor, and 2) the complex nature of the investing environment (so many products available to the investor).
It’s not long before Meb brings up a current reality facing advisors: With asset allocation being largely commoditized with a low fee attached, where is the main “value add” for advisors these days?
Mike believes that the advisor’s role is to be the behavioral coach. He has multiple stories about the power of using data and analytics to keeping the investor invested. This leads into the most common mistakes Mike sees that many investors continue to make.
It’s not long before Meb turns the mic over to the audience (remember, this was recorded in front of a live audience in Lake Tahoe). You’ll hear:
There’s plenty more in this episode, including Meb’s discussion of the impact of fees on various global asset allocations… home country bias… the challenges of trend-following… and of course, Mike’s most memorable trade. It turns out, he has two, the latter of which is what led to the creation of the Riskalyze concept.
What were the trades? Find out in Episode 75.
In Episode 74, we welcome Jeffrey Sherman from DoubleLine. We start with Jeff’s background – it’s a fun recap, including stories of running the scoreboard for The Stockton Ports… being a bank teller… earning graduate degrees… there’s a brief aside into catastrophe bonds which is a good primer if you’re less familiar with them… then back into Jeff’s background with DoubleLine.
This dovetails into Meb asking about the type of shop DoubleLine is, as well as its overall investing framework. We learn that DoubleLine will go into whatever market it finds interesting. They’re also a macro shop, which led them to fixed income. After all, Jeff tells us “If you want to know what’s going on in the world macroeconomically, the bond market tells you.”
Next, Meb asks how the world looks to Jeff today.
Everything is growing, but it’s not the same old growth. The difference is debt. Overall, it has been a positive environment for investing; inflation is low, but the price of assets now reflects this good environment and people are projecting that forward – but it’s not realistic. Many assets are expensive now. Jeff puts a point on the situation by saying “There’s this ‘buy-the-dip’ mentality… Do you play in it or just shake your head?”
The guys cover lots of ground here: Prices in the bond market have gotten ridiculous… Policy mistakes from the Fed… How this is “The Jay Cutler bull market” meaning it’s very “ho-hum”... how Europe is growing at the same rate as the U.S., yet they are continuing to do QE, while we’ve hiked rates four times… we’re talking about unwinding bonds while they’re buying – there’s a disconnect. And we don’t truly know what unwinding is going to look like.
This leads into a great discussion of bonds and how they respond to a rising rate environment. As Meb notes, most people hear “interest rates are going up” and they think “bond prices must be going down.” But that doesn’t have to be the case. Jeff dives into some great detail here on the math behind bond returns and rising rates. If you’re a bond guy, make sure to catch this part of the episode.
A few twists and turns later, Meb brings up a DoubleLine fund that combines U.S. equities in various sectors, paired with a fixed income component. He asks how is it designed, the benefit, and so on.
Amongst other details Jeff tells us, we learn that the fund applies a sector rotation strategy based on Professor Shiller’s CAPE ratio. Historically, people have used CAPE to evaluate markets. Jeff wondered why one couldn’t apply it to smaller subsets of the markets – sectors. For instance, utilities and tech have different profiles re: beta and whatnot. So why not take each sector’s CAPE and compare it to its own CAPE history? You then look for the cheapest sectors of the market. And you can avoid buying a value trap by apply momentum (in Jeff’s strategy, they throw away the worst one-year momentum sector).
Meb asks which sectors look good from a CAPE perspective now. Jeff tells us he’s looking at technology, consumer discretionary, consumer staples, and health care. He was looking at energy, but he booted it due to its bad momentum. He tells us another high flier is the financial sector. Up 35% or so since the election.
Meb asks a Twitter question next – how much does DoubleLine incorporate technicals into their process? Jeff tells us that he uses technical more on trade implementation and things that are hard to value like FX.
There’s so much more in this episode: sentiment… Trump, and the D.C. status quo… commodities… the “Four Asset” portfolio… More write-in questions from Twitter… a quick descent into a crypto-rant… the biggest mistakes Jeff is seeing investors make… and of course, his most memorable trade.
