Guest: Episode #42 has no guest, but is co-hosted by Meb’s co-worker, Jeff Remsburg.
Date Recorded: 3/7/17
Topics: Episode 42 is a remote podcast with Meb calling in from Hawaii. Fortunately, the roosters in the background aren’t loud enough to interfere…
Though this is a Q&A episode, it’s slightly different in nature. Rather than discuss listener questions, we’re experimenting with using some of Meb’s “tweets of the week” as our topics of conversation. It’s a way of getting inside Meb’s head a bit more. We’d love your feedback, so love it or hate it, let us know how we can make this format (or any, for that matter) better and more beneficial for you.
Some topics you’ll hear covered in this episode include:
- How do you know when your market strategy has lost its efficacy, versus when it’s simply having a rough stretch, yet will rebound?
Details: One of Meb’s tweets suggested “After you read Buffett’s new letter to investors, read this,” which pointed toward his post about how Buffett’s long-term returns have crushed those of nearly everyone else, though he’s underperformed the market in 7 of the last 9 years. This brought to mind a question which Meb asked Ed Thorp: “When do you know when a strategy has failed, versus when it is time to remain faithful, as reversion to the mean is likely about to happen?” The Thorp answer was generally, “Do your homework so you know whether your drawdown is within the normal range of probabilities, or something unique” We push Meb on how a retail investor is supposed to do that.
- With the VIX hovering around 11, is Meb considering buying LEAPS?
Details: If you’re not an options guy, don’t worry. Meb takes this question in a slightly different direction, discussing low volatility and options more in a “portfolio insurance” type of way. You buy insurance on your home and car, right? Buying puts at these low volatility levels has some similarities to buying portfolio insurance.
- The last time stock market newsletters were this bullish was Jan. 1987. To what extent does this level of ubiquitous optimism get Meb nervous?
Details: Lots of indicators seems to be suggesting we’re far closer to the end of this bull market than the beginning. Of course, that doesn’t mean it’s going to happen tomorrow. You’ll hear Meb’s take on various indicators and what he’s taking away from them right now.
- Newfound did a study, finding that the 60/40 model is predicting 0% through 2025. What are Meb’s thoughts in general?
Details: Meb is not surprised by this prediction. He’s discussed future returns based on starting valuations for a long time. But if you’re somewhat new to the podcast, this is a great primer on how Meb views potential returns of various asset classes going forward.
There’s plenty more, including something Cliff Asness referred to as “deeply irrelevant,” how advisers can excel as robos continue changing the investment landscape, Meb’s experience at a recent Charlie Munger speech, and Meb’s issue with Tony Robbins.
What is it? Find out in Episode 42.
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Transcript of Episode 42:
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 cambriainvestment.com.
Sponsor: Today’s podcast is sponsored by the Idea Farm. Do you want the same investing edge as the pros? The Idea Farm gives small investors the same market research usually reserved for only the world’s largest institutions, funds, and money managers. These are reports from some of the most respected research shops in investing. Many of them cost thousands and are only available to institutions or investment professionals, but now they’re yours with the Idea Farm subscription. Are you ready for an investing edge? Visit the ideafarm.com to learn more.
Meb: Aloha investors, and we have a remote Q&A episode today with Jeff Remsburg. Jeff, welcome to the show.
Jeff: What’s happening?
Meb: We should start calling you Jeffpisode maybe episode. Anyway, I’m here on the island of Kauai on a cacao farm. So, listeners, you may hear some roosters and birds in the background. If you do, just accept it as being me, sitting on a farm and the authenticity that goes with that. Jeff is local in the office in Los Angeles.
Jeff: Things have never run smoother around the office with you out.
Meb: Yeah, I should stay away more often. I like to call this a writing sabbatical but I’m not getting much writing done. So, I don’t know what to call this, a reading sabbatical perhaps. But a few logistics before we start into our Q&A. You know, so as we’re coming up on a little over a half a year or three-quarters of a year on the podcast, it’s been a blast. You know, we’re just starting to think of a little more interesting segues. You know, currently, we do one episode per week on Wednesdays on occasion you know, most of the formats are a Q&A with a fun guest and then we do sometimes Q&A with Jeff and I. We’ve done a few kinda audio books or research pieces and we’ve got a lot of great feedback. So, one, if you have any feedback on the show going forward, say hey, shoot us an email and say what I’d really like, I would love to see more you know, Meb doing a deep research dive into a particular topic or an audio book on the books that we’ve published. Or perhaps maybe we’ll have some solo Jeff episodes whatever you guys think, just shoot me an email at email@example.com.
Also, it’s important to us Jeff reads every one of these so please leave a review only like .1% of you have left your reviews. So, shame on you if you’re listening right now pull your car over, pull up iTunes, give us a review. Good, bad doesn’t matter but be honest, we’ll really appreciate it, we put a lot of work into this, so. But open to fun ideas going forward. So. if you guys got any ideas, please let us know. As well as sending us questions we certainly read a lot of these on the air we’re gonna read some today, and let’s get started. Anything else before we get started, Jeff?
