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Episode #49: Steve Sjuggerud, “This is Not What the Peak of a Bull Market Looks Like”

Episode #49: “This is Not What the Peak of a Bull Market Looks Like”




Guest: Dr. Steve Sjuggerud. Steve is the editor of True Wealth, an investment advisory specializing in safe, alternative investments overlooked by Wall Street. It’s based on the simple idea that you don’t have to take big risks to make big returns. Steve did his Ph.D. dissertation on international currencies, has traveled to dozens of countries looking at investment ideas, and has run mutual funds, hedge funds, and investment research departments.

Date Recorded: 4/20/17

Run-Time: 1:17:56


Episode Sponsor: Global Financial Data and

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Summary: In Episode 49, we welcome Dr. Steve Sjuggerud. The conversation begins with Meb and Steve reminiscing about the origin of their friendship, which dates back some 10 years. This leads the guys into Steve’s background, and how he transitioned from being a broker into being the highly-popular investment newsletter writer he is today.

Meb asks Steve to describe his investing framework. Similar to Meb, Steve likes both value and trend. Specifically, he looks for 3 things: assets that are “cheap,” “hated,” and “in an uptrend.” This methodology applies to all sorts of asset classes. The guys dig deeper into value and trend, leading to Steve ultimately to say, “If I had to choose between one or the other, I would actually choose momentum over value.” Meb agrees.

Next, Meb asks how the world looks to Steve today. Is he buying? Defensive? Where’s he looking? And so on…

Steve tells there are always reasons to sell or stay out of the market. Despite this, Steve’s thesis is that interest rates will stay lower than you can imagine, longer than you can imagine. And this will drive asset classes higher than we can imagine. We’re still not at absurd equity levels yet here in the U.S. – Steve says we’re maybe around the 7th or 8th inning of this bull market. But the biggest gains can often come at the end of a bull market, so there’s potentially more significant room to run.

As the guys discuss this, the conversation tilts toward investor sentiment. They agree that irrational exuberance for this bull market simply doesn’t exist right now. There’s no euphoria. Steve sums it up simply: “This is not what the peak of a bull market looks like.”

Yeah, valuations are high, but interest rates are near historic lows. Relative to bond yields, the equity values are far more reasonable. Investors need to compare returns to what you can get through other asset classes.

The guys jump around a bit, touching upon the warning signs Steve will look for to tip him off as to when to bail on U.S. stocks, a discussion of the Commitment of Traders report and how to use it, and then a discussion of U.S. housing and how it’s a solid investment right now because housing starts are nowhere near what they need to be to equalize supply and demand.

The guys then turn toward foreign equities, where it appears that value and trend are lining up. Foreign has been cheap for a while, but it’s been underperforming. And now that appears to be changing. Meb asks Steve to tell us what he’s seeing – it generally boils down to one big thing: China.

You’ll definitely want to listen to this part of the discussion, as Steve tells us about a revolution in mobile payments that’s already happened in China (and will likely happen here in the U.S.). But beyond that, Chinese stocks as a whole are now incredibly cheap. Even better, there are going to be tailwinds of adding Chinese stocks to a major index. I won’t get into the details here, but the analogy the guys use is having the teacher’s manual of a high school textbook with all the answers ahead of time. Best of all, Steve gives us the names of some actual ETFs that may benefit from this trend.

There’s much more in this value-packed episode: gold and gold mining stocks… Steve’s investment in St. Gaudens coins… Steve’s surfboard and vintage guitar collections (including the story of a $30K guitar he bought and later sold for $72K)… And of course, Steve’s most memorable trade – which involved a painful 50% loss for Steve and his subscribers, all stemming from the lie of a certain global politician.

Which politician and which lie? Find out in Episode 49.

Links from the Episode:

10:18 – Value & Momentum Everywhere

15:35 – AAII Sentiment Survey

20:26 – Vic Sperandeo

24:00 – 24:26 – When things go on sale, people run out of the store and T-Bills outperforming stocks

35:00 – WeChat

43:00 – KraneShares

46:00 – A+H Shares 

53:42 – St. Gaudens Gold Coin

58:54 – Larson Brothers Guitars

1:02:00 – Icon

1:10:40 Longboard study on stock returns and J.P Morgan’s study on returns

1:11:50 – Dailywealth

Transcript of Episode 49:

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

Sponsor: Today’s broadcast is sponsored by Global Financial Data. We’ve been using data series from GFT for almost 10 years, ever since I wrote my first white paper. The data has been super useful in other areas like creating CAPE ratio calculations, and for over 20 years, Global Financial Data has been aggregating and transcribing data from original sources, which no other data provider has done before. Please have a look at their website at for more info and to set up a trial account. If you mention that I sent you, they’re offering a 20% discount on all new business subscriptions. Again, that’s

Meb: Hello, podcast listeners, we’re extremely lucky today to have one of my favorite people on the planet on the show. Steve Sjuggerud, welcome.

Steve: Thank you, Meb. Thanks for having me.

Meb: So I’m sitting here looking at your Skype photo and it’s a picture of you surfing somewhere. Do you know where this photo is from by the way?

Steve: No. No, I don’t know what…it might be a picture from Nicaragua but I don’t know the picture that you’re looking at. But, yeah, I’ve been fortunate to surf all over the world.

Meb: We’ll come back to surfing later because that’s a topic I know that is dear to your heart. And interestingly enough, you know, thinking back, I mean, I think I met you almost…it’s coming on almost 10 years ago now when Steve sent me an email here in LA. Steve, you remember the first time we met up?

Steve: Absolutely, yeah. Meb, I was a huge fan of your work. Basically, I felt like you were going similar…going down similar roads that I was going down on research, but you were quite frankly doing a better job at it than I was. So I felt like, “Man, I really need to meet this guy, Meb.” And I had a window of opportunity to meet up with you in LA but then the window started shrinking and shrinking. I was supposed to meet with our friend Van Simmons at about the same time, and then another good friend of mine moved out to LA the same moment. And so, I said, “Meb, I’d love to have dinner with you or catch up with you, but my only window of opportunities with a 60-year old guy and a 19-year old guy, and are you up for that?” And to my shock, you were on board and we actually had a fun night that night.

Meb: I mean, I love meeting interesting people and you couldn’t have asked for a more eclectic dinner. And so, we had Van on the podcast last week which is a really fun one, and Van lives in this like museum in Long Beach of amazing collectibles. You could just walk around and spend hours in there and then, of course, there’s some like 19-year old world class surfer, and I remember sitting down because I just met Steve, listeners, and, you know, he said, “Hey, I’m gonna be in town.” By the way, I mentioned your book. This is the first book IV Portfolio and about a day or two later I look up on Amazon and the book was sold out, which doesn’t really happen on, you know, first prints for books usually. That’s a very rare scenario and like for the life of me, I couldn’t figure out what it was. And I said, “It couldn’t have been that mention of that guy that, you know, said he’s gonna be in LA.” Anyway, so we meet up, sit down with Steve. I said, “Steve, what are you doing in LA?” He says, “Oh, going surfing with Laird Hamilton.” I said, “Oh, of course.” Well, that sounds obvious.

But so, Steve, for those who don’t know is a macro guy and a rider and a long-time writer, been doing it for…I mean Steve’s gotta be…since what? The late 90s?

Steve: Yeah. Nineteen ninety-six, I started writing an investment letter and…

Meb: Give us a little background on how you kinda came to what you do now. So give us a little Sjuggerud history.

Steve: Absolutely, yes. So I went to college at University of Florida at age 16, ended up studying finance. And long story short, by age 23 I was vice president of a global closed-end mutual fund and I’ve done a lot of different things. I’ve been a broker specializing in international stocks for a while…international stocks and bonds, and while I was a broker, I saw that a lot of my clients were reading these horrible investment newsletters. And I couldn’t believe that these intelligent people were relying on such basically horrendous advice and, you know, all of the clichés about the newsletter industry were even worse in the mid-1990s.

