Episode #91: Radio Show: Meb’s Most Popular Tweet of All Time… Signs of the Top… Listener Q&A
Guest: Episode #91 has no guest, but is co-hosted by Jeff Remsburg.
Date Recorded: 1/17/18
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Summary: Episode 91 is a radio show format.
We bounce around a bit in this one, starting with Meb’s most popular Tweet of all time. It involves a market record that people decided to politicize.
Next are some “signs of the top.” We discuss various indicators that support the general takeaway that (to no one’s surprise) we’re in a frothy market: US investor stock allocations are approaching the highest levels since 2000… Stocks as a percentage of household assets adjust for pensions funds are now the 2nd highest ever… The average expected return of state and local pension funds is 7.5%… The number of days the VIX has spent below “10” in 2017 was 52 (the combined amount for all years dating back to 1999? Less than “10”)…
We then discuss Meb’s upcoming personal portfolio rebalance. He publishes this each year, and he gives us the preview. Then there’s a discussion of Bitcoin, and Meb’s thoughts on how an investor might reasonably participate if so desired.
Then we hop into some listener/Twitter questions:
- Is there a broad asset class that appears especially attractive right now? Emerging Markets seems to have gone to a case-by-case situation. Is there an entire asset class you like?
- Why does value investing work?
- If you had to buy one country and hold it for 10 years, which one would it be?
- Have you ever done a back-test combining a simple moving average timing strategy overlaid with a value approach? For instance, going long an asset class when it’s above its SMA, but below a historical multiple?
- What changed in your investing philosophy in the last year?
- Value factors been out of favor for a decade or however long. At what point can we say they’ve been arbed out and not coming back…ever?
- What is the long term mean or hurdle for real US Treasury rates?
Plus, Meb is about to do some traveling overseas. Where’s he headed this time? Find out in Episode 91.
Links from the Episode:
- 00:50 – Welcome and discussion of how productive Meb will be on his flight to Japan
- 1:36 – Invest with the House – Faber
- 1:45 – Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies – Faber
- 1:47 – Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market – Faber
- 1:48 – Shareholder Yield: A Better Approach to Dividend Investing – Faber
- 3:01 – Meb’s most Re-Tweeted tweet of all time on the historic run-up of markets
- 5:28 – “Where the Black Swans Hide And The Ten Best Days Myth” – Faber
- 6:47 – Is the market rise going to fuel more growth or is it stretched thin
- 8:01 – Signs of the top
- 8:03 – Tweets of the week
- 8:51 – Signs of the bull market
- 9:15 – Tweet: US stock allocations hitting highest level since 2000
- 9:16 – Tweet: Stocks as a percentage of household assets
- 9:26 – Tweet: Jesse Livermore and pension funds
- 9:40 – Absurd pension fund assumptions
- 11:00 – “What if 8% is Really 0%? Pension Funds Investing with Fingers-Crossed and Eyes Closed” – Faber
- 13:40 – Dan Rasmussen podcast episode
- 14:35 – Rob Arnott podcast episode
- 15:04 – Rob Arnott’s piece on the three pillars
- 15:29 – Any particular broad asset class that Meb sees as especially attractive right now
- 15:59 – “50% Returns Coming For Commodities And Emerging Markets?” – Faber
- 18:52 – Expectations for the market in 2018
- 19:03 – “How I Invest My Money” – Faber
- 24:46 – How to intelligently trade bitcoin
- 31:44 – Twitter question – What country would Meb buy and hold for ten years, and what metrics would he use to make that determination?
- 33:03 – Twitter question – Has Meb ever done a back-test combining a simple moving average timing strategy overlaid with a valued approach?
- 34:59 – Twitter Question – What changed in Meb’s investing philosophy over the past year?
- 36:55 – Has Meb ever tried to model an average valuation for the global market portfolio?
- 38:38 – Twitter question – Is the value factor gone forever?
- 40:09 – Twitter question – Why does the value factor work?
- 42:33 – Ted Seides with Michael Mauboussin podcast episode
- 44:26 – Meb’s take on green bonds and sustainable investing instruments
- 46:01 – What is the long term mean or hurdle for US treasury rates
Transcript of Episode 91:
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.
Meb: Hello, podcast listeners. Welcome to the first radio show of 2018. Jeff, how goes it?
Jeff: Goes good. How are you holding up?
Meb: It feels like we just did one of these yesterday, but it’s been over a month. We may have to start doing episodes biweekly, no, twice weekly. What’s that called, twice weekly?
Meb: Okay. It’s late in the day or maybe every day. We just start doing them daily. We just record our team meetings. Anyway, what’s going on? Do you have a resolution?
Jeff: I never get into that stuff, man. Things are good as they are. I’m happy. No need to switch things up.
Meb: All right.
Jeff: I’m more concerned about you right now, getting ready to get out of town to Japan. How much more you gotta do before flight out?
Meb: Oh, man. Not too much. I mean, it’s a 12-hour flight. I get plenty to get done on the flight. On the last flight, I rewrote the “Invest with the House” book. I think we’re gonna turn our attention next to either updating. So we’re trying to bring them all through 2017. So updating either Global Asset Allocation, or Global Value, or Shareholder Yield, or all three.
Jeff: What do you think is more timely?
Meb: I think people would probably like Global Value the most because it’s been at least four years, five years maybe, since we did it. A lot has changed in that time. I don’t know.
Jeff: Well, stop going to Japan to ski.