What were the details? Find out in Episode 74.
In Episode 73, we welcome Jeff Porter and Barbara Schelhorn from the financial planning group, Sullivan Bruyette Speros & Blayney.
We start with Jeff’s background. He was a contemporary of Meb’s at the University of Virginia. The guys share a laugh recalling running out of class to check stock quotes back in the Dot Com boom.
As the conversation turns to investing and financial planning, Meb asks about changes in the industry – with the rise of robo-advisors, indexing, target date portfolios, and so on, how does Jeff, as a financial planner, continue to add value on the investment side?
Jeff tells us how the aforementioned products can be great for many investors, but less so for others. For investors who need more handholding, and/or have more complex financial situations, advisors can add significant value.
What follows is a great discussion on questions Jeff asks his clients as he seeks to evaluate the right market strategy for them, as well as the right implementation. There are myriad issues: what’s the best asset mix? Do you add hedges? Active or passive? Factor tilts? And so on.
Jeff looks to understand what his clients need from a return perspective in order to reach their goals, as well as their ability to handle risk. This includes variables such as when will the client need to take withdrawals. This leads to an interesting conversation about those risky years shortly before and after retirement begins. If luck is against you, and the market is down in those years, it can make a huge difference in your portfolio’s balance and therefore, your retirement lifestyle. Jeff tells the story of how retiring at two different points in time led to two very different outcomes.
Another question Jeff asks clients is what percentage, or dollar value, could they accept as a temporary loss in a bear market?” He tells us another story about a husband/wife client who realized they had very different answers to this question.
Meb asks what’s the average answer to “how much can you stomach being down?”. Apparently, most clients say they can handle about 15-20% declines.
Meb then brings up how portfolio creation and management is just one part of a person’s entire financial picture; therefore, as Jeff and Barbara think about risk and a client’s holistic financial view, where do they begin?
Barbara answers this one. She tells us one of the most important things she does is help clients organize their financial lives. She accomplishes this by asking three questions: Who? What? And how much?
She goes on to give us great details on what really goes into these questions. In essence, she’s helping clients gain far greater control over their financial lives. You’ll hear Meb sound a bit overwhelmed in response, noting how simply the organizational side of getting someone’s financial life in order can be massive – and that he could personally use the help.
The conversation drifts toward allocating cash and savings. But one of the problems is that many investors have way too much cash sitting in accounts earning nothing. At a minimum, they could use that cash to pay down various debts or mortgages. Meb makes the point that countless investors are bad at optimizing the cash/debt equation. He says there are simple techniques to easily turn cash earning 0% into cash earning 1% per year.
Meb continues to steer the conversation toward traditional financial planning topics: Social Security, retirement benefits, health and liability risks, and so on…
Barbara provides some wonderful information on insurance and long-term health care. As an interesting aside, she tells us that most of her male clients don’t want to waste their money on long-term health care, while her female clients find it to be more of a need. Barbara says the reality is somewhere in between.
This hardly even begins to scratch the surface of what’s covered in this episode. (It’s our longest to date!) You’ll hear about umbrella insurance policies (and why Meb could use one for some property he owns in Colorado)… The importance of proper titling of your assets and how it can protect you from litigation… Gifting loved ones with stock rather than cash to get around big capital gains… Effective financial strategies using tax bracket trends… SEP IRAs versus 401Ks vs Roth IRAs… When to start taking Social Security… And way more.
And of course, you’ll hear Jeff and Barbara’s most memorable investments. While Barbara’s is interesting, Jeff’s involves a huge market loss thanks to a bad tip from a certain college friend (you guessed it – Meb was to blame).
What was Meb’s bad investment advice that cost Jeff thousands? Find out in Episode 73.
Episode 72 is a radio show format before we start back with guests this fall. Some of the questions and topics you’ll hear:
As usual with the radio show formats, there are plenty of additional rabbit holes including the potential direction of the U.S. dollar, the velocity of money, and the tug of war between inflation and deflation.