So I think I was 24 years old and I said to my girlfriend at the time who’s now my wife, I said…I laid out 5 investment newsletters and the most popular ones on the pool deck at her apartment complex. And I said, “I think I can do this better than this and I’m not sure what better means but I’m gonna go for it.” And it’s kind of a strange dream for a 24-year old to say, “This is what I’m gonna do,” but I got a job. The idea was that I could reach a lot more people and give them a lot more useful investment advice by writing an investment newsletter. And shockingly 22 years later we’re still doing it and Porter and I have become one of the biggest in the world, if not the biggest in the world, of doing this thing just by trying to treat people the way that you would wanna be treated if your roles were reversed. So that’s kind of the story.

Meb: And that’s sort of, you know, people vote with their dollars, right, and, you know, yours…Steve writes a publication called “Daily Wealth” or “True Wealth.” There’s two once monthly and we’ve been a paying subscriber for a long time. It’s a macro focus. So Steve, why don’t we talk a little bit about how you think about investing? So despite the fact you guys have an enormous global audience of subscribers and readers, a lot of our audience may not be familiar with your work. Why don’t you talk a little bit how you think about investing and then we’ll start to move on to some more specific themes and the way you see the world today?

Steve: Absolutely. You know, Meb, I think you and I became friends because we are two of the only people that we know who actually believe in both looking at value and in looking at momentum in the uptrend. And I’ve kind of joked that I don’t have a lot of friends in the investment world because the value guys wonder how the heck could you look at that momentum stuff, and the trend-based guys wonder how the heck you could look at the value stuff. But you’re one of the rare guys like me that actually are interested in both value and the trend.

Basically, what I’ve written to my readers for many years is that I look for three things in an investment. Ideally, an investment could be cheap, hated, and in an uptrend, and what I found is that you can apply these basic criteria, cheap, hated, in an uptrend to all different kinds of asset classes, stocks, bonds, real estate. You can even take it into…somewhat into currencies and the same things apply across them. You just have to figure out how do you define hated. How do you define cheap in each of these different asset classes but I think that’s again…that’s one way that you and I became quick friends, was that, you know, we both have this…

Meb: And was this something, you know, a lot of people…you talk to value guys or trend guys, and there’s this sort of aha moment in the beginning. You know, a lot of people sort of like…whether its politics or religion or anything else, they come to their world view early and then they kinda stick with it. How did you kinda come around to this sort of framework? Was it trial and error/ Was it years of trading? Was it something where you just from day one kind of gravitated towards it? What was kind of the process to arriving at how you look at the world today?

Steve: Yeah. I think it’s a great question because in school you’re basically taught…at least when I was, you know, efficient markets value is all that sort of matters. And, you know, so I was coming…it had been ingrained, you know, kind of beaten into your head that’s value is what matters and the trend stuff is irrelevant.

And so that’s where I started out in the world but then when I started actually crunching numbers for myself, darn it, the thing that actually worked over and over again…I couldn’t make momentum not work, if that makes sense. You know, like it always won. It was always…so it was like…it was an evolution. It wasn’t that I woke up one morning and said, “Well, this has to be the way it is.” It evolves. You know, Porter Stansberry probably doesn’t wanna hear me say this and he writes my paychecks, but I…and you’re probably in the same camp with me that if I had to choose between one or the other, I would actually choose momentum over value. And I know that’s gonna cause at least 50% of your listeners the hell but…

Meb: I actually agree with you and I think that, you know, a lot of…we had Wes Gray on the show, you know, a professor at Drexel, studied under Fama at Chicago. And he kind of arrived at trend following from the same sort of perspective, namely through and through Chicago classic style efficient markets. And then with some value sprinkling in and also, you know, but has really come to understand and appreciate momentum. And one of the kinda irrefutable parts about it is there’s been a lot of research that just continues to come out in the academic community, you know, the classic paper that really defines sort of this area as AQR paper. Cliff [inaudible 00:10:16] called value and momentum everywhere and, you know, many people tend to think just in terms of stocks or maybe in global stocks. But really, it’s an investment framework that if you apply it to currencies and commodities and stocks and everything, you can really apply the same thing and then there’s been a lot of other people that are publishing on it too.

So okay. So starting with that framework and how you look at the world again, I’ve been reading your stuff for 10 years, but a lot of people haven’t. What’s sort of the way the world looks at you today as far…I know a recent piece you did in the last few months was something along the lines of a transcript or a playbook for the Trump market, and Steve to his credit and I actually tweeted this certainly in the last year or two. But I said you’ve been one of the most consistently bullish people on U.S. stocks maybe with Richard Bernstein.

There’s not that many more that have been consistently bullish for years now. You know, most people either got out in ’08, ’09 and never bought back again, you know, and a lot of other value crowd says, “No, no, no. It’s way too expensive.” You know, the GMO’s of the world and all these other shops, and not giving them our time. They stick to their process. That’s great but tell us a little bit about what’s the kind of the way you see the world today?

Steve: You know, you mentioned GMO. Briefly, I’ll just say something about Jeremy Grantham. I mean, it was incredible what he said in 1999, 2000 about at the peak. He really called the peak, nailed it, and then he nailed the bottom in 2009. It was pretty incredible. So I don’t wanna give them too much of a hard time because they did do some…did have some really great major calls, but so for me what I wanna do is find…there are always 100 reasons why you could sell or not buy, but I wanna find the one compelling reason, the overwhelming thing that is going to affect the market, and which basically causes all of the other reasons to be almost not valuable. And so, the thesis that I had early on and maybe, you know, this is basically that, and I’ve been writing this for many years, essentially, that interest rates would stay lower than you could imagine for longer than you could imagine. And that would drive asset prices like stocks and house prices higher than anyone can imagine, and that has been the thesis that I’ve stuck with for many years probably since 2009, 2010. That rates would stay lower than you could imagine for longer than you can imagine and that would drive asset prices like stocks and housing higher than you can imagine. And the thing is that the first part of that has been correct and, yes, we’ve been in, you know, seven, eight-year bull market here, but we still haven’t reached the point in my mind where asset prices like stocks and housing are truly higher than anyone can imagine.

Meb, even though I’ve been bullish all these years, I’m actually still bullish. Basically, if it ain’t broke don’t fix it, right? We are getting stretched. Let’s call it the seventh or eighth inning of this great bull market, but the biggest gains often happen, and you know this is as well as anyone, the biggest gains often happen in the final innings, and I think that NASDAQ 1999 is a great example of this. The last six months of the dot-com bull market were where, you know, the biggest move happened and it was an extraordinary move and so even though stocks have gone up a lot, there’s still a lot of pessimism. Basically, individual investors don’t fully trust it yet and so until they do, until they’re on board, the peak isn’t here yet.

So my core theme that I’ve actually had all of these years is still in place and my current theme is really this idea of a melt-up and I like using the phrase melt-up, the term melt-up because it implies a meltdown may follow. And I do think we could have a melt-up like we saw in the NASDAQ in 1999 or in house prices, you know, a decade ago, where things just completely go off the rails and there’s no foundation to reality, to any sort of value whatsoever. I think that’s where we’re headed. We’re not there yet and so…

And but like I said, cheap, hated and in an uptrend. We have our uptrend. The market is relatively hated. It’s not free for sure but as you know bull markets don’t die because of valuation.

Meb: You know it’s funny is that…so I remember watching a presentation you gave and I don’t know how many years ago, let’s call it two to five years ago, and Steve is spot on, gives literally the same presentation about here’s what’s gonna happen to U.S. stocks, and this is what happened, right? So they’ve had this kind of trudging bull market higher, and after the presentation, I said, “Steve, good talk.” And Steve said, “Meb, nobody cares.” And it was really funny because the audience didn’t. The audience was like, “All right. We don’t wanna hear this. We wanna hear, here’s why stocks are gonna crash,” or, “Here’s why XYZ is gonna do this.” And, Steve just said, “Look. This bull market has a lot of room to run and here’s why.” And so, it’s funny to watch because I actually just recently saw the American Association of Individual Investors sentiment survey and it’s still…the bull percentage is incredibly low. It’s hit like 26% which is a super low reading and the bear’s reading is actually pretty high. So despite the fact that we’re in year eight bull market, usually you don’t see the sentiment being that low, but it’s kind of this general Malays, or don’t care, or kinda…I don’t know the right word to describe it, but you don’t have the euphoria. That’s for sure.

