The Meb Faber Show - Better Investing

In honor of this Sunday’s Super Bowl, Episode 38 is a special, bonus “gambling” podcast. We welcome mystery guest, E.V. Better, which is an alias for “Expected Value Better.”Meb starts by asking E.V. how he got to this point in his career. E.V. had a traditional finance background, working at a long/short hedge fund for 5 years, but realized he could apply certain predictive analytics that work in the financial world to the sports betting world. He helped create a basketball model at Dr. Bob Sports and enjoyed it so much that he made the jump from traditional finance.Next, Meb requests a quick primer for the non-gamblers out there; for instance, how the various types of bets works, the “lines,” the most popular bets, and so on. E.V. gives us the breakdown.The conversation then drifts toward examples of “factors” when it comes to gambling (such as “value” or “momentum” is in the stock market). E.V. tells us there are really two schools of thought in traditional investing – fundamental and technical investing. When it comes to gambling, there are similarly two schools of thought; you have the strength of a team that’s measured by traditional stats (for example, net yards per pass) or technical factors (having been on the road for 14 days…having suffered 3 straight blow-out losses). When you combine these two factors, you better a better idea of which way to go with your wager.These leads to two questions from Meb: One, how many inputs go into a multi-factor model? And, two, how do you replace older factors that don’t have as much influence or predictive power as they used to? E.V. gives us his thoughts.Meb asks about “weird” or interesting factors that are effective. E.V. points toward “travel distance,” though the effect has diminished over time as travel has become easier. He also points toward “field type.” This leads into a discussion about betting against the consensus (contrarian investor, anyone?). And this leads into a common investing mistake – recency bias. For example, because the Broncos won the Super Bowl last year, people expected them to be great again this year…and they didn’t even make the playoffs (Meb is still bitter).Meb steers the direction away from the NFL. Whether basketball, baseball, or whatever other sport, you’re simply trying to find an edge over the house. Meb brings up “variability” (the more games the better if you have a slight edge), and asks how this changes over different sports.E.V. says duration of season is a huge factor. Also, the level of data available for analysis is key (for example, the amount of data in baseball is amazing). But overall, E.V. says the goal is reduce the variance to make thing as simple and predictive as possible to find your edge.Finally, we get to the topic du jour – the Super Bowl. Meb asks E.V. directly, “Who do you like with New England at -3?” If you’re thinking about betting this Sunday, don’t miss it.There’s far more in this bonus episode, including discussion of betting on the results of the Super Bowl’s coin toss… How long it will take for Luke Bryan to sing the National Anthem… How many times will “Gronkowski” will be said by the commentators during the Super Bowl broadcast… Want to put the odds in your favor? Then join us for Episode 38. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 37, we welcome John Bollinger, creator of Bollinger Bands, one of the most widely-used analytical tools in investing.As John is also a market historian, Meb start by asking him about his historical influences – those individuals who helped shape John’s perspectives on the markets and trading. John gives us his thoughts, identifying who he believes is one of the most important figures in technical analysis. This leads to an often-forgotten takeaway – that many of the most effective market concepts have been around for a long time. Some very profitable strategies that still work today were being explored 100 years ago.Meb redirects, asking John about his background. It turns out, John was in the film business as a cameraman. But by a few twists of fate, he ended up in front of the camera, providing technical commentary on markets for a fledgling financial broadcast network.This leads into a discussion of John’s famous “Bollinger Bands.” He gives us an overview of the tool, and how he came to establish it. In essence, Bollinger Bands can help investors identify relative market bottoms and tops, helping find direction for profitable trades.Meb then asks if John’s thinking on Bollinger Bands have changed since the early days. John tells us that the core concept stands the test of time, though he has added some extra indicators.Next, Meb asks about combining two types of analysis – technical and fundamental – something John calls “rational analysis.” For many people, you fall into one camp or the other. But John was able to find overlap between them. He tells us how, and even ropes in two additional types of analysis to include – quantitative and behavioral. He thinks combing all four works better than using any single one. Meb asks how you actually use them all together, to which John gives us his thoughts.Meb then asks which sector John is currently identifying as a good source of potential trading profits – but he immediately discounts the validity of his own question. You’ll want to hear why. This leads into a great takeaway – using the right charts for entry/exit in a trade. Specifically, a trader may use a short-term chart to initiate a position, but then not move to a medium-term chart to help him navigate how long to hold the position. Instead, he keeps looking at the short-term chart, which obviously will oscillate, and potentially scare the investor out of the trade. John says “People have this time frame confusion that I think does a huge amount of damage.”Meb then asks about trade management. John says the most neglected issue is position sizing. People need to know how much capital to commit to their strategy, and there is a mathematical “optimal” answer. In essence, the problem is “betting too large.”This leads John to reference the trading concept of “regret” – the percentage of time you’re in a drawdown. Turns out it’s about 80% or 90% of the time you’re invested. The only times you’re not in a drawdown are when you’re setting new highs, and that’s pretty rare. But most investors hate drawdowns and just don’t do well with this reality (part of the reason why investing is so hard for most of us).There’s far more in the episode, including the most influential books John has read, Bitcoin, currencies, how to trade volatility, and John’s most memorable trades (good and bad). What were they? Find out in Episode 37. Learn more about your ad choices. Visit megaphone.fm/adchoices