What is Meb’s take on all this? Find out in Episode 72.
Episode 71 is a solo-Meb show in which he reads a white paper we’ll soon be publishing. The white paper might be a tad controversial as it calls into question an investing strategy that’s so beloved, it borders on sacrosanct.
What’s the strategy? Since this is a shorter episode, we won’t reveal it here. Instead, here’s a bit from the paper’s introduction…
“…Similarly, if you worship at the altar of this wildly-popular investing strategy, you too may find this paper’s contents equally blasphemous.
Yet if you find yourself feeling that way, I would encourage you to keep an open mind, for rejecting what you’ll read today would only shortchange yourself. That’s because I believe the approach I’ll suggest you consider in place of this beloved strategy has the potential to increase your returns significantly. And that’s just the start, because it also carries benefits that could result in even greater improvements for taxable investors.”
What are these strategies? Find out in Episode 71.
Episode 70 is a radio show format. We start with a quick catch-up, discussing the recent eclipse and Meb’s upcoming travel, including Iceland, Reno, Orlando, Amsterdam, among others.
Before jumping into listener questions, we get Meb’s thoughts on Episode 69, which featured Jason Calacanis (Meb dabbles with some angel investments himself). Meb tells us a bit more about his own angel experiences and his reflections on interviewing Jason.
This dovetails into a question about how Meb allocates his own money between private investments, public investments, debt, and so on (with a “capital allocation” comparison to Thorndike’s book, The Outsiders). You’ll hear Meb’s thoughts on his personal asset allocation.
This segues into our first set of questions from listeners, focusing on where to put “safe” money right now. Meb gives us his thoughts, leading into a discussion of which asset could be right for listeners wanting to keep some money on the sidelines, yet without inflation taking too big a chunk of it.
What follows is an assortment of questions and rabbit holes: If Meb had to short just one market right now what would it be and why… How an individual investor should look at leverage in a portfolio (includes a recap of risk parity)… Who is Meb’s favorite 13F guru… What hedge fund replication strategies Meb finds most interesting… And even a cryptocurrency challenge to listeners from Meb.
What is it? Find out in Episode 70.
In Episode 69, we welcome legendary angel investor, Jason Calacanis.
We start with Jason’s background. From Brooklyn, he worked his way through college, then was in New York at the breaking of the internet. He started his own blogging company, and eventually sold his business for $30M. Later, he landed at Sequoia Capital as part of its “scouts” program, and went on to be an angel investor in a handful of unicorns (a startup company valued at over $1B).
As the conversation turns to angel investing, Meb starts broadly, asking Jason about the basics of angel investing.
Jason defines it as individuals investing in companies before the venture capital guys get involved (before a Series A). He tells us that the more you can analyze a company through data, the lesser chance it’s an angel investment. That’s because to get the huge returns that come through a true angel investment, there has to be some level of risk (in part, related to having less data-driven information about a company’s financials).
So, the challenge is to find that “Goldilocks” period – before revenues are so high that a VC is interested, but after a startup company has launched a product and shown a hint of traction (so many early stage companies end up failing even to launch a product). When you time your investment in this manner, you reduce your downside risk.
Meb makes a parallel to traditional equity investing, where only a handful of stocks make up the majority of overall market gains. He suggests this dynamic is likely even more exaggerated in angel investing.
Jason agrees. That’s why he suggests you want to go slow at the beginning, ramping up as you learn more, building your network, and growing your deal-flow. But when you get it right, it can result in massive wealth. Or as Jason says, “I think that this is a little secret way… a dark art of becoming truly wealthy… massive wealth.”
Meb points the conversation toward a section of Jason’s book which made the point that to get started in angel investing, you need at least one of four things: money, time, expertise, or a great network. He asks Jason to expound. So, Jason provides us some color on these different angel-factors.