Steve: Yeah. Here’s a fact. I know you like to look at numbers like this. Over the past four weeks, I don’t know if you saw this, the net outflow out of equity mutual funds and ETS was 21 billion dollars which is a massive number. I mean, there is just…this is not what the peak of a bull market looks like. This is not euphoria at all. Now, someone may ask, “Well, Steve, you know, value is, you know, clearly, we’re at a high in valuations but one point that I want to bring up and stress or just kind of have, people think about is sure we’re at a high in valuations but we’re also near all-time lows in long-term interest rates. I’m sure your audience, Meb, realizes that assets…you don’t just choose assets in a vacuum. For example, what I mean is let’s say that U.S. stocks are paying an 8% dividend. Well, that sounds great. That sounds like a great value but in 1980, if short-term rates are…if you can get 15% on a CD or 8% in a dividend, are stocks attractive at that point?

What I’m getting at is relative to interest rates. Every asset that you’re buying is relative. The value is almost relative to something else. You’re choosing what to do with your money and you have to choose relative to other assets where the value is. People that are forced to invest every day even though dividend yields are low, even though valuations are high relative to bond yields.

I mean, do you wanna buy high yield bonds today? I mean, where is the value? Where are you gonna put money to work today and I think when you can buy the world’s top companies, many of them at, you know, valuations 4PE’s in the teens when the bond yield is so incredibly low, I think the value is there. When you look at Japan when it soared, you know, interest rates were so incredibly low and that was kind of the fuel for the outrageous valuations in Japan. I mean, there were other factors, of course, but I just wanted to point out if someone is saying, “Well, gee, why would anybody buy stocks at today’s current valuations?” You’ve got to realize that valuations are really all relative and you’ve got to look at what you can get for your money elsewhere.

Meb: And, you know, you and I have both done this research where you kinda chop the stock market into four quadrants. Whether it’s cheap and expensive markets and uptrend and downtrend, and we always say that the highest historical returns have come from cheap in an uptrend but second is expensive in an uptrend. And that’s surprising to a lot of people that, you know, the second-best returns come from an expensive market just getting more expensive. So what are you looking for? Are there any classic signs for you that there is either warning signs or time to get out of stocks? Is it simply trend rolling over? Is there anything in your kinda…in your playbook that you would start to look to to give kinda yellow flashing light?

Steve: Yeah, no. It’s a great question. I mean, we’re nowhere near that point yet. What I would like to do is to ride this as high as possible. I think it will go much higher than anyone can imagine and then I will actually use trailing stock type things to get me out. I think there’s a great source quota. I’m gonna mess it up but you basically want to know what you’re…you want to know the enemy. You want to know what’s gonna hurt you and we know that this isn’t gonna last forever. I’m not drinking the Kool-Aid of the dot-com stocks or whatnot. I know that I’m gonna get off the bus but so what I want to do actually is in the next…over the next month, we’re gonna put together a report that’s basically our four indicators of the peak. And how we’ll know we’re at those…how we’ll know we are at the peak.

I mean, right now we’re just a long way from it and I know that feels crazy to people who say, “How can we look at an eight-year bull market or whatnot and say that this thing can’t be near its end?” But Meb, I don’t know if you know. I remember reading Vic Sperandeo early on. Did you ever read Vic Sperandeo’s stuff?

Meb: Trader Vic, of course.

Steve: Yeah, Trader Vic, exactly.

Meb: Wasn’t he one of the original market wizards or second round of market wizards?

Steve: Yeah, yeah. Yep. And I remember reading his stuff and this was many years ago but he did something. He basically said that a bull market had an age. It had a lifespan and basically, he looked at the length of every bull market and said that he basically gave a probability of the market continuing to go on. And, of course, this idea of a lifespan of a bull market, it blew up on him in the 90s, you know. I mean, the bull market just kept going higher and higher and higher and higher. And there were a couple other guys that did this type of work too, and the 90s taught me that that was all wrong. There is no official length of time. It is when all of the factors that you and I, you know…when the euphoria is here is when the ultimate peak is in place, and we’re a long way from that.

Meb: And I think that’s, you know, you can flip that too and, of course, true on the downside, I mean, how many value investors have you seen go out of business or have massive drawdowns because they say, “Here’s a country or a sector or a stock that can’t go any lower.” And then it continues to go lower and lower and lower. So the same sort of thing. There’s never necessarily a floor as well as a ceiling on a lot of investments.

All right, so bonds aren’t that attractive. I know you use commitment to traders a lot in some of your analyses.

Steve: I do. You know, you said bonds aren’t that attractive but we’re actually long treasuries. We’ve been long treasuries for two months and making great money on it, but I’m probably gonna close that trade out pretty soon. So it was really high yield bonds that I was specifically saying, you know, the spreads are just incredibly narrow, and what’s your risk versus your reward there? It’s not very sexy.

Meb: Yeah. But so, is the thesis on the treasuries? Was it because they just moved too far in one direction? Was it because all the…can you explain what a commitment of traders is for people?

Steve: Yeah, I mean, in the shortest description, I guess it is what it sounds. It is the commitment of big investors in the futures markets and what you look at is which way they’ve committed their money. Are they long or are they short? And I think what we saw in the treasury market was it was clear that the Fed was saying, “We are going to raise short-term interest rates in this year and we are gonna be on a consistent path of raising short-term interest rates.”

And so, the futures bets, I mean, this is a simplified explanation but futures trader started betting that bonds…interest rates on bonds would go higher and the bets reached an extreme, an incredible extreme, where everyone was betting on higher interest rates to a…I don’t remember right now if it was a record extreme or a decade or multi-decade extreme, but whenever you see these extremes, it’s often…you’re often very close to a turning point. And if you can just wait for the trend to confirm your idea that this extreme…when everyone has bought something, there’s nobody left to buy, right? I mean, that’s the simplest idea or if everyone sold, the opposite.

So in the case of treasuries it was really a sentiment trade. We just saw an extreme where everyone said, “Well, Gee. If the Fed’s raising rates, treasury rates have to go up too.” I mean, there are other factors, you know, Trump election and optimism in this and that, but so we entered the trade and it’s actually been a great trade because who would bet on lower interest rates when the Fed is saying, “We are raising interest rates.” And we did and it’s been a great trade for us but, yeah, I like to look at commitment of traders as a sentiment example, but only when the commitment of traders reaches an extreme.

Meb: And with Treasuries, we’ve done some studies here too but investing when, you know, 10 or 30 years are in large drawdowns or high percent drawdowns has actually, historically been a great trade, you know, for a year on out to get high treasury returns and that was set up. That coincided very much similar with what commitment of traders was saying and that, you know, you can bet at times for treasuries the mean refers when they’ve had a pretty nasty period. We’ll link to that in the show notes if I dig it up.

So before we move on to kinda foreign investments which we’ll talk about in a minute, you know, you’ve talked a lot about housing and whether that’s single-family homes and how to get exposure to that asset class as well as actually, you know, advising investors over the past seven, eight years to…as this is one of the best times to invest in housing as well as buying a house or even speculating on land. I think you even bought some land in Florida.

Why don’t you tell us a little bit about your thesis on housing and update it to kind of where we are today?

