Episode #22: “Listener Q&A”

Episode #22: “Listener Q&A”


Guest: Episode #22 has no guest, but is co-hosted by Meb’s co-worker, Jeff Remsburg.

Date: 9/27/16     |     Run-Time: 59:49

Summary:  Episode #22 is another “Listener Q&A” episode. Meb has been traveling again, this time giving several speeches. So we start the episode with Meb giving us the highlights from his most recent talk in Vegas, in which he details four mistakes that investors are making right now. Next, we get into our listener Q&A. Meb tackles:

  • Is shareholder yield a smart beta factor in its own right, or is it a combination of factors?
  • Should a shareholder yield strategy outperform portfolios with size, value, and momentum tilts?
  • Is there a reason why Meb rarely talks about adding small caps to a portfolio?
  • What are the merits of investing in ETFs versus bonds directly?
  • Can sentiment indicators be used to add tangible long-term value to a portfolio?
  • How does Meb define risk, a term he uses quite often?
  • While certain global countries with low CAPEs appear attractive, if the U.S. entered a correction, wouldn’t those foreign countries follow, negating the decision to invest there?

There’s plenty more, including talk of gambling in Vegas (and counting cards), Meb’s high school reunion, and some of the worst investment losses Meb ever suffered (think “biotech” and “options”). Hear it all in Episode 22.

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Links from the Episode:

Interview links:

Transcript of Episode 22:

Welcome Message: Welcome to 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.

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Meb: Hi, everybody. This is Meb. It’s fall time. Welcome back to the show. I’m in the office after a bit of a whirlwind country tour. Figure we’ll do a Q&A episode today. So we’re bringing back Jeff. Welcome, Jeff.

Jeff: How is it going?

Meb: It’s going good. It’s good to be back in LA. It’s like 95 degrees out, so hopefully we’ll get a little sun, a little surfing. Been kind of on the road a bit but happy to be back in my own bed.

Jeff: Yeah, you’ve been out of town for a while now. Where have you been?

Meb: Was in San Francisco for a beautiful wedding and then hopped over to Las Vegas for four days for a business conference, which is a long time for anyone to be in Las Vegas.

Jeff: How much did you gamble?

Meb: Usually I’m pretty good. You know, when I go there and mentally can prepare myself, I’ve been rock climbing in Red Rocks there. I’ve gone up Mt. Charleston. This trip I was gonna do some mountain biking but oddly enough it just never happened. I love to play poker, but at casinos…tournaments in casinos, it’s boring for me. I can’t sit there for hours. If I put in some some podcast now maybe that’s a good idea, I could do it, but it gets really boring. So I love to play with friends, I love to have a few beers and play, but to play in a tournament… I played at one here in LA and I remember looking over and seeing the Lakers owner sitting there. It sounds just junkie casino.

But, you know, four hours in, it’s 2:00 in the morning and it’s just kind of… You know, it’s not that much fun to me. And then blackjack, you know, back in the day, used to…in the vein of Bill Gross, you know, used to count cards in Tahoe, I used to count cards, and that became fun up to about the first time I got kicked out of a casino, because I was young, didn’t have a bankroll. So, you know, after sitting there for six hours, again, it’s not fun because you…

Jeff: How did they catch you counting?

Meb: Well, it’s not fun. You can’t drink, you can’t…because otherwise you’ll start to… I mean, you can have a few beers but after that your brain gets a little fuzzy. But you’re sitting there with people. There’s chain smokers at the table. It’s depressing because you’re watching them lose all their money. You have to bite your lip when someone’s like, “That’s not what you’re supposed to be doing,” you know, when you’re playing by basic strategy.

So counting… I mean, blackjack in general, you have half a percent disadvantage. There’s a lot of great books to read about this. Ed Thorp, one of the pioneers, would love to get him on the show. He’s actually local Newport, ran one of the most successful if not most successful hedge funds of all time called Princeton Newport. But he wrote the original book Beat The Dealer and it was about counting cards. And it’s very… I mean, it’s very simple. You can come up with a very simple high low count that moves your advantage.

And it’s actually very interesting kind of applied to quant strategy because there are so many takeaways, where you get a very slight edge but played out over thousands of hands, you know, you’re going to win. The same way as a casino is going to win no matter what if you play thousands of hands with basic strategy. It just means you lose less.

Jeff: Before we get too far down this rabbit hole, let’s steer it back to something investing-related. What we’re you talking about at your speeches in Vegas?

Meb: It was a new talk and… Oh, I did two, but the main one was a new talk. Actually it was a stands [SP] research conference. It’s a great group. We’ll get some of the guys on there. Because it gets the most eclectic crowd. I mean, there’s speakers from Ron Paul, to P.J. O’Rourke. I mean, I had dinner, I was sitting next to a guy that had climbed and then ski down Everest, and the next to me on the other side was a… They had a hypnotist. I mean, it is the most eclectic crowd.

Jeff: Because last year you had Laird Hamilton, right?

Meb: Yeah, I had to go in after Laird. That was kind of a brutal…that was in LA. That was a brutal follow up, what’s better than following Laird than some quant investing strategies. So anyway talked about…this was a new. It was four big investing mistakes. There are mistakes that not just retail or individuals make, but I see professionals make over and over and over again, and they’re mistakes that are fairly easy to fix, but without a plan, you know, people continue to make them on all levels. Not just…. I mean, again, it goes from the guy who’s got 1,000 bucks in his investing account to the people that manage billions of dollars. And you see them over and over and they’re not that hard to fix.

Jeff: Can you give us a quick recap?

Meb: Sure. So there was four. The first one…and I’ll run them real quick and then maybe we’ll talk about one or two. But the first one was having unrealistic expectations. We’ve talked a lot about this on the podcast and blog in the past, where they’ll do surveys for institutional investors. You know, we talked about institutional investors expecting 13% out a hedge funds, which is just bananas. Because that means on a gross level they gotta do like 20%. But there was a recent survey from Schroders, interviewed 20,000 people around the world and said, “What do you expect out of stock returns?” And almost always it falls right around 10%. If you look at the distribution, it’s actually interesting because this another psychology experiment, you know, t falls on the hard numbers, 5,10, 15, 20.

Jeff: The round numbers, yeah.

Meb: Zero, five, but mostly around 10. You know, what we said is the first step is why do people center around that number? And historically it’s because that’s what stocks have returned in the U.S., 9.7% going back to let’s say 1920 or 1900. And in particular, I think millennials in the U.S. were expecting 13%. Because in one of the reasons they’ve never seen a bear market…

Jeff: Yeah, they’ve been influenced by the last, you know, seven years or so.

