My guest, this episode, likely needs little introduction. His paper, a Quantitative Approach to Tactical Asset Allocation is the highest ranked paper on SSRN with over 200,000 downloads at the point of recording.
But Meb Faber’s interests go far beyond tactical asset allocation. His work over the last decade-plus – from his blog to his podcast to the books he has authored – spans broad topics such as shareholder yield, global value, hard asset alternatives, risk parity, and angel investing to name a few.
I rarely enter these podcast conversations with a singular objective. Being a prolific writer, however, there is very little that someone cannot find out about Meb’s investment beliefs through a simple Google search. What I was keen to learn in this conversation is what drives those beliefs. Why does Meb keep searching and exploring? Is it simple curiosity, or is there a deeper, underlying philosophy that unifies his body of work?
As you can likely guess from the title of this podcast, there is indeed a unifying theory. But I’ll let Meb explain.
Corey Hoffstein 00:03
Hello and welcome, everyone. I’m Corey Hoffstein. And this is flirting with models, the podcast that pulls back the curtain to discover the human factor behind the quantitative strategy.
Corey Hoffstein Is the co founder and chief investment officer of newfound research due to industry regulations. He will not discuss any of newfound researches funds on this podcast all opinions expressed by podcast participants are solely their own opinion and do not reflect the opinion of newfound research. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of newfound research may maintain positions and securities discussed in this podcast for more information is it think newfound.com.
Corey Hoffstein 00:46
My guest, this episode likely needs little introduction. His paper, a quantitative approach to tactical asset allocation is the highest ranked paper on SSRN with over 200,000 downloads at the point of recording. But MEB Faber is interests go far beyond tactical asset allocation. His work over the last decade plus from his blog to his podcast to the books he has authored spans broad topics such as shareholder yield, global value, art, asset alternatives, risk parity, and angel investing, just to name a few. I rarely enter these podcast conversations with a singular objective. Being a prolific writer, however, there is very little that someone cannot find out about meds investment beliefs through a simple Google search. What I was keen to learn in this conversation is what drives those beliefs. Why does MEB keep searching and exploring? Is it simple curiosity? Or is there a deeper underlying philosophy that unifies his body of work? As you can likely guessed from the title of this podcast? There is indeed a unifying theory. But all at MEB explain. Thank you for joining me today.
Meb Faber 02:04
Great to be here in my office in your office.
Corey Hoffstein 02:08
Yeah, thank you for hosting me. I appreciate it.
Meb Faber 02:09
I’m going to interrupt you. I have a really important question before we start. I haven’t heard your podcast yet. Do you have any intro music?
Corey Hoffstein 02:18
I liked that you’ve taken over as podcast hosts already. You can’t you can’t even let the table started. I do have intro music
Meb Faber 02:24
because because this caused a lot of consternation for me. It’s kind of like thinking about a baseball player and what’s his what’s his going to be his walk off? Music and so the listeners will have already heard this by the time it gets public. Can you can you give me a little hint? Taylor Swift
Corey Hoffstein 02:38
Yeah, it was Taylor Swift. It’s actually funny because it is that that self branding aspect of it. And then I got a song in my head that I was like, This is what I want it to be. So I pass it over to a musician I said this is I want as close to this as possible without having copyright issues. But it’s a little bit of a blues, guitar blues rock type feel to
Meb Faber 02:56
REM everyone hurts Exactly. The you know, it’s funny, because for a while I was like, you know, I’m gonna get all the guests to give me their their own walk off music and they can play whatever they want in the beginning, but it’s all copyrighted. So it’s a problem. But then it’s even funnier because everyone listens to the episodes that one and a half or 2x speed. Right? So so it’s gonna sound totally different no matter what. Okay, well, everyone’s already heard it. I’ll listen when it comes out. Keep going.
Corey Hoffstein 03:17
I’ll make sure I hand it over to you. Can I have my podcast back? Now? You’re gonna have it you’re gonna do I appreciate it. Well, a little bit of a belated congratulations to you. By the way, I know you just passed 100 Plus episodes on your on your own podcast. Last fall, I think it was you hit a billion in assets at Cambria, which massive, overnight 12 year success, so congratulations. But where we want to actually start actually feel a little bad about this starting point. It’s sort of like having a band that’s been on tour for 12 years. And we’re just going to ask you to play your hit song out of the gate. But I want to start with your very famous quantitative approach tactical asset allocation paper. Bore, I actually want to start there. And I’ve actually asked around a number of people and tried to get their input as to why you actually wrote that paper. What was the catalyst to make you go down that road because it’s been such a massively influential paper for a lot of people, especially post crisis, rethinking asset allocation, but nobody knows why you even wrote it.