Steve: Yeah. I mean, for me what I like to invest personally in are what I call fat pitches. You know, it’s where you can…there’s no way to go wrong in it and in 2011 I bought some land in Florida, like you said, as an example. The property was previously under contract for $14.4 million in 2009. I offered $750,000 on it in 2011. The bank that had been…the bank that was stuck with it countered at $900,000 and I took it. So in 18 months this property lost, you know, essentially over 90% of its value. You know, that was just never gonna happen. That was basically a market with no bid, the housing market in Florida at the time.

And so, I invested personally aggressively in Florida real estate and those times are obviously gone right now. I mean, Florida real estate is back in a big way but what’s missing from Florida real estate and I’m using Florida real estate as a proxy for the nation but…Florida’s where I live. What’s missing here is housing supply and basically the housing starts are nowhere near where they need to be to equalize supply and demand, and it’s not just the Florida story. If you look at the national numbers on housing supply, you know, housing starts, basically, we are not starting enough homes. And again, this is economics 101. What happens if there’s not enough supply to meet demand? Prices go up, of course.

So in my…like I said, you wanna just come break it down to the simplest factor, the most important thing, and right now nothing is in people’s way of buying a house. I mean, mortgage rates are low and people can get a mortgage if they need it but there’s no supply and so I think…you can’t believe. I live near Jacksonville, Florida. I think on Zillow you can take a look but I think the average or median, whatever Zillow uses, is about $140,000 for the average Jacksonville home which is probably a three bedroom, two bath house with a two-car garage and a yard.

And, you know, you travel anywhere in the world. I was in Beijing and if you want an apartment in Beijing, you’ll get a dump for a million bucks and Hong Kong is more than that. Vancouver, you can’t get a house for…you can’t get anything for less than a million dollars Canadian, in Vancouver. So when you look at U.S. home prices, it’s no surprise why foreigners are buying here. Why I see there’s still plenty of upside, I think Florida…California might be a different story for you, Meb, but the rest of the nation I think is still an incredible value. Maybe we’re in the say fifth or sixth inning of that as opposed to…it’s not the beginning, but it’s not the end for sure.

Meb: It’s very localized like you mention and so, you know, we’ve had Jared Dillon on the podcast who talked a lot about Canadian real estate bubble. And you see things like the euphoria where you’re not seeing here and certainly not in stocks, but having lived through enough bubbles and you as well. I’m sure the signs are familiar. I mean, he was just sending out a tweet about, you know, a Canadian get rich real estate conference headlined by Tony Robbins and Pitbull. And by the time Tony Robbins and Pitbull are doing a real estate get rich conference, you know, that’s a coincidence sign that things are crazy. We’re a little frustrated because it has gone crazy here where we live in Manhattan Beach, California and we have, you know, a standard office here. We’re budget guys. We’re value guys and I’m laughing because there’s an open house tonight for what we called our kind of dream office. It’s right on the pier overlooking the surf but was listed at three times what we pay now. And so, it sat empty for a year and then, you know, where we are on the cycle someone eventually picked it up which was just a dagger in my heart because I like you was putting in these lowballs. So there’s definitely landlords and realtors around the country that probably hate Steve and I. And just people on Craigslist in general because I was putting in lowballs as landlord every month. I said “Man, this is empty. Come on. You’re just burning money.”

And then someone eventually came and paid for it and the worst part about it now is that the company that moved in and that is having the open house tonight is also named Cambria.

Steve: Oh, that’s funny.

Meb: It’s a granite tabletop company. The only beauty though is that the Cambria…they have huge signage everywhere and they sponsor like almost every sports event in the country so they must be doing well, but it never says what their company is. So hopefully, we’re just getting a little name recognition in town now. Everyone’s just saying they think that’s our Cambria and when they fold and move out, hopefully, we’ll take over the office.

Meb: That’s right, perfect. Exactly, yeah. Exactly.

Steve: So yeah. Real estate is interesting and so you’ve mentioned I know in the past some sort of mortgage ETFs as a way to play it as well as some of the single-family stock companies. Whether it’s been…gosh, I’m trying to remember their names. Silver Bay or Two Harbors? Are those a couple of them that it plays…

Steve: Yeah, there’s…yep. Yep.

Meb: Okay. So moving on from housing and thinking about that spoken from a happy renter by the way, let’s move on. So I’m looking at your current recommended list and of the 15, 20 odd positions, there’s some very common themes, and one of…the biggest common theme is foreign equities. And finally, this is a world where it looks to me like the value and trend is lining up. We’ve been talking about foreign stocks for the past four years, about them being cheap, but until really last summer, maybe kind of when interest rates bottomed in the U.S. you hadn’t seen the foreign stock outperformance. Why don’t you start to tell us a little bit about your thesis on why there’s, you know, so much in the kind of foreign space, and we’ll drill down a little more specific into a couple of areas that I know you’re very bullish on.

Steve: Yeah. I mean, I think it’s a simple story and Meb, you do this work literally as well as anyone on Earth but, I mean, look, emerging markets…what is it? Seven years of flat performance or something. I don’t have it in front of me versus the S&P’s almost straight vertical performance. I mean, the out-performance of the S&P or the under-performance of emerging/foreign is incredible and so obviously, it creates some value. It creates a degree of…hated’s not the right word, but just…people have just given up. They’ve just thrown in the towel and a lot of times ignored is even better than hated just because absolutely no one’s in. No one is even thinking about it. Meanwhile, this is where…this is the growth engine of…this is where, you know, you’re gonna see faster growth in these countries than you will in the U.S. for sure. And so, there are moments I started out specializing in foreign stocks as a broker and, you know, I started in 1993 and I think Mark Mobius’s Templeton emerging market fund went up 100% that year, and it was just euphoria over emerging market stocks. And it seems to come and go and people think China is gonna, you know, take over the world, and people forget about China completely. People think Chinese stocks are great and you have to own them. People think there’s no reason that you would ever own them and you just kind of end up kind of playing that love and hate. That bipolar investor opinion on these things because the countries don’t change so much. It’s the investor sentiment that changes and so if you can just play that a bit you can actually do extremely well.

Meb: Well, let’s talk about China because I know you’ve spent a ton of time in China traveling there. I think you’re going there again this summer. I’ve actually never been. I’ve been to Hong Kong but I don’t know how much that really counts, but you spend a lot of time in China. And it was maybe last year or even two years ago where you and I were speaking at a conference and you pulled me aside. We were sitting by a cocktail reception and you said, “Meb, I wanna talk about this story. I’m really excited about this China story.”

So why don’t you tell the listeners a little bit about what you told me then, and kind of what you’ve learned since, and what your thesis is on China?

Steve: Yes. So China is an incredible opportunity. It is one of these fat pitches and I’ve only had a few of them in the last decade like two or three. So there are so many opportunities. So I think the story that I may have told you was I went to my first meeting and I just realized that China was actually so far ahead of the States in one particular area and I didn’t see it coming, but a woman was doing everything on her phone and literally everything. And the guy that we were travelling over there with said, “Steve, do you have WeChat yet?” And I said, “WeChat?” He said, “Yeah. You’ll need it. It’s kind of like Skype over there. You’ll need it.” And I said, “I don’t need a messaging…I don’t need Skype.”

I mean, but then I learned very quickly that if you wanna call somebody on the phone, you don’t call them on their phone number. You reach them by WeChat. It’s almost like a Facebook Messenger thing, was my first thought of what this was, but then I later understood that the people of China basically their entire…in two years their entire life moved from sort of the way we live now to having everything on their phone, to a degree that we can’t even fathom here in the States. Nine hundred million Chinese use WeChat and 50% of them use it for 90 minutes a day and send 75 different WeChat messages a day. So it is it has completely taken over China’s lives, but WeChat does so many things. One of the very unique things and very interesting things that really Facebook hasn’t or no one in the States has really implemented is a payment system where instead of paying with dollars or paying with your Visa card, you actually just kind of zing people money by WeChat and people prefer to pay with their cell phone than any other means.

