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Episode #20: “Listener Q&A”

Episode #20: “Listener Q&A”

Guest: Episode #20 has no guest, but is co-hosted by Meb’s co-worker, Jeff Remsburg.

Date: 9/12/16

Run-Time: 39:29

Topics:  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.

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Transcript of Episode 20:

Welcome Message: Welcome to The Meb Faber Show where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Sponsor Message: Today’s podcast is sponsored by YCharts. YCharts is a web-based investing research platform that I’ve been subscribing to for years. In addition to providing overall market data, it offers investors powerful tools like stock and fund screening and charting analysis with Excel integrations.

It’s actually one of the few sites that calculates both shareholder yield as well as 10-Year P/E ratios for stocks, two factors that are notoriously hard to find elsewhere. The YCharts’ platform is fast, easy to use, and comes at a fraction of the price of larger institutional platforms. Plan starts at just 200 bucks a month. If you visit go.ycharts.com/meb you can access a free trial and when you do, you’ll receive up to 500 bucks off an annual subscription. That’s go.ycharts.com/meb.

Meb: Hey everybody, it’s Meb. It’s end of summer time here, football season starting up. We got Jeff, I figured back in town for a little bit we would do catch up on some of the Q&A episodes so a lot of the feedback. We’ve got a gazillion questions. Jeff, welcome?

Jeff: Hey, how’s it going?

Meb: Not bad. I just got back from the Chicago, the Morningstar ETF Conference where I was on a panel with former podcast guest, Wes Gray and Gary Antonacci, chatting about momentum, and just got back home a few days ago.

Jeff: We have not seen you in the office much for a while. It sounds like you’ve been out for, how long has it been now?

Meb: A little road weary. Chicago is great. I was also giving a talk in Vancouver and then going to Las Vegas next week to give a few talks. I’m actually a little bit frustrated today, maybe you’ll able to hear it in my voice. So if I’m a little nasty, in short you’ll know why, but I did a little TV, I did CNBC today. And listeners, I’ve done this probably well over a hundred times on the various networks and it’s about the same as me writing a book. Every time I’ve done I’m like, I’m never gonna do that again, because one of the challenges with doing TV is it’s such a short news cycle. So you’d go on and you get a couple of minutes, right?

And I get it and I kind of…the frustration is a little bit of the format but I did it today and I’m on with Santelli and the whole crowd, so it’s like a octobox with a bunch of people in CNBC. And their market has been moving the last few weeks. It’s the same old questions. They’re asking me, somehow they’re like, “Meb, I know you’re the more a long-term investor. We’ll put a link in the show notes, you guys can follow along.” And there’s been these major moves over the past week and I already want to stop there and be like, “No, these aren’t major moves, 1% move in the market, 2% is not a major move, that is a normal market move. A 4%, 5%, 8% move in a day is a normal market move. So I’m already a little frustrated.

And then they said…then they started bringing up the all-time worst word, which is the Fed, and I’m just like already starting to have meltdown, like I have a very thoughtful answer basically saying, “Look, I bring up our Digital Advisory which is just launched in the last couple of weeks and talk about how long term investors can put together a great portfolios that they don’t have to worry about what’s going on the Feds or works in any market environment and inflation, deflation. And then we do our tilt stories, value and momentum and trend following, so that no matter what, you have a portfolio that’s responding to what’s going on. And then they make this offhand comment. Did you see it by the way?

Jeff: I did not.

Meb: Okay. They make the offhand comment where, and I generally like all of the anchors and so I’d sympathize with their job. There’s no one who’d be worst at their job than I would, so I can’t really give them too much crap. But they’re like, “Oh, great plug,” and Bill who have been on with me a million times is like, “Yeah, great commercial.”

And part of that just hit me in the wrong way, and so I’m sitting there just starting to fume and there’s smoke coming out of my ears and I’m getting ready to be like, “All right, listen you numbnuts, let’s talk about commercials. You guys have people on here every day, these mutual fund managers, the charge on average is 1.25%, 1.5%, 2%, there’s something like 30 billion in asset allocation mutual funds. So it’s essentially the size of the entire robo-industry, they charge over two percentage points per year.