Meb Faber 04:14
Like most people, their careers, there’s a lot of serendipity. And so I was a young 20 Something no nothing and had just started Cambria. And for many of the designations, you know, CFA has like three levels of terrible tests. There’s the kind of technical analysis cousin, redheaded stepchild version of the CFA, which is called the CMT by the MTA organization. And like CFA, it has three levels. And the third level used to be you could either take the test or write a paper, and the problem with a lot of the CMT world and technical analysis is law. out of it to me is kind of in the same category as mythology. You know, a lot of it is fantastic and a wonderful base for things, I believe in a lot of things. But then you have all sorts of weird stuff in that world, that to me probably doesn’t have a whole lot of serious sort of base for it. So anyway, they announced that they were going to do away with the third level paper. And I started having panic, because the last thing I ever wanted to do, like many people’s take another test, half of which I didn’t believe so memorize it, regurgitate it. So you had to turn in an abstract by the end of the year. So I turned in an abstract, very poorly written like two sentences on literally like December 30. And it said something along the lines of, you know, a trend following approach to markets or something. And then I was like, well, crap, now I have to go and write it. And it started, you know, trend following looks over 100 years old, you could even go back probably a couple 100 years as an investment methodology, very similar to value, right, very, very long time origins. And so what I did was just take a very simple approach to trend following that made it really simple for investors to follow and understand, but also put in the context of a typical asset allocation portfolio, a lot of trend following would get applied. The origins that most are familiar with institutional community is the CTA is commodity trading advisor to the 70s. You know, the very famous sort of turtles and all that sort of stuff, long short trades 50 100 markets, I said, Well, let’s, let’s take it down to the kind of normal adviser individual level. And let’s just show how a very basic confined works on a typical asset classes like s&p 500. So did the modeling wrote the paper, original title of the paper was something along the lines of market timing approach to asset allocation, something with the word market timing in the title, it no one would read it. As you know, there’s certain phrases that just automatically causes cause people’s brains just just misfire. And market timing may be the queen of the mall like that. That is the biggest, probably phrase that causes people to line up on two sides. Anyway, it’s like talking politics religion. So I’ve actually changed the title to the current title, which is a quant approach. topclass occasion, published it. Again, I had never published I had never even considered publishing an academic literature. But I said, You know what this kind of fun paper may as well, I’ve written it, submitted it to a bunch of friends and a bunch of luminaries that I looked up to three quarters of which either didn’t respond to email or told me that I was an idiot. And market timing is impossible, including a couple Nobel laureates, and then a couple of people offered really thoughtful reviews of it. And one in particular said Mab look, you know, this is good idea, it works. The way you’ve written this as a C paper, and honestly, to get it published in one of the top journals, like you need to write it in the format that these academics write it, and you know it, clean it up a lot and work on it and get in that format. And then you probably have a chance. And so I did. And by the way, that was Robert or not, who, you know, is his managers, I think 200 billion now at this point close to it. But that also made a huge impression on me for the rest of my career where I said, Man, look, if it made such a huge difference to me that a lot of these people would take the time or not, and some being downright rude and just very dismissive. Anyway. So I’ve only published two academic papers. I’ve written a dozen or so but but after that one experience published an academic paper, which there’s like a year lead time it goes through peer review, then it goes back and you get comments and back. And after that, I said, Man, I’m going to toss this online and let the entire world tear it apart, as opposed to two guys, you know, in academia, because you’ll get a lot more feedback that way anyway. But I finally published my second one, which was about the first 110 years later, and it was a retrospective event. And I was very, I think, honest and humble. And I said, Look, if this paper came out, no nine, P would have been like, cool, but No shit, Sherlock. You know, it’s obviously market timing works after the fact. So obviously, so much of the paper popularity was because it came before the crisis said this is our trend following model works. And then it worked. But of course, the funny part too is that trend following in many cases has also struggled since then, and ensuing period. So you’ve seen kind of both sides. And I think for like any investment approach, it’s so important to be thoughtful and understand both the good and the bad sides.
Corey Hoffstein 09:39
Was it out of the gate, a very popular paper because I think by the time I stumbled across it and post 2008 Oh, no, I actually I think I saw it in 2007. You know, if it came across my radar, it was probably pretty popular. But even still, I have to imagine the proof of 2008 2009 just put rockets behind it. You know,
Meb Faber 09:59
it’s Finally, because you see so much today where people talk about and Vanguard has published a lot on this, you know, they say, so many indexes, you look at the back test performance, and they go live, and then it’s terrible afterwards. And this is one of the rare cases that by far the best performance was actually randomly just out of sample. So it was popular, you know, the, it’s funny, the first version, that paper I look back at it, I was reading the other day, and we did this retrospective, in you being a kind of quant nerd like me would really appreciate it because it had much more in depth, statistical like is talking about skew and kurtosis, and all this other stuff. And then I said, No one’s no one cares about that. Let’s simplify it down to the very core. And listeners, if you haven’t read this paper, it’s nothing more than a long term moving average. So is the 10 month simple moving average, which is essentially the monthly equivalent of the 200 day moving average, overlaid on asset classes. And so we used five, but you can use many more in future version of the papers had many, many derivations, but my my favorite ribbing, I like to get my wife who did her PhD in German philosophy is I used to joke with her. And this is being very self deprecating, by the way, I don’t want to sound like a total aihole. But I used to always kid her, because there’s nothing more academic than be a PhD in philosophy. But he’s always say, you know, this is the most downloaded paper on the academic database, and she turned bright red and get angry and kick me in the shin. But having looked so much in our world of finance, the people that get anointed, the the kind of kings of the world are people that try to forecast with a lot of conviction. And then if an event happens, they become immensely popular, so we can name so dozens these people in history. And eventually, you know, the their time comes and goes, and then you start to get things wrong. And then the next one comes along and calls the next crash, and they get it right or, or whatever it may be. So you can look back over the years. And there’s so many of them. And obviously, there’s an element of that shine, which people said, oh, he built this model that, you know, did this and look, so much of it was locked, so much of his timing. That having been said, you know, in the ensuing 10 years, you’ve seen all sides of it, you’ve seen when and why it underperforms when and why it outperforms or not. And there’s still a lot of misconceptions about trend following in general that you probably get all the time too. But hopefully, people are starting to kind of understand a little more.
Corey Hoffstein 12:29
So you actually touched on two topics I wanted to veer into. So I’ll hit the first which is you did just publish your version to your retrospective, a decade plus of out of sample experience with the model. And I want to get a sense from you. What were the surprising lessons learned in the decades since publishing?
Meb Faber 12:52
I think if you look at trend following in general, and you have enough respect for history, you probably wouldn’t be surprised by anything that’s happened this decade. And I think the surprise for a lot of people is they misunderstanding trend falling in general. So when you say trend following, it can mean 100 different things. It’s like saying, you know, dog, where one’s a St. Bernard and one’s a beagle. There’s a huge difference between those species a trend following it could mean anything from what we just talked about, which is kind of that time series momentum where you’re in or out of a market. So if you’re above the long term moving average, you’re invest in the s&p, if you’re below it, you’re out. That’s very simple. But there’s so many other flavors of it, you know, the CTA is typically your long, short, so they short a lot of markets, whereas ours just moved the cache. So that has very different outcomes. And so something like the system we’re describing, the I published, would have been flat in Oh, eight, maybe up a little bit, maybe down a little bit, but something like a CTA would have been up 30. So this is a different, same, same general description. So the I think the surprise for most people that understand trend following is that, by and large, that sort of binary and out, it’s everyone wants it to be an outperformance sort of strategy where you’re getting a lot higher compound returns, because you’re picking market tops and bottoms. And that’s not how it works. trend following particularly works because you get the majority meat of a move, you’re never going to pick the bottom exactly, you’re never going to pick the top exactly by definition. So really, when it works best is these long trending markets. And so it’s actually worked great as applied just to say, s&p 500 the cycle because it’s been a very long trending market. But in general, you don’t really outperform what you do is you reduce the volatility, you reduce the really big draw downs. And for so many people that’s that’s an important behavioral component, psychological component of staying invested is if you look back to the 1920s 30s, US stocks decline over 80%. And how many people can sit that very few? And people say, Wow, that you know that that was a great depression doesn’t happen. Well, I say all right, well, We’re looking around to Greece and Russia and Cyprus and gazillion other places. It’s happened in the last 20 years. And it does happen. So I don’t know that there’s anything that’s been a big surprise, I think the behavioral component, we can get into this at some point to have, you know, buy and hold. Investing is tough for many reasons. And it works great. trend following is tough for a whole other set of reasons. And it also works well. So I think you’ve seen the full cycle of all the the warts and benefits and everything in between.