And so, I like I said, I was in this meeting, first meeting with a major sort of mutual fund company in China, and I asked the woman, the chief investment officer, if she’d actually used cash or credit card for anything, and she said that she only uses her cell phone. She doesn’t carry a purse. She doesn’t carry cash. I said, “Is there anything in this world where you don’t use just your cell phone?” And she said, “My parking lot attendant only takes cash and every month I berate him to start taking, you know, mobile payments.” And it was just an entire revolution in China that we can’t even fathom here in the States, and so to me I came home thinking that while the parent company of WeChat which is called TenCent is actually going to become the world’s largest company.

So that’s one theme of this that kind of blew my mind and it’s quickly starting to happen here more so in the States. So one theme in China is really this. Man, they’re ahead of us shockingly. It took no time at all and they do not want to use money like we do or use a cell phone like we do. They’re not tied to their old banking system or their old phone provider. They don’t use the mobile network like we do. They wanna use Wi-Fi and just contact you on WeChat. If you’re in a taxi, the taxi has Wi-Fi and you can talk on WeChat to business contacts.

Anyway, that’s just one little slice of what’s happening in China. From an investor perspective, it’s incredibly exciting. First of all, it’s super cheap but there are two actual catalysts that are once in a lifetime opportunities. So the short version of why they’re cheap in a sentence is that the Hang Seng China enterprises index which is the major Chinese companies hits at a 4PE of seven and one times book value. So that’s about as cheap as anywhere on Earth and these are some of literally the world’s largest companies in this index. So Chinese stocks are incredibly cheap. Those are the ones that I mentioned or Chinese stocks listed in Hong Kong but there’s a much bigger story going on that no one…shockingly, no one is talking about. And Meb, you will know the story better than most but I think that hardly anyone is up on the story and it’s the basic idea that look, China is the world’s second largest economy and when you add up the Shanghai and Shenzhen stock exchanges, China is the world’s second largest stock market. Now, where in the global stock market indexes are the Shenzhen’s and Shanghai stock exchanges? Where is China’s stock market in the global indexes? Meb, what percentage of, you know, the world index? If China is the second largest country in the world what percentage of the world index is made up by local Chinese stocks?

Meb: You’re saying what should it be or what is it?

Steve: What is it, what is it, what is it now?

Meb: I think I already know the answer but it’s basically nothing, right?

Steve: That’s right. It’s nothing. So you have the world’s second largest economy. The world’s second largest stock market. The Asian market for Chinese stocks and 0% of them are in the world indexes. Now, what do you think the likelihood that that will continue? What do you think the likelihood of that is?

Me: Same number, zero.

Steve: Yeah. I mean, yeah. So here we are. We have…if I just you know…if I just said to you Meb, “Look, the world’s second…” Let’s say it’s not China. Let’s say it was…oh, Germany is not in the global indexes, Meb but it’s going to be added, and Germany is gonna make up…I don’t know, 15%. We’ll just make up a number and so Germany is gonna go from 0% of a global index to 15% of a global index. So then what would happen to German stocks?

Meb: Well, they’re gonna go up a lot. I’ll give you a great example as that any time things get added to the S&P. If you remember when Berkshire got added to the S&P it went up like 15% before it actually got added. So as people, every tracking index had to start buying it and that’s actually the dirty secret of indexing is a lot of names that come in…once they get added, you know, there’s a lot of run up up to that period. So, yes, I would think German stocks would go up a lot.

Steve: Yeah. I mean, we’re not just adding one stock to an index. I mean, we’re adding the entire market to, you know, to a major, major index and it’s not just, you know, emerging market indexes need this. China indexes need this. World indexes need this. It is going to be a movement in the hundreds of billions of dollars into Chinese stocks and the thing is that people are going to have to buy them. ETFs, index funds, anybody tracking, you know, MSCI emerging, anybody tracking this stuff. Whether or not Chinese stocks are a good value, these funds are going to have to own these particular stocks. So my suggestion, my fat pitch is get yourself there first and thankfully we can actually get in incredibly cheaply right now.

So this is a once in a lifetime opportunity. You know that hundreds of billions of dollars are going to flow in. Now, look, it’s not gonna happen in a day. MSCI recognizes that. I mean, this is a dam that needs to burst and what they’d rather do is let the money trickle in, but I think over the course of roughly five years, it’ll go from no stake to its full stake in these indexes. So you have a five-year, few hundred-billion-dollar tailwind as you’re buying one of the planet’s cheapest markets.

Meb: Let me give you an interesting data point and I remember talking about this on Twitter and so this is a couple years ago. This is the end of 2015 and I was tweeting about China and I said, “This is the cheapest the stock market has been in a decade.” And I just started getting the nastiest responses and emails as a sign of like, you know, people really hating Chinese stocks but if you go back…and then I eventually posted a chart of 10-year P/E ratios on the China stock market. You know, people forget that in the mid-2000s when everyone was clamoring for emerging markets because they had been outperforming. So all the money was chasing it. All the stories were about how, you know, all the same data points we have today, but that emerging markets were growing faster. That they’re huge portion of world population. That the BRICS were emerging and China and India…specifically, well, China got to a P/E ratio of 60 in 2007 and so that’s a legit bubble. The U.S. only hit 45 in the late 90s. Japan hit the highest we’ve ever seen which is in the 90s and 80s, but so China hit this huge value, and so it’s taken them forever to work that off. But I tweeted and I said, “Hey, look, you know, 2007 China had a cape ratio of 62 at the bottom. In ’09 it hit 17 so right back to normal price.”

In 2013, it hit a low of 12 but still it only increased to a value and this is in 2015 of around 15 and I’d have to check what it is today but I know it’s…in late 2015, it hit a value of around 12. So I know it’s in the low teens but it just goes to show when you’re talking about sentiment, there’s a lot of positives lining up on this trade which are all the positive demographics in economic side, but also that it’s not particularly liked. You know, it’s kind of in this hated category where I get flamed if I tweet about it.

Steve: That’s great. I love it.

Meb: So it’s a long-term play and so how do people go about it? Is…do they…I know you’ve talked about the Crane shares funds in the past. What are some other…like what’s the way to place this trade? Is it through ETFs?

Steve: Yeah. I mean, it’s a challenge. So, you know, you and I can’t buy…easily buy A shares ourselves and, man, I think the right way to do it, you mentioned Crane shares. The Crane shares guys have been out in front of this and they actually created an ETF that holds what will be bought by all of…so this is, you know, the word front running might be the wrong word to use. I don’t know if it is or not but I mean if you wanna get out ahead of this trade, Crane shares actually…so what happened was MSCI came out with essentially their roadmap to, you know, to…inclusion is the word they use and to me a couple years ago when they put this out, they actually gave the specific allocations of the stocks. So to me I don’t know Meb if you’re a bit younger than me, did you ever see the teacher’s manual when you were growing up in school where it had…there’s your textbook and then there was the teacher’s edition that had all of the answers?

Meb: That’s right. I hadn’t even thought about that. Yeah, the same textbook and then the answers were usually in red.

Steve: Yeah, exactly. So not only do we have the textbook but MSCI actually put out the teacher’s edition and I don’t know if this was on accident because they don’t have it in their current versions of the inclusion stuff, but they actually gave you, you know, the teachers’ edition, the actual answers as to what their allocations were going to be. And Crane shares built an ETF not on what the allocations are looking backwards but what they will be, and KBA is the symbol of that one.

And so, to me that’s the simplest way to take advantage of this particular trade but I also like, you know, that KBA is the symbol of the ETF. But I actually just like owning even FXI, simple FXI is a great way to play this as well, and I know that sounds funny. But so, what FXI is basically holds the Hong Kong listed Chinese blue chips and these are the behemoths of China, and TenCent’s the top-holding and China Construction Bank and really massive businesses, but these are all still part of the inclusion process. These are gonna be the benchmark stocks of China and there’s a weird thing, Meb. I’m sure you’re aware of it but the AH Premium. Are you familiar with the AH Premium?