And let’s forget about, I mean I didn’t know their stat that it was once over one and a half or 1% and it was like 300 billion, right? So these guys come on and I looked at the stat and we talked about this before, 71% of asset allocation mutual funds, the manager has zero dollars investing in the fund. So this people come on all day long and tilt their funds and give people advice and talk about their funds and what you should do and how you should listen to Fed and they charge 2% in these points a year, and then they don’t invest in it, they’re cooking. And then here I am being like, “Hey, we have a no-fee offering. It’s this great balance offering.” I invest all of my money in these strategies.

Anyway, I’m obviously a little twerked but, so you heard me again, I’m refusing to go on TV for indefinite future. So there’ll be a lot of Q&A episodes coming up.

Jeff: Well, speaking of Q&A let’s tackle, there’s more today. Thanks to everybody who has written in and we’ve gotten a great deal of questions. And actually there’s so many that we can’t tackle them all right now. So what I’ve done is I’ll try to pick a few that I feel are most representative of questions that could have answers that are applicable to the broadest amount of people out there. So if you wrote in with something that’s a little bit more specific to you or your own situation, a little bit more narrow and focused, probably we won’t be able to get to those. And if you want to try to write in next time and just broaden it a bit, it will probably increase the odds that we’re able to tackle it.

So why don’t we just start off here, Meb? First one is a bit about a recap on trend. We have a few questions which I believe you’ve actually covered before either on the past episode or on some of your papers, but because we have new listeners trickling in from time to time, it’s never a bad thing just to revisit a couple of topics.

So this one really is, if one were to follow a simple moving average as the trend metric for example, the 100, or 200-day moving average is the idea to buy or sell on day one of a broken trend or should one wait three days following the broken trend or on heavy volume or as is more likely is there a nuance approach to the trend following idea?

Meb: So back when we published our first white paper, “Quan Approach to Tactical Asset Allocation,” it had a very simple rule. It was literally the most simple rule you could come up with on the planet. It was if the market is above the 10-month simple moving average, you’re long the asset, you updated once a month, and that’s it. You wait a month, you updated again, and if you’re above, you’re long, if you’re below you’re out.

The 10-month simple moving average roughly equivalent to 200-day, simple moving average, the most famous trend indicator, the most famous indicator probably in all of investing. It’s so funny because over the years people would read this paper, and there’s literally one rule, one equation in the entire paper, and people would email me and I’ve had hundreds, if not thousands of emails about this saying, “Hey Meb, I read your paper. So do you implement this? Do you do the 200-day moving averages? Do you wait for it to break 1% below or do you only update it every day or do you update it once a month? You know, how do you go about this? Does it matter…?”

And I’d say, “Wait…” like why are you trying to introduce subjectivity into a simple rules-based process? It’s almost always people wanting to put their own spin on which is fine but really they want to reintroduce their ability to make a decision into a rules-based methodology. And so this question made very well have been actually literally, how do you define trend in which case it’s I don’t care, pick your indicator. It could be 200-day moving average, 100-day weighted moving average, it could be 30-day breakout, another trend falls on the podcast said three-year all time highs. It doesn’t matter, but then stick with it.

And don’t try to second guess, I mean, I can’t tell you how many people back in ’07, I remember I just put out the paper and the first kind of crack in the multi-asset class big bear market was real estate Reeds Peak, and so Reeds started to go down. Then I get these emails to be like “Wow, Meb, is this really a good time to be selling Reeds?” I know they’re below their long-term average, but the old curve is doing this or the Fed is doing that or whatever, right?” So they’re looking for a reason to try to ignore the signal, same as probably in ’09, people were looking for a reason, “Oh, no, no, well, you can’t buy this. It’s a great depression and the fed…” who knows what.