Meb: No. That’s the whole point is I have to… By far, the best work I do is on planes. And, it’s sad because nowadays, you have TV and internet on planes, but back when you used to not have either of those, I was by far the most productive I’ve ever been. Although, the last plane flight I just took, we were coming over The Rockies back to LA from home over Christmas. And, the stewardess said it was… She’s been in the business for over 10 years. The most turbulent she’s ever experienced. Stuff was flying in the air, people were screaming, and cursing, and crying, and praying. It was out of old airplane movies.
Jeff: I flew back on a connector from Atlanta with a hell of a lot of UGA fans who were flying out here for the game. As we landed, they launched into an impromptu Georgia chant.
Meb: Go Dawgs!
Jeff: The entire plane erupted.
Meb: I had a bunch of Sooners when I was flying.
Jeff: Well, nice. All right. We have got a lot to cover today, so a hodge podge. But, I thought it would be fun if you gave us a quick recollection of congratulations on what is your most retweeted tweet of all time, I think?
Meb: You know, it’s not surprising in a year like 2017 that my most popular tweet and it’s probably order of magnitude, the most popular tweet somehow, this is construed as related to Trump. And I forget the exact words, but I said along the lines of, “For the first time in history, we’re gonna finish the year with the stock market up every single month.” And so, sure enough, this is the funny part, this explains so much about society, and the way news is consumed and repurposed. If you go read the responses to the tweet, they’re in, like, one of four categories. It’s either my Democratic friends being like, “Thanks, Obama. You know, you set the stage for this amazing economic boom.” Or it’s MAGA and someone saying, you know, “Trump, see, it’s all because of Trump.” And the third category is, of course, like, the gold-bugs who say something along the lines of, you know, it’s the fed and it’s manipulated, and it’s all some sort of scheme. And it’s just kinda funny because if you go back to my tweet from election night, my takeaway is that politics has nothing to do with it.
Jeff: Well, to clarify, your tweet didn’t mention anything about the president’s politics or whatnot. It was simply the market behind that.
Meb: Sure, right. And so, everyone just wants to construe it for whatever political sort of topic they want. But the tweet when Trump was elected, I said, you know, look…and I think… I can’t remember if I said it before or after the elections, but I said, “The person that wins the election is totally inconsequential.” However, it is humorous to me that despite all of the sound and fury of the past year, and politics, and everything else just news flow, everyone going kind of insane. You had the smoothest stock market year in the history, you know? And it seems to be continuing, by the way. If we finish up January, we’re knocking on the door for the longest months-in-a-row streak ever, which was… I have it as 15 in the 1950s. Other people have it as 12. So, we’re either at the longest streak ever or getting ready to cross the longest streak ever.
Jeff: So how do you personally interpret that?
Meb: Totally meaningless.
Jeff: You don’t see this as…
Meb: No, I mean, look, bull markets… I mean, if you go back to my old paper where the black swans hide. You know, you basically come with the research that bull markets uptrends are low volatility. And you can go through these periods of years where there’s just not that much volatility. And this has happened numerous times over the past century, granted it’s particularly unique right now, particularly kind of extended. But you have seen these long periods. Now, what happens is, is when markets move into a downtrend, and we’ve shown this in dozens, if not, you know, 30-plus markets around the world, equities, bonds, everything, commodities being the only exception, was the markets are much more volatile when they enter a downtrend than in an uptrend. And the reason is simple, is that, people will react totally differently to losing money than to making money. They use a different part of their brains. Scientific studies have shown this. In markets, I forget the exact statistic, how much more volatile they are, but you… So, that’s one of the reasons you always see the worst days always happen in downtrends, but also the best days, and it’s called volatility clustering. So that’s one of the reasons trends following works because you avoid this period. So, you have a year like last year which is in an uptrend, and so it’s mellow, calm, and chill, until it’s not. And then you see a downtrend, where everyone starts to freak out.
Jeff: But do you see the streak of consecutive months up? Do you see this more as a bullish indicator of sustained momentum in one direction or do you fall on the other camp of it’s being stretched too far, it can’t sustain, it’s got to pull back?
Meb: The former is correct. I think in an uptrend, it’s everything you wanna see. It’s making new highs, it’s everything is copacetic. But anytime… If you look at the stock market, as the market goes up, you’re simply stealing returns from the future, and the vice versa when it goes down. So, you’re getting more returns now at the expense of more returns later. And so, trend following and the market going up, hey, that’s fantastic. The market is getting more expensive, so future expected returns are getting lower. If you’re an older person right now, you’d say, that’s fantastic. If you’re a young person just starting out their investing career, you’d say, “Man, I want the market to crash by 80%. That way, I can start to dog across average into the rest of my adult life.” It just kinda depends on your perspective.
Jeff: What a wonderful segue into some of our other topics here.
Meb: We’re not gonna talk about Trump and politics the whole time, sadly.
Jeff: Do you have more to say?
Meb: No, I don’t.
Jeff: All right. You’ve posted several tweets of the week that had some interesting stuff, which I’m kind of lumping into this general category of science at the top. One of which was U.S. investors stock.
Meb: But, technically, I think it’s science. Is it coming from the Science of the Bull Market? These are two separates. So, Tweets of the Week is my weekly, which by the way, is usually every two or three weeks curated favourite tweets, and it’s basically a research compilation of the best quotes, articles, white papers, clips, everything. It’s like the most valuable thing I do, by the way, in my own mind. No one seems to care. I think it should be an actually entirely separate business that people should be doing, human-curated offering. Anyway, I also did a separate list called Science of the Bull Market, which was any link that I found that was completely absurd about what’s going on in this current environment.