Meb: Yeah. But why don’t you explain it to our listeners?

Steve: Yes. So this is crazy and Meb I’m sure you’d agree. So in China in the A shares, the identical company…literally everything about it is the same. The stock is identical, trading in Hong Kong and trading in China and right now the AH premium as it’s called is at about 20%. So the same identical stock trading in China is 20% more expensive than that stock trading in Hong Kong. The identical shares and so by buying FXI, you’re buying the same identical stocks, but you’re buying them at a huge discount. I mean, when do you get a chance to buy global blue chips, legitimate stocks at 20% discount to, you know, their other holdings or whatnot? It’s, you know, to the identical shares. So you would think that there would be some sort of arbitrage happening in these shares and that arbitrage in my mind…to me, this is the biggest anomaly in finance and it will go away soon. So you can buy KBA as a way to play the A shares but FXI actually holds many of the same companies that are gonna be part of MSCI’s inclusion. They just happen to be the Hong Kong listed versions of the identical stock. So we can buy them at a discount there. I’m just throwing that out as an idea. A very simple, a very common way that might be easier for, you know, if some of your listeners are fund managers or something, it might be easier for them to get through their investment committee to buy something like FXI.

Meb: And aren’t you getting ready to go back to China this summer?

Steve: I am, yeah. I mean, the opportunity is too extraordinary and I’m killing a bunch of birds with one stone there. I feel like I want my subscribers, my customers to actually see what I saw for myself with WeChat and with sort of the technological revolution because when you see it for yourself in China, you see what’s possible here. And then you reach, basically, this new sort of thesis for the U.S. that basically we’re gonna enter a world where there’s only a couple companies that matter. You know, and I realize that sort of Facebook and Google and Amazon and these sorts of masters of the universe already seem like they’ve soared so much and how much more can they soar. But what you see in China is, for example, there is no room for a Pepsi. Like WeChat had…you know, it’s Coke or nothing. What I mean by that is WeChat, there is no second place. No one wants to be on a separate network. Does that make sense? Like no one…and so just like in the States where Google has 77% of global market search, global internet search, and Bing has 7%, there isn’t room for second place. Facebook, who wants to be on a different network than Facebook or Instagram or, you know? I mean, obviously, there’s Snapchat and such but the point is that these companies like WeChat in China and I just fully…I got it in China is that Facebook and Google are able to gather such an incredible amount of information about you and me for free. And then they can use sort of machine learning and artificial intelligence to absolutely make the most out of that data set. Whether it’s serving up ads for you and making more money of ad revenue to selling the results of their data, you know, for a variety of different reasons. So my trip to China actually reinforced that if we have this melt-up as I’ve described it, Meb, I actually believe that these big tech names will be big winners in the melt-up even at their current valuations. I think there’s still room for them to go much higher. So I didn’t mean to get off of the China theme but…

Meb: No, that’s good. I mean, you know, people talk a lot about the first trillion-dollar company and usually, the names bandied about are Apple and Amazon and everything. So it will be interesting to see if it ends up being a Chinese tech company or what it might be. I wanted to touch on one more thing before we start to wind down. I mean, we’ve, man, burned through an hour almost already. This could go on forever, which is great. I know you think a lot about real assets and commodities and over the years have recommended, you know, investing in various ways, whether it’s been actually gold coins or through the [inaudible 00:51:09] or through even positions. You know, recently such as, you know, miners or gold shares. What’s your general perspective on real assets? You know, is it the same exact framework you’re looking for? Is it slightly different and kind of the role that they play in a portfolio for you?

Steve: Yeah. I know that it might make some gold bugs mad but it’s just another asset class. It’s just another one to find sort of cheap and hated and in an uptrend. It was funny. I was asked to speak at Rick Rule’s big Sprott Natural Investing symposium in Vancouver last year, and I stood up on the stage. It was late July, end of July and I think I might have been the first speaker at this conference. And first thing I said was I told everybody in the room, “I just sold all of my gold stocks yesterday.” And, you know, so basically, it’s like being in a church and telling everybody there’s no God or something. It was, you know, people couldn’t stand it but it was exactly the right thing to do. I mean, I nailed the peak in gold stocks but before then and in about January, I’ve never really bought gold stocks in my career personally, which sounds crazy from a newsletter writer, right? But I’m just looking for a great value, a fat pitch, an extraordinary moment, and I hadn’t seen that extraordinary moment until sort of January of 2016. I bought heavily and then I sold heavily in July. I haven’t really been back that much. I mean, it was an extraordinary…it’s just another asset class. I know that I’ve done a lot in collectibles and a lot in, you know, all kinds of things that normal investors aren’t looking at, but it’s really just trying to find another great value.

Meb: I was thinking because I had Van on last week and we were talking a lot about rare coins and ideas. It’s not an area that I’ve really spent much time with historically but I chatted with Van to get a starter allocation up and running. But so, he was talking a little bit and I see kind of you’ve mentioned, and I may pronounce it wrong, saying St. Gaudens. Is that how you say it?

Steve: Right, right, yep.

Meb: MS 65 and you’ve talked about that as a way to play gold where these coins traditionally have a premium to kind of the melt value that in bull markets with gold can get really high, but right now is it one of the lower premiums in a while? Can you talk about your thesis there at all?

Steve: Yeah, absolutely. So what I’d like and as any good investor, you would like to have limited downside and if there’s a way to improve your upside but keep your downside the same, I’m interested. And so, with gold and with St. Gaudens coins, they are at their record low premiums relative to the price of gold. So what happens is if gold goes down the St. Gaudens coins go down by about the same amount. So you have a one-for-one on the down side. Does that make sense?

Meb: Yep.

Steve: But on the upside, I mean, we’ve seen these particular coins rise. I mean, hundreds of percent even a 1,000%. So it’s really just the idea of having limited downside, unlimited upside. So, for example, an MS65 St. Gaudens coin today sells, you know, it depends on a couple things but let’s say it’s around 1,800 bucks. It’s not a huge premium over the price of gold but they are premium coins. They are rare and these coins could rise dramatically based on if they do anything like they’ve done in history. So what I like about them is they sort of have one-for-one downside basically with the price of gold, but you have multiples on the upside. It’s almost like a leveraged ETF where you get double long upside, but your downside is one-for-one.

Meb: I wonder if you couldn’t structure a trade. I’m just thinking out loud here and I don’t know anything about this area where you buy a basket of these coins. So let’s say you buy a million bucks of these coins and with the knowledge of the trade, these as you just outlined, and I wonder if you couldn’t short out some of the exposure to the price of gold through the futures because the gold curve to my knowledge right now is in contango. So if you shorted the 2017 or 2020 gold futures, you would get a roll down in yield…roll down in price. So you’d get a positive role yield from that investment and so by…I don’t know what the options would trade at, but you could buy by puts options on the futures. I wonder if there isn’t a way to structure that trade where you would have potentially even more limited downside to the price of gold but a high multiple expansion to the…it’s kinda like almost like buying a free call option. We may have to do some work on that.

Steve: Yeah. I mean, my thought was…I mean, I think it’s an interesting idea but then you’re just only exposing yourself. I mean, it’s a great idea but you’re only exposing yourself to the up side of the coin, and I’m not calling myself an expert on the on the up side of the coin. But if I wanna be long gold, this is an interesting way to do it where it could go one-for-one upside, but it could go two for one or three-for-one on the upside. So I would rather still maintain my exposure to gold and the coins. Does that make sense?

Meb: Yeah, yeah. Absolutely. All right, sorry. It was a random tangent. We’ll have to do some work on that and report back, listeners.

Steve: No, but by the way you talked absolute…I’m glad I was able to introduce you to Van all those years ago. There is nobody that’s more of a walking encyclopedia of how to make money in alternative assets than that guy, and I hope that you were able to learn something from him, the stories that he tells.