Jeff: Well, I think you know, this episode is slightly different. You mentioned it’s Q&A we’re gonna read some of the questions on air. This episode’s slightly different in the fact that I think we’re gonna focus a bit more on your personal tweets and some questions that come from that. Just in the nature of what you mentioned a moment ago, trying some new concepts to see if people enjoy it. So, this one’s a less of a listener-generated Q&A and more of a Meb generated in the sense. One of the ideas is maybe we could use this as a way to try to get more in your mind. I mean I’m a retail investor and one of my questions, obviously, is how do I more closely emulate the mindset of more professional money managers. So, if something’s striking your interest or you’re especially intrigued by something to the point where you’re tweeting or posting about it, you know, I’m curious as to what about that has caught your interest, and what I can learn from it myself. And doing that maybe try to hone my sense of the market.
Meb: And we’ve got a you know, interesting [inaudible 00:04:50] different parts of social media and publishing take hold. I mean, we’ve been publishing on Twitter for a long time. But Twitter also, you know, isn’t gonna reach the vast majority of the people that are listening to this podcast. For whatever reason, maybe it’s because they’re not on Twitter at the time if I tweet something brilliant right, at midnight, you know, who’s gonna see it? Probably a very small fraction of people. And most people don’t go back and read someone’s entire timeline. So, one of the features we do I think is one of the most valuable research pieces I put out consistently. I don’t think anyone really cares, and so maybe we need to find a better medium for it. Maybe we should develop an app or something else where there’s two levels of curation we do. One is we do the tweets of the week and where I go and pick like 20 of the best tweets of the week it usually comes out every two weeks or so. So, maybe it’s the tweets of the last two weeks, but it’s the best investment quotes or research pieces or ideas from other people as well as stuff we published and it’s a awesome compilation. But you know, I don’t know that it’s something that people really use or love that much. And then on the much more involved side, of course, is the Idea Farm, which is the more highly curated, professional, targeted research pieces that we think are actionable either process or ideas. So, do you guys got any good ideas? Maybe, I don’t know maybe we’ll develop an app Jeff, I was just thinking about that this morning. But anyway, so let’s chat about from the last publication that we did? We also post these on the blog by the way, so.
Jeff: Yeah, listeners you can follow along I’m gonna basically be using Meb’s recent tweets of the weeks as our basis for questions here. So yeah, Meb we’ll just bounce around a little bit. One of the first that I’m curious about is one of the posts suggested after you read Buffett’s new letter to investors, read this. And that was about your post you’ve referenced a few times where Buffett’s long-term returns tend to crush everyone’s. That these underperform the market in seven of the last nine years. This makes me think of that question I think it was Ed Thorp you asked. It’s the one where, “How do you know when a strategy has failed versus when is it time to remain faithful to it as you know, reversion to the mean is likely to give it a bounce pretty quickly?” I think Thorp’s answer was generally, “You need to do your homework so that you know whether your drawdown is within the normal range of probabilities or something unique.”
So as a retail investor listens to that and thinks about taking it from the theoretical to the practical how do you really do that? How do you implement that? You know, let’s say you’re like a dividend investor. Are you supposed to look over the last you know, 5 years, 10 years, 3 decades of historical market data and try to do this on your own? Or what are the best resources for giving yourself this knowledge here?
Meb: We can start from the simple to the much more complex. So, the simple is starting with say, asset class level data, you know, and we have over 115 years of very quality data on global stock returns and global bond returns. And so, you have a pretty good idea of what can happen there, and…
Jeff: Okay let me stop there. Where does the retail investor find this first of all?
Meb: So, the first and best stop for that, and there’s a number of publications, there’s the “Classic Ibbotson Yearbook which I think they still publish which you can find online. There is the one that we always recommend you know, my favorite investing book is called “Triumph of the Optimist” it’s a little outdated, but there’s a yearly update called “The Global Investment Returns Yearbook” and that’s published in concert with Credit Suisse and they publish that every year. And it takes stock returns for developed and emerging markets going back all the way to 1900. And it’s a wonderful really kind of stepped back view of what stocks and bonds done over the past 150 years or 120 years whatever it is. And so, you get a lot of perspective there. So, on any one market in the case of the United States, you’d say, “Okay I know that stocks historically have done about 5% real meaning after inflation so tack on inflation, you get up to that historical kind of 9% level 10% just to round off. So, I know historically, stocks have done about 5% a year, but the good and the bad of that is that you know, that includes times when they went down by half you know, in ’08 globally. And any one market can go down 80% to 100%.
You know, the U.S. has gone down over 80% in the Great Depression as well as individual markets you know, based on kind of government shutting down the markets in general essentially had a complete destruction of wealth in countries like China and Russia so that’s 100% loss. So, the global portfolio you certainly need to expect a 50% loss but it could get worse. And so, that’s kind of your baseline, right? Five percent returns you’re gonna go through losses of a third regularly, you’re gonna go through you know, worst case scenario is where you lose 80 and so that’s kind of the baseline, right? And then most people say well, okay. They kinda ignore the bad side and the possibilities of that but that’s the base case
Then and you add bonds and you say, “Okay, bonds [inaudible 00:10:13], they’ve done about 2% real after inflation so add inflation that gets you back up to 5%, 6%, 7%, and then bills or cash basically keep up with inflation but about 1% real after inflation. And so, that’s why they yield very low today but they also have their own drawdown to losses. Historically bonds you say, “Well they only lose about 20% in the worst drawdowns but if you include inflation on a real basis they also lose about half. And so, you know, you put that portfolio together it’s obviously gonna be less volatile but that gives you the perspective.
