The Meb Faber Show - Better Investing

As we recorded Episode 28 on Halloween, it starts with Meb referencing his costume from the prior weekend’s festivities. Can you guess what it was? He stayed true to his financial roots, dressing as Sesame Street’s “Count von Count.” (Sorry, no photographs.)But the guys jump in quickly, beginning with the subject of Larry’s 15th and latest book – “factors.” Larry tells us that the term “factor” is confusing. He defines it as a unique source of risk and expected return. So which factors should an investor use to help him populate his portfolio? Larry believes there are 5 rules to help you evaluate factors: 1) Is the factor “persistent” across long periods of times and regimes? 2) Is it “pervasive”? For instance, does it works across industries, regions, capital structures and so on. 3) Is it “robust”? Does it hold up on its own, and not as a result of data mining? 4) Is it “intuitive”? For instance, is there an explanation? 5) Lastly, it has to be “implementable,” and able to survive trading costs.The guys then switch to beta. Larry mentions how valuations have been rising over the last century. He references how CAPE has risen over a long period, and points out how some people believe this signifies a bubble. But Larry thinks this rising valuation is reasonable, and tells us why. Meb adds that investors are willing to pay a higher multiple on stocks in low-interest rate environments such as the one we’re in.Next, Meb directs the conversation toward a sacred cow of investing – dividends. He asks about one particular quote from Larry’s book: “Dividends are not a factor.” Larry pulls no punches, saying, “there is literally no logical reason for anyone to have a preference for dividends…” He believes investors over overpaying for dividend stocks today. He thinks it’s unfortunate the Fed has pushed investors to search for yield, inadvertently taking on far more risk. Dividend stocks are not alternatives to safe income. There’s plenty more on this topic you’ll want to hear.Eventually the conversation drifts back toward market values. Larry tell us that when the PE ratio of the S&P has been around its average of 16, it has about a 7% expected return. So now that the CAPE is roughly 25, and the expected real return is around 4%, some people are shouting “Sell! Huge crash coming!” Larry disagrees and tells us why.But the guys just can’t leave dividends alone. They swing back toward the topic, with Larry telling us the whole concept of investors focusing on dividends literally makes no sense. If you want a dividend, create your own by selling the commensurate number of shares.There’s far more in this episode that you don’t want to miss: the correlation of value and momentum… trading costs… the use of CDs in your fixed income allocation… corporate bonds and an eroding risk premium… the state of the ETF industry 10 years from now… There’s even a warning – if a former Miss America is pitching you a mutual fund, beware… In what weird context does that advice apply? Find out in Episode 28. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 27 starts with a quick note from Meb. It’s a week of freebies! Why? Meb is celebrating his 10th “blogiversary.” (He’s officially been writing about finance now for a decade.) Be sure to hear what he’s giving away for free.But soon the interview starts, with Meb asking Porter to give some background on himself and his company, as Porter’s story is somewhat different than that of many guests. Porter tells us about being brought into the world of finance by his close friend and fund manager, Steve Sjuggerud.This conversations bleeds into Porter’s thoughts on how a person should spend his 20s, 30s, and 40s as it relates to income and wealth creation. But it’s not long before the guys dive into the investment markets today, and you won’t want to miss Porter’s take. In essence, if you’re a corporate bond investor, watch out. Porter believes this particular credit cycle is going to be worse than anything we’ve ever seen. Why? There’s plenty of blame to go around, but most significantly, the Fed did not allow the market to clear in 2009 and 2010, and it means this time is going to be very, very bad. Porter gives us the details, but it all points toward one takeaway: “There’s going to be a big bill of bad debt to pay.”Meb then asks what the investing implications are for the average investor. This leads to Porter’s concept of “The Big Trade.” In a nutshell, Porter has identified 30 corporate offenders, “The Dirty 30.” Between them, they owe $300 billion in debt. His plan is to monitor these companies on a weekly basis, while keeping an eye out for liquid, long-dated puts on them that he’ll buy opportunistically. He’ll target default-level strike prices, and expect 10x returns – on average. Meb likes the idea, as the strategy would serve as a hedge to a traditional portfolio.Next, the guys get into asset allocation. Porter’s current strategy is “allocate to value,” but for him that means holding a great deal of cash. Meb doesn’t mind, as wealth preservation is always the most important rule. This leads the guys into bearish territory, with Porter believing we’ll see a recession within the next 12 months.This transitions into how to protect a portfolio; in this case, the guys discuss using a stop-loss service. Porter finds it invaluable, as most people grossly underestimate the risk they’re taking with their investments, as well as their capacity to handle that risk. He sums up his general stance by saying if you don’t have a risk management discipline you will not be successful.Next, the guys get into the biggest investing mistakes Porter has seen his subscribers make over the years. There’s a great deal of poor risk mitigation. He says 95% of his own subscribers will not hedge their portfolio. Meb thinks it’s a problem of framing. People buy home insurance and car insurance. If we framed hedging as “portfolio insurance” it would probably work, but people don’t think that way. He sums up by saying, “To be a good investor, you need to be good at losing.” Porter agrees, pointing out how Buffet has seen 50% drawdowns twice in the last 15 years. If there’s a takeaway from this podcast, it’s “learn how to hedge.”There’s far more, including what Porter believes is the secret to his success. What it is? Find out in Episode 27. Learn more about your ad choices. Visit megaphone.fm/adchoices