Meb: I learn something from Van every time I talk to him even when he stopped in just to say hi for dinner. When I was out with some friends the other night and we started talking about pocket knives and probably would have talked about an encyclopedic knowledge of pocket knives for about an hour. But, yeah, Jeff, my co-host and I are gonna head down to Long Beach probably next week to make some initial purchases of some coins for my starter collection. So we’ll post those to the show notes when we pick them up.

Steve: Awesome.

Meb: Let’s start to wind down with a few shorter questions. And speaking of collectibles, actually, I have one more real quick one before we get into shorter questions. You know, some of your passions that don’t have anything to do with markets. You know, speaking of a collector, talk a little bit about what your…you collect some interesting objects both in the surf and music scene. Are there any particular items that stand out in your mind?

Steve: You know, I mean, a lot of times there are some great stories. I mean, just where it came from and, you know, a guy that owns a music store not far from here, he said, “Steve…” He knew the guitars that I liked. He said, “Steve, this guitar can…” He said…he’s a legend. He did some guitars for Eric Clapton and Keith Richards and super legendary guy. And he said, “Steve, you gotta get down here.” And he didn’t tell me what it was but I knew it was gonna be something important. Basically, I ended up buying a guitar that came in from a little old lady. I paid $30,000 for it and the guy couldn’t believe I paid $30,000 for the guitar, and then I owned it. It was a Larson Brothers guitar which most people aren’t familiar with but…and then it was in such perfect condition that I didn’t even wanna play this darn thing. So I ended up selling it through Gruhn Guitars in Nashville for $72,000, I think. You know, where these things come from and the stories of how you end up acquiring them, and what you end up doing with them. It’s been a fun ride learning about collectibles but I’ve also learned…and Meb, I’m sure you can appreciate this on liquidity and illiquidity. One of the things that I really love, for example, about Timberland is I feel like you get paid a massive yield, but you’re buying illiquidity. And I thought for a while that by buying illiquidity, I was buying higher yields. Does that make sense?

I don’t know if you…but I learned through buying particularly illiquid investments cheap is that you still need to find a buyer, you know. And so, one thing if anybody is considering getting into collectibles, whether it’s, you know, sports cars or whatever it is, you don’t necessarily want…if you’re really gonna buy it with the intention that someday you’re gonna sell it, you really need to buy something that someone else actually wants.

It’s a crazy thought but, for example, if there are 30 Mercedes gullwings, for example, then there’s a known market for their Mercedes gullwing and there’s a known buy and sell spread, but if you have the prototype to me that sounds sexier like wow. Not only you don’t…this is before the 30 that everybody is aware of but the way collectibles markets work. It’s pretty strange that the prototype may be worth significantly less than the ones that everybody is already familiar with, and even though it may be cooler to you or me, the collectibles markets don’t work that way. They want illiquidity. They want familiarity but for me going back to what I’ve done, you know, I’ve built some…a collection of some of the finest vintage surfboards starting from the ancient, you know, the early Hawaiians up to presents and, man, it’s just really…the stories are extraordinary. But I don’t how interested investors would be in them. It’s a lot of fun but it did teach me lessons for the financial markets. Like, for example, with Timberland where buying illiquidity isn’t necessarily a path to higher investment returns.

Meb: I have a great example of illiquidity sitting in my driveway right now, if any listeners wanna buy a 1967 Toyota Land Cruiser, that is also a good example of money pit investments. You know, restoring vintage cars or boats, those are kind of the opposite end of the old, you know, 80/20 rule but it’s a lot of that comes…

Steve: No, that’s a cool car, man. Have you thought about like…have you seen the Icon? Isn’t Icon out in the…

Meb: Oh, man, the Icon. I had mine restored by the same company which is in the Valley in Los Angeles and the Icon for listeners who don’t know, that’s kind of a from scratch restoration of a Land Cruiser FJ40, which is the jeep body style. They go for like 150 grand and so that is…and believe me, I about once a month search the internet for used Icons for sale because like I said I’m a cheap bastard and would love to put in a low bid, but mine is kind of the similar, you know, has all Corvette engine and modern components. But, unfortunately, I think its run its course as a favor investment but I love it. Well, I only drive two miles to work anyway so there’s not a whole of driving going on.

Steve: Sounds cool.

Meb: Steve, you’ve been writing for, man, almost two decades now. What has been your most memorable investment or trade in that period? You can take some time to think about it but and it could be a good trade. It could be a bad trade but is there one that kind of jumps out at you?

Steve: You know, I thought you might ask like what was sort of my worst trade but you’re too polite for that.

Meb: No. You can ask that too.

Steve: That’s what came to mind. So, you know, I mean, this was…I’m gonna share my worst trait. I mean, I’ve had a lot of, you know, successful trades, obviously, but my worst trade it was buying…Putin had come out and said that, “I am not going to bankrupt Yukos. I have no intention of bankrupting Yukos, the big oil company.” What he wanted was to put Khodorkovsky, the outspoken leader of Yukos, in prison and he did. He made up some bogus charges and put Khodorkovsky in prison and he came out and said, “I have no intention of bankrupting Yukos.” And Yukos was trading at like two times earnings and I don’t mean like two times earnings. It was trading for two times earnings and so what’s your downside in buying, you know, one of these massive Russian oil companies at two times earnings? When the president, the only guy who would basically say, “We’re…,” the only guy who had an interest in bankrupting Yukos says, “I’m not gonna bankrupt Yukos.”

So what I did, Meb, was I trusted a politician. And fortunately, when we bought the stock at two times earnings, no kidding, I put a 50% trailing stop on this. I thought there’s no way this is gonna happen but it is a Russian stock. It could be extremely volatile. We put the widest stop I’ve ever put on anything which is 50% on Yukos and sure enough Yukos went right to 50%. We stopped out and I felt terrible for my subscribers. I felt like I’d let them down and how foolish was I to trust the words of a politician and Yukos actually…it went all the way. Putin bankrupted Yukos. That maybe the most…it may not be the most memorable but it’s surely impactful and you probably learn more from your losers than from your winners, right, because you dig in and say, “What did I do wrong?” And so, I think that’s a good one for you.

Meb: You know, it’s funny that it’s a question we don’t give the podcast’s guests ahead of time. If they listen to our podcast, obviously, they would hear it but it’s so funny because you ask if you like…what’s your worst investment? Almost every person…there’s this pause and then almost just this like sigh, right? This just visceral feeling of pain. I mean, I can think back to my worst trades and anyone who’s been through it. You know, you learn that’s a very physical experience. The real physical pain of losing money or doing something really stupid and it sticks with you and hopefully listeners, you make those mistakes when you’re young and don’t have any money or not with much money, but it’s something that’s probably the most useful educational tool out there rather than the opposite, which is getting really lucky when you’re young, and then making the dumb mistakes later.

Steve, one kind of related question and then we’re gonna wind down. You know, for someone who’s been interacting with hundreds of thousands of subscribers over the years, if not millions, and a lot tend to be individuals. What kind of advice would you give to the listeners of this podcast, that you kind of seize the common mistakes that most of these investors make that would probably be easy to correct if, you know, I know you mentioned trailing stops but what would kind of be your advice that’s reflective of, you know, the feedback you get from subscribers over the past 20 years?

Steve: I mean, it’s really always the same thing and it’s that individual investors let their losers ride and cut their winners and it’s shocking that it’s so challenging to learn. The best thing I can do when I hire new people is to tell them, “Don’t open an account,” because basically they need to learn what’s right and know it down in their bones before they start trading because as soon as people start investing their own money or trading and they don’t already have this idea of don’t let a small loss become a big one and don’t cut your winners early. I would say that’s the biggest thing that individual investors have a hard time with and it’s crushing.