This dovetails into how much of your net worth should be allocated toward angel investments. It’s a great conversation diving into the math of various net-worth-percentages, and how a couple of investment-winners can have a profound impact on your overall wealth. Meb tells us about his own early-stage investing experience, and how the contagious optimism is exciting.
Meb asks what are some resources and places to go for more information. Jason points toward doing some syndicate deals. By doing so, you can read the deal memos, and track the investments even if you never actually invest. It’s a great way to learn – Jason uses the analogy of playing fantasy baseball. The guys go on to discuss ways to grow your network through other syndicate investors.
A bit later, Meb asks about pitch meetings when company founders are looking for money. What’s your role as a potential investor in these meetings? Jason likes to ask the question “What are you working on?” He then provides some great reasons why this question is effective. A follow-up question is “Why now?” In essence, what has changed that makes this moment right for your business? For example, for Uber, it was GPS on phones.
Curious what the “why now?” of the moment is? Robotics is one of them. Jason gives us a couple others (but you’ll have to listen to discover what they are).
The conversation drifts into how to exit your angel investment (or invest more). Jason says if you have a breakout success you want to quadruple down. For instance, if a big VC like Sequoia is thinking about investing, you’d definitely want to jam as much money in as possible. The guys then discuss taking some money off the table if your investment goes public, perhaps selling 25% of your position at four different times.
Meb likes this idea, as we discuss the behavioral challenges of investing so often, with so many investors thinking in binary terms – “in or out?” But scaling is such a powerful concept.
There’s so much more in this episode, and if you’ve ever been curious about angel investing, you’re going to learn from the best. The guys discuss how the lack of liquidity can be a blessing in disguise… why the sophomore year of angel investing can be brutal… a great way to tell if your angel investment is doing poorly… a huge ($10M huge) tax benefit of early stage investing… and of course, Jason’s most memorable trade – it turns out, he was the 3rd or 4th investor in Uber.
Want to hear the details? You’ll get them all and more in Episode 69.
In Episode 68, we welcome Meb’s friend and Newfound Research founder, Cory Hoffstein (or as Meb refers to him, a “fellow nerd”).
Per usual, we start with Corey’s background, but then Meb jumps in by asking Corey to describe his general, 10K foot investing framework.
Corey tells us that a specific product and/or style doesn’t necessarily define him or Newfound. Rather, he believes in a consistent, well-researched process that takes into account the behavioral challenges that accompany any given investment strategy. This is because the journey is often just as important as the destination.
Meb asks where Corey starts when creating a portfolio. Corey tells us it’s about the balance of risk. This is because “risk cannot be destroyed, only transformed.” Therefore, when building a portfolio, there’s no single holy grail. You need to understand the goals and fears of your client, then figure out how to balance various strategies in order to find a robust, flexible portfolio that handles risk appropriately.
This dovetails into one of Newfound’s white papers, “Portfolios in Wonderland,” which tackles today’s investing climate. Corey tells us that we’re in a unique environment, whether focusing on equity valuations or interest rates. It used to be that stocks and bonds zigged when the other zagged. But in the 1980s, both became cheap. Today, we have the opposite: high equity values and low yields on fixed income.
This leads to a great discussion on bonds, including Corey’s rule of thumb for estimating future bond returns, and his research into the source of bond returns – how much was due to the coupon, versus declining rates and roll yield.
The guys agree that with U.S. equities richly valued, and bond yields so low, future returns of the classic 60/40 portfolio don’t look too appetizing. So, what’s the solution?
Corey likes the proliferation of asset classes that used to be found almost exclusively in hedge funds. Now, we can use them to diversify our portfolios and reach a solid rate of return. The conversation bounces around a bit here – how 8%-10% returns aren’t likely going forward unless you’re invested exclusively in emerging markets... how if you let a portfolio optimizer do its thing, you’d have almost no U.S. exposure in either equities or bonds... and how, behaviorally, most people couldn’t have 0% allocated to the S&P, so finding a balance between the best portfolio and the most realistic portfolio is needed.