Corey Hoffstein 15:33
I don’t want to dwell on this topic too long. But there was sort of one last question I wanted to ask you. Because I think you’ll have a unique perspective on this. I found that in my own writing, having developed somewhat of an audience now, people often bring their own interpretations to your writing. And sometimes they’ll read a piece that you write, and they’ll walk away with a complete misunderstanding of what you were trying to say. And I can only imagine that this is truly exponential for you with a piece of this popular. So with a decade of experience of having this writing out there and having it be so popular number one on SSRN. What do you think the takeaway is that most people get wrong from this paper?
Meb Faber 16:19
Oh, boy, there’s a lot. So we actually added we ended up adding FAQs, because we got so many of the questions over and over again. And your point is funny because being a quant, the rules are black and white. That’s the whole point. And one of the biggest challenges of a trend following approach or any active approach, final design, because you do nothing, by definition, trend following because if you’re running it on your own, it introduces breakpoints, which are every time you have to make a trade, you have to make a decision. I mean, you shouldn’t be if you follow the rules, it’s it’s black and white. And some people have struggle with that. And some people it’s second nature. So it’s funny to get people email me all the time and say, ma’am, hey, I noticed like the REITs, the only close like 1%, below the moving average. So should I wait, you know, probably till next month, I decided, you know, it’s not that big of a deal. I’m gonna wait till next month. And they start to introduce all these discretionary inputs of their emotions and interests and biases. And it defeats the whole purpose, right? And because so many times when you’re doing trend following, particularly at the end of Long moves, where something starts to roll over, if you think about REITs, back in Oh, seven, oh, man, we really want to sell REITs right now, everything’s ripping. I don’t know, maybe I’ll wait a month, or same thing back March of 2009. You know, the trend following probably didn’t enter until the next month or the following. But, man, this looks like a Great Depression. Everyone I know has lost their job. Lehman has gone under all these banks have gone and I, I’m just going to wait until you know, things start to get a little better. And then again, next thing you know, it defeats the whole purpose of the system. So that’s a big one. Then, of course, there’s the people just straight up, I get emails say hey, man, I was following your 300 day moving average system every week. And where you published, you know, I said, Whoa, we didn’t publish any of this stuff. The good news is there’s a million different derivations, you could take it. And we always said to people said, look, a lot of people struggle with the binary outcomes, I need to be in or out. So we often said, Hey, you could average across three or four different moving averages. You could update it weekly, you could do half monthly, you could do like a gazillion different things, to start to eliminate some of these emotional problems. Over the years, there’s been some evolution of my thinking about how it fits into a portfolio, I used to always say trend following is my desert island strategy. But that’s evolved a bit over the years. And happy to get into that at some point. But yeah, I mean, it the biggest problem with investing across the board is people and so we’ve had one of our largest investors, like you mentioned, entered a trend following program at probably the worst month in the past decade, and exit and an arguably one of the worst months to have exited for rolling performance. And you know, we used to do some articles. If anyone reads those celebrity rags you see at the grocery store, us no celebrity weekly, I can’t remember the names of them, but they have a section. They’re like celebrities, they’re just like us where they’ll show Britney Spears, getting coffee or whatever. And so we used to write an article called instant institutions. They’re just like us where these billion dollar institutions and advisors they make the same mistakes often chasing performance and it’s hard I sympathize with it, but we’ve seen it particularly in the trend following space. Now that having been said, and I was talking with with Jerry Parker about this who’s been doing this for much longer than I have. And he said you know MEB look, you close your eyes. If you plug trend falling into a mean variance optimizer and you simply look at any of the indexes any of the strategy styles, you end up with a pretty heavy allocation to trend following fun. How many advisors in the country allocate more than just a fraction? Most of them zero to turn one strategy? Almost none. Now, if you really want to get deep, and I’m totally straying off your question, but the definition of passive investing market cap weighted indexes, so the thing about the s&p 500, we’re investing based on stocks just based on size. That’s a trend following index because the only input is price, you’re investing more stocks go up less as stocks go down. That’s the ultimate trend following index. A lot of people don’t like to hear that, particularly, you know, in the bond holders, but by definition, that is literally the definition of a momentum or trend falling index. So anyway, so yeah, there’s people love to the fiddle. The doctors and engineers are the worst, I can say that I’m an engineer. But those are those are by far the worst investors because they know enough to be dangerous. I don’t know if that’s your experience, but it’s definitely my
Corey Hoffstein 20:53
Yes, it’s absolutely been my experience, because this is one of those ideas that is so simple that you think you can add more bells and whistles to it to make it better. And very often, adding more complexity only introduces more room for error. Yep. And it only makes it worse. And then it becomes a maddening treadmill cycle of trying to improve it. So I want to touch on something you mentioned, which was your desert island strategy. And I had heard you say in the past, that managed futures trend following was your desert island strategy. And one of the things I had a lot of fun doing in preparation for this podcast was not only listening to a number of your old podcasts, but actually going to your blog, and going back to 2006 and 2007. And reading some of the posts you wrote, and I’m going to get into those in a little bit. But I would love to hear a little bit about the evolution of your thinking, since launching Cambridge, a sense writing a quantitative approach to tactical asset allocation. Sounds like maybe your desert island strategy has changed,
Meb Faber 21:54
you know, like, like, almost everyone. It’s a journey. I was a biotech guy in college, late 90s, internet bubble, biotech bubble, trading stocks, from my dorm room, making tons of money, losing tons of money, started out as a fundamental equity analyst in the biotech space, which is pretty tough. Because you have incredible binary outcomes, or even some of the smartest scientists will get it wrong. Many of them are kind of coin flips, but gravitate to be more and more quantitative. And I would like to think that I’m pretty honest. And this is a phrase that’s getting used a lot, but evidence based, where try to soak up as much history, understanding of what possibly works, but have a common sense bent to it. And unlike a lot of people in our world, actually think there’s plenty of investment strategies that work just fine. If you tell me that your cousin is totally happy sitting in CDs, awesome. If your your uncle is a dividend guy, and like clipping dividend coupons totally fine. You know, I have what I think is my optimize best ideas all into one kind of bucket that we can get to. But you know, over the years, to me, it’s it’s meant a lot of different things. And as I get older, I’m optimizing more and more on less headache, an outcome that will hopefully work in any market environment, something that I think is balanced, and hopefully benefiting from a lot of the ideas and mistakes that I made early. I mean, like many investors, you can be lucky enough to blow up a trade when you’re young, because that’ll teach you a lot of lessons and mine. Mine certainly happened in my 20s, where I was eating mustard sandwiches for a year trading options, which is a great way to blow up, by the way. And so, you know, there’s an evolutionary journey for a lot of people. And I laugh because I talk to friends and say, Man, I think most people probably just be totally fine in buying the global market portfolio and move on with their life. But for me, it’s meant, you know, some of the really boring stuff ends up I think mattering a lot more than people think stuff like fees and taxes. So evolution has kind of come full circle, I can kind of tell you where we’ve arrived out of the finish line, unless you have some some some more questions along the way.
