Blood in the Streets (or, Why Investing in Low CAPE Works)

People often ask me why we use 10 year inflation adjusted PE ratios rather than simple trailing 12 months.  

Below are two charts that I think are at the crux of the arguement, and basically visually demonstrate why CAPE works.  

0.75 correlation for CAPE, and only 0.24 correlation for TTM PE.

Keep Reading…

Would You Rather?

I don’t pretend to consume information the same way my readers do (I still don’t have a Kindle or iPad, though probably should).  I was chatting with a reader over breakfast and this question came up, so I thought I would ask you directly how you would prefer to receive The Idea Farm content…


Create your free online surveys with SurveyMonkey , the world’s leading questionnaire tool.

You Are Not A Good Investor

You probably think you are good at picking stocks (and investing in general).  I hate to be the bearer of bad news, but you are not.  In fact, you are terrible at investing.  Now, there may be a few of you that outperform, and part of that is due to luck, but I am speaking to the collective “you”.

The statistics back up his assentation.  DALBAR releases a yearly study called The Quantitative Analysis of Investor Behavior (QAIB) that compiles flow data of dollars into mutual funds.  They have found that the average investor underperforms the market by a mile – 4.32% per year in stocks and 5.56% per year in bonds! 

So why do most people think they are great investors?  Likely the same reason most people think they are better drivers than average, and are certainly better looking than average.  It is a built in behavioral bias floating around in our genetics passed down from our ancestors many years ago.

Don’t be too downtrodden; stock picking is hard, really, really, hard.  The basic odds are stacked against you.  My friends at Longboard Asset Management completed a study called The Capitalism Distribution that examined stock returns from the top 3000 stocks from 1983-2007.  They found that:

-39% of stocks were unprofitable investments.

-19% of stocks lost at least 75% of their value.

-64% of stocks underperformed the index.

-25% of stocks were responsible for all the market’s gains.

Simply picking a stock out of a hat means you have a 64% chance of underperforming a basic  index fund, and roughly a 40% chance of losing money! 

Not only is it hard to pick stocks, you are also up against the most talented investors in the world.

There is a famous saying in poker, “If you sit down at the table and don’t know who the fish is – you’re the fish.”  Most people who sit down at a poker table with a professional player will quickly lost all of their money.  While luck can have an influence in the short term, eventually the outcome is near certain.  Most individual investors do not know that they are the fish in the game known as Wall Street…

(Will update this post with a few more stats this weekend…)

Click to enlarge graph (Blackrock, via InvestaBullish)





Free Data Sources

Every day I receive a slew of emails asking about historical data.  While I use Global Financial Data ($), below are some resources for free and paid historical data.  If you are close to a B-School you can probably access a lot of the paid for free as well.  Some readers also suggested public libraries that give you access to ValueLine, Morningstar, etc.

Please leave a comment if you know of any other good websites I am missing.  

Quandl is also another one that readers have emailed in (HT: LW).

Free Multi-Index Data

The book is about $160, although you can probably get one used for less.  Not sure how much the data sub is on Morningstar.    Stocks, Bonds, Bills, and Inflation – Ibbotson (now part of Morningstar).  Includes monthly data for US Stocks Large (1926), US Stocks Small (1926), Long Term Corporate Bonds (1926), Long Term Government Bonds (1926), High Yield Corporate Bonds (1926), Intermediate Term Government Bonds (1926), Inflation (1926), T-Bills (1926).  Since 1969 adds Gold and Value/Growth classifications. 

Surprised no one has turned this into an Excel sheet.

Shiller has US Stocks, Dividends, Earnings, Inflation (CPI), and long term interest rates back to the 1870′s on his website.

Ralph Vince’s Barron’s Download



Free US Stock Index Data

Fama-French (Monthly 1926, Daily 1963)


Free Foreign Stock Index Data

MSCI Barra


Free Interest Rate Data

St Louis FRED CPI, Interest Rates, Trade Data


Free Real Estate Data

REIT data (1972)

Housing Shiller (1890)


Commodity Data

Morningstar, IASG, Barclay’s


Paid ($$) Data Sources

Morningstar Encorr ($10,000)

Morningstar Dimson, Marsh, Staunton Module ($3,000)



CRSP ($25,000)




Activist Investing – 9 Stocks They’re Buying

Quartz had a fun profile of some activist investors recently.  The profiled best friends Ackman, Icahn, and Loeb in addition to Greenlight, Trian, Jana, Elliott, Starboard, ValueAct, and Relational.  

I thought it would be instructive to take a look at a portfolio of these funds to see how it would have performed since 2000, as well as what they are buying now.  

Keep Reading…

Mebane Faber Research Premium Launches!

It has taken me awhile longer to finally get the technology working here, but I think we are all set.

If you want to go ahead and signup for the premium version of the blog here is the link.  

Future posts will have the WSJ style posts locked down unless you have a login.  I imagine there will be a few hiccups so please let me know if you have any issues.

I prefer to see this less as locking down part of my content and more of an incentive to produce and put to paper more of our research that otherwise never sees the light of day.  

I’m looking forward to doing lots more writing on the coming months, and please email in any burning questions you want me  to research..

Sign up here!

Low Nominal, Normal Real

I forgot to add these longer series on yields back to 1900 to our post the other day on real and nominal yields, so here you go.  




The End of the Middleman

“I look at where the music industry is now and it’s not helping me so I’ve learned to exist without it!”

Replace every “music industry” phrase with “(high fee) financial industry” and you begin to understand.  Phenomenal post by @jaltucher

As you all know I’m self publishing my next book in a week or two and have written a longish case study post that I’ll update as the experience progresses.


AAII Updates

I publish these every once in awhile.  Not much interesting here…






Silliness In Cyprus

There is a lot of silliness going on across the Atlantic with Cyprus and their bank deposit seizure plan.  (For those that haven’t heard here is a brief summary:

“In exchange for €10 billion ($13 billion) in rescue money, creditors would impose a one-time tax of 6.75 percent on all bank deposits under €100,000 ($131,000) and 9.9 percent over that amount….Anastasiades said savers would be compensated with bank shares. Moreover, all those depositors who opt to keep their money in Cypriot banks for at least two years would receive government bonds with a value equal to their losses. The bonds will be backed up by future revenue generated from the country’s newfound offshore gas deposits.”

And while I think it is absolutely moronic, I also think it is worth putting in context.  One thing that people miss is that there are a lot of threats to wealth.  One is taxes, one is outright confiscation, and one is inflation.  In the US we are in a scenario many refer to as “financial repression”.  This scenario of low/zero interest rates and inflation (2-3%) is terrible for savers as their deposits slowly bleed and lose 2-3% a year to inflation.  

So while everyone is gnashing their teeth and freaking out about Cyprus, realize that here in the US, even though your deposits are safe – nonetheless they are getting confiscated, just by a different means…

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