We’re back with the first Q&A episode of 2017.We start by discussing the “Zero Budget Portfolio,” about which Meb wrote a recent blog post. The quick idea is that when considering your portfolio, you should start from scratch, or “zero.” Imagine your perfect portfolio – which markets you’d like to own, which assets, tilts, etc.Now compare that perfect, hypothetical portfolio to your actual portfolio. To the extent that your real, owned assets have a place in your perfect portfolio, you’ll continue owning them. Any assets that don’t fit, you sell immediately.But it’s not long before we dive into listener questions. A few you’ll hear tackled are:-         How do I decide whether I should use a robo-service or manage my portfolio myself? How likely am I to underperform a robo? -         We know that value can lag market returns, but should lead over time. What is the time horizon by which you determine whether a strategy like value is successful? -         Are there are country ETFs that you would not trade in a global, low-CAPE portfolio because of country risk? -         How has your timing model performed since you introduced it a decade ago? -         Will you discuss momentum investing versus chasing performance? It seems that a long-only momentum portfolio basically chases what has already gone up. -         Given real world tax issues, is active investing still a better strategy than buy-and-hold? -         Given that 44% of the S&P 500 revenue and profit comes from overseas, is there really a home country bias if you are invested in the S&P? And with this in mind, what is the right allocation to Emerging Markets?As usual, there are plenty of additional rabbit holes, including options, currencies, and even the Baltic Dry Index. What’s Meb’s take on it? Find out in Episode 36. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 35 features one of the original Turtle Traders. “What’s a Turtle Trader” you ask?The story involves Richard Dennis, a great trader from the 1970’s. As the story goes, he made his first million by about age 25. By the early 80’s, he was worth about $200 million. Around this time, the movie “Trading Places” came out (two millionaires make a bet on the outcome of training a bum to be a financial whiz, while taking a financial whiz and, effectively, turning him into a bum). Richard felt he could similarly train a financial no-nothing, turning him into a great trader. Richard’s partner felt it wouldn’t work. So they made a bet. (Though as you’ll hear on today’s podcast, Jerry doesn’t actually believe there was ever a bet.) Regardless, how’d it turn out? Three or four years later, the group Richard trained had made, on aggregate, around $100 million.The episode starts as Meb asks Jerry how he became involved with Dennis, trend following, and the Turtle Traders. Jerry was hooked on the idea of trend following from the beginning. Meb suggests that many people either “get it” or they don’t – meaning they get hooked, buying into the strategy completely, or not. For many people, the philosophy just doesn’t take.Eventually the program ended, after which Jerry moved back to Virginia and started Chesapeake, which basically consisted of a telephone, a quote machine, and his trading rules. Jerry tell us how the company grew and how its trading systems developed. They’ve gone from trading around 20 markets to well over 100 now. Meb asks in terms of conditions, what’s been the most challenging market for Jerry in his career at Chesapeake? His answer – the market since 2008.The conversation eventually steers toward leverage and volatility. Meb says how most people don’t realize how they can tamp down a volatile market through trend following and managed futures. Jerry agrees, and adds that you want to “make the same (volatility) bet” despite different markets, to maintain consistency.Meb then asks why so many investors, retail and institutional alike, have such small allocations to trend following. Jerry gives us his thoughts, pointing toward the inherent bias people have for equities. He also believes most investors truly don’t realize how powerful diversified trend following can be.Jerry thinks people have it backward—they see trend following as an add-on to some other strategy, when in fact, it’s the core. Start with the CTA strategy and maybe add some long-only equities.The conversation then turns toward common investor mistakes, most notably the tendency to hold losses and sell winners short. Simply put, the behavioral side of investing is extremely challenging. This causes Meb to wonder what will happen to the roboadvisors when a bear market finally begins. Specifically, with it so easy to pull your cash out of a roboadvisor (and no live advisor to stop you), how many investors will allow fear to make them liquidate their positions?There’s tons more in this episode, including how Jerry lost 60% in one day, the differences between technical analysis and trend following, the “turtle program” of the future, and the one market that won’t allow futures trading. Do you know which one it is? Find out in Episode 35. Learn more about your ad choices. Visit megaphone.fm/adchoices