Corey Hoffstein 24:25
Well, I’ve got plenty of questions along the way. But let’s let’s go to the finish line, I mean, where and then I’ll circle back to my session. So me
Meb Faber 24:30
to every person, the starting point, should always be the global market portfolio. So that’s you go by the world of publicly available investment assets. And that doesn’t include a lot of real estate doesn’t include a lot of farmland, some other stuff that’s private. But in general, if you buy the world of stocks and bonds and things like that, you end up with a portfolio the world is roughly half stocks and half bonds. Ish. Remember drowning because it’s simpler. And some stuff like corporate bonds is really a mix of the two. So the exposure probably looks a little more stock heavy. And of that, it’s about half us half foreign. And so almost no one has that portfolio. And almost in every country around the world, people put way too much in their own market. So in the US of the stock allocation, they put about 70% of us, are Italian friends do the same thing, or Ozzie British Japanese buddies all do the same thing way too much in their own market. It’s called home country bias. And could it work out? Sure, but usually, it’s pretty horrible, uncompensated idea. But so to me, that’s the starting point. If you want to deviate from there, great. And you want to make active bets from there. Great. But that’s to me, always the starting point that historically has done, you know, nine 10% A year returns similar volatility, big fat drawdown can’t really do anything to get around that. And one of the challenges too, is is 99.9% of investors think in terms of nominal returns, meaning before inflation, but that’s a big apples to oranges comparison over history, because there’s been time in the US when inflation is high single digits, potentially even low double digits right now, it’s what 2% Some countries it gets even much higher, much lower, but to say a 10% return in the time of a percent inflation, you only really made 2% returns returns, you can eat. Whereas now, if you had a 2%, if you had a 4% return, and 2% Inflation is the same thing. But it’s it’s hard for people to think in those terms, it’s hard to compare it over time, it’s a lot simpler to work with nominal. And that has a lot of repercussions. We get that later. But one of the point points being, if you look back over history, is that it’s really, really, really hard to pick a portfolio on a buy and hold basis that doesn’t decline it least 25% After inflation. And a lot of people say man, but what are you talking about? Look at bonds, bonds are the passive, there’s no, we did this Twitter poll, which I’m sure you probably saw where we said, you know, how much did you think bonds declined after inflation? 10 year bonds or long term bonds? I said zero to 1010 20, you know, yada all the way down? 50 Plus, and by far most people said zero to 10? What’s the answer? It’s over 50%. because inflation is the biggest risk for bonds, it’s kind of that slow erosion, whereas stocks, it’s kind of that crash risk.
Corey Hoffstein 27:36
There’s actually a great chart in your Trinity portfolio piece where you actually show the equity curve for I think it’s intermediate term government bonds in the US from 1926. Onward. And if you look at the post inflation chart, you actually, if you bought in 1926, you ended up with the exact same amount of money, I think it was 19 was something to like the late 1950s, that after inflation, you hadn’t made $1 in bonds. Whereas if you looked at just the nominal, you know, curve, it was straight up.
Meb Faber 28:16
It’s tough, you know, and so a lot of people the conclusion, they often come to and say, Look, if bonds or bonds have 50% draw downs, and they have much lower returns, why not just put all your money in stocks. And the problem is stocks also are super volatile. And they also have huge draw downs. And so the combination of the two, because they’re not perfectly correlated is usually a bit better. And then you also got to think globally, because there’s examples of global bond markets that essentially lost all their value, if you think about Japan, or Germany, or any countries that went through hyperinflation. But the same thing can be said about stock markets, Russian and Chinese markets closed up shop totally in the 20th century. So you lost all your money. So there’s no reason in my mind not to take a totally balanced approach us is one of the best performing capital markets in the 20/20 century. No question. Would anyone have predicted that in 1899? Maybe, chances are, they might have liked Argentina too, and you would have lost a bunch of money there. So diversifying, it makes a lot of sense. And if you want a little historical, we love saying there’s a rule of thumb that after inflation, global stocks should return historically, they have returned about 5% bonds, if you round up about 2% and bills about one now, where it starts to get interesting is you say all right, well, what about all the other stuff? tactical asset allocation and models like that? And I think they can offer a lot of value, like the trend following stuff we talked about. And so where we’ve kind of settled for me personally, is this trinity portfolio concept you talked about you mentioned, which is half the allocation and buy and hold. And within that you still want to do some things that make sense. You know that that will get you 90% of their just your asset. Okay? acing, but should you tilt towards value away from a market cap weighting? Yes. So is it worth doing? Yes? Should you add a little momentum in those indices? Yes, that probably makes sense to. So kind of adding better indexing or bedding, better strategies other than market cap weighting basically anything other than Mark cap weighting. And then the other half of the portfolio is for me is the trend following portfolio. And that can mean a few different things. We use numerous funds in that allocation to diversify but think that the trend following both of those are equally hard to comply with. But I think having one foot as an anchor, in the fundamental world a buy and hold, lets you not be too different from your neighbor. It gives you a good return stream, you own assets that historically pay you your equity heavy, that’s great. But on the flip side, you have the trend falling component that if and when you have a monster, long bear market, at least you have something that zigging and zagging hopefully. And something that hopefully protects you a little bit or a lot bit. And it gives you that feeling of at least you’re trying to do something. I think a lot of people really struggle with buying hold when you’re not doing anything. I think that of all the g7 countries, I don’t know of one that hasn’t had a two thirds 6040 allocation drawdown on a real basis ever. And how many how many clients can sit through a 60% drawdown? Not many.