So the interesting part about that is kind of in two parts, one is that, picture indicator and I don’t have a preference which, I bet they’re all similar. You could even use multiple like we talked about with the value composite. You could use a 50-day, a 200-day, a 3-year, blend them all for whatever so that you’re not all in on one indicator but second is the whole point of it, this goes back to the famous Turtles experiment, which we’ll be talking about in the coming podcast is, the guy who started it, they’re like, ‘Hey, you’re making your rules public. Isn’t that going to ruin?” And he goes, “I could publish my rules in the newspaper and no one would follow it.” Because for that reason…and people always try to reintroduce their own bias in decision-making into the process.

Jeff: Well, in this situation let’s assume that this person wasn’t trying to introduce his own bias, what if this is purely from a mathematical perspective. Is there some amount of days or whatever that significantly improves getting you out before a crash, or was it Tudor who got out of the 200-day?

Meb: We showed, yeah, we’re talking about the ’87 crash, talking about using the 200-day moving average.

Jeff: So if you’ve been using something significantly larger would that have…?

Meb: It would have been long. All right, so that only matters, I mean I think you could go from 50 on out of the 300-day for example, I think that we showed in our original white paper on the monthly level. It really didn’t matter, 10-months moving average parameter was not ideal on any measure of return or risk adjusted. So it showed what we call parameter stability.

So the problem is if you had something where it’s like only the 186-day moving average is working, everything else didn’t. That’s a problem. But it broadly works across, the whole scale, and the whole point is not, again, it’s…that you’re gonna be avoiding the really big losses, the really big long bear markets. And it’s not the…ironically, I don’t think it’s the 1987 style events where it’s really going to help. It’s the really long, drawn-out bear markets where I think it helps the most, particularly the ones with a great depression sort of level depth.

Jeff: All right, so that’s an interesting perspective that I think a lot of people potentially miss, is what your goal is in using trend following. A lot of people have think or would say that the goal is they want to avoid ’87 but you’re saying no, that’s really more of a blip on the radar compared to the broader multiyear bear market type situation.

Meb: Most people get wrong about trend following is the vast majority of the benefit of trend following, the vast majority. It is not a return enhancing strategy. So if you think you’re magically is gonna take stock returns from 10% to 20% by the time in the market’s trend following, I’m sorry to burst your balloon but the whole point of trend following on a single market is it traditionally reduces the volatility and resist a drawdown, traditionally. And it might not even. I mean there’s some markets that might not. And then the whole key, you put together enough varied markets when we had Crittenden on, we were talking about they trade over a hundred markets around the world that are uncorrelated, then you come up with an entirely new sort of return stream which is the massive diversification across them in these markets.

And when you reduce the volatility and drawdowns across all of them it has an additive effect. And so while you may not miss the short move in coffee or the Japanese Yen, you probably will get it in the Pound or European stocks or coco, whatever it maybe. So one of the biggest problems that people always want to look at it on say the SMP which has worked wonderfully on but it may or may not work on any given month or any given year even in a given decade, but traditionally it’s worked well in long bear markets.

Jeff: This actually segues in well to the next question which is what are a good mix of trend strategies for sideways or chainsaw markets?

Meb: Sadly, trend following in general usually doesn’t work for sideways markets. I mean trend following…again, I talked about being my “Desert Island” strategy, Managed Futures as one example, massively diversified long/short across many markets. And then I’m seeing again pairing that with something like a buy and hold globally, I mean the way that we do it with the Cambria Digital Advisor, the Trinity portfolios we do half in buy and hold and half in trend following.

So that’s a nice pair, when markets maybe going sideways, the buy and hold portfolio is probably great. You’re getting income from all of the various investments, you’re getting dividends and yield and everything else. Trend following, maybe the biggest risk to trend following is the whipsaw, going back and forth, getting along as soon as it goes down and then you get out and it goes back up and back and forth, which we haven’t really seen in a lot of markets lately. There’s actually been some great trends over the past few years.

Now, if you’re running a trend following portfolio and you specifically want to avoid that there’s a lot of things you could do like short-term mean reversion type systems or code in a multisystem approach that will do okay or have exits or entries when a trend following approach, the trend following phrase, trend is your friend to advance in the end, so that point where you’ll never pick the top and bottom with trend following but when you have something that maybe a top or bottom picker. Even if that system isn’t positive expectancy of return it may diversified enough to improve the overall system.