So, at that class level it’s easy because we have a ton of data, right? In the future, you know, what we always say is that normal investment returns aren’t normal you know, something like 75% of stock returns are either higher, on a given year, are higher than 15% or less than zero. So, that normal zero to 10% range that everyone expects which is the average, rarely happens. And so now the more complicated question is if you’re using an active strategy or a factor or a tilt?
Jeff: Yeah, I think that’s where I was going is let’s arbitrarily pick you know, a factor investor you’re a dividend investor, how do you, in a sense, overlay the drawdowns you’re referencing? And the broader market with more that targeted dividend yield that’s gonna fluctuate up and down, up and down potentially giving you signals as to when to get out or buy in?
Meb: Sorry. And so, right before we get to that. So, on the stocks and bonds level you know, that’s if you buy and hold, and you have a 50-year time horizon. You know, at the same time, I think it’s totally reasonable to take a step back and say look, can we use basic common sense to say hey, look at from a…like we talked about with the podcast with Thorp, is there simple common sense we can use when placing this bet, this speculation, to put the odds in our favor and not do something really dumb? So, the case of valuations for stocks, for example, you know, when stocks from the late ’90s trading a PE of 45 is that a reasonable time to expect historical returns? No, of course not. In the ’80s in Japan was it reasonable when they were checking at 90 plus times PE. Do you still expect normal returns? No. And the same thing was on the flip side when they’re trading a PE of 5. So, you wanna be able to have a little bit of common sense you know, and I think this is particularly interesting now as U.S. stocks inch up around that PE of 30 which, historically, has been quite high, but they’ve been 45 before so it can still go up 50% from there.
Jeff: As Ramsey said, “If the market is destined to melt up it’s got room to go.”
Meb: Yeah, of course. And so, and there’s no reason it can’t. You know, it’s simply [inaudible 00:13:04] spirits, what are people willing to pay. And so, as you’re looking at active strategy, so dividends or maybe something even more esoteric for most people like managed futures is can you understand the strategy, and can you understand common sense-wise why it may not be a good time for that strategy? So, if a strategy goes through under performance can you say okay that made sense I understand why that happened. You know, trend following is so basic it’s so easy so you understand why trend following had a monster year in ’08. But you can also understand why it may not have had as good of a period in ’09, and in the years to follow. Okay, and looking back on it now it’s harder to predict. And it’s funny, you know, we get so many investor emails and they’ll say, “Meb we launched a fund maybe three months ago, or an investment strategy or something can you send me a performance?” And I say sure. Or you can see it online of course, but out of curiosity they say, “I wanna see performance before I invest.” And I said, “That’s reasonable whatever but what do you hope to gain from that?”
And you know, most people I think like let’s say you lost a strategy and they understand that we’re onboard with it and you show them three years of very poor performance, they’re less likely to be interested. When, in reality, the opposite is probably the correct thing to do. You know, something like managed futures or dividends or currency went through five years of terrible returns. And we talk a lot about this with uranium and coal and all these [inaudible 00:14:30] ideas you should be more interested. But that’s not human nature. Humans absolutely don’t wanna invest in things that have done poorly recently and that’s part of the reason why the alpha probably exists. So, going back to the strategies. You need to have a little bit of common sense so with dividends, for example, you say take a step back. You know, why did dividends work. Well, they’re kind of a value tilt not a particularly good one, but it gives you a little bit of value exposure. And that’s why I say dividends stocks and high dividends have outperformed a percent or two over market cap waiting per year going back 100 years.
However, right now, I mean, we just put out a new piece called something like “Think Growth and Income Don’t Exist in this Market? Think Again” and it’s on the Cambria website go check it out, it’s a great piece. But it goes to show you know, this particular environment, this regime where people have been chasing yields over the past 15 years looking for yield anywhere you know, when one [inaudible 00:15:24], they push an asset class like dividends and they’ve had good returns until about last summer into being in a territory where they’re expensive, they have lower yield, not an attractive investment. So, and Rob Arnott has this awesome new feature on Research Affiliates website and I don’t if you’ve seen this yet, Jeff. But you can go on there and we’ll put the link in the show notes, and they post a lot of the historical factors like price to book or momentum or whatever it may be. And then show the valuation of that basket relative to history, and so you can kind of say well, okay, look dividends have historically been priced to outperform by a percent or two, but the basket right now is currently unattractive. And I don’t know what theirs says, but we believe they’re very unattractive.
Jeff: So, I think that’s what I find fascinating actually because part of the question I was gonna ask is if you are a dividend investor let’s say that a standard dividend fund is now 18% down from its peak. Well, how do I, if I’m a fledgling dividend investor, you know, I don’t know a whole lot about historical returns? Is 18% within the threshold of normal? Is that way beyond the threshold? So, it sounds like what Arnott’s putting on his site here might be pretty helpful.