Meb: Right. You’re guided by your own experience. If you’re a young person in Japan, you don’t invest in stocks because they’ve gone nowhere for 20 years. You know, that’s a fool’s game, that’s a mug’s game, why would you ever do that? But in the U.S. for the last eight years stocks have only gone up, you know. And we talked about this in a prior podcast, but the Dow, for example, is right now the third longest bull market ever. If it goes through December, we cruise through the election, it goes the second longest bull market ever.

And if it makes it… I think it’s either March, April, or May, it will be the longest as bull market of all time. Now, the magnitude, it’s not the biggest, but it’s up there as one of the longest, which is interesting. So the reason people anchored to that number is, one, that’s what stocks have done historically, and two, you know, it’s been a bull market for the last number of years. So people kind of gravitate towards that. But we say, you know, particularly right now that’s very unrealistic.

Jeff: You know, it kind of reminds me of your podcast with Arnott when he made the point that low returns aren’t a problem. It’s low returns when your expectation is higher returns is the problem.

Meb: Yeah. Worst case is you spend less save more, and I was in Vegas so I said, “All right, wait a week, you know, you can still go to the buffet and do everything this week,” which by the way, there was a line for the buffet… It was like an amusement park, where I was staying at Aria. And it trickled around, snaked around, but there were signs like an amusement park, where it’s like, if you’re in line at this point you have to wait an hour and a half. If you’re in line at this point, you have to wait two and a half hours. Why in… I hate buffets already.

Jeff: You would never wait an hour a half for a buffet.

Meb: Buffets are my nightmare anyway. Why would you ever want food that’s just been sitting out? Anyway, we’re going off topic. But one of these I talked about I said, you know, I talk a lot. I been talking about valuations for years and I’m kind of over it. I mean, I’ve talked about it so much till I’m blue in the face and it’s working wonderful this year as far as global valuations. A lot of the cheap countries are just blowing it out of the water. Though we said, you know, for the U.S., for example, we wrote a book on this, Global Value. We talk a lot about the 10-year PE ratio as a good fundamental anchor.

And people, for some reason, their brain just…it doesn’t work when you talk about CAPE ratio, I don’t know why. You can use any evaluation metric. So my point of this…so finally I said perfect. There’s recent video and article from John Bogle, you know, Vanguard’s founder, the king of indexing and buy and hold. But he had published 25 years ago a very simple formula to calculate expected stock returns. And I said in my speech, I said, you know, I’m only gonna include one formula because Stephen Hawking says…he’s famous. He said when he wrote his book Brief History of Time, he said, “My editor says every formula I include I’m gonna cut my readership by half.”

And so this in this case I said I’m only including one formula, but it’s super simple. It’s expected stock returns equal…there’s only three inputs. One, starting dividend yield, and that’s known, that’s easy, okay? Two, earnings growth, percentage number. And three, change in valuation. And so the first two are the economics of a business and stock in the business. And so historically these numbers have been around a 4.7% dividend yield historically, which is pretty high.

Jeff: It’s just S&P? What is this?

Meb: Yeah, U.S. large market cap weighted. So S&P, back to when it existed and before that the Coals Commission and everything else, but market cap weighted. Two, earnings growth, earnings dividends growth, 4.7%. So it’s easier to remember because it’s the same number, but you could round up, round up, say four and a half or either of those, whatever. That gets you… And then historically valuation shouldn’t change….

Jeff: It’s all nominal?

Meb: It’s all nominal. Valuation shouldn’t change because over time, you know, it should be a wash. But because of a lower starting point the beginning part of the centrina, [SP] higher ending point now. You’ve had a point 0.3% per year tailwind. So that gets you to 9.7%, which is why people expect 10%. But let’s go through and do that equation again. So right now a dividend yield 2%, if you’re lucky, okay? So way off the historical 4.7.

Jeff: Side note that reminds me of how you right now hate dividend stocks, one of your least favorite…

Meb: Totally separate topic, another podcast, but yeah, high yielding instruments in the U.S. without a valuation filter, one of my least favorite investments. And so if you add those two together, 2% dividend yield, so earnings growth is hard to forecast. Because you’re gonna assume a historical growth rate but it tends to be mean reverting. And so we’ll get into that later, but let’s just assume historical growth rates, which we probably won’t have, but let’s assume it.

So 2% dividend yield, 4.7% earnings growth, and we’ll assume valuation stayed the elevate levels where they are, which is a CAPE ratio of around 26, historical is around 17, that gets you to 6.7%. So even right there, assuming earnings growth goes swimmingly that valuations don’t change, you’re already three percentage points lower than historical. So 6.7, but 6.7, hey, I mean, that would be awesome. That would be great. However, let’s look at valuations.

Let’s say valuations revert to normal valuation levels, which is going from 26 down to 17, that takes you… So you a get 2% dividend yield, 4.7% earning, minus four and a half, 4.6% per year valuation headwind. This is over 10 years, by the way. That gets you to 2.1%, which basically keeps up with inflation. Now, if you say, “Look, I believe we’re gonna be in this normal inflationary environment,” so 1 to 3%, 1 to 4% is kind of safe inflation zone, people pay more for stocks when you’re in that zone.

So the valuation multiple, let’s say, can stay as high as 21 for the CAPE ratio. In that case, it’s only about a 2% headwind, and that gets you to 4.4% annual return. Again, this is why we always say, look CAPE levels where we are at 27, it’s not a bubble. It’s not good. I mean, it’s high. So even if we mean revert on valuation, let’s call it around a 4% expected return, which is better than bonds. But, again, if you look at foreign markets you input the same numbers. So maybe 3, 4, 5% dividend yield in some countries and the valuation tailwind, they get you into double digit returns.

In some cases it’s 10 to 15% returns for a lot of these countries that we talked about when we did that article at the beginning of the year, the cheapest markets of the world, the Brazils and Russias of the world get a massive tailwind. So it’s a very simple equation. It doesn’t mean it’s gonna play out over this year or next year, but over the most next 10 years it’s what’s likely. In the example I gave in Vegas, as I said, it’s like blackjack. You know, if you sit down on a table this equation is like being able to play against the dealer but deciding if you wanna bet after the first round of cards have been dealt.

So if you get dealt a 16 and the dealer has a 10, that’s a very low expected return hand. You’re likely to lose. So you can say, “You know what? The equation for stock returns, the equation for this blackjack bet is not great, you don’t have to play.” There’s a name in an article we did on the blog. There’s no one saying you have to invest in stocks, right?