Corey Hoffstein 31:27
So I do want to come back to this trinity portfolio. But I want to take a step back first. And again, having gone through a lot of your old blog posts listened to a number of your podcasts. At the risk of flattery you are somewhat of a modern day renaissance man of investing just to sort of rip off a few of the topics that you’ve talked about at length or have personally invested in getting ready to be so embarrassing farmland rare coins, global tactical asset allocation, risk parity, global value, shareholder yield 13 F investing, you’ve gone on a whole crusade against the sort of dividend yield concept. Large focus on endowment portfolios closed in funds trading at a discount. You’ve done some angel investing and you’ve written extensively. I mean, I think you have something like 1500 blog posts that you’ve written over the years. Take me a step back and help me triangulate what it says that MEB Faber actually believes
Meb Faber 32:26
there was a good Jim O’Shaughnessy thread that kind of went viral this week, which you can link to in the show notes for listeners and there was a place and I’m gonna paraphrase because I’ll murder this but he said something along those lines. And the listeners if you’re not familiar, Jim is kind of old school. Quant? I mean, he wrote the Bible on the Godfather so God for me is on the Mount Rushmore, you know, wrote a book about equity screen factor based quant screening that that he probably shouldn’t have written because he would. You gave away a lot of give the keys
Corey Hoffstein 33:00
but I can’t even name it. What works on Wall Street. Yeah, well, like
Meb Faber 33:03
but but then again, he got to go on Oprah for that. So it’s a trade off. Would you give away all your secrets to be on Oprah? So he but he had a tweet that he said something like, you know, here’s all the things I’ve learned. And this is what I believe. And this is what I strongly believe. But like, am I certain? And it’s, you know, he’s like, No, I believe that these things work. And I have reasons and it makes sense. But you know, the future. The future is uncertain. And then Zweig had a kind of similar quote, It was he said something like the future is a storm of which you’re getting blown into backwards. And I just love I just love that. That’s like my day, my every day. I feel like as a storm. I’m getting blown into backwards. So there’s a lot of things I believe in. I mean, look, do I believe in ultra low cost, buy and hold investing the taxes and fees matter? Absolutely. Do I think the vast majority of the money management industry charges way too much for for buy and hold investing? Yes. Do I believe that? There are plenty of brilliant investors and hedge funds and private equity and Angel investors that are worth their weight in gold? Absolutely. Do I rail against financial advisors that charge too much and do nothing? Yes. Do I believe that financial advisors are worth their weight in gold? For what they do if they do offer value added services like estate planning and taxes, insurance and behavioral coaching? Absolutely. 1% is probably not enough. So it’s a little bit complicated. There’s a lot of areas where a little bit of knowledge like real estate, if you’re a local real estate investor, and you have a huge amount of value added knowledge and you know that that house in the corner, somebody got murdered in the basement and one next door has chemical poisoning in the basement, the one next door as asbestos like that’s a value added knowledge and the same thing exists in our world where there’s so many potential advantages and differences and but I think the thing I believe in most is one being a student of history. So trying to soak up as much knowledge what happened in the past, what’s worked, what hasn’t worked, what’s the really dumb mistakes to make and the biggest compliment you can give any money manager in our entire world is simply that they survived. So you went back and looked at the blog. And I actually did this a year or two ago because it hit its 10 year anniversary. And I said, I’m gonna go back and read every blog post. And on top of that, I went and clicked on all the links, let’s call it half are defunct, and half the money management shops gone, half the startups that I linked to, or cool ideas or website, gone. Three quarters of the bloggers, you know, everyone thought writing I’m going to be a blogger tried for about a month is like, Oh, my God, that’s so much work, I’m not going to do that anymore. So just surviving is tough in our world. And if you look at, I mean, 2017, by the way, was a graveyard for all star hedge fund money managers. I mean, so many just gave up. Like, they’ve just had years and years of underperformance. And so I think a lot of what applies to our world of professional management, but also investors, as you just want to stay in the game, and so many people that we recently put out a podcast, and by the time this comes out, it should be out a piece on what we call the food pyramid of investing. Whereas what we knew 40 years ago about food pyramid, if you looked at the bottom of the food pyramid, older listeners remember this younger people, there’s this USDA recommended diet, where it said at the bottom was, it was like bread, muffins, carbs, and cereal was like 11 servings a day. And I don’t care what diet you’re probably on a keto diet,
Corey Hoffstein 36:46
whatever, more of an intermittent fast, Paleo intermittent
Meb Faber 36:48
fast, or whatever the diet is today, I guarantee you none of them have, the base of the diet is bread. So you learn though, and that’s that’s part of compounding of knowledge over time. And so same thing in investing. Like if you go back 50 years, what you knew is not what you know, now, and you learn over time. But I think the biggest important thing is make sure you live to invest in other day. And so a lot of the very basic stupid mistakes are the most important things to avoid. And like the rest of the asset management industry is all you know, what we’re spending our time debating and talking about is all well and good. But it’s like the big muscle movements in the first place is not just don’t do dumb stuff.