Jeff: Yeah, different things. I read that.
Meb: Two different things.
Jeff: Okay. That was good. I read that. This was more of just the label I threw on the….
Meb: Just making up your own category.
Jeff: Why not? So you had a one which was the U.S. investors stock allocations are approaching highest levels since 2000. Then we have a stocks as a percentage of household assets, adjusted for pensions, just hit the second highest ever, what? 41%, I believe. Then there’s something from Jesse Livermore talking about pension funds and their future return assumptions. Now, let me stop here real quick. Do you see absurd pension fund estimations as just par for the course or is that in of itself another sort of sign of just too much rosiness?
Meb: There’s a couple of problem with the pension fund assumptions. One is, they’re always right around 8%. Some of them had started to move down to seven and a half.
Jeff: This is seven and a half, yeah.
Meb: Okay. Same difference. It doesn’t matter. But, it makes no sense to think, always thinking nominal returns when inflation is at different levels. So, 8% returns, when you’re in the world of 8% inflation, and you have 10% bond yields is totally different than 8% returns when you live in a world of zero inflation, and if you have 2% bond yields. Because the bonds right there, you’re investing percentage of the allocation in bonds, but it affects every asset class, okay? So, one, the pension fund should target their expect of returns based on just a very crude expect of returns algorithm. So, the only reason they say 8% is because that’s what they’ve done for the past 40 years. It has nothing to do with what’s gonna happen going forward. So, almost everyone, if you look at just the simple math of stocks and bonds, U.S. stocks are new about 4% in the next 10 years. Bonds, two to three. So, no matter which way you put that portfolio together, you’re gonna have somewhere between 2% to 4% of the returns. None of that approach is 8%. You can’t add those two to get 8%. So there’s two issues I have right now. And, we wrote a paper on this a couple of years ago called, “Pension Funds Investing with Their Eyes Closed, Fingers Crossed.” What if 8% is 0%, something like that?
So, one, there’s this funding status of pension funds. That’ll be a societal problem. Two, they should do a better job of adjusting their target to reflect real returns and/or what’s going on in the markets. Now, one, in the back of my head, there’s a part of me that says, “Okay. Is there something we’re all missing?” We all being all the large money managers like GMO, AQR, Research Affiliates, all the way down the list. Jesse Livermore just mentioned that, all, John Bogle, all expect 4% of returns from the stocks-ish, some are 0, some are 6, but nowhere near 10, which is historical. And, you know what bonds are gonna do? Bonds are gonna do two and a half, whatever they’re yielding. So, is there something we’re all missing? My joke is always is, is Elon Musk gonna find perpetual motion energy generator? Is there gonna be diamonds in the core of Mars? I don’t know. The more likely answer is no. It’s not something we’re all missing, but it’s not gonna matter until it does. And so, it starts until returns are poor, and pension funds are failing, and society is, you know, throwing a fit about it. So, my last issue is, why isn’t anyone doing anything about it? Meaning…
Jeff: Sticking your head in the sand is a lot easier.
Meb: Yeah. I mean, they’re so barbed wire. Any investors, if you look at the institutional or even the wirehouse-recommended allocations, they may shift from, “Hey, here’s our 60:40 to 55:45.” But they really don’t make the large scale changes that need to be made in my mind to move away from solving the problem. And so, I don’t know why. And so, you actually have it happening more in the opposite direction, which is what you mentioned, which is a lot of stuff you’re seeing in a bull market, which is the U.S. allocations hitting an all-time high, all these coincident indicators that’s setting up people for harder times.
Jeff: But solving the problem right now, it’s sort of two issues. Solving the problem in its rosy definition is finding a way to sort of hit the target numbers pensions need because of these forward projections, and that’s not gonna happen.
Meb: There’s a great chart in one of the publications that says, “Here’s pension funds expected returns for each asset class.” And that’s the hilarity, is they’re all below 8%. So, you cannot put together any combination of these 20 assets. I think one was above, and it was, of course, private equity. And if you listen to our last podcast, if you haven’t, go listen to it with Rasmussen which was… and I always mispronounce his name. How would you say it? Rasmussen?
Jeff: Dan Rasmussen.
Meb: Rasmussen. Sorry, Dan. A lot of the rosy returns from private equity probably aren’t gonna continue because private equity is also allocating at high enterprise value to EBITDA multiples relative to history. So, their one possible outcome is to try to allocate to something that has a higher return, but it’s probably not gonna have a higher return. So, there’s a lot of simple answers to these problems like most things, but no one’s gonna do it because it’s career risk, it involves, example, for the pensions funds, having to go fund them to a higher funding percentage. There’s all sorts of terrible takeaways that most people… It’s like going on a diet or something like that. It’s just like take your medicine.
Jeff: I was about to say the exact same thing.
Meb: We’re so in touch.
Jeff: It reminds me of Arnott. And if you remember, we had him on…I believe that was his takeaway was, take your medicine. Expect lower returns.
Meb: Just to be clear, I mean, there are other asset classes, like, if you were to ask me personally. I mean, look, there are steps you can take, of course. It’s the most basic one is moving away from U.S. equities. So, if you move in to foreign develop, foreign emerging, it’s a lot cheaper. If you move into the cheapest bucket, it’s even cheaper still. That’s one or moving into Rob probably talked about his three pillars, which are research pieces that talk about, you know, adding things like emerging market debt and just a large global asset allocation for other asset classes. But even then, you know, I don’t think you get to 8%. I mean, we do other things like trend following, etc. But I think just having realistic expectations is the most important first step.