So you can take a step back and say, “You know what? I’m not gonna make that bet.” And maybe a CAPE ratio of 27 is not terrible for you, but at some point common sense takes over. If it’s at 35, if it’s at 45, where it has been historically, you know, lot of people will say for an expected return of zero or 2%, am I willing to risk 50 to 80% loss at some point, which has happened in the past. Very recently 50% loss is twice in the last decade, 80% loss in the Great Depression, but a lot of countries around the world have been down over 50 to 80% in the last few years.

Now, on the flip side you could sit down the table and have a 20, king and a queen, and the dealer has a six. That is a very high expected return bet. So you can say, “You know what? I do wanna play that.” That’s what I think a lot of emerging markets look like now, a lot of the cheapest markets around the world, which are having a fantastic year. I mean, we run a fund based on this, which had a horrible year in 2014, a pretty good relatively year in 2016, a great year this year. But that sort of bet is a great bet, so you could say, “Yeah, I do wanna place that bet.” Now, again, it doesn’t guarantee you’re gonna win. The dealer could flip over a five and hit a 10, they got 21, they win, right? But it’s putting the odds in your favor. So there’s a spectrum of outcomes.

Jeff: Okay. So part of your advice then as this pertain to your presentation was just your expectations, which means flip side of that is a look, global, because you can probably get better returns. So second point.

Meb: Yeah. So the four points we made, one was unrealistic expectations, two is to get away from the U.S. folks portfolio. I mean, again, I’ve talked till I’m blue in the face about home country buys. People have way too much in the U.S., so start to move global. The U.S. as a percent of world’s market cap is only half, so have a minimum of half in foreign equities. I think you could go as high as three quarters. No, that’s very uncomfortable for most people, but the U.S. as a percentage of world’s GDP is only around 25%.

So if you were to GDP way the world, then you would have three quarters in foreign stocks. And one more quick point, as I also said, “Look the cool thing about this equation is you can put in the extreme event, what has happened historically.” So if U.S. stocks had gone from a CAPE ratio of 27 to 45, that only gets you…so that the highest bubble we’ve ever had in the ’90s for U.S. stocks to go back to bubble valuation only gets you to about 12% returns per year.

So you would think it be 20% or something amazing, no, it all only gets you about 12, because we’re starting from elevated valuations already. Now, to go back to five, which we’ve been in the past a few times, that takes you to about minus 8% per year. And historically stocks have only seen negative real returns a few times, but we’ll link to the show notes on the blog on a couple of posts we did here. All right, so yeah, so one of things obviously we’ve been saying this for many years, get a balanced global allocation, get exposure to foreign, particularly the cheap countries of the world we think will be much better, and so diversify globally. It makes a lot of sense.

Jeff: Sounds good. Well, do you want to rotate now to Q&A or you wanna tackle a bit more?

Meb: Well, there were the two more points we made and then we can move on to whatever the Q&A. I mean, the third with a point… And again, a lot of these are kind of taking your medicine, paying too much in fees. Jason Zweig had a great tweet about this today where he said something like, “The good news is financial adviser costs have come down, the bad news is that average is still like 1.3%.” And in financial advisers, I love you guys, but I think you’re worth your weight in gold if you deliver a lot of value added services. But from the buy and hold asset allocation side, you want as cheap as possible for that.

For a financial planner, for an adviser, that’s great. You can pay whatever you feel comfortable with that will help you, you know, have all your goals. And it kind of ties into the last point, which is not having a plan. So everyone listening, whether you’re on a run, whether you’re in your car, whether you’re using my soothing voice to go to sleep at night, think about this for a second, write it down, and say, “Do you have a written investment plan?” I’m guessing the percentage is 5%. Jeff, do you have one?

Jeff: I do not.

Meb: Yeah. And so, meaning… And not just like, “Here’s my allocation,” but, “Here’s my asset allocation and here’s how this will change.” So this is how I’ll rebalance it or this is how we talked about in our podcast over rebalance. This is how this will change based on XYZ happening. If interest rates go from one and a half percent to 10, how would that affect my portfolio? And for a lot of people is, “I have a buy in…my portfolio won’t change it at all.” If interest rates go from one and a half to minus two, if oil goes back to 200 or oil goes to 10. If stocks go up 80% or down 80%, do any of those impact your portfolio? If a nuclear bomb goes off in the Middle East?

Jeff: You know, I’ve even heard this idea expanded to individual security selection. So before you go out and purchase a stock or an ETF, you might wanna sit down and write down why exactly am I buying this and under what conditions will I sell it, whether as a protective device or to take profits when [inaudible 00:18:40] is gonna change?

Meb: I love that advice and no one does it. And the reason they don’t do it is a lot of people, like going back to Vegas example, like to gamble. You know, people like buying lottery tickets, people like playing craps and blackjack in Vegas when they know they’re going to lose. They like having an asset allocation where they have an input, they feel control. You know, they like the gambling nature of it. It gives so much temptation to be able to do it on the go. So, I mean, how many people listening are even thinking that Trump or Hillary has even a remote impact on what’s going on with stocks for the next 10 years?

A lot of people, and a lot of people will change their asset allocation based on the outcome of the election, even though I think it’s meaningless about, you know, going into the election, about all these various inputs, what they read in the paper, and you can predict what’s gonna happen. So, do you have an asset allocation policy portfolio? What we call it in the endowment in real world space. And how are you going to update that given anything that could happen in the world? And if you don’t, then you’re kind of just messing around.

Jeff: Or part of the implication there is the time frame. So, you know, when you’re gonna update this, so somebody who’s looking and actually believes that Hillary or Trump might affect the portfolio obviously has a much shorter time frame than you do. What do you think is the most effective time frame to have and stuff?

Meb: So not only…well, it depends on the person. I mean, there’s people that are listening, they’re going to be 85, 90, there’s people that are listening they’re probably 18. But again…and then it depends on the rest [SP] on, what they’re trying to do with their life, their goals, everything combined, right? But the best thing about writing this down is you should also share it with someone, whether it’s your husband or wife, or your children, your parents, your buddy because it gives you accountability.

And just like losing weight, you know, if you say, “Hey, some of the best ways to lose weight people have shown is a lot of these…” Man, there used to be a website called Stick, where you could make bets with people. Say, “Hey, look, I’m gonna email you once a month my weight, and if it’s up I have to put in $20 into…I have to donate it to charity.” And then Stick had a great feature. Whereas not only did you donate to charity, you would have to donate to the like the anti-charity. So if you’re like a die -hard Republican you had to donate money to Hillary.