Corey Hoffstein 37:32
So I want to explore this idea of just survive first in the context of the Trinity portfolio. And then I want to explore it in the context of Cambria, and how you think about running an asset management firm. So let’s start with the Trinity portfolio. This grounding theory for you have just survived how does that actually exists in practice with the Trinity portfolio,
Meb Faber 37:57
so the you have to remember that the best investment strategy is the one that works for you. And so we were tweeting the other day, and we said, I was like, followers, find me an asset class, or an allocation, that a real basis has declined less than 25%. It’s basically impossible. And a lot of people would be surprised by this, it would mean that I put my money in CDs, I said, remember, after inflation, and cash has lost about half after inflation at one point. And so it’s tough. And so, you know, a lot of people, they kind of think in two buckets, the get rich portfolio and the stay rich portfolio. And a lot of people that are used to the get rich portfolio, don’t transition well to the other good example is the tycoon in Brazil, I’m gonna murder his name, like Batista or something at one point, he got to 25 billion. And now I think he’s equivalently zero, because concentration risk, which is what gets you rich, you know, and leverage, those are horrible on the on the downside. And so, you know, there’s a great old phrase is, once you get to a certain point, you know, realize you’ve won the game, and you don’t have to do the same thing. So Trinity was a concept where I said, Look, I’m gonna put everything possible into one, holistically into a bucket. And then on top of that, you know, if you want to dial it down with more bonds, more cash, you can go one way you want to get more aggressive, you can go the other way, you can customize it to your heart’s content. To me, that’s kind of where I’ve arrived at. But again, I’m, I’m honest, that there’s other ways and the challenge is, you look around the world, and we’re of the opinion that US stocks are pretty expensive. Now, I don’t think they’re a bubble, but they’re expensive. And historically, that sets you up for larger drawdowns and a higher possibility of a big fat drawdown. And so having a balanced portfolio and even having a fair amount of cash to is always erring on the side of less risk, I think is important. You know, it’s funny because so much of what people invest In is colored by the personal experience, my mom loved her to death, one of the best investors I know. But her experience was, she invested during the 80s and 90s, her father worked for RJ Reynolds, tobacco company, one of the best performing stocks of all time. So her experience is colored by that. And she’s always telling me growing up, which is actually good advice. But Josiah said, Ma’am, you buy stocks, put them away, you hold them forever, which is good advice in general. But if you’re someone in Greece, or Russia, or Brazil, you may not think that’s such good advice. If you are parents who worked for Enron, you may not think that’s such good advice, or CGI, or pets.com, yada, yada, on and on. So, so much of it gets colored by your personal experience. So my allocation, and this is where it starts to get fun and philosophical. And let me give you example, let’s call it I don’t know, somewhere between 50 and 99%, of my net worth is my company. So I was riding a chairlift with a buddy once and having this discussion and say, Look, my public portfolio of investments, compared to this, it’s not a rounding error, but it’s small. So if you think about it, you can make the argument one of two ways, and I think both are actually quite valid one, because your entire outcome will be determined by this company, you should take as much risk in that public portfolio, because it’s not going to matter because it’s gonna be determined by the company’s outcome, you could also make the argument that because your allocation is going to be dominated by your interest in your company, why take any risk at all, you should take no risk in your in your personal portfolio,
Corey Hoffstein 41:44
well, let me put a third spin on this, because this is something you and I have talked about, you happen to have the unique situation where you own an asset management firm, and asset management, you know, asset management firm valuations better than I do, but call it six to eight times, EBIT, ah, and so
Meb Faber 42:01
your we don’t have any EBIT da, so that’s easy.
Corey Hoffstein 42:04
So AUM, and day to day market fluctuations are going to have a very large impact on your private net worth. So even though you have this private versus public, your private is a levered exposure to the public market pipe. You know,
Meb Faber 42:20
it’s it’s even worse for people that work for say, Merrill Lynch, or Morgan Stanley is wirehouse. And so we call it something like, if you’re a financial advisor, you’re four times levered to the stock market, because one, you probably have your own personal portfolio and stocks. Second, and you may, even if you’re a moron, have your retirement in your company’s stock, should never do that, too, is that your employer, again, your clients portfolios, your revenue is tied to the market size. Third is that if you work for a company that you don’t own your own company, you’re at the risk of get fired in a downturn. So just like quadruple, leverage the stock market. And you know, if you think about that, and almost no one does this, but the same way the Southwest Airlines hedges, their fuel costs, or, you know, a cereal company hedges their wheat cost, you could also make the argument that no financial adviser in the country should own stocks at all, either to smooth out their revenues, or that they should consider some hedging with options or consider some, like strategies trend following other ideas. But so that’s the fun part about the philosophical side, because you could have inputs, and I’ll add the emotions on top of that. So we’ve had an example was a couple. They’ve come together to their risk scores, you know, they’re moderate, but she can’t handle anything more than a 5% drawdown and he can handle 80. So it’s you add those emotions together, that’s, that’s going to create problems at some point. So part of it that’s part of the art of this world. It really comes down to what you’re comfortable with. So my family, my dad’s side, grew up in Kansas, and Nebraska. My dad grew up on a farm. I mean, no running water, outhouse sort of thing. And we and we sell a lot of family in Kansas. And so we have some Wheatland will cropland and western Kansas mostly grows wheat but other crops too. And so when he passed away we the brothers inherited that so we’ve kept that and that’s at current wheat prices basically like a T bill investment. It’s fun until like two years ago when we had a combine that burned down and then it becomes a huge pain but a lot of fun. But it’s a great diversifier farmland was actually one of the best performing asset classes of the 2000s until about a year or two ago, until it got to like a P E ratio about 20. So for me, that’s a big chunk. The public stuff is in the Trinity portfolios. And then personally I’ve been doing and I have some interest in another business started but then angel investing But to me, that’s been something that I’ve been doing over the last five years. Because it’s fun. I consider tuition. There’s some behavioral benefits to that, that historically, I think a lot of people have considered to be negative, so of the asset class, but the fact that you invest in a private business and there is no exit. So you you exit when the business goes out of business, or they pay some dividends or they get acquired or IPO. And that’s it. So the cool thing about that is you can’t do anything, you’re stuck. And there’s some actual cool tax benefits, we don’t probably don’t have time to get into today, newer tax benefits of private investments called que SBS that you essentially can invest in them tax free. That’s pretty cool for taxable investors. So, you know, for some people, they’ve arrived at a totally different allocation for various reasons, but that ends up being mine.