If you’re ready to dive straight into the deep end, Episode 26 is for you. The guys waste no time, starting off with complicated topic of currencies. Jeremy takes issue with the currency-stance belonging to some former, unnamed Meb Faber Show guests. Specifically, he challenges the idea that currency hedging is expensive. Not true, he says. It’s only “selectively” expensive. You can actually get paid to hedge certain currencies. He gives us more details, leading to his overall takeaway: You should be hedged a lot more than you are. Meb then asks about any rules that might be applied when using a dynamic currency-hedging strategy. Jeremy gives us his thoughts, telling us when we want to be hedged versus when we don’t, as well as two good signals to use – interest rate differentials and momentum. Where are we overall today? Well, Jeremy says that there is no country so cheap that his shop would take their hedge ratio to zero. Eventually, Meb switches the topic to factor investing. Jeremy gives us his take, noting that minimum vol is where things are most expensive. The guys then discuss factor investing as it pertains to the bond space – in essence, moving away from market cap weightings. Why is that important for bond investing? Well, do you want to give the most weight to the countries issuing the most debt? Unlikely, but that’s how market cap weighting works with bonds. Next, Meb steers the conversation toward liquid alts, specifically managed futures. That’s followed by a great discussion on corporate buybacks. Gotta watch out for that dilution from new share issuance. Interestingly, it turns out that buybacks are largely a U.S. phenomenon. Jeremy agrees, but points out some spots around the globe where that might be changing. As we near the end of the show, Meb asks about the opportunities Jeremy sees going forward. His response in a nutshell? “People are underinvested overseas.” There’s plenty more, including an asset class that is coming up on being down a whopping six years in a row, as well as how Meb hacked a VPN service that enabled him to watch the last Super Bowl from a tiny village in Japan. How’d he do it? Find out in Episode 26. Learn more about your ad choices. Visit megaphone.fm/adchoices

We have some great guests lined up in the coming weeks, so we figured we’d squeeze in another Q&A episode. This week, Meb is back from traveling yet again, this time to The Caymans. The show starts with Meb giving us highlights from the trip, as well as one low-light (waking up one morning to find a welt on his head, and hoping it isn’t Zika). This transitions into a topic recently covered in one of Meb’s blog posts; of all the animals that people find most terrifying, lions and sharks are near the top of the list. But statistically, lions and sharks are responsible for only a tiny amount of human deaths per year. You know what kills 725,000 humans per year – yet few fear (until recently)? Mosquitos. Similarly, many investors are terrified about the outcome of the U.S. Presidential election. But this election isn’t likely to “kill” a portfolio. On the other hand, you know what is? The mosquito known as “fees.” Eventually, the conversation gravitates toward listener questions. A few you’ll hear Meb tackle are:-         What are some of the best ways and resources to learn about markets and investing? -         (Dovetails into…) Why don’t we hear Meb discuss single-stock fundamental analysis more often? -         What does the typical day look like for Meb and other successful investment professionals? Habits? Amount of reading? How much sleep? And so on… -         How does an investor tell the difference between an investment strategy that’s simply “out of favor” (and therefore, underperforming) versus a strategy that has truly lost its effectiveness (and underperforming)? -         One of the variables in Bogle’s formula for estimating returns is dividend yield. Why wouldn’t you substitute shareholder yield instead? -         What are the pros/cons of protecting the downside by buying puts versus using trend following? -         Assuming an investor is a huge risk taker and can handle it, should he put all his money in the asset class with the highest expected return – for instance, be “all in” Russia?As usual, there’s lots more, including Meb’s upcoming travel schedule. He’s going to be in Orange County, New York, Richmond, and D.C., so drop him a line if you’ll be in the areas. All this and far more in Episode 25. Learn more about your ad choices. Visit megaphone.fm/adchoices

Exploring historical investment bubbles, the podcast delves into famous bubbles like the South Sea Company and Dutch tulip mania. Strategies for capturing bubble upside while protecting from fallout are discussed, with a focus on trend following using the 10-month simple moving average. The episode highlights the importance of risk management and surviving market bubbles through historical examples.

Financial expert Gregg Fisher discusses the behavioral side of investing, highlighting how the best strategy may not always be the right one. He emphasizes the importance of experience in investing and the need for diversification. Fisher also talks about combining value and momentum factors in investing, emphasizing the significance of being different than the average investor.