So if there’s anything that’s gonna make you probably stick to your diet and lose weight is the prospect of donating to something you hate, you know, if you are a person who believes in gun control, having to donate to the NRA. But my point being is that you have to have accountability, otherwise if you write it down, you can just change…you can erase it and change the rules. If you have to talk to someone…and that’s what the beauty of financial adviser is, because they act as a wall between you and doing something really stupid.

And also there’s also the beauty of a lot of the automated investing strategies. You know, we just launched Cambria Digital Advisor. But I would ask people now and I sit down with them, I say, “Look, why would you not have a low cost commission free rules-based, automated tax efficient investment process? What’s the alternative?” Just watch Cramer and, you know, pick out like your best ideas?

Jeff: Darts at a board.

Meb: It’s what is the alternative? So we talk about those four things, but like talking about losing weight or talking about things that you know you should be… I mean, losing weight is also a simple equation for the most part, you know. People have different metabolism, their bodies are different, but in general calories in versus calories burned for the most part is the simple equation. Again, there’s dials you can turn anyway.

Jeff: So do I assume you’ve written down your own plan?

Meb: Yeah, I publish it. I mean, I put my portfolio…I’ve published it the last few years, I save portfolio each year. I need to update it now because we’ve transitioned to this Cambria Digital Advisor. I invest 100% of my net worth and our funds. So that people can see very clearly my mindset. And so my average Trinity exposure of the Cambria Trinity’s is one being most conservative, six being most aggressive. I have three or four different accounts in there. Some retirements, some not, and it’s around three and a half. So I’m pretty middle of the road as far as…

Jeff: But you say you publish that once a year, but yet a minute ago we’re talking about this being potentially for you, a younger guy, a long term thing. So how do you…?

Meb: Sure. Well, a lot of that has to come with the fact that as Cambria puts out new funds, as there’s cheaper and better options, the broad allocation doesn’t really change. Is there cheaper funds? Is there better funds out there? So it’s more kind of updating. It might be… But now I don’t expect to do anything at all. I mean, it’s totally hands off, right? So it’s a great exposure. Yeah, I’ll write it down and share with you later.

Jeff: All right. Anything else good from the speeches we should know about? Are we finished up there?

Meb: They may be streaming them, they may have them online. So we can find them online, we’ll link to it. And then on the tail end of that I came back home and then it was my high school reunion, so I had to go back home to North Carolina, which I get very nostalgic for, living out on the west coast. My favorite part of the reunion was catching up with a buddy who I haven’t seen in 20 years, and he said, “Meb, are you still driving that old Land Cruiser?” And I had a 1983 brown Land Cruiser in high school, which eventually died after college, but I said ironically I actually drove it to work today. I have now a 1967 Toyota Land Cruiser, which even spends more time in the garage, but it’s working now. So knock on wood.

Jeff: All right. Well, in that case, let’s steer it back to some Q&A now. We’ve got a…

Meb: That was a long intro. We haven’t even got to a Q&A yet.

Jeff: Let’s go.

Meb: Let’s find some quick hits.

Jeff: All right. So, again, thanks to everybody for writing in. Keep them coming. We’ve got some great questions. I think we should start this week with a few on shareholder yield, we seem to get several of those for some reason, and then we’ll move on from there. So starting off, “How does Meb think about shareholder yield in the context of factors or smart beta? Is shareholder yield a factor in its own right or is it the combination of factors?”

Meb: By the way, questions, feedback at the Meb Faber Show, keep them coming. Jeff loves reading these as do I. So shareholder yield, for the readers might not be familiar, it’s combining dividend yield and net buybacks, and we think it is one of the most basic mistakes of investing to only focus on dividends or only focus on buybacks. It is the most nonsensical investment approach I can think of to only focus on one of those, because you’re only looking at one side of the coin. So if you’re listening to this and you still invest based on dividends or buybacks ask yourself why. I mean, it is so nonsensical I can’t even begin, but I wrote this book a while ago so my emotions have tamped down a little bit about the process.

So anything that moves away from what we call market cap weighting, which is just investing based on the size of stocks or investments, which is what reflects the global world opportunity set. You know, S&P has more an Apple than it does in some tiny healthcare stocks or biotech stock. Anything that moves away from that is…and if it’s rules based, based on a factor and a factor is something like dividend yield or earnings growth, by definition it’s in my belief it’s kind of smart beta. So yes, shareholder yield smart beta. And the question for a lot of people is, you know, “How do I pick a smart beta approach?”

Well, you know, you can certainly sort by one factor, such as value or momentum or quality, which is what a lot of funds do, or you can sort it by lots of factors, which is called multi-factor. And they may include five of them or they may include 20 or in some cases a lot of these quant mutual funds or hedge funds, they may include 500. And it’s funny if you type in a stock for a multi-factor portfolio, look, everyone has the same PhDs So you’ll type in a stock name and look at the holders and AQR owns it and LSV owns it and D.E. Shaw owns it, all of them own the same thing.

But for me, it’s…some of my favorite factors, of course, are value and momentum. Even if you equal weight and move away from market cap portfolio I think you’re out a percent or two. That’s the biggest thing, just breaking the market cap link, because that puts you in expensive stuff and the bigger stuff.

Jeff: You’re dovetailing into the second question ironically.

Meb: Good, perfect. By the way I don’t get to see any of these questions ahead of time so I’m perfectly in. All right, what’s that?

Jeff: Should an investor expect portfolios with a shareholder yield tilt to outperform similar portfolios with size, value, and momentum tilts?

Meb: They’ll start to look more similar. So, you know, the worst thing you can… I mean, look, market cap is a great first step. I’m okay with you investing at S&P 500, but I think you can improve that by equal weighting or any other weighting. Now, I have my pet favorites because shareholder yield, for example, very high correlation to free cash flow. Because it’s companies that we think about and we use additional factors in our funds for value and then a final sort on momentum.

So our shareholder yield fund ends up in cheap companies that have a lot of cash flow, because you can’t have cash flow and distribute it, you know, if you’re…and also that are under leveraged. So we look at having lower levels of debt. And so, yes, will that looks similar to certain multi-factor portfolios, because maybe they start on quality and then sort on value and then sort on momentum. So a lot of them will end up in the same place. Now, again, I think you need to be very concentrated, and we’ve talked about this with a few different guests where we said, you know, if you’re gonna have a portfolio like this, be different.

