The Meb Faber Show - Better Investing

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. Learn more about your ad choices. Visit megaphone.fm/adchoices

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. Learn more about your ad choices. Visit megaphone.fm/adchoices

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.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. Learn more about your ad choices. Visit megaphone.fm/adchoices

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. Learn more about your ad choices. Visit megaphone.fm/adchoices

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: To what extent do economic indicators have any effect on Meb’s view of the markets? Bitcoin has been on a meteoric rise recently in advance of the introduction of Bitcoin futures on Sunday 12/10. What are the potential ramifications of futures trading on it? New money coming in? Prices imploding? What about blockchain? How will it affect various industries? Wes Gray and Toby Carlisle have argued that EV/EBIT is a better metric than PE for latching onto the value premium. Why not then use a cyclically adjusted EV/EBIT instead of CAPE? Someone puts a gun to your head and tells you that you have $1M from an orphanage which you must invest in a single stock. What do you pick? If enough people adopt a trend following approach, and the trend starts heading south, could it lead to a market meltdown like ’87? What are Meb’s thoughts on the best ways to invest when your assets are stuck in a 401k? 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. Learn more about your ad choices. Visit megaphone.fm/adchoices

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. Learn more about your ad choices. Visit megaphone.fm/adchoices

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. Learn more about your ad choices. Visit megaphone.fm/adchoices

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. 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. Learn more about your ad choices. Visit megaphone.fm/adchoices

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: What’s the latest on global CAPE values? Which countries are cheapest? Buffett was on CNBC the other day opining that stocks were cheap because you have to view them in relation to competing investment opportunities, and interest rates are still quite low. Thoughts? Is it possible to construct a CAPE index for other asset classes besides stocks? How do you recommend getting exposure to commodities? Aside from the physical metals, it’s hard to get good exposure because most of the ETFs invest in futures which get hurt by contract rolls. What’s the answer? In the typical asset allocation, would muni bonds produce more alpha than Treasuries? What different risk would it introduce, and is it worth it? Trend following is primarily a binary thing: You are in if your signal has triggered, otherwise out. But is it better to be in a market that is trading, say, 10% above your trigger than a market that is 1% above? Is low volatility a valid and sustainable outperforming factor? 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. Learn more about your ad choices. Visit megaphone.fm/adchoices

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. Learn more about your ad choices. Visit megaphone.fm/adchoices