Meb: It goes back to what’s your investment policy statement you know, for an individual. And we talked a little bit about this, in the beginning, a year ago, when we talked about the zero budget portfolios. We said write down your investment process. So, listeners how many of you actually did that? Probably very few. And you should do that. If you haven’t go back and read that article called “Zero Budget Portfolios.” And so, like let’s say your portfolio look I’m gonna do the market cap portfolio [inaudible 00:17:13] I’m gonna re-balance once a year and that’s it. Then you don’t even care about this.
And you may check in once a year and look and say okay you know, I’m just checking in to see if there’s anything I need to trim, but in general, you already have your policy portfolio and you don’t worry about this conversation. If you’re someone who’s the engineering doctors on here who love to fiddle with their portfolios, you go in and say, “Okay look, no I am gonna have a little bit more of an active approach. Once a year I’m gonna you know, re-balance but also tilt away from factors that are really expensive tilt towards things that they have done poorly then this comes into play.
But you know, for most people what the long-term time horizon you know, it depends on your policy portfolio. And so, the nice thing about having certain types of active funds…so we manage Global Value funds and Global Momentum funds. And the Global Value Fund automatically will re-balance into the cheapest stuff. So, that kind of does it for you. So, you’re not having to worry about, “Okay, well, am I getting exposed to these?” Naturally, with market cap, you will be, so it just really depends on your approach, and how much you really wanna be involved and if you think you’ll add any value by being involved. Most of us won’t.
Jeff: I’m gonna checkout Arnott’s site. That could be interesting to see, contextually, historically how these factors are measuring up. But let’s move on so we capture some more questions here. Another thing I found interesting was you tweeted about the VIX hovering on 11. You know, just because we have sustained long periods of a low VIX environment doesn’t necessarily precipitate a huge drawdown in the market. But you know, what do you see when you see a VIX at this level you know, are you thinking you know, buy long-term leaps? Or are you just…is there anything actionable coming from this or are you just sort of watching with curiosity?
Meb: So, volatility, you know, historically, can be very mean reverting particularly at extremes, and particularly when it’s very high. But you can go through these periods of multiple years where volatility, it just kind of bounces along the bottom here. You know, it’s like fishing you’re just strolling and the lure’s just sitting there bouncing, bouncing along. Then I saw a couple stats that from a few people like this measured on various levels. This is one of the least volatile starts to a year since 1960s. And that in and of itself doesn’t you know, say that things are gonna explode or things are bad or things are, you know, just it’s kind of a normal environment to be chugging along.
You know, the challenge comes when you have sort of this, any sort of tail event negative or a tail event a black swan sort of bad event. And kind of what you’re talking about and we have a fund coming out around this concept of tail risk, is that in environments where say U.S. Equities right now. You know, historically speaking buying puts or buying some sort of tail insurance on a portfolio is a cost. You know, much like buying renters insurance, or car insurance or health insurance, that’s a yearly cost. And most people don’t think of it the same way with portfolios because they think of it as a drain on their returns and that’s true, it is. Historically most of these tail strategies all have negative returns per year.
As an example, buying a basket of, say, of S&P puts that you know, you continue to roll forward. However, you know, in an environment like today where you have three factors, one, stocks are expensive not bubble yet, you know, but on the expensive side. And then volatility is low and you had eight nine-year bull market, you know, those are things that you would say, “Okay, well, maybe it makes a little more sense to be buying some sort of protection on that portfolio.” You know, great we talked about a million other ways to diversify a portfolio like using bonds, bill assets, and foreign stocks, and cheap stocks, and managed futures, and trend following, and all those have positive expectancy. So, that’s the way to build the core portfolio.
And so, you know, we’ve talked about many times with Trinity, for example. So, that’s the way we view buying a core portfolio, but there’s a lot of people out there, and we need to update this article where we wrote an article maybe last year, two years ago, called something like “Hedge Your Business.” And the concept was, is that a lot of people you know, have a large stock exposure that they don’t either diversify or do all these other things, but also that they may not be able to.
So, they may say look, “I have a pension fund and it’s just all stocks and I can’t do anything about it.” Or, and this is even more important. Where let’s say your financial advisor’s listening to this. And you know, you manage money for a group of individuals or an asset management company like ours but say you’re a traditional one. So, you’re mostly in U.S. stocks and bonds which is what most people do. Well, not only is your personal wealth probably in stocks and bonds, but your business and economic you know, salary is also exposed to stocks and bonds because of your clients. And so, when let’s say the markets have an ’08 again and your revenue goes down by 50% because your client’s assets went down by 50% and oh, by the way, your portfolio also went down by 50%. That’s like tripling down and so you know, as a financial adviser or someone who manages an investment company we said why wouldn’t someone hedge that the same way that a Southwest Airlines hedges fuel costs or a cereal company hedges wheat prices? Why wouldn’t you hedge the possibility of these really down markets or poor performing S&P and it’s a very [inaudible 00:23:10] cost? So, the worst case all it does is diversify your earnings stream and smooth it out and we had some contributing [inaudible 00:23:18] some multi-billion-dollar asset managers that said that actually [inaudible 00:23:22] we’re considering implementing that. I don’t know if they did and we plan on doing some of it with our parent company.