Jeff: How shorter term are we talking here?

Meb: I mean, I don’t know, I don’t spend that, I don’t care that much about this topic so I don’t spend really any time looking into it. So, there’s gazillion of examples that we could talk about where reading some more books on equities for example that is a great system…there’s a quan system they’d buy stocks, they’d on 10% on the day, exit end of day.

That system is not gonna correlated really to anything else, or other types of short term daily or weekly type or extended systems. So for example, would be, “Hey, we have a market SMP.” And when it gets 30% away from its 200-day moving average will exit or reduce our position or go short or something like that or when it goes x-amount of standard deviations away.

And so there’s ways you can code in to the money management rules that either reduces or expands the positions based on, how stretched that market maybe to reduce the impact of a move that goes against your current position.

Jeff: All right, let’s go to the next one here. They’re all related so it’s a good sort of topic to be on here. One of the problems of momentum investing is a momentum crash which comes with a high max drawdown. How about combining momentum investing with your simple 10-month trend strategy as a risk management tool? Buy momentum stocks when they are up trending and selling them even before the rebalancing period in case they’re down trending.

Meb: There’s a reasonable idea in concept but, we talked about this actually on our panel in Chicago where one of the biggest challenges with trend following and depending on who you ask. AQR did some presentations in the morning where they talked about momentum, it survives transaction cost but other academic say, one of the biggest promise of momentum depending on how you trade it is certainly transaction cost. And so if you start not only trading a momentum strategy but then also trading a hedge on top of that strategy or moving in and out of the stocks on top of that you just got to be careful about transaction cost. That is just the caveat.

So, when the traditional academic literature talks about a factor you have to be careful whether it’s value, whether it’s momentum, whether it’s size premium, so large cap versus small cap. They often talk about it in a long/short context, meaning they go long the high momentum stocks and short, the low momentum. They go long cheap value, the short expensive stuff. They go long small caps, short-large caps. And so you have all of a sudden double exposure.

And so a lot of people confuse this, so when you talk about momentum and the press talks about it, sometimes the academics are talking about a momentum crash, so, ’08 for example. The momentum stocks that happens is a turning point because let’s say when the market is going down, right? And let’s say the depths of the bear market in the end of ’08 beginning of ’09.

The good momentum is probably in a lot of the safe stocks, it’s probably the utilities or stocks that are historically safe or great balance sheets, whatever, right? And a lot of the bad momentum would have been in the junk, the stuff that was just getting crushed in late ’08. When it bottoms and you have the market moved 10%, 20%, 30% very quickly everything reverses. So it’s the junk, the stocks that are trading its super levels that have been disseminated 50%, 80%, 90%, 95% that all of a sudden have a 50%, a 100% moves off the bottom. So theoretically what you had been long and short at the bottom is exactly opposite what you want to be long and short as it goes up.

So I actually did a post on this years ago called something along the lines of “How to Fix Market Neutral,” and meaning…so let’s say you have a market neutral strategy applied to momentum. So your long momentum stocks, your short poor momentum stocks, the problem with that is that you’re fighting a headwind. So equity markets rise overtime and so there’s a risk premium there for owning them.

So the fact that your market neutral means you’re running into the wind because you’re short just as much as you are long. One of the ideas I said, “Look, it makes a lot more sense to just reduce your short exposure as the market declines.” Because you don’t really want to be market neutral or short as much long when the market is already down 50% or 80%, because that’s when you really see the face rippers. And so the basic strategy said something along the lines of for every 10% of the market went down, you reduced your short exposure so that by the time it was down, whatever, 50% you’re long-only, or something like that.

So that’s one way of removing the sort of short constraint, if you want to do it in the first place. And so if you talk about crashes from just a single factor perspective, it’s usually not as bad if you’re long-only as when you’re a long/short or market natural. Because you have to be right or wrong twice. So a lot of the hedge funds example, when they get into trouble its they get into trouble because they said they may have their world view, say a long/short stock fund. They have their world view and they’re long is good stocks, they’re short is bad stocks. And they get into an environment where they don’t realize that it’s actually the same bet and so, what’s their long goes down and what their short goes up and they lose twice. And so that’s when you get into the big drawdowns and loses.