So whether it’s 50 stocks, 100 stocks, but concentrate enough for it to be different than what the world’s doing, that’s good sometimes and terrible other times. Any active strategy can underperform for years, but yeah, it will look more similar to certain… So right now, that go anywhere style portfolio ends up having somewhat of a mid cap tilt and certainly a tilt towards value stocks as well.

Jeff: Just playing devil’s advocate, you tilt towards or you put a filter valuation on your shareholder yield. Why wouldn’t you put a valuation of just momentum? Because, you know, value can stay depressed for a while, it doesn’t necessarily mean you’re gonna catch any tailwind, but momentum could be very overvalued. But if it’s moving in the right direction, you’re getting a little bit of benefit there.

Meb: Okay, so there’s a lot of ways to skin the cat, and people…the academic literature does this a lot of different ways. We have another fund that’s a value in momentum style methodology. And so a lot of people will say, for example, you know, momentum and value tend to not correlate most of the time. Sometimes they do. And so it’s nice to combine two things that have low correlation. And so some people, for example, in literature, the way they do the funds is they’ll rank all stocks on value and then rank all stocks on momentum and then take the average of the two, invest in that portfolio.

Some people will invest in the top, say, will rank the top third of value and then sort those by momentum. You end up in kind of the same place, you know. Because when we talk a lot about these factors like value and trend and momentum and everything else, you know, one of the biggest takeaways for me is always it’s not just that you’re buying the cheapest or you’re buying the stuff that’s going up, so value and momentum. You’re also avoiding the most expensive and what’s going down.

So either way you kind of try to skin the cat you’re gonna be scraping off the junk on the top and investing in the good stuff from the bottom. You may not end up with a lot of overlap. But if you look at a lot of funds and there’s some cool tools out there for ETF and fund investors, Morningstar, of course, is great, there are some other ones that you can look through the portfolio, look at overlap, which by the way is another very important thing to think about.

Because a lot of funds, they may sound like they’re very different active factor base, but they end up looking almost like the very index, what we call index huggers. So they’ll end up looking just like the S&P but they’ll charge higher fees for it. So you wanna make sure that you’re different enough to be able to actually add any value and, of course, have some low cost, too.

Jeff: Okay, third question on shareholder yield. Regarding the book, while I understand the concept, I wonder if a low percentage of buybacks has any meaningful impact on stock price? Like he might have not fully gotten the gist of it.

Meb: Oh yeah. So, I mean, again, you know, you can take the strategy back to the ’20s. O’Shaughnessy has in his book What Works on Wall Street and it’s outperformed I think every decade, maybe one that it hasn’t outperformed, but a basic strategy has done very well. It’s done particularly well since the ’80s when the rules kind of structurally changed in favor of buybacks. But here’s the cool thing about a holistic approach. All that people care about is the total distribution amount, and that has the highest correlation with value.

Because let’s say people don’t know this, but if you look at dividends and net buybacks and you have to use net buybacks because there’s companies…rewind in the ’90s, but certainly today that may be issuing more shares than are buying back. So they may issue 4% dilution to pay executives, to pay bonuses, but then only buy back 2%. So in reality you may think, “Hey, cool, 2% buyback.” No, you’re actually getting a negative 2% because you’re issuing all these options to management.

So a very simple way to look at this is last 12 months shares outstanding change. White charts does a very good job about that. We’ve talked about this on the blog. Obviously you can look at them on Bloomberg and other sources. But that’s one way to look at it, and then combining that with dividend yield. So you could have a 0% and dividend yield and a 5% buyback yield, or vice versa, or in the Apple’s case, you know, a lot of these companies that do both, it’s the holistic measure.

A couple of the caveats about it. One is this is a hard strategy to track, because not a lot of the software out there tracks net buyback yield, payout yield, shareholder yield, all these different vernacular definitions of it, and it’s a little harder to find than just dividend yield. But in general it looks like a much better portfolio. I mean, said this a million times, the largest dividend ETF right now has a higher valuation than the S&P and a lower dividend yield, which obviously makes no sense to invest in. Anyway…

Jeff: All right. So before we get you down the rabbit hole on dividend yield, move on. Is there a specific reason why I never hear you talk about adding small cap to a portfolio? It’s the last market premium that can be added without changing the portfolio concept.

Meb: When French-Fama and a lot of other researchers started talking about, you know, some of the factors that added value to a portfolio, they talked about value, they talked about just the market in general, they talked about size. And small cap has historically outperformed a lot of that performance comes in January. And in my mind…

Jeff: Why January?

Meb: There’s a lot of reasons for it, but some of it has to do with probably tax selling. I think it’s kind of a flimsy factor. Meaning, I would never just bet on small cap. I mean, in a world of infinite choice, why wouldn’t you pick a much better structure such as value? And small cap tends to have better…can have better value because market cap tends to be overweighted, right, because the more expensive stuff gets bigger. But in a world where you don’t have to just choose between small cap or large cap, I mean, look they’re gonna have super high correlation. There are still U.S. stocks.

So if you’re trying… You know, I mean, how many portfolios have I seen where they come in with a bunch of mutual funds, they have 10 U.S. stock funds, small cap, mid cap growth, large cap value, large cap growth. So basically you just bought the S&P. Now, there’s some caveats to this. If you’re an active manager, is the small cap space less efficient? Yes, absolutely think so. Almost any factor-based strategy, whether it’s value, momentum, etc., works better in small caps than it does in large cap because large cap is much more competitive.

The big dudes, these guys with a $10 billion mutual funds or hedge funds, they can only wait in that pool because they’re much too big to trade a market cap stock that has $200 million market cap. So it becomes much more efficient. There’s 50 banks, 100 covering Apple. There’s probably zero covering some little tiny medical insurance company based out of, you know, South Dakota that has a tiny market cap.

Jeff: So given that innate potential alpha right there, why haven’t you personally taken your factors and your strategies and sort of focus them more on a smaller cap space?

Meb: We’re agnostic, so our funds actually go anywhere. And there’s times when small cap as an asset class is more attractive than large cap and vice versa. So back to the late ’90s, large cap was the super expensive stuff, the Ciscos of the world. Fast forward… And so you could have a small cap portfolio and not even really had much of a bear market, depending on what you invested in in the early 2000s. Then small caps in over the last few years got to one of the most expensive they’ve ever been relatively to large cap, which is why they sucked so much wind over the past few years relative to large cap stocks. That’s now back to normal.