But it’s something to think about that I don’t think a lot of people…and a classic example, of course, is similar to a lot of people that have a lot of their own money in their own stock pensions plan, Enron was a great example. But a lot of people don’t realize that they have…you know, a lot of people think they say, “Look, I have this steady salary, oh I have this portfolio and you know, I’m growing my book of business, but realize that the same trade three ways. You’re betting for markets to go up. And so, I think hedging particularly…and this is a really long-winded answer to your question about volatility. But in a time when volatility is cheap, like today, and you have these other coincident indicators, I think it’s a totally reasonable thing to wanna hedge part of that portfolio.
And a simple way to do it you know, you always bring me back to being practical and implementation, you know, I would stay away from any of the VIX ETFs or any of these crazy, leveraged inverse ETFs I think they’re horrible investments. The vast majority of them. But you know, a simple way is to buy a puts, you could also wait until you say, maybe you’re gonna say put 5% in a portfolio in puts. And then when the U.S. stock market closes below its 200 day or 50 day or 10-month moving average you up that to 10%. Because historically speaking volatility is much higher when markets are in a down trend and losses are much higher as well the returns are much worse. So, you could come up with some sort of plan or you know, we plan on launching a fund base on this very soon, would be an option too, so.
Jeff: I like that because I mean when I think of, you mentioned diversification and when I think of basic asset class diversification yeah, you’re gonna get some protection out of that but I can’t remember who said it on one of our podcasts. But in a truly bear market or an exploding market correlation goes to one. And so, you’re gonna get you know, a limited effect from your basic diversification. So, it’s more of a defensive play but you know, the offense of equivalent of that I would think is buying puts, which are gonna actively really outperform if the market is getting crushed.
And you know, here we’re at you know, again a VIX of 11, that’s pretty damn cheap if you’re buying insurance. But as you pointed out, you know, you can continue paying for that for longer than you potentially want to because the markets obviously can continue to climb past the point where you rationally think they should, so.
Meb: And you know, most asset classes, right, so most asset classes it’s a bit of a roll the dice will they diversity a U.S. stock portfolio? So, going from like least consistent would be something like global stocks. Like if you have stocks go down 50%, is it possible that foreign stocks are up? Sure. But you know, chances are that they’re still stocks and the correlation is very high. And chances are they’ll probably also be down. You know, again, you know, emerging market bonds and other risky assets you know, will likely be down as well. Stuff like real assets or commodities in REITs, [inaudible 00:26:33] it just kind of depends. And so, the 2002, 2003 bear market they did awesome, 2008 bear market, they did horrible because it was at this inflationary deflation sort of a bear market so they all did very poorly as well.
Trend following you know, is one of the best historical diversifiers. Managed futures are through global momentum insurance funds, but again it’s not guaranteed. And so, you have a market like right now, for example, everything is going up, almost everything is going up. Long bonds maybe not, some other I think precious metals kinda been waffling maybe AX. But almost everything else is going up.
And this is a scenario where you kind of have the sharp downdraft where if you have like a 1987 [inaudible 00:27:20] where trend following is not fast enough to catch up where you have that risk that nothing diversifies. Maybe U.S. government bonds do they’ve historically been one of the best diversifiers, but at these low levels is that guaranteed? No. I mean, it’s not a 10 out of 10 if you look at a worst months or years S&P, it’s not like it’s 100% guaranteed that U.S. bonds will do well. You know, most of the time is like 80%, do they? Yes, but it’s not guaranteed. So, you know, I think that is a totally reasonable addition to a portfolio.
Certainly, it could let you sleep better at night to at least have something that’s gonna protect if everything hits the fan and make you feel better. Despite the fact that it may reduce your return or you know, you think about it the same way as buying, again going back to car insurance or health insurance or even pet insurance. You know, almost no one I know, by the way, owns pet insurance and almost everyone I know’s dog ends up getting sick or have some surgery. Then they’re like, “Oh my God I just spent $3000 on my dog, I wish I had pet insurance.” But all those, the same thing. You don’t see it as a you know, draw and return but rather just helps you sleep at night and not sweat it.
Jeff: So, let’s actually dig into the implementation just in case any listeners are intrigued by this conversation topic. So how much of your portfolio percentage-wise do you think would be reasonable to throw towards a basket of puts each month knowing you might have to re-up the cost each month? And then, the second part of that is ties into the cost of it here we are in a VIX of 11 which is historically pretty cheap. But you get around that VIX level of 20 tending to separate a calmer market from a more fearful market. Is there a price at which you slow down buying because it’s getting to expensive? How do you measure that out?
Meb: Yeah, I mean, look. I like to stay away from getting into esoteric trading strategies and trading options and buying puts or you know, trying to get advice or thoughts on that is definitely not gonna go down that rabbit hole. Because options for a lot of people are fairly foreign investments but in general look, I mean there’s a lot of different ways you could do it, you could simply buy a ladder approach, you could buy a 12-month put and roll it once a quarter that’s pretty simple. You could buy you know, depending on your idea, you could even get more sophisticated with you know, selling call, all sorts of different ideas that may reduce the carry cost of buying puts. I mean, the simplest is just to buy a put and roll it whenever you feel like it is a reasonable amount of time.