It’s a special holiday episode of The Meb Faber Show. We thought it would be fun to combine all the “beautiful, useful or downright magical” contributions from Meb and our various guests into one episode. If you’re one of our listeners who has written in to report how much you enjoy this segment, this one is for you.A quick word – as we move from 2016 to 2017, we want to give a huge “thank you” to all our wonderful guests for having given us their time and wisdom. And, of course, a very special “thank you” to all our listeners. We appreciate your time in tuning in to us, your thoughtful questions and comments, and your overwhelming support.In order to spend time with our families, we won’t be publishing a new episode next week on Wednesday 12/28. We’ll see you in the New Year! Learn more about your ad choices. Visit megaphone.fm/adchoices

It’s another Q&A episode before everyone gets too busy with the holiday swirl.Per usual, Meb has just come back from more travel, this time to Todos Santos, Mexico. He gives us a quick update before we hop into listener questions. A few you’ll hear tackled are:-         I don’t really understand Trend. In order to maximize return, wouldn’t it make more sense to buy below the simple moving average, then hold or sell when above it? I’m just applying common sense – buy when cheaper than average. What am I missing? -         If you were building an investment strategy for the next 30-40 years, would it more resemble the one found in your QTAA paper, an absolute value strategy (similar to what Porter discussed in that podcast), or your Trinity approach, which is more buy/hold with rebalancing? -         Have you ever considered a strategy that buys put option protection for equity portfolios when valuations are historically high? You could buy long puts or long puts/short calls to offset some of the option premium. -         Are recent bond yield increases causing you to tweak your bond allocations in the Trinity portfolios? -         How does your use of momentum differ from Gary Antonacci’s dual momentum system? -         I’m a banker, and can’t tell you how many times I’ve heard a variation of “Rates are so low at the moment, what a great time to borrow.” What are your thoughts on the long-term debt cycle, and how would you “time” leverage?There’s plenty more, as several of these questions send Meb into deep, labyrinthine rabbit holes – one of which involves his thoughts on how to educate children about investing. He believes most parents today do it entirely wrong. So what’s the right way to raise a world-class investor? Find out in Episode 33. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 32 is like no other we’ve done to date. Local guys, Brew and Brett, run a startup in nearby Manhattan Beach – and it’s disrupting the real estate financing market. It’s not long into the episode before the guys give us the overview of how it works.Peer Street invests in real estate debt. Now, when most people try this, there are too many intermediaries. The effect is the yield is stripped out. Peer Street is fixing this, focusing on short-term, high interest rate loans. The guys’ vision is to enable investing in real estate lending to be as easy as buying a stock through an online broker.After giving us their fascinating professional backgrounds prior to starting Peer Street, Brew and Brett dive into how the process work.There’s always been a shadow, niche market in this space. A real estate investor finds a good property that he/she is able to fix up and sell/rent. But to make the deal happen, the developer has to move quickly, and doesn’t have time to get a traditional loan through a bank. In steps a reputable cash lender, enabling the deal. Brew and Brett are enabling retail investors to take part in these localized real estate deals.Meb asks about the range on yields… how many current deals they have… just general top-down metrics to paint the broad picture.Since the end of Oct 2015, the guys have opened around $200M of loans. The average yield to investors is 8.5% net of fees and expenses. The average loan duration is 10 months. And the average loan-to-value ratio is 65%.The guys then discuss how deals are vetted. There are approval processes, several layers of underwriting, a requirement wherein lenders have to commit their own capital, various data analytics, then stress testing of the loans.Meb asks what would happen to these loans in a real estate Armageddon situation.The Peer Street guys tell us they use as much data as possible to mitigate potential losses. And these are only 10-month loans, so to lose money, the borrower has to stop making payments and the value of the property has to decrease by about 35%. To try to protect against this, they run algorithms and compare the data to previous cycles. Then they consider what was the worst decline in that submarket. This helps them do a manual underwrite of the loan, after which they get an appraisal from an independent 3rd party. There’s far more on how the guys manage risk which you’ll want to hear.Next, the conversation steers toward how an investor would actually take part in the deals. He/she can pick from, typically, 3-15 available deals at a time. Or investors can set up an automated system, establishing parameters from which Peer Street would match them with the right investments. Ten or more loans at a time is recommended for diversification, with the minimum investment being $1,000.There’s way more in this episode, including Brew’s and Brett’s vision for how disruptive this could be, where this type of investment would fit into an asset allocation model, and an “imposter Cambria” that has Meb very angry. Curious why? Find out in Episode 32. Learn more about your ad choices. Visit megaphone.fm/adchoices

Experienced investor, Mark Yusko, emphasizes the importance of asset allocation in managing large pools of capital. He discusses the challenges of accessing great money managers and the need to identify them early. Mark also shares insights on when to part ways with a manager and the significance of continuous learning in finance.

