The Meb Faber Show - Better Investing

In Episode 68, we welcome Meb’s friend and Newfound Research founder, Cory Hoffstein (or as Meb refers to him, a “fellow nerd”).Per usual, we start with Corey’s background, but then Meb jumps in by asking Corey to describe his general, 10K foot investing framework. Corey tells us that a specific product and/or style doesn’t necessarily define him or Newfound. Rather, he believes in a consistent, well-researched process that takes into account the behavioral challenges that accompany any given investment strategy. This is because the journey is often just as important as the destination.Meb asks where Corey starts when creating a portfolio. Corey tells us it’s about the balance of risk. This is because “risk cannot be destroyed, only transformed.” Therefore, when building a portfolio, there’s no single holy grail. You need to understand the goals and fears of your client, then figure out how to balance various strategies in order to find a robust, flexible portfolio that handles risk appropriately.This dovetails into one of Newfound’s white papers, “Portfolios in Wonderland,” which tackles today’s investing climate. Corey tells us that we’re in a unique environment, whether focusing on equity valuations or interest rates. It used to be that stocks and bonds zigged when the other zagged. But in the 1980s, both became cheap. Today, we have the opposite: high equity values and low yields on fixed income.This leads to a great discussion on bonds, including Corey’s rule of thumb for estimating future bond returns, and his research into the source of bond returns – how much was due to the coupon, versus declining rates and roll yield.The guys agree that with U.S. equities richly valued, and bond yields so low, future returns of the classic 60/40 portfolio don’t look too appetizing. So, what’s the solution?Corey likes the proliferation of asset classes that used to be found almost exclusively in hedge funds. Now, we can use them to diversify our portfolios and reach a solid rate of return. The conversation bounces around a bit here – how 8%-10% returns aren’t likely going forward unless you’re invested exclusively in emerging markets... how if you let a portfolio optimizer do its thing, you’d have almost no U.S. exposure in either equities or bonds... and how, behaviorally, most people couldn’t have 0% allocated to the S&P, so finding a balance between the best portfolio and the most realistic portfolio is needed.There’s way more in this episode, including answers to “Should we be holding more cash?” “Is dividend investing dangerous” and “How do you factor in various global interest rates when looking at a bond allocation?” There’s also how Corey constructs multi-asset portfolios… how value works across asset classes… the biggest concerns Corey is hearing from clients today… an idea Meb has for a “weird ETF”… and of course, Corey’s most memorable trade.What is it? Find out in Episode 68. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 67, we welcome Simon Black, founder of the newsletter, Sovereign Man.We start with Simon’s military background, having been an intelligence officer. He spent lots of time overseas, yet became disillusioned after the promises of WMDs failed to prove accurate. From this, he began challenging the status quo.Underpinning everything was an ethos of personal freedom, which is at the core of what Simon’s newsletter, Sovereign Man, is really about.Meb asks what global red flags and/or issues Simon is seeing now which might be challenging our personal freedoms. Simon tells us “I see a lot of red flags.” Specifically, he’s seeing a global trend toward socialism. People have a sense that the system is rigged. There’s an intuitive understanding that something is wrong, though people aren’t quite certain what it is, so they blame capitalism. But when people gravitate toward socialism (“I want more free stuff”), we run into the challenge of too many people wanting to jump on the cart, without enough people actually pulling the cart.This leads to an interesting conversation about the effects of socialism in Venezuela, where Simon is located. He mentions how there are vast quantities of soil where the Venezuelans could be growing crops, yet there is starvation. He steers the conversation back to challenges here in the U.S., which leads toward the need for what Simon calls a “Plan B.” In essence, this is a plan intended to protect yourself and your assets from the various risks we face today on many levels – financial, personal, governmental…Part of an effective Plan B ties to diversification. Simon mentions how if all of your assets are in the same banking system, then you’re not diversified. So, Simon suggests at least some money should be kept in banks outside of the U.S. – after all, there are many global banks that are better capitalized than those here in the U.S. He offers Hong Kong as an example.The conversation drifts toward an example of personal diversification – getting a second passport. Simon thinks this is the ultimate option, providing tons of opportunities and benefits – all upside with no downside, for minimal cost.Next up is Simon’s suggestion to legally reduce your tax burden. He tells us “reducing your taxes…that’s the easiest return on investment you’ll ever make.” Simon tell us a favorite tax-reduction technique upon Meb’s request.Next up, the guys discuss having cash outside the U.S. banking system. The conversation references why this is important – just look at what happened in Cyprus and Greece a few years ago. This leads into a discussion of cryptocurrencies. Simon tells us how so many people putting money into crytos today now have no idea what they’re doing – do they even understand Bitcoin and Ethereum? Who has actually read the original white paper on Bitcoin?There’s way more in this episode: where Simon is looking now for safe, margin-of-safety-style investments around the globe… how private equity can help your portfolio… Simon’s entrepreneurial advice… what Simon’s readers are most concerned about today… and of course, Simon’s most memorable trade – it involved day-trading Compaq (and losing everything).How’d it happen? Find out in Episode 67. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 66 is a radio show. We start with Meb referencing the just-published book, The Best Investment Writing, which he edited. It’s a great collection of essays from some of the smartest minds in investing. Check it out.Next, we jump into market commentary, using Meb’s recent “office hours” as our vehicle for discussion. What that means is Meb had some extra time over the last few weeks, so he opened his calendar to his followers, scheduling loads of 30-minute phone calls with various individual investors and RIAs looking to pick Meb’s brain on a variety of subjects. Meb tells us the topics which came up the most often, as well as his thoughts. There’s talk of U.S. equity valuation (and at what level Meb would start selling even before a crash), angel investing, portfolio allocation weightings, and far more.We end with several listener questions. The first involves how Meb views market breadth in light of the growth in index investing; the second solicits Meb’s thoughts on the dangers of ETF investments if the market heads south; the third is at what valuation level the buyback component of a shareholder yield strategy ends up being a headwind.What valuation level did Meb indicate? Find out in Episode 66. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 65, we welcome CTA and commodities expert, Emil van Essen.Meb starts with a fun bit of trivia – if you mesh his and Emil’s name, coming up with “Emil Faber,” can you guess in which movie that name appears?It turns out it’s from the classic comedy, Animal House. “Emil Faber” was the founder of the movie’s “Faber College” and under his statue was his quote, “Knowledge is good.”After Emil gives us a bit about his background, the guys jump into the deep end. Emil trades managed futures, and while most people think “trend following” when they hear “managed futures,” there are other styles. Emil tells us about a style he uses often, spread trading.Emil looks at the term structure in commodities futures contracts. There’s a price for every month going out in time. You can trade the differences between those months (calendar spreads). He also trades relative value and roll arb. Emil likes these strategies because there’s tons of alpha available.Meb pauses to explain a bit for any listeners who are less familiar with all this. He explains exposure to the futures markets, using oil as an example. This leads into a discussion about the growth of commodities markets. Back in the 2000s, commodities went from being just a product to an investment vehicle. So the powers that be created indices and various commodities products to meet this demand. Investments in commodities exploded, driving up prices. This dovetails into what Meb calls “one of the dirty secrets of indexing,” which is how many indices can be front-run. Meb tells us how, for some 1.0 commodities indices, the slippage was in the order of 3-4% per year.Meb then asks Emil to describe what he looks at when establishing a position. Is it fundamental? Technical? Emil tell us it’s very important that you use both, because “you have to understand the fundamentals because things change.”Next is a great conversation about front-running trend followers. This is something that Emil does. He knows that if there’s a big move, the trend followers are likely all on the same side of the position, so when it comes time to roll the front month, and Emil generally knows when that will happen, Emil takes advantage of the price movement. Meb and Emil then discuss the easiest way to implement this strategy.A bit later, the guys discuss what themes/positions Emil is interested in right now. He tells us how there has recently been a shortage in gasoline, so gas has been running up against crude oil. It’s at high levels now, and Emil thinks it’ll come down. Emil also tells us that he’s looking at grains, the energy markets, and certain metals including platinum and palladium.This leads into a discussion on oil. Meb asks Emil’s take on the industry.Emil gives us some great background on what drove oil up so high, and why it crashed. Then he discusses the technological revolution in oil drilling, the result of which is that the cost of finding and developing oil has collapsed. There are some great details in here which oil investors won’t want to miss, but Emil wraps up this part of the conversation by saying “the days of $80 oil – that’s a long way away.”Meb then asks what areas of commodities Emil likes right now. Emil tells us his thoughts on at what level crude is buy. And he mentions a certain metal which he considers a “no brainer.” You’ll have to listen for the details.There’s way more in this episode: how Emil views gold in light of new cryptocurrencies… A Twitter poll Meb conducted that reveals just how stubborn some investors can be when it comes to selling out of overvalued equities… Where Emil has seen the most investors make the biggest mistakes over his 25+ year career… The dangerous false belief that “we’ve seen this before” in the markets, and how computerized investing is taking us into uncharted waters… And finally, Emil’s most memorable trade (which was a loser that will get your blood racing).What are the details? Find out in Episode 65. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 64, we welcome David Varadi from Blue Sky Asset Management.David tells us a bit about himself before he and Meb jump into investing. Meb starts by referencing a quote from Blue Sky’s website:“Unlike endowments, investors do not have an infinite time horizon. For this reason, we believe that a traditional strategic asset allocation approach based on modern portfolio theory is suboptimal. It makes more sense to adapt to changes in the economic environment. We favor a dynamic approach to asset allocation using market information to guide our investment decisions. Most importantly, we believe that a systematic, quantitative approach is necessary to avoid emotions and biases in decision-making.”Meb’s a fan of all the ideas in that quote, so he asks David to expound and discuss his general market framework.David tells us how it’s easy to be a buy-and-hold investor when market is going up; much harder so when the market is falling – especially when nearing retirement. Significant drawdowns can be devastating. So David tells us that “managing risk is absolutely critical.” Investors need to be able to adjust their strategies to handle a wide variety of market scenarios – bear markets, varying interest rate scenarios, and inflation. And “if you have a dynamic asset allocation, you have the ability to be more in tune with the market regime that is currently going on.”Meb asks David to dig deeper – what are the rules and frameworks in place that make his models dynamic?For David, much goes back to fundamentals, trend, momentum, and volatility. David starts with a strategic allocation that reflects longer-term assumptions. But what’s interesting is how David uses volatility in concert with trend/momentum, helping him know when to be in the market versus cash. Most people think time-series momentum is a binary decision, but David brings probabilities into the discussion.Meb then asks about the challenges a retail investor faces when trying to implement the strategies David has been discussing.A big challenge is tracking error. The more dynamic you are (moving away from buy-and-hold indexing), the more potential tracking error. Another issue is how often you trade. David tells us that the investor has to ask himself what is most important – does the investor want to reduce the drawdown in a 2008 scenario, and if so, is he willing to take the tracking error associated with that?Meb echoes this tradeoff between buy-and-hold versus active. It’s very hard to look “different” than the market and/or your neighbors when you’re underperforming.Next, Meb brings up another Blue Sky whitepaper, this one about retirees and risk. David hits the high points, discussing the challenges of volatility in retirement.There’s plenty more in this episode, including the new areas David is researching… David’s most memorable trade (one involves put options, the other Bitcoin)… And David’s one piece of investing advice to listeners, involving three mental “buckets” for your asset allocation.What are they? Find out in Episode 64. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 63, we welcome Gary Beasley and Gregor Watson, co-founders of Roofstock. If you’re one of our listeners who has written in requesting an episode on rental real estate, be sure not to miss this one.We start with some quick background on the guys, how they came to found Roofstock, and the way in which their company is aiming to make rental real estate investing far easier. In essence, they want to simplify things by separating the “investing” side of rental real estate from the “operational” side of owning a rental home.After the background, Meb starts with a broad, contextual question: So how would a new rental real estate investor start?In the old way, you would identify a market in which you’re interested, look at tons of homes, make some offers, perform due diligence on the ones where the offers have some traction, renegotiation the price and finally buy, then find a property manager to handle operations for you.But the guys then tell us how Roofstock is making this traditional process far simpler. Basically, the home and rents, tenant, and local property manager have already been vetted and approved. You see the various yields ahead of time. This enables investors to buy without all the traditional brain-damage. The guys tell us “Our goal is to make it incredibly easy to get exposure to the asset class (rental real estate).”What follows is a wonderful discussion about some of the traditional challenges with rental real estate, and how Gary and Gregor are helping investors overcome those challenges. The discussion touches on how to compare rental homes across different markets… Evaluating rental homes via gross yield, net yield, IRR, and on an after-tax return basis… How Gary and Gregor arrive at rental home valuations… Financing versus all-cash buying…There are also great tidbits of rental real estate investing wisdom dropped in. For