Jeff: One of your early points on the subject that was about the transaction cost of that double exposure, were you implementing this in the IRA, would you feel more confident on it or…?

Meb: No, if you talk to…that’s taxes. So that’s separate, that’s taxes you’re paying on it. I’m talking just on bid-asks and commissions.

Jeff: Okay, I got you.

Meb: But, we talk to Eric Crittenden, and I mean again, shorting stocks is tough, it’s really, really hard to be able to pick stocks on average. I think most hedge funds don’t generate a lot off of there and Eric was talking about, they just use the stock indices to reduce exposure. But our favorite quote when it comes to risk on reducing exposure is that, “If you want a hedge risk, just don’t take it in the first place.” Reduce your exposure until you’re comfortable and can sleep at night.

Jeff: Fair enough, all right. Let’s move on to the question here. This is about Managed Futures, as you stated in the podcast, long board ASG and AQR are the three major players in the space that don’t have multiple layers of fees. I found them to have a roughly 0.8% correlation to each other over the past couple of years, based on that I’ve opted to invest primarily in the lower cost AQR funds. Aside from cost, do you have any thoughts on what might warrant choosing one diversified trend following managed futures fund over another?

Meb: Again, it’s…obviously, I can’t recommend funds in this podcast but it’s kind of a do your homework. Find an offering and understand it on your own. You shouldn’t be asking me, you should be going through all the literature, reading the perspectives, reading the presentations, sitting on webinars, say, “Do I understand the strategy. Could I explain the strategy to someone else? Do I fully comprehend what they’re doing?” Because if not what’s going to happen is that strategy or fund is going to lose 20% or one-quarter and you say, “I don’t know if they lost it because the strategy is junk?” Or because they’re doing something they weren’t supposed to be doing or it was just randomly, the market.

And so you got to be comfortable, and there’s a big opportunity. We’ve talked about this on the podcast before. I think there’s a great opportunity to write an investment newsletter or boutique focused on the alternative space. They’re publicly available alternatives, so not the private funds but rather just a mutual funds in ETF. So there’s thousands of these out there. Most people don’t understand them. There’s a million-dollar idea for your podcast listeners.

Jeff: It seems like I’ve heard you do this a few times, where you turned it back on your listeners and the idea is an essence that there are so few, really true black and white rules that are right in investing. So much of it is you find a strategy or something that works with your temperament but then you have to stick with it. And the real devil in the details is when you forget your own self, you forget your own strategy and you end up hopping around and you don’t stay consistent, that’s when there’s a lot of trouble. Is that accurate or…?

Meb: Yeah. I was reading an interview on a magazine on the plane with John Malkovich, the actor, and he’s talking about all these Q&A questions and somehow it came up that he was in investor in Madoff, and it’s interesting because that’s a great example of being invested in something you have no idea what they’re doing. Because if you look at that, I mean that you asked and, let’s get ignored the 50 red flags about it, but one, it’s just like most of those investors I assume wouldn’t been able to explain what he does or he has investment strategy.

So if you can’t explain or you don’t understand it, just don’t invest with it. I mean Managed Futures look, I like it, it doesn’t mean you need to like it. It doesn’t mean any of these investors even need it, okay. So for example, I was talking to a reporter and they were trying to get me to talk bad about the Robo-Advisors. And I said, “Look, I think they’re perfectly reasonable investment strategy. It’s a Modern Portfolio Theory, its buy and hold. It’s low-cost. It’s better than probably 80% of what’s out there already.” And so, yes, do I think the way that I do it and we do it is better? Yeah, I do, it fits my personality. Do I think it’s bad? No. There’s a lot of investing strategy. They’re “Coffee Can” portfolio. What’s wrong with that? Nothing, it’s not ideal, but it’s certainly better.

