Omaha, Process, & Skin in the Game

Every time Peyton Manning steps up to the line of scrimmage he is prepared to audible.  He has spent thousands of hours of film study to get ready for nearly every situation.  So when he shouts “Omaha”, he isn’t panicking or reacting emotionally, he is simply instituting a reaction to calculated probabilities from many years of experience and study.  

The same should be true for your portfolio.  Do you have a plan?  Or do you simply have a portfolio for today, that you will emotionally react to if and when current events dictate?

You should be prepared for the possibility of a 80% decline or 100% rise in stocks.  What would you do with bonds yields climbing to 10% again in the US, or declining to and staying at at 1% for 10 years?  Gold at 400, gold at 4000? Oil at 50, oil at 200? Did the volatility and losses of September and October scare you?  Did they cause you to alter your plan?  Do you even have a plan?

Much like the great book Checklist Manifesto, you should have a written investment plan – what real money institutions call a “policy portfolio”.  I wrote a whole book on the topic (The Ivy Portfolio).  If you promise to write a review I’ll even send you a copy.  The simplest policy portfolio is just the global market portfolio which can be had for about 0.2% through ETFs.  But it doesn’t matter what your policy portfolio is, just that you have one and you can fathom the possible outcomes.  It could be 100% in CDs, or the Talmud, or anything else.  Some like trendfollowing, others, a farm and guns.

 I’ve been in Asia for a few weeks and in general would love to add more to my foreign stock allocation on any weakness or declines.  I have limit buy orders in every 10% down in foreign stocks for the next 50%.  Likely? No.  Possible?  Sure.  But if and when stocks go down 20,40, 60%, I don’t want to be at the line of scrimmage wondering if I will pull the trigger or not.  I have a plan, and my portfolio has a roadmap for any possible outcome.  While I am a trendfollower at heart, I have a (very) long time horizon, and can be aggressive.  Younger investors should relish market declines (hard but true).

In June I sat down to chat with Samuel Lee at Morningstar.  I think it is instructive to illustrate the way I think about process of my portfolio, as many investors don’t think about possible outcomes until they happen.  You can see my broad allocation to public investments below, and I will update again at year end. 

Lee: In a recent blog post, you disclosed the rough breakdown of your personal portfolio. Would you mind disclosing exact proportions for your liquid assets, and why you’ve made those bets?

Faber: I think it is hugely important to have a money manager with skin in the game. In addition, many commentators and portfolio managers are willing to provide you with plenty of advice, but just try getting them to disclose how they invest their own money–impossible! If you don’t believe me, or want to see how much your portfolio manager is invested in his own funds, the filings are public, so you can view them at any time. Next time you are chatting with your advisor or broker, or hear someone giving lots of advice at a conference, ask them one simple question: “Specifically, what do you do with your money?”

My net worth is dominated by my ownership in Cambria Investment Management. Next in line would be farmland and real estate owned with my two brothers. I also hold equity stakes in a few other private companies (including The Idea Farm and AlphaClone). On the liquid side, I have 100% invested in our funds. All of my cash flows simply funnel into these four investments on a periodic basis. My horizon is very long-term and I have a high risk tolerance.

The breakdown is currently:

60% Global Tactical Hedge Fund (private)

20% Global Value ETF (GVAL)

10% Shareholder Yield ETF (SYLD)

10% Foreign Shareholder Yield ETF (FYLD)

The percent allocation in the three ETFs is actually higher than stated above, as the Global Tactical private fund is composed of ETFs. I will be adding to this list as we launch new funds in the coming months. Specifically, my assets in the hedge fund will transfer to the Global Momentum ETF when it launches.

As you can see, my holdings are dominated by foreign stocks, portfolios that can and do have the ability to tactically move to cash (and have a high exposure to real assets), and stocks that are shareholder-friendly and returning lots of cash to investors. I am least exposed to traditional bonds, but for me they are not that attractive at these levels for my time horizon and goals. If stocks experienced a large drawdown of 30% to 90%, I would shift more and more of the allocation to the equity portion. As I’ve mentioned in our new book, I don’t think U.S. stocks are that attractive currently, but I am very positive on foreign stocks.