instance, did you know that the total cost to a home-seller to vacate, spiff up, and sell is about 10-12% of the sale price? Did you know that the average cost of a property manager is about 7-8% of collected rents plus a separate leasing fee? Guess what percentage of rental real estate owners live within about an hour of the homes they own? You’ll find out…Later in the episode, Meb asks about the range of yields on the various rental homes featured on Roofstock; specifically, why wouldn’t he invest in a handful of homes yielding, say, 25% versus those yielding just 5%? Is there a parallel here to high-grade bonds and junk bonds?The guys tell us, yes, lower yielders tend to be the safer investments, whereas the higher-yielding homes are a bit riskier. But both potentially have a place in a rental portfolio, depending on the needs/goals of that investor.There’s much more in this episode: the difference between buying single-family homes directly versus investing in a REIT… How to think about starting and building a rental real estate portfolio… How much time an investor would need to commit to being a landlord when not using a property manager… What happens if there’s another 2007… And Gary and Gregor’s single best piece of advice to listeners interested in starting with rental real estate investing.What is it? Find out in Episode 63. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 62, we welcome journalist and author, Ron Lieber.Meb begins by congratulating Ron, as it was Meb's pregnant wife who read Ron's book about how parents should discuss financial matters with their kids, and promptly told Meb he needed to read it and get Ron on the podcast.Turning attention to Ron's book, "The Opposite of Spoiled," Meb begins by asking about Ron's motivation for writing it. Ron tells us there were three factors: one, a pointed question from his three-year-old ("Daddy, why don't we have a summer home?"); two, the focus of Ron's writing at work (young people who borrow vast sums of money to pay the huge college tuition bills); and three, his own situation as a teen, having seen the collegiate financial aid application process thanks to his mother. All of this together led Ron to the conclusion that "we're not having the right kinds of conversations with our kids about this stuff."Meb mentions how it's a shame that they don't teach personal finance in high school, which makes it all the more important that parents have these discussions with their kids. Unfortunately, many parents are reluctant. Meb asks Ron why this is so.Ron points toward shame. Perhaps parents are ashamed they don't know the answers to the questions (maybe they don't have a firm grip on finances themselves), or maybe they're ashamed at how much (or little) they earn, or at how they earn their money.The conversation drifts toward a piece of advice in Ron's book; it's the suggestion that when facing a question from a child, the parent might ask "Why do you ask that?" The reason this is helpful is that many times, the stated question isn't really want the child wants to know. Questions like "how much do you make?" are rooted in fundamental questions such as "Mom/Dad, are we okay here? Is our family normal?"Meb brings up the four things spoiled kids have in common from Ron's book and asks for some commentary. Ron tells us that, ironically, these spoiling factors have almost nothing to do with actual money. They are: one, not having any rules for kids; two, if there are rules, not enforcing them or having consequences; three, smoothing out the path in front of kids and making sure they never face any challenges; and four, allowing kids to grow up without any context for how lucky they are for their opportunities – no gratitude, and instead, an attitude of entitlement.This dovetails into a great conversation about chores, which points toward allowances. Ron suggests dividing allowances into three buckets: savings, spending, and giving. The specific allocations will likely reflect the values the parent is looking to instill (for instance, if a parent wants to focus on giving, the allowance amount can reflect what the parent believes is an appropriate amount the child should skim off the top for "giving").There's way more in this episode, and if you're the parent or grandparent of a young child, you don't want to miss this one. You'll hear more about the conditions that lead toward materialistic kids and how to avoid them... Unique ways to deal with things like a visit from The Tooth Fairy... How to handle kids wanting cell phones (do you know how long Bill Gates made his kids wait before buying them a cell phone? You'll find out)... And how to use a great tool called "The Fun Ratio" to help your kids make better spending decisions.What is it and how does it work? Find out in Episode 62. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 61, we welcome Jack Vogel, CFO/CIO of Alpha Architect, and the partner of Wes Gray, who you may remember as one of our earliest Meb Faber Show guests.After Jack tells us a bit about his background and how he came to be at Alpha Architect, Meb jumps in, starting with "factors" - specifically, the value factor. Meb asks about Jack's value philosophy in general, and how he creates a value portfolio.What follows is a great look at how a professional portfolio manager/asset allocator creates a portfolio. Using quantitative tools, Jack starts by constructing the universe of potential assets to include, keeping in mind scale. Next, Jack applies some forensic accounting in order to exclude certain toxic assets that one wouldn't want in a portfolio. Then, he screens for value. Jack likes using enterprise multiples. Finally, he looks for "quality." These are things like free cash flow, margin growth and marketing stability.Meb then points the conversation toward momentum investing. Jack offers us a general overview first, noting how momentum investing can be really beneficial for value investors. He also makes the point how it's definitely different than growth investing.In discussing creating a momentum portfolio, Jack discusses adding seasonality (which means addressing when to rebalance) and quality. On the topic of quality, Jack gives us a great example of what it means in the context of earnings; it involves two stocks, one of which is flat for an extended period, but then explodes in value in a short amount of time, versus the other that experiences the same growth, but gradually and consistently over the entire period. Which earnings are more "quality"? Jack gives us his thoughts.Next up is Alpha Architect's great tool, Visual Active Share. It's a wonderful way for investors to compare the holdings of an ETF to its benchmark index. Investors can use this to see just how "different" the ETF in question truly is. After all, you don't want to be paying too much in fees for an ETF that's really just a closet index fund. The guys discuss whether there's a particular number for what "good" active share is, as well as the challenge of tracking error as you grow more "different."As usual, there's a great deal more in this episode: Alpha Architect's new value, momentum, trend ETF... A discussion of the state of robos... What new tools Jack and his crew at Alpha Architect are working on now in order to help investors pull back the curtain on various funds... And of course, Jack's most memorable trade - it was the last individual stock he owned, which he now refers to as 'The Titanic.'What was the stock? Find out in Episode 61. Learn more about your ad choices. Visit megaphone.fm/adchoices

William Bernstein, founder of Efficient Frontier Advisors and a former neurologist, shares his insightful journey from medicine to finance. He emphasizes the importance of robust saving habits amidst a consumer-driven culture. Delving into investing strategies, he advocates for a simple three-fund portfolio accessible to all. Bernstein challenges the notion of home ownership as a sound investment, viewing it instead as an expense. The discussion also touches on behavioral finance, cryptos, and the wisdom gained from understanding market psychology and biases.

Episode 59 is a radio show format. This week we're diving into some of the recent market stories which Meb has found most interesting. We also bring back some listener Q&A.We start with a Tweet from Cliff Asness, in which he rebuffs a Bloomberg article titled, "The Death of Value Investing." The article states that value isn't working. Sticking to that approach has resulted in a cumulative loss of 15 percent over the past decade, according to a Goldman Sachs Group Inc. report. During roughly the same period, the S&P 500 Index has almost doubled."So is value investing dead? Meb gives us his thoughts. We discuss its underperformance, mean reversion, and factor-crowding.Next up is a New York Times article referencing a recent stance-reversal from Burt Malkiel, a passive investing legend. He's now saying he recognizes where active investing can exploit certain market inefficiencies. The same article has some great quotes from Rob Arnott on the topic of factor investing, and the danger in tons of quants all looking at the same data and trading on it. Meb gives us his thoughts on factor timing and rotation, using trend with factors, and the behavioral challenges involved in both.Another Arnott quote steers the conversation toward backtesting - the pitfalls to avoid when backtesting, so you don't create a strategy that looks brilliant in hindsight, but is hideous going forward.Next up are some listener questions: I still can't wrap my head around how to use commodities in a portfolio. The Ivy Portfolio promotes putting 20% in a broad commodity index, but in the podcast, I've heard you discuss the financialization of commodities futures leading to loss of roll yield. So what's the answer here? Include commodities as an inflation hedge but be prepared to pay the price of long term drag? Or forget about commodities and just focus on stocks/bonds/real estate? Please explain the difference between the unadvised practice of performance chasing and the highly encouraged practice of momentum investing. I would like to know your thoughts on implementing lifecycle glidepaths for an individual or clients' portfolio. Your quant-style approach looks at risk a lot different than most, but I do see value in reducing portfolio risk as you come closer to withdrawing the money - the question is which risk, or what approach do you use to reduce the risk? Regarding your trinity style approach, does that mean reducing from a Trinity 5 to a Trinity 3 (for example) a couple years prior to retirement? There's plenty more - including our new partnership with Riskalyze, which enables advisors to allocate client assets into Trinity portfolios. But the more interesting story is how Meb gave his wife food-poisoning the other night. How'd he do it?Find out in Episode 59. Learn more about your ad choices. Visit megaphone.fm/adchoices