So thinking about a lot about these ideas it’s what are you comfortable with, what can you understand. My biggest nightmare as a money manager, my number one concern is having a client that has expectations that don’t align with mine or having them not understanding what we’re doing. And here’s an example, I was listening to Mauboussin’s interview with Ritholtz on Masters in Business. Listeners, if you have to listen to one other podcast Barry is a great one, and Mauboussin was talking about a psychological study.

And he said there’s two people, one person has 10 very famous songs in their head, so think Happy Birthday to you, right? And then the other person is listening. So the first person who has a knowledge would tap them out on the table and try to get the person to guess what they were. They then pulled both of them afterwards and they did this, obviously, with a hundreds of people, they pulled the person who knew the songs, “What percent do you think the other person got right?” And he said 50%.

Jeff: No way.

Meb: And then they said, “What percent did they actually get right?” And it was 3%. And the point of it is like there’s this burden of knowledge and information. So as investment advisors, if you’re a professional investor listening to this, the biggest complaint about investors when they come to sit down with the advisors, one, the advisor talks about themselves. So the advisor sits down and says, “We’ve been in business for 20 years. We managed $4 billion dollars, yada-yada.” Who gives a damn, right?

The client comes in and want to be like, “All right, how is this about me?” And their biggest fear is feeling stupid, honestly. I mean, and you’d listen to enough of these clients who have talked about it or studies about it because they come in and they’re fearful and for good reason. It takes decades to learn a lot of the investing knowledge and expectations. So the biggest nightmare I have is talking to someone or having a conversation and always remembering, “Hey, look, they don’t start with this knowledge of the history and what’s happened in the investing markets.”

And so you always got to start from the standpoint of let’s keep it simpler than more complex. And there’s nothing that’s more complex than Managed Futures, particularly from any investors because it involves derivatives, it involves some form of leverage essentially. In some cases, it involves structures in the Caymans which I’m going to give a speech in on October. By the way if you happen to be in the Caymans, anyone, I’ll be there. I’m doing my best to avoid any mosquitoes.

Anyway, so look, I love Managed Futures but I’m not going to be the first to give advice. It’s find a process that you’re comfortable with whatever it maybe.

Jeff: It actually dovetails onto a question next about investor expectations. Meba, read your article related to the Tony Robbins book in which he details out the Dalio All-Weather Strategy. I’d love to have a piece of mind of the All-Season Strategy or All-Weather Strategy, earning a 10% compound annual growth rate on my retirement without fear or major setbacks. But as far as I can tell its false hope, is it?

Meb: Okay. So a couple of things, one, it’s something that’s been driving me increasingly baddy over the last few months is the difference in, and this question came up in Chicago, the difference in nominal environments based on inflation. So hypothetically, if you have a environment like the 70s where let’s say that there was 8% inflation, all right? A 10% stock return while it sounds good, it means you only made 2% real. Okay, 8% of that is gone to inflation. So you’ve been a 2% real return.

Well, an environment like now which is, let’s call it 2% inflation, if you made a 4% return most people would say that’s not that good, its exact same thing as the 10% return before, right? An example that just as mind numbing is the traditional 8% expected return for a lot of pension funds and endowments etc. They don’t change that by inflation environment which makes no sense.

Jeff: It’s all nominal?

Meb: It’s always nominal. It’s just 8% nominal, right? And some have come down a little bit in recent years just because of the…I feel like the craziness of it. But, everyone thinks of nominal returns because it’s harder to compare apples, it’s…today, and apples and oranges over various time periods. So the golden age of hedge funds, certainly in the 70s, 80s, and 90s, much higher nominal inflation or environment. And so this has a lot of ripple effects. It has ripple effect for financial advisor and institution fees.

A 1% or 2% fee on a 10% return isn’t nearly as bad as a 1% or 2% fee on a 2% to 4% return, right? So like the investment advisor fees don’t not only adjust, so it’s a challenge. So looking back historically, look, 521 rule, equities overtime is historically done real 5% a year, globally. Yet globally-diversified portfolio of equities, you’re gonna do 5% after inflation. Bonds is about a percent and a half, bills is about half percent, but like it around, 521 is my rule. Asset allocation portfolio is historically 4% to 6% real. So 4% real add on 2% inflation, you’re looking at 6%, and that’s to me a good boogie right now for a good globally-diversified portfolio.