As Meb is back from another series of speaking engagements, Episode 30 starts with a brief recap of his travels. But we hop in quickly, first addressing the election. We’ve had several anxious people write in, requesting commentary on the financial markets now that Trump will be taking over. Meb offers his thoughts, which we can reduce to one word: irrelevant.Next Meb gives us an overview of a white paper he’s soon to begin writing – a rebuttal to detractors of Shiller’s CAPE ratio. He provides some convincing points on why CAPE can be an effective timing tool. You’ll want to hear this if you’re a CAPE fan – even more so if you believe CAPE is flawed.After that, we hop into listener Q&A. A few of the questions you’ll hear Meb tackle are:-         How does CAPE do as a valuation metric for a stock index when the composition of the index is changing or there is significant dilution? -         When it comes to value filters like P/B or P/E, how do you rank metrics which can become negative or distorted when they get too close to zero? -         Besides trend following, what other alternative strategies (e.g. long/short, diversified arb, global macro, market neutral, etc.) do you believe are a worthy addition to a balanced portfolio? -         Please address living through drawdowns versus using trailing stops. Discuss the tradeoff between minimizing drawdowns versus potentially missing huge recoveries. -         What do you think of using CAPE in Frontier markets? And does the 10-month SMA timing model work in these markets? -         How do you practically implement the bond strategy laid out in your paper, “Finding Yield in a 2% World”? -         James O’Shaughnessy’s “What Works on Wall Street” references an investing strategy that posted amazing returns for many years. Seems too good to be true. Any insights? Wouldn’t everyone be using this system if it really was this wonderful? -         Any pointers on how to do your own backtesting?As usual, there’s lots more, including the common investor sentiment of “I’m waiting until the uncertainty dies down before I put more money into the markets,” Meb’s thoughts on cash and inflation, and the benefits of systematic investing. All this and more in Episode 30. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 29, we welcome market veteran, Tom McClellan. Meb starts with some background on Tom – he’s been doing financial writing for 20 years, likely making him one of the longest-running financial writers in the business.The guys then provide an overview of Tom’s proprietary market tool, the McClellan Oscillator. The roots of the Oscillator date back decades ago, when Tom’s father, Sherman, was trying to develop a system by which he could better time corn purchases for their farming business. (It turns out, you can get a better price in March.)In short, Sherman eventually crossed paths with some technical analysts who were exploring breadth statistics in the market (advance/decline line). Sherman applied moving averages to the advance/decline line, and a few tweaks later, we got the McClellan Oscillator.Meb then asks about the best way investors can use the Oscillator, and what the signals are telling us now. Tom gives us a quick tutorial, then suggests that the Oscillator is saying “oversold” (keep in mind this episode was recorded on 11/9). It has been correcting since July, but now that election is over, maybe we’ll see that change.With the election in mind, Meb brings up the sentiment he’s heard from many investors: “I want to wait until the election is over and things are more certain.” Meb finds this amusing, as when are the markets ever certain?This segues into Tom’s election indicator. It had predicted Trump. Tom gives us more details about the mindset behind his indicator. In essence, we see market movements reflected in the poll numbers. In other words, the market is a leading indicator for where the polls will go.As evidence, he references the election when Bush/Gore was too close to call, discussing this through the prism of what the markets were doing at the time. And in this most recent election, the indicator had called for Trump to win though the polls didn’t. Tom says that’s because the poll numbers before the election hadn’t reflected the big decline in the stock market in the week leading up to the election – but that decline did show up as a change in the actual vote.This sets the guys off on a conversation about “sentiment” which is an indicator Tom loves. Then Meb steers the conversation toward interest rates and the Federal Reserve. It turns out, the guys believe you can tell where the Fed should set the Fed Funds Rate by looking at what the yield is on the 2-year note. It’s when that doesn’t happen that we see market issues. Tom gives us an example from Bernanke’s tenure.Meb then points toward another chart from Tom: the S&P verse Federal Tax receipts divided by GDP – in essence, how much the government is collecting in taxes. What’s the relationship here? Well, if you’re against the government taxing too much, you’ll likely agree with the findings.There’s more fascinating conversation about Tom’s various charts. For instance, the common conception is that a slowdown in the economy leads to an increase in crime. Tom says not true. Do you know what is correlated to an increase in crime? Inflation. What inflation does in Year 1 is what crime will do in Year 2.Meb then asks about the biggest mistakes that investors make when creating their own charts. Tom tells us that people want to simplify too much. “Just give me the one chart that will work.” Unfortunately, there is no holy grail. If you’re looking for easy answers, the stock market is not the place to find it. Look for more obscure indicators. If everyone is using the same indicator, there’s no value there.There’s lots more, including a conversation about “value.” Turns out, Tom doesn’t really use value at all. In fact, he says there are only two variables that matter. What are they? Find out in Episode 29. Learn more about your ad choices. Visit megaphone.fm/adchoices