Jeff: I was gonna ask you this later on, but we might as well hit on it now. As we talked about before we came in here to do the recording, any particular broad asset class that you see as especially attractive right now? And the example I referenced earlier before we started recording, I was looking at EM, emerging markets. But I thought that that was sort of getting to a country by country basis now, where the entire broad market wasn’t necessarily just stay awesome no-brainer anymore. Am I incorrect there?
Meb: Emerging markets have had a great two-year run. You know, we have been talking about them for quite a while. We wrote that article a couple of years ago called, “Are 50% Returns Coming for Emerging Markets and Commodities?” And emerging markets have already hit that number, I think, in the past two years. They’ve just been going straight up. And commodities mixed bag, some of them like base metals and oil have done great. Others like agriculture have not. But if you look at the valuation, it depends on how you weight them, but if you did a market cap weight, I think the PE is around 15. For developed, it’s around 20, 22, and then for U.S., it’s like 32. So still a lot cheaper. And historically, there’s no real reason there should be a premium of one than the other. Now, emerging markets are up, but what would I’d be most excited about, same thing we’ve been talking about for forever is the cheapest quartile of stock markets. So that’s 12 out of 48 or 45-ish investible developed markets and emerging, and that gets you to a PE ratio of 12. And they were up huge 2017 and 2016, so they were at a PE of like nine or eight. But because they have gone up so much, they’re now up to a stratosphere of 12, but that’s 12 versus… that’s still half of probably developed and almost a third of the U.S.
Jeff: Well, so, if we pull back from a relative comparison of these markets and look at it at just on a straight absolute basis, 12…
Meb: 12 is super cheap.
Jeff: I was about to say. Let’s say you inherit a million bucks, are you actively gonna dump that million into this bucket with a PE 12 and be excited about it or are you gonna hold off?
Meb: That’s a totally separate question. Why would I just dump everything? So, for example, we have our Cambria’s retirement 401K or whatever our retirement plan is. We just started like a year ago, which can only invest in Vanguard because that was like the cheapest. Oil and mine just dumps into emerging markets. I would love to invest in our Global Value fund, which is I think superior, but it’s not a choice, of course. So, it just automatically goes on into emerging markets.
Jeff: Put all money in Bitcoin.
Meb: Okay, okay, okay. All right. So, yeah. On an absolute basis, I mean, historically, normal PEs are 15 to 20. And then, you know, anything below, that’s cheap and anything above that gets to be expensive. But that’s kinda the normal range. Because it’s so funny because people wanna justify whatever they wanna justify. They say, “No, no, no. Well, PE doesn’t work, look what the U.S. stocks have done.” I say, “What about the other 44 countries around the world?” Somehow, it doesn’t work in the U.S., but it does work for some reason in other countries. There’s still this industry environment trading it at 10 PEs. You know, people, going back to the Trump. They fit their beliefs to any narrative they can think of.
Jeff: Confirmation bias.
Meb: Yup. Exactly.
Jeff: All right. Circling back to where we were a moment ago, we were discussing the potential science of a top year. That kinda bleeds into what the market is gonna be for 2018. One of your recurring pieces is what you’re doing with your own money and your own asset allocation. I would assume, you’ll update that sometime soon given 2018. You wanna give us a preview?
Meb: That’s the beauty of an automated process. There’s really nothing to update. So, for just an overview for the investors who aren’t familiar. So, I published my financial situation, my broad allocation. It’s obviously dominated by ownership of Cambria, as well as a couple other private companies, but Cambria determining somewhere between 20 to 99% of my net worth, zero to 99%, I guess. I don’t know. It could go bankrupt or something, but the vast chunk. And then, of course, I have some farmland that I inherited that our family’s run for a while. We’ve been experimenting. I’ve been experimenting with Angel Investing since 2014. That’s a relatively small portion. But the vast majority is in public investments of which it’s all in the Trinity portfolios. And I don’t even look at that. That’s the beauty of an automated solution. I don’t know why anyone would ever use anything else, honestly. And I don’t care if you use Vanguard, Betterment, TROB whatever. It’s just so easy, it’s so simple, it’s optimized, it’s low cost, it’s tax efficient, it’s everything you want.
Obviously, I prefer our Trinity portfolios to what those shops are doing, but those aren’t bad either. So, I just continually add money to those and take it out as needed. You know, the one difference was last year, I mentioned I have an allocation to tail risk and strategies. And I would add more to that after a year like last year. That’s 10% of the publicly-traded assets. I would be totally open to taking that up to 20. But I think the trigger for me would be moving into a downtrend because as we mentioned earlier, all of the historical volatility kinda switch occurs after the market moves into a downtrend, so…
Jeff: What are you gonna consider a downtrend? What market move…
Meb: You get the long-term moving averages as something like a 200-day, 10-month moving average. And I don’t know that it has to be specific. And look, if it gapped down 20% overnight like in 1987, I wouldn’t add it then. But as we’re existing in this environment of some of those volatility on record, and the stock market just kinda moseying on up, adding the tail risk… And we’ve talked about this a lot on the podcast and blog posts before, in research papers is that, the tail risk allocation to me is a very personal choice, where it’s not necessarily fit for everyone because a lot of people… I think there’s a lot of steps you can make before you would wanna do tail risk. But for someone particularly in the asset management industry, I think it makes even more sense. So, you know, a lot of companies…we’ve talked to a couple of big shops that also add this to their own company to try to reduce their exposure to the broad swing of the stock market and their revenues as well.