And like what, or now we’re talking about in podcast, “Hey, look, worst case scenario, you said low expectations, you do better.” All it means is you saved more and you made more than you thought you would but start with low expectations in the first place and then go from there. And then speaking of the Ray Dalio, the All-Seasons, and we talked about it in the book and showed all these different allocations, he runs three versions of his portfolio, All-Weather is the buy and hold asset allocation. It’s a risk parity tilt but it’s basically a buy and hold allocation. And we showed it on a blog post called “How to Clone the Largest Hedge Fund in the World” that if you just did a basic globally asset allocation portfolio similar to what we talked about in Trinity, you clone it exactly.

So what they’re doing, “The Largest Hedge Fund in the World” you can get for free, read my book. Second, go to freebook.mebfaber.com, free copy, and you can learn how to clone the largest hedge fund in the world. Then they have Pure Alpha which is the multi-strategy hedge fund, correlates to nothing. The first one, All-Weather was long-only, Pure Alpha multi-strategy hedge fund, that’s the one you really want. By the way it’s getting creamed this year. I think it was down 12% the last I saw. And then the last is called Optimal Portfolio, which is the combination of the two. And I forget the exact percentage of which, how they put them together, I have to look it up, but it’s basically Trinity portfolio, right?

So, obviously, they’re going to be doing a little different. They’re not just a momentum in a Trinity shop but it’s some in buy and hold, some in what they called their Pure Alpha go anywhere as the best allocation.

Jeff: I have to throw my list away because you keep on saying things that point towards questions that aren’t in the order I put them in. Let’s actually go with this, so we’re talking about asset allocation and different portfolios, another question we got was about Episode 17 in which your guests, that’s the ReSolve Group, I believe it was, said, “You know asset allocation completely dominates long-term portfolio outcomes but then the reader, the listeners says having read your book on global asset allocation, my takeaway was that overtime asset allocation doesn’t matter. So have I misunderstood or do you and your guests hold opposing views on the importance of asset allocation?”

Meb: No. I think if you have a true diversified asset allocation, most of them do the same thing. If you have something where, so like if you have something that looks like the global market portfolio and some variation of that they’re mostly gonna end up in the same place. If you have something that in my opinion is very undiversified like a 60/40 US stocks/US bonds, those are gonna be the outliers for better or worse.

So for the past seven years, it’s probably been a positive outlier, for in the next seven or the seven before that it was not. So to have a global diversified portfolio the exact percentage is, I don’t think matters. So when I say does it dominate? Yes, I mean in any given year, the permanent portfolio is gonna look vastly different than the All-Seasons, which is going to look vastly different than 60/40, I mean they could be 20, 30 percentage points different from each other.

But overtime, they’ll look pretty similar, and the last thing you want is, in my mind the huge outlier that’s gonna get you something that’s way worse on one end or way better because then you’re just rolling the dice.

Jeff: Okay.

Meb: I have one and we should wind this down because I’m trying to keep these around 30 minutes. Do you have anything else real quick?

Jeff: If you got something, go for it.

Meb: I got a handwritten card in the mail which we occasionally get with sometimes they have some beef jerky or a bottle of wine or something but I’ve got a handwritten card. I’m just gonna read part of it because I think it’s a question I get a lot, and so I wanted to…I’ll keep the author anonymous. But it says, “Dear Meb, thanks for the podcast. My dad loves it after I recommended it to him. You’re actually his first podcast, congrats. Also congrats on the Cambria Digital Advisor launch, best luck. As a college senior I have two questions about working after college. What quality skills and abilities do you look for at Cambria? What unique skills could a college graduate bring to their first time employer? My goal is to maximize my next year in college before I graduate.”