Corey Hoffstein 45:52
So let’s get off our, our branches of tangents here and go back to the main line thread of just survive. I’ve mentioned, is there a mainland thread? Okay, well, I’m at least rewinding a little bit, because I did mention there were two avenues I wanted to pursue and then never pursued the second. And the second is that idea of just survive in the context of running an asset management firm. When you look at the suite of products that you’ve launched at Cambria, its you have a suite of country rotation based on both value and momentum, you have a suite of shareholder yield ETFs, you have a sovereign bond ETF, global asset allocation, zero cost global asset allocation, I think with except for the underlying expense ratios. You’ve got a value momentum, tactical hedge and a recently launched tail risk ETF all sort of within the suite. How do you think about structuring your product offerings, and running your firm as it relates to this just survive philosophy,
Meb Faber 46:52
there’s about three to four criteria. And as you know, as an investor, there’s only so much we can control. Julian Robertson, who was the founder of Tiger very famously said a young fund manager came up to him and said, Hey, what’s the best advice you can give a young young manager starting out? And he said, I’m paraphrasing said, be lucky, and in the first year have fantastic returns, because everyone’s gonna think you’re a genius, and money will just wash all over you. And unfortunately, in our world, that’s true. And how many times have you seen, you know, the managers get anointed? The most brilliant managers? My favorite example from the 2000s was, I think it was the fund manager, the decade by Morningstar in 2000s. I think it was Ken Huebner and great track. I mean, he did something like 12% a year. And that’s awesome. hugely different, sort of very concentrated guy. But the average investor in that fund didn’t do 12 hours, and it had like negative returns, because they chased him after he had up 50% year, then he had down 70. And they all sold. So it’s hard. So you can only control so much of the flows. And we joke so the tail risk fund, for example, I say, I think it’s a great time to be allocating to it, that fund is only going to see flows after the event, probably as as after it goes up 1020 50%, then everyone’s gonna buy it, much to their detriment, but I can’t really control that. So, so be lucky. That’s the first part. But you know, for us, we have about four criteria when launching a fund. The first for me is it has to be something that no one else has launched, or we think we can do a lot better or cheaper. Cheaper is a little more rare in a world of five basis points. But but it does happen every once in a while. Second has to be something I would put my own money into. And lastly, and this is kind of the hard part is it has a sorry, it has to be something that, you know, there’s enough evidence for that it works. It makes sense. Hopefully, there’s a lot of academic literature about it. It’s common sense, you could probably explain it to your niece or nephew. Lastly, and this is the hardest one for me is always Is it anything anyone wants. And we have some ideas that I think are just awesome. And I guarantee you, not a single person on the planet is going to want it. Good examples. We wrote a paper where we basically demonstrated that a taxable investor should never invest in high dividend stocks because they’re gonna get hammered with taxes. So their after tax return is lower in the s&p. Well, imagine the hate mail from that. So I said better solution because dividends are essentially a value tilt and a particularly good one is if you’re going to do value, just do value and so do a value strategy that avoids high dividend stocks. And so picture the potential investors in that one we’re gonna launch a no or low yielding fun Come on. But if you’re an honest person after tax basis, even if that fun kept over the s&p, after tax is it’s a much better investment. And with a value tilt, it should be better than the s&p. So listeners, if you had a 20 million 20 million Darcy, and you want to launch that, let me know, talk to me. But that’s an example of, you know, and the flip side is, so many of my good friends, so many buddies of ours in the industry, you know, launch funds that are, you could, you could say they’re fun, a lot of thematics. But are they in the best interest? The investor? Probably not. And we had a scenario this past January, where we could have and we could still be the first to do it launch a Bitcoin futures fund. And there’s like, I don’t know, 12, in registration, right. And so there’s a little workaround to where we could be the first one to market and that would raise a billion dollars, there’s no question. And I said, you know, it’s just not, it’s not really my thing. It’s not my brand. I don’t own it, I wouldn’t own it. I don’t know. So it’s challenging because there’s, in our industry, you have kind of two different types of firms. The ones that historically, you know, we’ll charge as much as possible and get away with it. There’s an s&p 500 mutual fund that charges 2.3%, which is the same thing you can get for five basis points. And it literally has s&p 500, in the name, right, x. Guggenheim, you’re, I’m talking to you. But there’s plenty that charge above percent percent and a half, and who owns those, it’s people that have either died or forgotten, or they’ve been sold and don’t know better, and that’s predatory. Anyway, getting off topic. So those are kind of the criteria. And so when you’re building a firm, in our early days, believe me when we just had one or two funds out, and they were long, only equity. That was not a good sleep at night situation for me. Now I sleep at night anyway. So that’s not a good analogy. But having that exposure made me very nervous. Because Because as a risk manager in your I’m sure the same way as I could spend all night spinning my wheels, think of the 1000 different outcomes of what can happen and a good example, as a good investor as a better, you got to think in terms of all the possible outcomes. So you sit down a blackjack table. And there’s the the guy at the end of the table that you know, the dealer has a sixth card, and the guy somehow has like a 17 and hits it anyway, but still gets a four and says I told you, though, see? So you know how many people go back to the last president’s inauguration would have predicted the first year in history with 12 months in the row and stock market zero. But we saw it. And so that’s on a positive surprise. But of course, you get the negative two. So having long only exposure was very nervous for me. But now I’m much happier with somewhat of a blended outcome. But going back to your way earlier point, the biggest risk is still stock beta.
Corey Hoffstein 52:59
So I want to bring this as we’ve been sort of narrowing down our scope. Sort of one last question for you before the final question that I’m asking everyone. But we’ve been talking about sort of research, philosophy implementation, the business, you’re running here at Cambria, and I do want to get a sense from you, you do run a number of different ETFs of varying complexity. And so this is a podcast about quants and how they think I want to get a sense from you how you think about bringing a new product to market, the research required to bring it to market and how you determine how complex that strategy ultimately needs to be. Before you can say, Okay, this is this is ready for primetime.