You know, there are no funds that do it in that traditional way which is why we’re launching one. And I have no interest in talking about our funds and marketing on this podcast, but there’s the problem with a lot of the products today is you have these like weird VIX funds that decline 99% you know, over a couple years and they are just these massively evolved or poorly designed products.
And whereas for most of people, all they really need is this basic you know, ladder of U.S. stock puts, for example. But we mentioned a couple of different ways to implement it, like whether you’re a trend follower and you wanna do it when markets start declining, you know, etc., etc. Kind of leave up to you and your own personal scenario as far as how much to put in them. Again, it totally depends on what your portfolio and exposure is. So, someone like a financial adviser who has his entire life own portfolio, clients’ portfolio, and book of business all exposed to the same risk factor, is much, much more than you know, someone who has a diversified portfolio with momentum in trend, and bonds and everything else that works as a college professor you know, and has a steady pension and none of this is related to financial markets, right?
So, it goes back to this…and Morningstar talks a lot about this as do a lot of other papers. You know, looking at not just your asset allocation but also including your human capital as well as your exposure and your pensions in other areas to what is your true exposure you know, not just your portfolio. Because a lot of times people can have this you know, multiplier effect on their own portfolio and risk, versus someone who may have a very much more robust job or you know, career path that’s future proof.
You know, and we’d say like is a robot gonna take your job in five years? No. Are you something that has a very steady stream of earnings and revenue with pension fund, you know, all these other things. That’s much more robust than say, like a financial adviser who historically charges you know, 2%. You know, not only is your business at risk from potential robots and other commoditization but you have the same global risk which is just equities. You know, you’re tied yourself to a equities bull market, you know, nine different ways. So, in that later case, I think it’s a much higher percentage than the former.
Jeff: Yeah, makes sense. Well, speaking of equities and returns another one of your tweets references a study by Newfound [SP] that the 64 models predicted to do 0% through 2025. So, I was curious if you posted that because one, you believe it as well or you know if you don’t? And then what you’re doing with it if anything? What’s your take away from a 0% for nearly another decade?
Meb: Well, look we’ve written a lot about valuations and projecting future returns and what to do about it. You know, and also the things that we tweet about and retweet and like and the same thing on the Idea Farm, is we like to expose readers to all sorts of opinions. And we’ll get emails back like, “Meb, how could you send this out this is so stupid I can’t believe you agree with this.” I said, “Whoa, you know, I didn’t say I agree with it.” And then they’re like you know, like “He’s a terrible money manager why are you re-sending out his research?” I say, “Look, I’m all about just improving my process. So, if I have a belief or a system, and someone comes out, an article or research that’s the flip side of that, you know, we’ve seen this with politics and everything else. Like we don’t want to live in this echo chamber. I want all day to read stuff that conflicts my views.
And so, if there’s ideas or comments, I mean and Buffet’s is a great example where he said “The stock market is cheap if you take interest rates into effect.” And there is no evidence for that there’s zero. You cannot come up with a model…I don’t know of a single model that you can come up with that backs up his claim, right? So, if you do listeners if find one send it to me. Don’t even start with the fed model. That’s the worst example of that by the way, so.
But I want our views to be challenged. And so, I’ll often retweet, favorite things that I may not necessarily agree with but either that I wanna read later or that I think are interesting. In the Newfound case, I actually do largely agree with them. I mean look, U.S. bonds, incredibly easy to forecast the returns, it’s simply the yield. So, you call the 10 or third-year bonds that you’re getting a couple percent.
Equities again, we think they’re gonna be low, you know, let’s call it sub 5% at this point. So, you know, let’s say you get a couple percentage points maybe two, and then after inflation real is zero, and there’s been a dozen different shops that talk about this. You know, I think AQR has said this is the lowest returns for 60/40 in a century. Research Affiliates put out a fun piece where they said the same thing. They said 0% returns expected and in the article, it’s funny because they said actually that’s a rounding because it’s 0.3% or something and I got a bunch of howling emails about this.
Anyway, but so what do you do about that? Well, there’s a lot of things you do and we’ve talked about this in Trinity Portfolio, many of our research pieces and books. You know the first thing you do is start with a global market portfolio to move away from U.S. assets. So, foreign and emerging we’re expecting to do historical rates of return or more emerging markets we think are really cheap. And finally, you know, I’m happy that the past nine months we’ve really started to see the world view aligned with ours. So, you know, a year or two before that it was not the case, 2014 really.
But the cheap stuff has been catching the momentum so that’s why you’ve been seeing explosive returns in foreign markets really start to take the lead as well as emerging markets and the stuff like Brazil and Russia up you know, in massive amounts. And so, the first thing you do is diversify, right? You invest in foreign bonds, you invest in foreign stocks, you invest in cheap markets in general. And then real assets. And then that’s the global market portfolio and to me, that is the starting point, right? Where you go from there and then what you have is trend following in our Trinity Paper as well that I think is a great [inaudible 00:36:15]. You know, these are all things you can do to kind of move away from that 0% return.