And you can go search our blog archives. We used to post a chart of PE ratios of small cap versus large cap, and we said, “Look, you should be avoiding small cap,” and they’ve had a huge underperformance, and it’s now back to normal.

Jeff: So was there a traditional multiple relative to large cap?

Meb: It depends on what metric you’re using, but it’s traditionally higher, but it goes all over the place. You know the vault, all right? So I would rather have a quantitative approach that says, “Look, I wanna find the best regardless of size.” So whether it’s… And again once you get to a certain size you can’t mess around with the small caps, and small caps are also more liquid so there’s a higher trading cost. Research affiliates will post these show notes, let’s put out some interesting literature lately a lot of people have about the factor exposures, but can you actually implement them in say small cap and at various levels of size?

So momentum, traditionally because it’s a very high turnover, the trading kind of kills the premium. So you can obviously come up with rules to reduce the turnover, to reduce the exposure to small caps, or whatever may be that fixes that. But in general the naive rules are very tough because if you’re trading a little $20 million market cap company versus trading Apple, you know, it’s a very different scenario. There’s gonna cost. If you try to put in 100 million into a company that’s 500 million market cap, you can’t. You’re gonna move it $20.

So there’s very real world consequences of these theoretical sort of debates, but in general, like if you had asked me, you know, “Meb, would you rather have small cap or large cap?” I say that’s a wrong question, really is what’s the best investing approach to kind of go anywhere. That that also dovetails into the U.S. versus foreign right now. So where would you most like to be, you don’t have to be in the U.S., although if you are…there are certain areas that look much better than others, but it waxes and wanes. Sometimes large caps look so much better, sometimes small cap looks much better.

Jeff: So hypothetically, if small caps fall in value you’ll see their multiples dropping a lot. We’re gonna see a lot more from you on the blog about pointing them out?

Meb: Yeah, we update. I mean, a lot of these charts we only update when they’re interesting. The vast majority of time, the investment world spends in kind of ho-hum mode, you know, where…like it’s in normal valuation ranges where things aren’t in extremes. And so there’s not really a whole lot takeaways, but we were writing a lot about the small caps being expensive last few years and most of that’s gone away.

Jeff: Perhaps you could discuss the relative merits of investing an ETF versus bonds directly. Assuming the bond is from a strong company and you’re going to hold to maturity buying direct seems to be safer than buying a fund.

Meb: Safer, I don’t really know it’s safer means, so… And I think they’re both probably fine, you know. With ETFs you get diversification and breadth. So if you invest in many of these ETFs, you end up getting 50, 100, 5000 different securities. So if you wanna just go buy a Coca-Cola corporate bond or whatever maybe great, I really care less, but in general, you know, bond funds it’s less… The tax efficiencies are smaller than they are for equity ETFs. It makes much bigger difference in the stock world than in bonds.

But it’s more of a diversification benefit. So the ability to go get the whole investment grade corporate bond exposure. In our case we have a sovereign high yield bond ETF that, you know, you get exposure to many, many things and you don’t have to go trade it yourself. I mean, if you wanna trade it, I don’t care. I mean, it’s not…it’s personal preference in this case.

Jeff: The whole process of looking up CUSIP number and dealing with the bond desk sounds like more of a pain to me than just, you know…

Meb: The trading of that is also very opaque. You don’t have centralized exchanges which people have been trying to change, which I’ve also been curious about for 20 years why there aren’t more bond exchanges. But yeah, I mean, these spreads can be massive. I mean, I know a lot of bond traders and it’s a phone call business. I mean, you call people and say, “Hey, you got any inventory for Coca-Cola corporate bonds?” And especially for little stuff, I mean, there’s some mile-wide spreads, and that’s how they make their money.

Jeff: Yeah. Regarding the contrarian nature of sentiment indicators, while no indicator could ever be considered totally accurate, it does seem that contrary trends can provide increased odds of success over medium to long term periods. Has there been much discussion on the use of sentiment indicators to add tangible long term value?

Meb: We talk a lot about sentiment. I mean, we talked about it in January when the market was going down viciously, one of the worst starts to the year ever. And the reading for the AAII bullish people…ask people are they bullish, neutral, or bearish on stocks, is one of the lowest bullish readings ever. And historically, if you go out 12 months and you take the most…when people are most bullish, future 12 month returns are terrible, I think they’re even negative, and when they’re most bearish, future returns are great. It’s like 12 or 14% a year.

And so we wrote about it in late January and the name of the post was “Come on Balance.” I said, “Look, when things usually get as bad, the next year is usually pretty good.” And that’s played out, you know, who knows? I mean, it’s a very small sample size of one. But in general when you get to extremes, it usually helps in your favor to go the other way. And we’ve written a lot on meaner version type of strategies. We’ve talked about it, the down multiple years in a row, we’ve talked about down 60 to 90%. And there’s a lot of ways, you know, and on our podcast we talked about over-rebalancing.

And the challenge is, for a lot of people, how you implement it, how… And the joke, I’m gonna stop using this joke because I’ve used it so much, is, you know, what do you call an investment down 90%? That’s something down 80%, then gets cut in half again. So you could buy something that’s down 80%, say, “Ah, hot dog, I got something that’s down…it was at 100, now it’s down at 20. I’m gonna get huge returns,” and then it goes to 10 you just lost half of your money. So sentiment, I think, it’s a great input. We don’t have a lot that is a quantitative trigger based purely on sentiment. Usually it has a high correlation with other things we use, such as value, you know.

If you look at Brazil, when we wrote about it beginning this year, we said, “Hey, this is the cheapest stock market in the world,” sentiment there was horrific. I mean, we have politicians getting impeached. You have essentially a Great Depression there. Single digit, I mean, the PE ratio got to…global CAPE got the five, it certainly got to eight, maybe five. But high correlation across the board for everything, and then eventually things get so bad that when they get slightly better, you see big returns in Brazil and then U.S. terms, I think, is up to 60% this year.

Jeff: I would think that if you were gonna use an indicator or sentiment in general, you have to be very careful about what you’re using. I remember that whole concept of the contrarian indicator was when Barron’s has a cover that features like a bull that’s really strong or can’t quit, that’s when you’ve gotta get out. I remember that happened back in maybe 2013. There’s a quote about like Hussman saying, “It’s time to get out because Barron’s just had another bull cover,” and then, of course, it keeps rising a few years.