Episode #22 is another “Listener Q&A” episode. Meb has been traveling again, this time giving several speeches. So we start the episode with Meb giving us the highlights from his most recent talk in Vegas, in which he details four mistakes that investors are making right now. Next, we get into our listener Q&A. Meb tackles:-         Is shareholder yield a smart beta factor in its own right, or is it a combination of factors?-         Should a shareholder yield strategy outperform portfolios with size, value, and momentum tilts?-         Is there a reason why Meb rarely talks about adding small caps to a portfolio?-         What are the merits of investing in ETFs versus bonds directly?-         Can sentiment indicators be used to add tangible long-term value to a portfolio?-         How does Meb define risk, a term he uses quite often?-         While certain global countries with low CAPEs appear attractive, if the U.S. entered a correction, wouldn’t those foreign countries follow, negating the decision to invest there?There’s plenty more, including talk of gambling in Vegas (and counting cards), Meb’s high school reunion, and some of the worst investment losses Meb ever suffered (think “biotech” and “options”). Hear it all in Episode 22. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 21 starts with a “thank you” to Michael, as it was his advice on starting a podcast that got “The Meb Faber Show” off the ground. But Michael and Meb quickly turn to Michael’s expertise, trend following. This is how Michael summarizes it: “We don’t know what’s going to happen. We can’t make a prediction worth a damn. The market starts to move, whatever that market might be. We get on board, and we don’t get out until it goes against us and we have an exit signal.” They then turn to the infamous “turtle” story. It involves Richard Dennis, a great trader from the 1970’s, who 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. How’d it turn out? Three or four years later, the group Richard trained had made, on aggregate, around $100 million. Meb then suggests that a profitable strategy such as trend following, that seems to work, should attract lots of investor dollars in the long run. So why then doesn’t trend following have more “big money” institutional investors using it? Michael points toward drawdowns – “the scarlet letter of trend following” – even though buy-and-hold has plenty of drawdowns too. The guys then agree that all investing is purely speculation. We like to believe there’s more certainty, but that’s not the case. They then bring up a quote from Ed Seykota: “Win or lose, everyone gets what they want out of the market. Some people seem to like to lose, so they win by losing money.” Michael tells us this is true not only for investing, but life as well. Next, Meb asks about Michael’s podcast, which results in a great recap of how Michael got started and how he grew it to be the success it is today. The guys then discuss the mass of great investing content out there, for example, the hours of great interviews from Michael’s podcast—where is a new listener supposed to start? It’s overwhelming. Michael gives us his thoughts. This leads to Meb’s latest entrepreneurial business idea (which some listener should run with and make lots of money). There’s plenty more, including the guys touching on sensory deprivation, yoga/meditation, and of course, what each of them find beautiful, useful, or downright magical – Michael has about seven for us. What are they? Find out in Episode 21. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode #20 is another “Listener Q&A” episode. Meb starts by telling us about his frustration after doing a guest panel on CNBC earlier in the morning. (Hint: questions about The Fed tend to annoy Meb…also, if you ever chat with him in person, do not refer to a 1% market move as a “major” move.) But soon we change gears, and Meb answers questions including:-         When following a trend strategy based on a 100 or 200-day moving average, is the idea to buy/sell on Day 1 of the broken trend? Or is it more nuanced?-         Is there some magic number of days (when following a trend strategy) that is the right length?-         (The above questions dovetail into a conversation about the #1 mistake the majority of investors make when using a trend following approach – expecting it to be a return-enhancing strategy.)-         What are good trend strategies for sideways/chainsaw markets?-         How about combining a momentum strategy with a simple 10-month trend strategy?-         When looking at managed future funds, aside from cost, any thoughts on what might warrant choosing one fund over another?-         (This dovetails into an interesting admonition from Meb in which he suggests listeners should do their own homework on issues like this—after all, if you don’t fully understand a fund’s strategy and have your own reasons for buying it, how will you know whether a 20% drawdown reflects a bad strategy, bad execution, or just bad luck?)-         Can you earn a 10% CAGR with Dalio’s All Weather portfolio without fear of a major drawdown?-         (This dovetails into a question about asset allocation – does it really dominate long-term returns? A listener thought he heard a difference of opinion between Meb and a guest on a past episode.)There are more questions, including one hand-written and mailed to Meb by a college student. He wants to know what qualities, skills, and abilities Meb looks for in new hires at Cambria, as well as what unique skills a college grad should bring to his/her employer. What’s Meb’s answer? Find out in Episode 20. Learn more about your ad choices. Visit megaphone.fm/adchoices

Jonathan Clements, an expert in money and happiness, discusses the link between income and well-being, advocating for experiences over material possessions. He highlights common investment mistakes and offers a three-pronged solution. The conversation extends to retirement planning, delaying Social Security benefits, and balancing career choices for financial stability and happiness.