So for me, personally, as the CIO of an asset management company, it makes sense. So, I would be totally comfortable taking it up to 20. And you can even see the scenario where I could take it up higher than that. Because, to me, it’s a bond substitute, and it acts as somewhat of like a fire or car insurance. You know, the best thing that can happen is it loses money because that means everything else is going up.
Jeff: Rewinding to just a moment ago when you said if the market gapped down 20%, you would not put in. You wanna explain that in a little more detail for the audience?
Meb: Well, I mean, if volatility goes from 8 or 10 to 50 overnight, an October ’87 sort of event, then the tail risk strategy is obviously would do very well. And the tail event has happened. Now, when are people probably most likely to add to tail sort of insurances? Of course, they’re gonna wait for it to happen and then do it. You know, when will most people probably go buy earthquake insurance? Well, after earthquake happens, you know, because it’s fresh in their mind, and it’s a very rare event. So, look… And to be honest, and by the way, I guarantee you that I probably have more invested in sort of tail risk allocation than 99% of the people in the country, if not 99.9%. This is an outlier belief. It is not a common widely-held belief.
Jeff: To what extent have you done any studying of an initial drawdown and then the ensuing continued drawdown? The idea being, let me challenge that if you miss the 20% drawdown, it’s not worth your time. You know, if you miss 20, is that indicative of, you had another 20 to go and so you can still benefit?
Meb: Well, I think timing of something like this is difficult or challenging where it’s like trying to trade a bubble or like a mania like Bitcoin, where it’s just going all over the place, and the volatility is just crazy, or it’s like trying to pick a bottom in 2008 or 2009. You can make some educated guesses, but there’s no reason the market didn’t go down 60%, 70%, 80% in 2009. I mean, it could’ve. I don’t know why. You can make an argument that it easily could have. I don’t know. I think that the tail risk challenge is that when the volatility explodes, the value of the puts goes way up, obviously. And does the VIX stop at 40, 60, 80, a 100? It’s like a very steep mountain top or steeple, where on the backside, it’s just as sharp coming back down. And the good news is if you disagree with me, you can go short the fund, and make a steady nut every month, and have the sharp ratio of two probably.
Jeff: All right. Let’s switch gears to a topic, which I know that you’re not wildly enthusiastic about. But I have sort of pressed you on this, Bitcoin. So, listeners, just as a quick context, we have an intern named Matt who works with us. Matt, thanks for all your hard work. We had a lunch with him the other day, and Matt was telling us how virtually every one of his friends is invested in Bitcoin. And as a percentage of their savings, a large part of it is invested in Bitcoin. And we actually discussed the term investing versus speculating, and his take on it was that every one of his friends who were in it thoroughly believed it to be a pure investment. They aren’t really as aware of the speculative side of things. So, as Meb and I have been talking about this over the last couple of days with Bitcoins taking another hit, it’s now down to 50% since its high in a month. I think it’s trading below 10,000 as we’re talking. And so, Meb and I were discussing how would you actually trade this in a somewhat intelligent manner? And Meb crunched a couple of numbers. Do you wanna tell us what your thought process…?
Meb: We’ve talked about crypto quite a bit on this podcast. I mean, my views have already been explained, so I don’t wanna bore people with it here. Just go back and listen to some of the old episodes. But, man, I have no problem with crypto in general. It’s most people approach it in the same way they would approach any investment they’re not familiar with. They say, “Well, I’m just gonna buy. What do you think about it?” That’s the question. They always say, “Meb, what do you think about X, Y, Z?” It could be Tesla. It could be stocks in India. It could be gold. In this case, it’s Bitcoin. “What do you think about Bitcoin?” I say, “Man, that’s such a long answer to this very simple sounding question. But how does that fit into your investment plan? Does it help you achieve your goals? Is it gonna help you achieve saving for your child’s college and then retirement? Is it generating any cash flows? Is there any sort of valuation?” You know, all those questions don’t really fit into traditional plan. However, let’s say, you said you’re undeterred and you want to invest no matter what. I wanna trade no matter what. There are plenty of approaches that I think are just fine.
No one’s going to do them, but at least, have a process. So, “Hey, you know what? I’m gonna buy some and I’m gonna hold it for five years or I’m gonna hold it for 10 years.” That’s totally fine. You gotta write it down and stick to it. Or, “I’m gonna buy some, but I’m gonna buy a market cap weighted basket of the top 10. And I’m gonna rebalance it once a year. And I’m gonna do so in line with a global market portfolio.” So, assuming that’s 200 trillion and crypto is rounding up are 1 trillion, that means you should invest a half percent. So, if you got a million bucks, that’s $1,000 in a basket of cryptos. I’m fine with that as a hedge against somehow the global monetary system. I wouldn’t do any of it. Lastly, if you’re gonna own it, if you’re gonna buy it, you could use a trend following approach, you know? And we’ve modelled this out. We should probably publish it in the blog, but overlaying a 200-day or 50-day. It’s so fast and volatile. It’s something shorter like a 10-day. They all work. So, the way that trend following has always worked. They reduce volatility and reduce draw down. Now, because, it’s so ridiculously volatile with vol up around to 50 or 70 or something insane, you have draw downs on Bitcoin already of 89% or whatever it is. But remember, that’s what stocks did in ’30s.
Jeff: Over what parameter?