Meb: Right. So a lot of those are just anecdotal. Would I ever invest based on a Barron’s cover? No. I mean, it’s tough, you know. But a lot of the quantitative ones…we published another one at the beginning of last year, and this is from Leuthold Group, one of our favorite research shops where they looked at another sentiment survey that goes back…it’s either the ’50s or ’60s, Institutional Investor, I think, is what it is. Investors Intelligence, that’s what it was. And they took the average bullish reading for the year.

So they said, “Let’s take a little step back.” And the beginning of 2015 was the second highest reading ever. They did, of course, the quant sorting and found that when you’re in the high readings, future returns for the next year are basically zero, and 2015 returns of stock market are basically zero, which is a really cool takeaway. So sentiment right now, it seems pretty normal. AAII, which does two different surveys, one is, are you bullish, neutral, or bearish on stocks? And the other is, how are you allocated? And people are still, you know, not that bullish on stocks, but they have a much higher stock allocation, because stocks have simply gone up.

And so it’s kind of a little bit of, “Do what I say or do what I do.” There’s that chart…one of our favorite charts is household equity, as a percentage of assets, has a massive correlation to future 10-year stock returns, inverse, right? so when people have most in stocks, future stock returns are low, when they have the least in stocks, future stock returns are high. So totally doesn’t even look at valuation whatsoever puts you to around a 4% future return for stocks.

Jeff: Yeah, it makes it interesting, people who are worried about…you know, we’re about to sort of drop off the edge of a cliff right now. It’s hard to imagine that happening when sentiment is not exuberant and that high up. I mean, you can see returns been muted. But this whole concept of things are about to completely collapse, it’s just hard to really believe that.

Meb: Things can collapse, well, let’s just wait till we get our tail risk fund out then they can collapse ,then it will be great. I won’t mind after that.

Jeff: Speaking of that, next question is, you talk a lot about risk but there are so many definitions out there. How do you define it?

Meb: Well, there’s a great book by Bernstein, and I think it’s Peter not Bill, both are great. We actually sent out a great… We’ll tag a show notes. There was a couple good interviews we sent out to the Idea Farm, which is our research service. One with Bill Bernstein and one with Phil Tetlock, just remind me of those. Anyway, risk, so Peter Bernstein book on this topic and it’s called against…man, what is it called? Not against the odds. It’s something, The Remarkable Story of Risk. We’ll tag it, whatever. And it’s great book, you should read it.

There’s a lot of ways to think about it, and again, it’s all encompassing terms. So historically, you know, people have thought about in terms of volatility. People don’t care about volatility. They care less about volatility. People love up volatility. You’re making money, no one cares that volatility is high. They care about down volatility. But all that means they care about losses. Survey after survey after survey you see that people can handle a 10% loss. They don’t like it, they start to grumble, 20% they’re gone in. And that’s just over and over and over again, and I’ve seen that in our decade of managing money. That’s the inflection point where people throw up their hands.

Jeff: Okay. So by that definition, then a 20% loss after you’ve made 40% you’re still up, what about risk as it connotes to your principal?

Meb: It doesn’t matter. People anchor… This is a great recent example. Let’s say you have an investment, a stock, and you have a 100 grand in a stock, let’s call it Bristol-Myers. One of the listeners listening this will know I know who you are. You get a 100 grand Bristol-Myers. Let’s say over the past five years it’s gone up to 200 grand, okay? And then whatever just happened, they announced some drug failing or whatever, and it goes back down to 150. That person is not thinking, “Awesome, I’m up 50 grand.” They’re thinking, “I’m down 50 grand. I had 200, now I have 150.” And so the same thing happens with markets, same thing happens with portfolios.

We did a post where we talked about percentage of time. So there’s only two states in the world for your portfolio or stock, same difference, but say portfolio. You’re either in an all-time high or you’re in a draw-down. There is no in between. And most investments spend only about 20% of the time at all-time highs. So the name of the post, I think, we did said, “To be a good investor you need to be a good loser.” Because you spend the vast majority of the time down from your all-time high portfolio.

So most of the time you’re in some state of losing money, at least mentally, from your anchoring point. So I think most people, the biggest statistics they care about is draw-down, which is, you know, distance from all time-high, peak to trough loss, which is why I also think that most investors we see have far too aggressive portfolios. They come in with a lot of the automated services, which I think are wonderful. You know, the equation you can write down on paper. “Hey, young people, you should…” And Bernstein was actually talking about on the interview,s he says, “Young people you should be a 100% in stocks.” But that’s not good advice because no young person can handle a 50, 80%. They can’t handle the volatility in losses.

Use 80%, you can’t keep saying, “Yeah, keep putting your paycheck in this, it’s a great investment,” because mentally they can accept it. It’s too hard, and I totally 100% sympathize with that, and I think most people have more aggressive allocations. And the example he used in this interview, he goes, “Look, if you’re wealthy or you have a good portfolio and your lifestyle is fine, you’ve won the game. You don’t have to put that money at risk.” So, you know, we always talk about the sleep at night portfolios that only take as much risk as you can and sleep at night to where… There’s almost no asset allocation portfolio that’s not gonna lose 20, 25%.

Jeff: I’ve also heard, when you’re discussing the risk, look at your portfolio less in terms of its NAV and more about it as its potential as a cash generating mechanism because…

Meb: That was Arnott talking about that. That’s tough. I think that’s tough. You know, yes, that is the rational way to think about it, but people don’t think in those terms. They think about the number in their bank account. They’re not saying, “Oh, this account is gonna generate 30 grand a year in dividends and income.” I mean they may, but then they say, “That thing just went down 50%. It’s still generating 30 grand but I have half less, what I’m gonna do?” So I think people…it’s really hard to accept those big losses, which is why in many ways…

I mean, at 60-40 portfolio has lost two-thirds in the U.S. we can’t find a country in the world where it hasn’t lost two-thirds in that country. And two-thirds, forget about it. I mean, no one can take that. So most people would say, “Look, almost every asset allocation portfolio in our book did I think 9 to 10% a year and Real did around 5% a year.” Because inflation was higher from the ’70s and ’80s but did about 5% a year. It’s gonna make no difference to you in my mind if you make 3% or 5% returns Real, or 7 or 10% nominal.

It’s gonna make a big difference if to get those 5% returns you had to have a 50% loss at some point. So to me, I think people are much more comfortable, which is why I’m totally fine with a chunk in cash, because it even if that cash isn’t earning anything…and there’s ways to optimize that cash returns. You can invest in the highest bank accounts in the country that up to the limit, which I think is 250 grand, and just rotate it and, you know, you’re totally protected by the government. And there’s some interesting websites that will do that for you. And I can’t remember off the top of my head, we’ll link to it. But I have no problem with cash because it gives you an emotional and psychological optionality to where there’s something in a side that if the market goes down 20, 50, 80%, you have that but you can also put it to work, even if it’s not earning that much.

