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.