Meb: No, that’s just buying and holding it. And so, if you then use the moving averages, the long ones don’t have as much because it’s so volatile, it moves so fast. So they take that 90% down to like 60. But you use like a 10-day and it takes it down to the 40s. So, not bad. And I’m modelling this back to like 2013. If you take it back before that, no one was really using it. But that’s totally reasonable to me. And so, that would have you… And by the time this comes out, Bitcoin could be anywhere between 100,000 and 100…by the way. But that would have you out of two to three parameters, and that’s another choice. And people don’t wanna hear this, but a second totally reasonable thing to do would be to use multiple parameters so you’re never wet it to one. The same way that if you use just one trend following indicator on U.S. stocks, 1987 rolls around. If you use the 200-day or longer, you would have been invested in stocks during the crash and use 200-day or shorter, you would’ve been out and sitting in cash during the crash.
So, a very different outcome. You lost 20% or didn’t. Same thing with Bitcoin. You know, if you use multiple parameters, say you use the 200, the 50, and the 10-day, granted I would probably skew that to a lot of the shorter stuff. And maybe use exponential, maybe use breakouts, and new highs, new lows, rolling periods, whatever, but use multiple ones. You don’t necessarily wet it to one parameter, so you scale in and out. So, right now, when I looked at it as of today, which is Wednesday the 17th, you would’ve been out of two of them. I think you would’ve been out of the 10-day and the 50-day and 200-day. I think you have to go all the way down to 7,000 before you get out of that portion.
Jeff: Let me push you on this. Let’s say I gave you a hundred grand just play money.
Meb: That’s on top of my million dollar inheritance?
Jeff: Exactly. You’re kinda rich all a sudden. Play money. And just said, “Meb, look, see if you can build this for me or grow it for me with Bitcoin.” What two metrics would you use?
Meb: First of all, I would say it’s gonna be… There’s so many problems with crypto even to begin. Most of these platforms I wouldn’t trust. They charge huge transaction costs in and out. It’s like a percent and a half, I think even if you use Coinbase, or three. And most of them always run a couple of the currencies. So, you can trade Bitcoin, Cash, Ethereum, and maybe Litecoin or Dogecoin. Dogecoin? I don’t know how to pronounce it. There’s actually a Ponzi coin. There’s like half of the coins are made with the expressed purpose of like literally, if you read the white paper, they didn’t have them. It’s like, “We will defraud you and take your money. This coin has no purpose.” But I would say, “Look, you can use a basket of the top five.” There’s no reason just to use one. I’d say take a basket of the top five, overlay a couple of moving averages on each of them. Be done with it. The problem is, if you’re paying 1.5% per in and out, like, that’s a huge toll already.
Jeff: They can do a lot. I mean, especially with like a 10-day or a 20-day, you can be in and out a ton, wouldn’t you?
Meb: Well, I don’t know. Go back to my earlier statement, which is just automate your finances and move on to something more productive.
Jeff: Right. I’m just trying to address the topics that a lot of the listeners wanna hear.
Meb: I’m concentrating.
Jeff: All right. Let’s knock out a couple of Twitter questions here. Meb, if you had to buy one country and hold it for 10 years, which one would it be?
Meb: Is this meant purely from the standpoint of perspective returns? Do I also have to go live there? Is it like an extradition?
Jeff: I would assume it’s returns. But my follow-up to this, which I was gonna be more interested in was, would you be analysing this purely by valuation metric or would you throw any sort of qualitative factors on it as well?
Meb: I mean, look, right now, there’s no question to me that Russia is probably the cheapest country. And oil and energy has been ripping up, and you haven’t seen a lot of the energy companies and stocks also in the U.S. participate as much as the energy complex has. So there’s divergence, one. So, I think Russia is a fantastic place to be. Obviously, that makes half the podcast listeners quizzy and nauseous to even thinking about, which makes it probably even better. But, you know, the problem with some of these smaller countries like if I have to say, Czech Republic, that only has like 10 qualifying stocks. Whereas something like Japan has thousands and thousands and thousands of very deep market. So, if I would…yeah, probably Russia.
Jeff: Russia, all right. Twitter question number two. Have you ever done a back test combining a simple moving average timing strategy overlaid with a value approach? For instance, going long in asset class while it’s above its simple moving average, but below a historical multiple?
Meb: Yeah. I mean, we wrote a whole paper on some ideas here on kind of combining value and momentum. I mean, there’s a hundred different ways to approach this. Like one of the ways we do it is we sort of value stocks, and momentum stocks, and you can take the average or you can sort of value stocks and then take the value stocks that have the best momentum. And then, you could overlay a top-down indicator based on the market’s valuation and trend and hedge that portfolio, which is what we do. On the flip side, you could do stuff like taking asset classes or countries that are cheap like our global with CAPE stuff, but then only buying them when they’re above their long-term average or sorting them in the momentum and then only buying them.
There’s so much research that shows that the combination of value and momentum is better than either alone. And so, just how you apply it or how you implement it, I don’t think necessarily matters, but that’s our bud’s Steve Sjuggerud favourite setup is cheap, hated, and entering an uptrend. You know, so, there’s a lot of stuff that…not as much stuff that’s cheap and hated and not in an uptrend yet. It’s almost all in some form of the commodity complex. So, we did our annual what should you ask for in your Christmas stocking last couple of years. And this year, we didn’t do it and it’s what’s been down multiple years truly hated. Two years ago, it was coal, which went up a ton. Uranium, which went up a pretty good amount. It was like 20 or 50% or something.