Jeff: Just curious, what’s your biggest personal loss on something?

Meb: Oh, there’s many things that have been 100%. We talked about in I think in the early podcast, especially when I was young, I had all of the behavioral mistakes. I used to trade biotechs in college as a biotech student in the late ’90s, so you can imagine how fun that was, right? Everything went up. But the beauty back then is I would short the IPO lockups, which was like shooting fish in a barrel. And I remember going on spring break to Jamaica. I did quote, “Didn’t have time,” because I was late to the airport and so didn’t put in any of the shorts. I would put in short orders and let the portfolio sit.

Well, of course, what happened that was when the first Clinton came out, made some nonsensical statement about can’t patent the human genome, basically an excuse for all the high flying stocks to go down 50% or whatever it was over the ensuing week. But you learn those lessons and hopefully you learn them when you’re young. You know, we talked about a biotech options trade that I blew up as a young investor. And Tudor Jones talked about this. There’s some quotes, where it’s basically like, you wanna have that experience because you learn very quickly the real pain of losing money. And as a young investor, every young investor listening in this podcast, there’s probably not too many, should be praying for the stock market to go down 50% and be praying for the investment world to go down to hell over the next 10 years.

Now, if you’re 90 years old, that’s not your time frame. If you’re young you should be praying for things to get whack so that the rest of your expected returns in your lifetime will be much higher as you have more money to put to work. Anyway, yeah, I’ve come to my investment stance now having made all the mistakes. I got all the behavioral biases, which is why I have an automated approach now that keeps me from doing dumb stuff.

Jeff: Made plenty of dumb mistakes myself.

Meb: Yup, mostly through options.

Jeff: All right, next question. I’ve been thinking a lot about global CAPE ratios recently and the cheaper countries like Russia, Poland, Brazil. However, were the U.S. to enter a major correction, I can’t help but think the aforementioned markets would follow suit, at least to some degree. Would with this correlation not in part negate the decision to invest in cheaper markets?

Meb: Historically… And there’s two publications we’ll link, Star Capital, which is one of our favorite CAPE aficionados, and who is the other one? James Montier, who’s now at GMO, have both published…and we’ve published on the blog as well. If you look at CAPE ratios for the U.S. but also international, and started it not just for CAPE but for five other valuation metrics, if you put them into buckets and then look at future one to five-year draw-downs, the biggest loss you experience based on the starting valuation, it’s exactly what you would expect. When you pay a lot for something, you have a much higher chance of a big fat loss. When you pay little for something, you have more of a margin of safety.

So ,in general, if you’re paying CAPE ratio of 40, 50, 60, 90 for something, you’ve got a pretty good chance of losing a lot of money. And the good news is there’s nothing in the world that looks that way now, but it has is as early as a few years ago. So the U.S. is expensive but it’s not terrible. I mean, again, there’s people, when they wanna talk about CAPE ratio they wanna think it’s a bubble, it’s crazy, it’s gonna go down 10% a year for the next 10 years, or it’s the best buy of all time and it’s gonna go up hundreds of percent. Most of the time these countries spend in this kind of normal boring valuation zone of let’s call it 12 to 25. They spend…they’re sort of some cheap, so expensive.

So, historically, the more you invest in a high valuation you’re gonna get a big fat loss doesn’t guarantee it. So, yes, if the U.S. went down 50%, would I expect foreign stocks to magically go up, you know, hundreds of percents? Probably not because stocks have high correlation, but they do diverge. You’ll see various markets at various times, the U.S. and foreign, we posted a chart of the 12-month as well as five-year out or underperformance. There’s massive periods of under and outperformance, the most recent being the U.S. from the global financial crisis to now has had mass outperformance over foreign.

But it’s a coin flip. U.S. versus foreign is 50%, any given year a coin flip. So I’m much, much more comfortable in many of these foreign markets, which is finally working in 2016. I’m so happy that these markets are finally having a great year, with the exception of Europe. Europe is still a basket case, but Russia and Brazil, a lot of countries are really having banner years. All right.

Jeff: Go ahead.

Meb: My voice, I’m getting…we’re heading about an hour. Should we start winding this down? I see about nine pages of questions.

Jeff: Yeah, we can cut it down. Actually one quick question on this though. You know, I realized there’s a greater degree of correlation between U.S. stocks and foreign stocks or EM stocks, but if the CAPE ratios are significantly different, I think back about your podcast with Arnott, which talked about a sympathy crash and correlation, if you see something crashing based upon a different market when it shouldn’t be, then that actually potentially is a great time to buy in. You’ll see a potentially a much stronger reversion back to where it went. I would think…

Meb: That comment that makes a lot of sense. I would never build an investment strategy around it from a technical analysis or a technician’s perspective that makes complete sense. That’s one of the most kind of revered sort of technical rules. It’s called relative strength, essentially, is what you just described, momentum. So I totally sympathize with that. I wanna make that a systematic approach. So whether you’re using value, could you add a momentum or trend filter? Absolutely. And I think a lot of our approaches do that. But I think, yes. Is that a good sign? Yeah, absolutely, if you’re seeing that relative strength, and you’re starting to see that now.

So over the past seven years, it’s been U.S. stocks and bonds, rates have just absolutely crushed it. And then in this year you have long bonds obviously around the world doing wonderful, you’re starting to see the rotation. Precious metals started to make it in earlier this year for relative strength, global moment portfolio. A lot of the foreign markets are catching up now. So nothing would make me happier than a nice fat foreign stock market run for a few years in the U.S. to get back to reasonable valuations, because then I’d be a little more popular at my talks and I could say U.S. stock returns 10% plus or expect it work [SP] side. All right, I’m running out of voice so let’s start to wind down. Anything else from you?

Jeff: No, just take it away.

Meb: Cool. All right, we’ll do another Q&A episode soon, so look, thanks for taking the time to listen. Please keep sending Q&A questions to feedback at the mebfabershow.com. As a reminder you can always find at the show notes and other episodes at mebfaber.com/podcast. Wanna thank all of you who have left reviews, you know who you are. For those who haven’t, take 10 seconds, go leave a review on iTunes or any of the other listening apps. We really, really appreciate it. Thanks for listening, friends, and good investing.

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