Look, Meb, we’re looking at China. I don’t mind. Look, China rose by triple digit percentage gains three separate times since 2006 so there is a strong likelihood that China’s starting at a single digit multiple on HSCEI, there’s a strong likelihood that sometime in the next five years we’re gonna see a triple digit gain in China. Let’s say that you buy today and you cut your loss at 15% or something if we’re wrong, and then you buy again and you cut your loss again at 10% or something if you’re wrong. And then you buy a third time and you make 150% gain because you…so what we did there is we cut our losses early and we let our winner ride, and that is the correct way in my opinion and in my experience to make money. But most of the biggest problem is letting small losses become big losses. Even in the case of that Putin example, I cut my losses at a massive 50% loss. You say, “Geez, I’m already down 50%. Why don’t I just see how this thing plays out?” But, you know, we live to fight another day. So I hope that answers…

Meb: I think it’s a perfect example and I think its great advice. It’s the most important lesson in investing and trading is simply survival and so many investors, they have a stop loss. It just happens to be zero. You know, the behavioral research shows, you know, it’s exactly and you could just walk people through this example. They buy something at 100 and it goes down to 80 and they say, “Oh, that’s stupid. I should’ve waited a month.” And then it goes down to 60 and you’re like, “Oh, I’m an idiot for listening to my broker friend. I’m gonna sell when it gets back to 80.” And of course, what does it do? It goes down to 40 and you say…you don’t open your statements. You just don’t think about it anymore. You’re pissed off and it goes to 20 and then at that point you say, “Well, there’s no point selling it now because what’s the point? I, you know, lost most of my money.”

And then it goes to zero. And so, you started to see by the way over the past few years, a lot of research on individual securities come out. Longboard did this originally and I know Goldman and JP Morgan and then there’s academic paper recently about the distribution of stock returns. And so, it’s something like two thirds of stocks underperform. A broad index roughly half of stocks have a zero rate of return and it’s something like 20% essentially go to zero and these aren’t micro caps. This is like Russell 2,000. Two thousand biggest stocks in the U.S. but the very small percent, you know, and this is one reason why indexing work and another reason why trend following works is these big winners make up for all the losers. But it also goes to show why stock picking is so hard because the chances are, you know, you’re gonna pick the losers and the really bad losers. So having the stop loss on all those stocks or investments that may do poorly and letting the big winners ride, and we will post these to show notes because these are some of the most important studies I’ve seen. I think that’s just a statistical verification for what you’re talking about right now.

Steve: Yeah. I mean, I think my personal outperformance comes down to a few great…you know, a few great winners that I’ll actually let ride, and the rest of it is kind of treading water. If you never let yourself get those few great winners, you are not going to outperform. I mean, chances are that you’re gonna underperform.

Meb: I was looking at the Stan’s very hall of fame trades and you’re sitting on top with number one is probably because the rest of the guys would have sold those big winners when they hit 100%, 200%, but, you know, knowing you it probably was a trailing stop loss.

Steve: Yep, exactly right. I think the stock was up like 1,300% and we had a 25% trailing stop on it and we pocketed at 995% gain, and that was after giving back some, you know.

Meb: That’s funny. Steve, this has been a blast. If listeners wanna follow you and your research, where do they go?

Steve: I mean, the easiest thing is It’s free and, you know, there’s a huge archive over many years of free good stuff. You’ll see Meb’s name in there a lot and, yeah, check out

Meb: Great. Look, Steve, it’s been a blast. I’m looking forward to catching up with you again sometime soon in the coming years. We’ll have you back on the program to see how this whole China story is playing out.

Steve: Yeah. We gotta get you in the water one of these days here, Meb.

Meb: You know, my surfing is so relative to simply who’s nearby and drags me into the water. I actually just went to Hawaii a few weeks…about a month ago or two months ago, and I have some local friends there that took me out to some of the local surf breaks. And I was out of shape and pathetic and I’m a terrible surfer anyway, great skier, terrible surfer but…

Steve: It takes a long time to learn but, man, I’m glad you just get out. It’s extraordinary all the things that you managed to squeeze in your busy travel schedule and all the extraordinary work you’re doing.

Meb: Surfing is a great humbling, you know, it’s a great idea. If you think your poo smells rosy, go surfing or do something like that and you get humbled pretty quick. I meant to post this on Twitter but we had one request who said, “What’s…ask Steve what the largest wave he’s ever been on.”

Steve: Man. It was probably in Fiji and, you know, we were staying [foreign word 01:13:13] and the pros were towing in the day before. It was too big to paddle in but, you know, maybe, you know, a couple times over head. I mean…

Meb: That’s a couple times too big for me.

Steve: Yeah. You know, I got held down that day pretty good and, you know. I mean, a severe hold down as you can attest Meb is, you know, it’ll shake your confidence. I mean, I was under. I got held under for a long time. You’re supposed to relax as, you know, right, when you’re getting tumbled by the white water and I relaxed and relaxed and relaxed and relaxed. And the white water wasn’t letting me up and so in Fiji you can actually open your eyes. The water is so clear and I look around and I got pushed through the reef, and I’m looking in all directions and it’s all kind of clear. So I take three or four strokes with my arms thinking I’m headed towards the surface and I can’t. I don’t think I’m any closer to the surface than I was before I took those three strokes and I’m out of air. My calves have actually locked up and I take three more strokes, still not at the surface. You know, finally surface, of course, and…but that was it for that day. You know, that was…

Meb: Makes my palms sweat just listening to that.

Steve: I mean, you know, it’s fun to challenge yourself and it’s a real joy to instead of just go to the gym or something to challenge yourself mentally, and to see if you’ve got the guts to go for it and such but…

Meb: I usually don’t. I’m like a waist high surfing sort of guy. I’m happy to take our Cosco wave storm out and cruise around. That’s like the…by the way, listeners, that’s like the best purchase. I think it’s like 100 or 200 bucks.

Steve: Yeah. It’s just $100. Yeah, it is the best purchase.

Meb: And it’s funny because you see down in Manhattan Beach now, you see a lot of…some of the best surfers. I mean, I’m sure they’re just playing around but ripping around on these wave storm boards. So there’s no stigma to riding one of these. I love it.

Steve: Yeah, just get out there. This morning I took two of my newer employees out to surf. One of them was first time and yesterday was the other one’s first time. They were both out of gas almost instantly but they were in heaven. You know, one of them is from Colorado. He’d never surfed. The other one’s from Chicago. You know, they don’t have any familiarity with the ocean but it’s just…brings joy in so many ways, and in 20 minutes they were done and we were back in the office. So life’s pretty good.

Meb: Watching someone’s face on the first wave they get set up. I actually tried to buy some sort of lessons last night at a silent auction and I lost because we’re trying to get my co-host Jeff out in the water and he’s afraid of the sharks so we’ll get him out one day. Is the Sjuggerud model coming to life? Wasn’t there a surfboard you were gonna kinda have coming out at some point?

Steve: Yeah, you know, Starboard which is the leading stand up paddle board company did make a Steve Sjuggerud Model Pro XL. So it’s funny because you met Sean Pointer who’s their superstar two-time world champ. So they have all these world champs with their pro model and then somehow there’s this old guy from Florida who was a pro model which makes no sense, but it was kind of them to…

Meb: People may start buying it. They’re just gonna have trouble pronouncing the name on ordering it?

Steve: That’s right. That’s right.

Meb: And say it must be a cool model if it has this many letters.

Steve: What it was…the story is I convinced them that like, “Look. You make all these pro models but all these guys weigh 140 pounds and nobody can actually buy a pro model. Why don’t you make a pro model that actually normal people can surf?” And they said, “Yeah. Will you help us do it?” I said, “Absolutely.” So that’s where the pro XL model came in so you don’t have to be zero percent body fat to use a pro model. You can use my model.

Meb: That’s awesome. Steve, it’s been a blast. Thanks for taking the time out today. Listeners, thanks for taking the time to listen. We always welcome feedback and questions from the mailbag at [email protected] As a reminder, you can always find the show notes and other episodes at You can subscribe to the show on iTunes and if you’re enjoying the podcast please leave a review. Thanks for listening friends and good investing.

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