Jeff: Sort of switching gears. A different conversation topic, one of the tweets was about Cliff Asmus and he was poking a little fun at, it might have been Fidelity. How they were touting that their fees are lower I can’t really remember. Basically, the fee differential was five BIPS to four and a half BIPS in one of the examples, which Asmus had called “deeply irrelevant.”
Meb: But you know, read the whole tweet. Do you have it in front of you?
Jeff: “Moving from 150 BIPS to 25 BIPS huge. Moving from 25 BIPS to 10 BIPS okay but not huge. The move from five to four and a half deeply irrelevant.” Well, my question wasn’t gonna be so much on the fee changes. We can talk about that, but I was pulling back a little bit more broadly. What your take personally, is on where we’ve gone with robos and where we’re going. I’m curious, both from a retail investor perspective what you know, they might have to look forward to, but also for advisers who might be listening you know, what the best way to position themselves are. Because you know, on one hand, we have this growing movement towards this you know, robot culture but you can’t really replace the human element as well. You know, where do you see this going and how do you benefit from it?
Meb: Right. There’s a lot in there. But first, in general, we’ve written an article called “It’s A Wonderful Time to Be an Investor” you know, a year or two ago, which is basically showing this trend where it’s getting much, much cheaper to invest in almost anything. And so, we have this scenario where you know, it’s funny as the robos started coming out the [inaudible 00:38:03] betterments to the world, we saw decompression the average adviser charges a percent, average mutual fund is 1.25%, average ETF is half a percent. What you can do is get a global portfolio now for less than point .3%. So, you had all these robo advisers come out and they charged around a quarter of a percent, so 25 basis points, and then they invest in a portfolio that cost them a 15. So, it gets you, that’s kind of 40 basis point range for all in.
And the cool thing about that is that yes, it’s much cheaper, but then you saw this like infighting. Like Wealthfront was particularly bad about this where they kept calling out all these other shops like Schwab and then Betterment where they’re like, oh my God and catfighting about what Cliff just described, which is kind of like these minor couple basis points right.
So, to me, like the big move was from, “Hey you’re not getting charged 2% anymore, you’re getting charged .25%.” So, whether you’re getting charged .25% or .2% is largely irrelevant. Like you did the big muscle movement. You got 90% of the way there like that’s what mattered. It doesn’t matter now at this point. So, the good news is there is a…let me just, there’s so many choices out there that are great and it’s easy to be a great investor now.
So as an example, you know, we lost a 0% management fee ETF and to invest in fund to fund to all in it’s like 25 basis points. And then there’s about three other asset allocation ETFs that you can buy and you get exposure basically to the whole world for about a quarter percent. That’s like the cheapest way to do it, right? You could try to put together a portfolio with [inaudible 00:39:45] some ETFs but it’ll be even lower. But there’s a more traditional market cap and it’s easy, so that’s awesome, right? What a great revolution that was. So, there’s plenty of other decent ways to do it and I don’t even have a problem with the financial adviser to the extent they add value in other areas. You know, we think they’re worth their weight in gold if they add behavioral coaching. If they keep you from doing dumb stuff if they do estate planning, wealth management, insurance, all these other value-added things and charge a percent. I think that’s totally fine.
You know, Schwab and Vanguard have set the bar now where, if you get a financial adviser with those shops for .3% I think Schwab is .28 of course because they’re trying to come in lower than Vanguard but…and that’s kind of an adviser light right. Like you’re not gonna get probably the white glove service and truly the best you know, family office-style advice that you would get from a lot of the more traditional family offices that are more expert. This is kind of like a…what’s the right word? I don’t wanna say call center of CFPs because I haven’t been through it. Maybe they are super high quality. But the good news you can get a portfolio and advice from very cheap now. And so, but that hasn’t even begun to disrupt the states yet like there’s still a long way to go on most of the traditional industry still being way more expensive.
Jeff: Well, so, if the real value-add for advisers is we’re moving towards whatever proprietary non-strategy related value-add that they can add themselves. And then, in essence, their outsourcing the market strategy itself you know, where’s that going? Is everything just being commoditized or is it gonna boil down to basically, if you pick active versus passive and that’s really the key difference?
Meb: Look, we’ve said for a long time that asset allocation from a market cap perspective is a commodity. If you [inaudible 00:41:49] asset portfolio we’ve shown in our book, “Global Asset Allocation” you can get a free copy online freebook.mebfaber.com. Download and see that most asset class allocations, it doesn’t really matter what you invest in but what matters more is you pay low fees. Now, certainly, will there still be hedge funds and higher fees funds 20 years from now that add value by doing XYZ? Absolutely. If you can outperform the market or do it with flexible or volatility and risk, you’ll still be able to raise $10 million and charge as much as you want.