And we did an old post on the blog basically called, I mean this is five years ago, called something like, “How to Get a Hedge Fund Job.” It reminded me of an old article or a book or something that Jim Cramer wrote. I give Jim a lot of crap on that podcast but he’s got a lot of wonderful qualities and he’s certainly one of the hardest working men in our business. But he had a great concept where he was like look, when I was working my hedge fund, you show up with a dozen Krispy Kreme donuts at whatever it was, 5:00 a.m., so be the first person there and just be like, “Look, how can I be of value, how can I help?” And he’s like and then show up the next day, and basically be tenacious.

And the whole key to me is always been how can you be of value. And half of our employers from Cambria, employees, have reached out at some point and demonstrated some sort of value before working here. The example I used to give on the blog is usually like, look, if I had an interview, and meanwhile this ignores the fact that you probably, no matter what need a great base of knowledge, you need a deep…obviously a average amount of intelligence if not more, that certainly helps. The plumbing is if you…the more the better, of course. And then obviously have a passion for whatever industry you maybe but be well read.

The advice from one of the Buffets lieutenants that I tweeted out the other day was, the college person asked him for advice and he said read 500 pages a day. That’s a little bit much, you won’t have much fun in college and probably not have many friends and certainly miss all the football games but I think it’s in general a good comment about be well read about a variety of topics, particularly in this industry.

Anyway, one of my favorite examples was, let’s say you’re going to interview at hedge fund or job, and this was a creative one what we used to talk about. I said, “Why wouldn’t you look up on, and you know the people you’re gonna interview with, so let’s say there’s a group of five people or three or whatever, I would go look up their names on unclaim.org which is our favorite example around tax time, we’d bring up on the podcast where it’s this everyone’s unclaimed assets from when they move or forgot about something, and/or unclaimed dividend checks, whatever.

And you look up to the three to five people you’re interviewing with and there’s a good chance that the government owes them some money. There’s actually a great chance. So you go into your first interview and chat with three people and invite and then say, “Look, by the way, did you know that the government owes you $5500 in IBM Dividends? You could make my first months totally transaction neutral by the fact that, I did this value-added exercise to get my foot in the door.

Anyway, just think about something that’s value-add, whether it’s working as a free intern or doing something that would help that person or help that company rather. So many people go into interviews and it’s all of their…they think it’s about them. They think about, hey, how can I get hired, what can I do so that, you’re gonna be, how much you’re gonna be paying me, and my benefits. And really, it’s like you get to understand it from the perspective of the person hiring. And one other things I did very poorly, I remember when I was first coming out of college, I remember I was a Biotech guy enrolled to finances, you also got to think about, the qualities of the actual role rather than necessarily just who you are as a person because necessarily the two don’t match. So you want to speak to the job or the listing you’re looking for.

Jeff: That’s an interesting point. One thing is if you’re not a good match then there’s a potential that you’re going to need a lot more handholding, you might be requesting a lot more face time with your direct superior and that’s going to end up actually being far more reliability to your boss. And if your job and our perspective is truly to try to make your employers life easier, that’s really what you’re there for. Then if you’re coming and thinking, “Hey, pour into me. Give me education, give me your time.” That’s really going to be the antithesis of why you need somebody in the first place.

Meb: Agreed, total agree.

Jeff: Be careful what your needs are.
Meb: All right, anything else Jeff?

Jeff: I’m good, why don’t you tell everybody again about Vegas, when are you gonna be there in case they are around?

Meb: Yes, I will be there. Assuming this podcast gets uploaded on Wednesday, I will be in Vegas the following week, Stansberry Conference, then I got a handful, about half a dozen other speeches in Orange County, San Diego, Grand Cayman, I’m in New York for an entire week in November. We’ll post the schedule to the show notes but certainly I would love to say hi to anyone, if you’re in any of these places and certainly in Las Vegas next week.

Thanks for taking the time everybody. Send us some more questions to Feedback Q&A Mailbag [email protected] You can always find the show notes, more episodes at mebfaber.com/podcast. Also send in some guest ideas, anybody you particularly want to see on the program, fire over their name. Remember you can always subscribe to the show on iTunes as well as many other podcast players on the blogs. If you enjoy the podcast, please leave a review. Thanks for listening friends and good investing.

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