Jeff: It pops and then it fell…
Meb: It went way up, it came back down, and then it went up again. And this year, I didn’t publish anything, but it would probably be anything in the agricultural space. That’s been getting crushed for years, but not in an uptrend yet. But so much of the world is in an uptrend now. It’s just a question… You know, I still think that there’s a lot of room for the cheap countries to still have another good year. But the really hated stuff still seems to be the last participant, seems to be agriculture sector.
Jeff: Any particular way that you would recommend playing that?
Meb: You know, you could go straight up with the commodities on something that Deutsch Bank’s commodity, NDCs [SP], and ETFs. You could try commodity stocks. I’m sure there’s plenty of ETFs that silo those. No pun intended.
Jeff: Does that usually come with higher fees?
Meb: No. Not necessarily.
Jeff: All right. Next Twitter question. I thought this was interesting. I’m not sure you have an answer for it. But, Meb, what changed in your investing philosophy in the last year?
Meb: I think the older I get, more and more… I’m just like, people should buy the global market portfolio with tilts and be done with it and spend zero time on investments. The more time they spend on investments, there was a quote or tweet that we got. I think it’s FAMA. It said, “Money is like soap. The more you handle it, the less you have,” or something. So, so many people just murk around their investment strategies, and trading, and implementation, and do terrible behavioural things that the less you get involved, the better. And having an automated approach to me and just not messing around with it and having it run itself is so much better than the alternative. So, that for me, changes and it just gets more reinforced every year. And to me, it doesn’t even matter what your investing approach is that much. It can be buy and hold. It could be what we do at Trinity. It could be whatever. But having it automated and low cost. And the impact to cost continually is reinforced in my mind, partially because I see so much junk out there. There’s so much terrible options and choices in these funds out there that people still invest in. So, I think that’s the default. I think early in my career, I had more of a disdainful view of cash, but I totally see cash as being a very reasonable buffer for a lot of people. Anything that makes them behave better and gives them potentially some power on the side that aligns to whether their life, whether portfolio downturns, all that good stuff.
Jeff: Have you ever tried to model in average valuation for the Global Market portfolio, to sort of be able to tell you when it’s a good time to invest on a broad aggregate perspective?
Meb: The nice thing is most… I mean, obviously, lower valuations have higher expected returns. So, valuation of stocks is one thing, but Global Market portfolio, I’m referring to includes bonds, commodities, real estate, everything, how you throw a valuation on commodities, etc. I’m not so certain. But if you look at overall asset classes, one of the benefits of diversification is they kinda zig and zag. So, some years in different macro environments, some asset classes do great and others, they don’t. But over time, we go back to my old 5-2-1 rule. Equities, historically, have real returns of about 5%, bonds, two, bills, one. And a nice asset allocation gets you up to that 4%-5% reel historically, and doesn’t really matter what your asset allocation is so much. Of course, you add on inflation. You get that nominal 9%-10% sort of returns. But I think that’s probably been the biggest change. There’s a lot of minor belief changes, so, you know, the examples we’ve had the past year for private equity, angel investments, and the tax benefits. The examples we’ve written on papers of value investing by avoiding Yoders and taxes I think is interesting. So, the importance of taxes and fees is one that’s so boring, but it’s the basic blocking and tackling that can still make a pretty big difference.
Jeff: Another Twitter question. We’ve kind of addressed this in the past, but I’m curious if you have a new take on it now. Value factors have been out of favour for a decade or however long. At what point can we say that they have been arbed out and are not coming back ever?
Meb: I think someone asked Cliff Asness something about an anomaly in whether it works anymore or not. He said, you know, “It should work everywhere, i.e., in most countries around the world. And it should work over various time frames.” And, you know, we’ll probably need 50 years to convince me that it doesn’t work anymore. So it’s longer than probably you and I investing lifetimes from here on out. So, it seems to me like it still works great globally and in certain areas, but that’s what sets the stage. Any under-performance, out-performance, is what sets the stage for it to outperform. So, if you look at the late 90s, value under-performed growth, and market cap and everything else by a mile for the second half of the 90s. But then that sets the stage for value to have monster out performance for the first half of the decade in the 2000s. Just massive out performance. And a lot of the markets in the U.S. now resembled the 90s in many ways. So, that’s what makes this fun and that’s what makes it possible, is you have this oscillations and shifts that change and wash around to where, you know, one market sets the stage for another and yada, yada, ad infinitum.
Jeff: Sort of a follow-up to that. Another Twitter question was asking you to explain why the value premium works?
Meb: I think it’s simple. I mean, I think the example I love to give, like, four years ago, where… There’s two parts, two sides of the same coin. One, the stuff that’s going down, no one wants to buy. So that creates a lot of value opportunities. If you look at a couple of years ago when I was giving speeches on all these countries that were so cheap, no one wants to buy those. And literally just a couple of years ago be like, “Hey, you should be buying emerging markets.” And people just look at you as if you’re so stupid. But on the flip side is, what does everyone getting attracted to? They get attracted to these lottery tickets, the Tesla’s of the world that just explode in value, right? And they are some of the best performing stocks of all time, but the problem is, you can’t identify those characteristics ahead of time. So if you were to buy a basket of those stocks, the results are very poor and they do very poorly. But everyone will always be attracted to them because you can always point to the one that hits the moon and has multi-hundred or thousand percent returns. And so, it’s a behavioural feature of the market. No one wants value stocks. Everyone wants the lottery tickets because that’s what seems to work, but if you do it in a shotgun format, it absolutely, is the opposite.