Meb Faber 53:43
Given all things being equal, I prefer simpler. And, you know, let’s look at our largest fun and invest in 12, cheapest stock markets around the world. Rebounds once a year, could not be more simple. So of the 45 developed in emerging market countries, invest in the top quartile, and rebalance once a year. And straight up value strategy. Super simple, super low turnover, but super concentrated, too. And so it’s going to look a little a lot different. If we launched it in 2014 2014 just got crushed, it was still as the US stock market outperform it was number one country in the world from 2009 to about 2015 which is basically never happened for that longer stretch. It’s very, very rare. Us versus foreign is basically a coin flip and 2014 we launched it and it kept going down and then since then has been just on fire outperformer but it’s very, very concentrated. And you’re gonna look very, very different. So a funny part is is I often say to people, I say look, if you’re a value investor, it’s equally important to be invested in the cheap stuff. but it’s as important to be avoiding the really expensive, you know, so making, not making the dumb mistake of being invested in the US now, or at least really overweight or invested in China and India in the mid 2000s. Remember, the BRICS, everyone’s marketing the BRICS, Brazil, Russia, India, and China in the mid 2000s. China and India are trading P E ratios of 40 to 60. Not investing in the US and late 90s not investing in Japan, the biggest bubble we are seeing in the 80s at P E ratio of 100. So, the main gist of that strategy is, is value investing. And it’s simple. And it’s so funny going back to our old trend following conversation where people want to complicate this they mad Well, shouldn’t you be doing this quarterly? Can you send me the valuation metrics every month? I say it doesn’t matter. It actually the more you rebalance the strategy, the worse it gets, it actually hurts it a value strategy that to rebalance it more often, when it’s that such deep value. And so thinking about that, and the implementation of complexity, I think most important for investors is that concept of storytelling. And so thinking of products, I prefer the to be as simple as possible. But I think getting it wrapped around someone’s head with, okay, I get it. I like the story. That’s as humans, that’s how we interact. So I can tell you statistically, why high dividend stocks have zero chance against a shareholder yield strategy going forward. And the same reason that they’ve gotten pummeled by a shareholder yield strategy the last four years. But is that the good story? No, the good story is, hey, think about dividends is only part of the picture. You think about a way a company distributes their cash, like Apple, just a great case study just announced 100 billion in buybacks, when people can start to understand that, again, the litmus test for me, which is not the case for most fun companies is I invest in all of our funds, I want to invest in our funds. And usually, that’s why we launched them is because there’s nothing exists, the tail risk fun, there’s no fun like it. And going back to what you’re talking about is that I want to weigh that me personally, and our company. So not only do I own the tail risk fund, our company owns it as a way and it’s been a terrible investment. And I hope it continues to be a terrible investment and loses money every year for the next 10 years. The same way that my car insurance and my house insurance lose money, I am totally fine with that. In fact, that’s best case scenario, because that means everything else is making money. So my biggest criteria is I want to invest in it. And for me, complexity for complexity sake, you know, is not the end goal.
Corey Hoffstein 57:47
Meb Faber 57:49
man Come on, i we i feel like we had another hour or two easy we go in our studio turns into a sauna here. So I have about sweated through both of my shirts, because we usually have turned the fan down because it gets too noisy,
Corey Hoffstein 58:00
where you can keep we can keep pouring the room over here. So last question, which is to get us more of a sense of who MEB Faber is. And I’ve been asking this question to everyone asking it slightly different way just to make sure I get a good cross section or responses here. But let’s say your wife knew as much about investing as you do. And was going to explain you as an investment strategy. So she could say hey, you know MEB is a slow and steady guy he’s low vol. Or Jana, that guy gets way too excited. He’s momentum. And it can be as esoteric or vanilla could be market data, it could be merger arbitrage. How would your wife describe you as an investment strategy?
Meb Faber 58:44
What can I feel like we should just call her and ask ask and you need like a call and it’d be fun or it’s like the radio show or they actually call the person and, and ask them. She would probably say I’m more like commodities. I’m just volatile. There’s there’s no expected return whatsoever. There’s a lot of downside. There’s a years of just underperformance every once in a while I’ll exceed expectations. And when you least expect it there’s a supply glut or there’s just under storm somewhere a hailstorm that takes out all the crop. Yeah, I don’t know. I mean, I think she would probably say it’s the stability of like a general boring ass asset allocation. With flipping tactically to the volatility of commodities at random times. I don’t I don’t know. I guess what we’ll have to recall recorded or later and send it to you. It’s a great question. We’ll
Corey Hoffstein 59:40
throw it in post interview here.
Meb Faber 59:42
I thought you’re gonna say what’s my gun to my head favorite investment.
Corey Hoffstein 59:47
Now it’s too easy.
Meb Faber 59:48
Yeah. Now we want to, it’s still it’s still be commodities by the way. Today are all the time. I love commodities right now. Everyone hates them. They have been getting pummeled. I mean, commodities is tough because you got to do commodity. group’s so energy has been going up for a while. Base metals have had a great run precious is kind of starting to move in an uptrend, but AG has just gotten crushed. And as you’re starting to see interest rates come up, you’re starting to see inflation come up. I like it. We did it, we did a post. Man, this goes back to our first book 2007, where we looked at asset classes that were down multiple years in a row. And usually, it’s pretty rare for that to happen and have an emerging markets and commodities couple years ago. And emerging markets have been ripping commodities as an asset class, which is mostly energy for most of the indices have done well, the pockets of them had done very poorly.
Corey Hoffstein 1:00:44
I think if I recall correctly, it was asset classes that have been down five years in a row well, so it gets exponentially more attractive. It’s almost like a poor man’s value. Yeah,
Meb Faber 1:00:53
I mean, it’s a fun study that I wouldn’t put any money to. But so asset class, I think it was three years in a row. So like the big asset classes, stocks, bonds, commodities. And that’s only happened like four times since the 70s bonds, long bonds that happened the late 70s, early 80s stocks that happened 2000 2003 along with foreign and then just happened with emerging in commodities, whatever it was two years ago, with sectors and industries, because they’re more volatile and concentrated. You can take that out to three, four or five years. And I think you’ve only had five years down in a row. Like a couple of times it was coal and like the Great Depression and coal again, like three years ago. What was the other one uranium maybe like a year or two ago. And I’m the only one flashing right now because we’ve had a kind of global Bull has been anything ag related.
Corey Hoffstein 1:01:48
So we’ll wait for the commodity rotation fun to come out shortly. Sure, Matt. It’s been a lot of fun. Thank you for hosting me here,
Meb Faber 1:01:55
Cory. It’s been a blast. Good luck with the pod and look forward to coming back on again.
Corey Hoffstein 1:02:02
Thank you for listening to my conversation with MEB Faber. You can learn more about MEB at MEB faber.com. And on Twitter under the handle MEB Faber show notes for this episode are available at flirting with models.com/podcast. If you enjoyed the conversation, I’d urge you to share the podcast with a friend or on social media and leave us a review on iTunes.