Meb asks how much drag there is on returns when moving away from the mathematically “best” portfolio to a portfolio which investors can actually stomach. Corey tell us investors are probably giving up 50-100 basis points of return which, over the long run, is a meaningful difference.
It’s not long before Meb asks about new research Corey is working on. Corey tells us he’s looking at much complexity an investor should bring into a portfolio. Some small details can make a huge difference. This leads to a great discussion about “timing luck” when it comes to trend following. More specifically, when you choose to rebalance can make a huge impact on your returns. If you’re a trend follower, make sure to catch this part.
A bit later, the guys discuss another white paper from Corey, “Outperforming by Underperforming.” This leads into a conversation about the challenges of looking different with your strategy, as well as the right time-frame needed to evaluate any strategy. The conversation includes a great quiz Corey often asks his audiences regarding Buffett and how badly he has lagged the S&P at times. Chances are you’ll be surprised to hear what Corey says.
There’s way more in this episode, including answers to “Should we be holding more cash?” “Is dividend investing dangerous” and “How do you factor in various global interest rates when looking at a bond allocation?” There’s also how Corey constructs multi-asset portfolios… how value works across asset classes… the biggest concerns Corey is hearing from clients today… an idea Meb has for a “weird ETF”… and of course, Corey’s most memorable trade.
What is it? Find out in Episode 68.
In Episode 67, we welcome Simon Black, founder of the newsletter, Sovereign Man.
We start with Simon’s military background, having been an intelligence officer. He spent lots of time overseas, yet became disillusioned after the promises of WMDs failed to prove accurate. From this, he began challenging the status quo.
Underpinning everything was an ethos of personal freedom, which is at the core of what Simon’s newsletter, Sovereign Man, is really about.
Meb asks what global red flags and/or issues Simon is seeing now which might be challenging our personal freedoms. Simon tells us “I see a lot of red flags.” Specifically, he’s seeing a global trend toward socialism. People have a sense that the system is rigged. There’s an intuitive understanding that something is wrong, though people aren’t quite certain what it is, so they blame capitalism. But when people gravitate toward socialism (“I want more free stuff”), we run into the challenge of too many people wanting to jump on the cart, without enough people actually pulling the cart.
This leads to an interesting conversation about the effects of socialism in Venezuela, where Simon is located. He mentions how there are vast quantities of soil where the Venezuelans could be growing crops, yet there is starvation. He steers the conversation back to challenges here in the U.S., which leads toward the need for what Simon calls a “Plan B.” In essence, this is a plan intended to protect yourself and your assets from the various risks we face today on many levels – financial, personal, governmental…
Part of an effective Plan B ties to diversification. Simon mentions how if all of your assets are in the same banking system, then you’re not diversified. So, Simon suggests at least some money should be kept in banks outside of the U.S. – after all, there are many global banks that are better capitalized than those here in the U.S. He offers Hong Kong as an example.
The conversation drifts toward an example of personal diversification – getting a second passport. Simon thinks this is the ultimate option, providing tons of opportunities and benefits – all upside with no downside, for minimal cost.
Next up is Simon’s suggestion to legally reduce your tax burden. He tells us “reducing your taxes…that’s the easiest return on investment you’ll ever make.” Simon tell us a favorite tax-reduction technique upon Meb’s request.
Next up, the guys discuss having cash outside the U.S. banking system. The conversation references why this is important – just look at what happened in Cyprus and Greece a few years ago. This leads into a discussion of cryptocurrencies. Simon tells us how so many people putting money into crytos today now have no idea what they’re doing – do they even understand Bitcoin and Ethereum? Who has actually read the original white paper on Bitcoin?
There’s way more in this episode: where Simon is looking now for safe, margin-of-safety-style investments around the globe… how private equity can help your portfolio… Simon’s entrepreneurial advice… what Simon’s readers are most concerned about today… and of course, Simon’s most memorable trade – it involved day-trading Compaq (and losing everything).
How’d it happen? Find out in Episode 67.