Now, that having been said, the more and more money that’s going into any investment strategy will diminish the edge. So we always talk about flows changing factors. So, if you look at dividend investing, you know, where that had a very real edge in the late 90s because there was a huge valuation discount to the overall market, whereas many dividend stocks are more expensive in the overall market now. Because money is chased in the dividend stocks for the past 17 years. So, that changes the opportunity set. At some point, will dividend be an attractive factor? Probably. But if you look at all the research that Research Affiliates does with talking about factors, and you kinda gotta be agnostic, say, “Hey, look. I like all these factors, but at some point, some are really expensive, and some point, the baskets are really cheap.” That’s based on the money just washing around.
So, I don’t expect the value premium to ever go away. I expect it probably to be a lot of the…You should listen to this podcast with Ted Seides and Michael Mauboussin. That’s two of the hardest names pronounced on the planet, by the way. But Ted’s “Capital Allocators” podcast had Mauboussin on it. And he was talking about, you know, the example, why aren’t there anymore 400 hitters. And Ted Williams being, you know, the last 400 hitter. And it happened a lot more frequently back then, and a lot of it is the talent across the board has gotten a lot better. And so, the volatility and standard deviation of potential returns is condensed. And so, you probably have a lot of the quant shops like LSV, AQR, not DFA, but also DE Shaw. All these that have the multi-factor models that are compressed the easy low-hanging fruit. So you may not have as much outliers anymore, so it’s a little harder. But, on a macro level, I can’t fathom it ever getting to the point where it’s totally gone because people keep acting human.
Jeff: It seems the voices that are calling for the death of value investing are really loud and very sort of convinced in their position. I wonder if this is the same for any factor of all time or value itself is connoting or if it is bringing them back…
Meb: Are there even any voices calling for this?
Jeff: Yeah. I mean, remember, we discussed this four months ago, five months ago. And this was literally the title of something in “Barron’s” or whatever it was, which was the death of value investing. I’ve heard this a bunch. Have you not?
Meb: I mean, I hear people like referring to, you know, Wes talking about the value pain train and the value not doing it great. But look globally, value has crushed expensive markets for three years in a row. So, it’s working somewhere.
Jeff: All right. Let’s get two more then call it a day here. Let you get out of there go to Japan. One question was asking about your take on green bonds or sustainability, investment instruments. Where do they fit in within an asset allocation model? You know, on one hand, they’re not a speculation, but they’re also not necessarily core. How do you view it?
Meb: So, there’s a lot that wrapped in, in that. I mean, I’m fairly agnostic. If someone wants to put their tilt or screen on investments, I’m fine with that. If someone says, “Look, I wanna eliminate all tobacco companies, or I wanna do ESG, or I wanna do green bonds. I wanna do any of that,” I’m fine with that. It just by nature reduces your breadth of opportunity set. So, it doesn’t mean you have to have a bad opportunity set. It just means it’s gonna be smaller. So, if you have 10,000 stocks, you may now have 5. Is that enough stocks to pick from? Absolutely. You could use your screens. You’re only buying 200 anyway, so it’s not gonna really matter. Mathematically, it makes your potential returns not as optimal as they were with more choice, but I’m fine with it. I mean, the bigger challenge I think is a lot of the ESG and I think Paul Tudor Jones coming’s out with the JUST Index for JUST companies and all these slants. You gotta question, is it a marketing angle used to sell me a product for a higher fee or is it something that actually is aligned with my interests, whether it be LGBT, whether it be ESG, whatever it is? I’m fine with it, but realize, by nature, what you’re doing is reducing opportunity set. But it’s not necessarily a bad thing.
Jeff: Last question. What is the long-term mean over hurdle for real U.S. treasury rates?
Meb: I think it depends on time frame you’re looking at. Are you going back 20 years, 50 years, 100 years? What is the average yield or median yield on a real basis? The real return on 10-year bonds globally was that 2% number when I was saying 5-2-1 rule, so 2%. But what the nominal or real yield over time is, I think it depends on what countries you’re looking at, in what time frame. I could find out in the U.S., for example. But I imagine it’s not a whole lot.
Jeff: That’s it.
Jeff: Anything on your end?
Meb: No, that’s it. If you’re in Japan, come say hi. We’ll go watch a sumo match, chat markets, have a… Japan’s actually got a pretty good craft beer scene now.
Jeff: How much snow do they have right now?
Meb: Tons. Over 300 inches already, which is more than most U.S. resorts get all year.
Jeff: Meb had a big day yesterday, listeners. He received an ungodly amount of packages from Amazon. Some of which were new skis.
Meb: I bought a Glen Plake-style ski bag.
Jeff: Do you wanna explain who that is?
Meb: Do you know who Glen Plake is?
Jeff: I know exactly who he is.
Jeff: He was my idol growing up.
Meb: Guys, he’s the famous skier with the big mohawk.
Jeff: He was the guy with the Mohawk.
Meb: Yeah. Anyway, he’s…
Jeff: Do you know who Scot Schmidt was?
Meb: Yeah. He’s still around, but he had a ski bag that’s fluorescent green, by the way. But it doesn’t have any pockets. I bought it. It doesn’t have any pockets. What’s the whole point? What do you do with all your stuff? Anyway, I got a lot of hand warmers. It’s actually really cold in Japan. So, one of the reasons snow is so good. We’ll be in Hokkaido.
Anyway listeners, enough of jibber jabber. Thanks for taking the time listening today as always. You can find show notes, podcast links to the almost 100 podcast now at mebfaber.com/podcast. Leave us a review on iTunes. We read all of them. They’re up to almost 300 now. We’ll have to read some of the funnier ones on air here coming up soon. And good investing.