But that game every year gets harder and harder. You know, everyone has the smartest Ph.D. on the planet working on this stuff there’s a gazillion CFAs now, it’s not easy as it was in the 60s and 70s and 80s. It wasn’t easy then even. So yes, I see the industry involving into low-cost asset allocation. You know, I think financial advisers, in general, will embrace most of the technology and I think that is a fairly future-proof job as long as you do add value. And that can be a personality value, it can be emotional value, it can be actual you know, trust in the States. So most these advisers will learn to embrace the software and say, “Hey, I’m gonna use this amazing software suite from Morningstar or whomever, and be able to implement and provide the best advice for these clients. Whereas you know, before maybe they weren’t software [inaudible 00:43:18].
So, they become a little more cyborg, what we call it. You know, cyborg advisers where they’re using the technology to assist them. The ones that are gonna be in trouble are the ones that charge 2% and just do asset allocation. I mean I think the brokers, you know, that whole business model you know, despite whatever the DOL rules, I mean that is gonna die a quick death no matter what, and you see the flows every year. I think that can be a very hard business model to sustain you know, even five years from now.
Jeff: Okay. Let’s pull it back to the market. Another one of your tweets referenced how the last time stock market newsletters were this bullish was in January 1987. And you know, Doug Ramsey in our podcast said this is the most optimistic he’s seen people in the last eight years. So, when you hear that do you personally, Meb, do you get nervous? Does that hold more weight to you? I know you’re a big CAPE guy, so you’re obviously eyeing the CAPE. But does one of these things hold more influence over you and your own gut on where the markets are going than anything else?
Meb: Yeah, I mean usually it’s coincident indicators so valuation when times are good and stocks are going up and they’re getting more expensive, everyone feels good, right? You’re making money, your portfolio is going up, you’re buying a new house, you’re thinking about indications are gonna take. So, a lot of these happen at the same time.
And so, going back to the sentiment indicator, yes, a lot of them historically you look at when they peak and when they got the highest, of course, it was when you know, markets hit their peak. So, the highest the AAII has ever been was January 2000. And the lowest it’s ever been was March 2009. So, you expect them and it’s not surprising. Does that mean the market can’t go higher? Absolutely not. Go higher for a year, five years who knows. But it’s things you see.
And so, here’s an example, and this is one of the tweets by the way. And you often read it but it’s something like it’s a Tweeter ad in their ad online where Mike Tyson is now advertising like some trading platform, right? What’s it called? Like Trade12 or something?
Jeff: It’s Take12, something like that? Trade12, yeah.
Meb: So, go back to the commercials of the last cycle, 2007, and remember you know, what was going on? Rick Flair, the wrestler you know, Nature Boy was advertising mortgage loans you know and refinancing. And so, you see this dumb stuff happening and you just see, just the longer you’re in business you start to see this kinds of coincident indicators. So, for example, Snapchat just went public. You know, 20-something CEO, but shares don’t vote, massively billion dollar you know, market cap all of these things that are just they’re like huh.
You know, my favorite tweet about that was a journal there’s an app that millennials love called Robin Hood which offers free executions which I think is awesome. I think it’s great thing for investors you can trade for free. Granted that’s you know, again like giving an arsonist a match, right? Like you don’t need to be trading but if you do trade it’s great that it’s free. You know, most brokerages, by the way, have been lowering their training costs down the like 5 bucks. But they had a stat. They said that almost half of Robin Hood brokerage clients bought Snapchat the day of the IPO. And I mean, that’s another classic sign of you’re getting pretty late in the cycle when people are chasing these high IPO lottery stocks. And then like, Josh Brown, my former broker had a great tweet, and he goes he recorded something like half of Robin Hood millennials bought Snap on the day of the IPO 99% are now below water.
But people tend to chase the lottery ticket later in the cycle because you know, they are younger investors, newer investors or to see all their friends getting rich, see the headline. So, they start going in on these lottery stocks with the hopes that they’ll go up and late in bubbles, and I’m not saying we’re in a bubble yet. But late in market cycles you often have…there’s a kind of the of below off the top returns so the returns start to accelerate. You have these big returns because it’s kind of the self-reinforcing cycle.
So, could we have 20% ahead from here? Sure. Put up 50%. And I would say I love bubbles they’re fine, but it’s a time when many people burn themselves and then set the stage for the next bear market. And then you know, they all washout and will never invest again and that just creates the next bull.
So, the things like the Mike Tyson ads I’m sure we’ll start to see more of them. So, readers if you find some particularly…readers I always say that. Listeners if you find any particularly egregious examples of you know, the Mike Tyson ads send ’em over and we’ll share ’em.
Jeff: You saw Charlie Munger speak last week or two weeks ago did he say anything about where we are in the cycle here?
Meb: Man, he’s awesome. You know, he’s a national treasure I love Charlie Munger, so I went down to the…he does an annual board meeting because he’s on the board for the Daily Journal, a little newspaper that he bought years ago. And so, kind of like the [inaudible 00:48:49] speech he just holds court for an hour or two. And the room, it’s actually a functioning office which I was laughing at because there’s people trying to work in the office which was really funny. But I went and sat and listened and so happy I did. I mean he’s in his 90s and is as sharp as ever and you can find some transcript of his speech and we’ll post them to the show notes where he talks about you know, everything that day. I mean just, if you have the chance, he’s not gonna be around much longer, but still, I mean as sharp as anyone I’ve ever met and he’s in his 90s.
Jeff: You weren’t expecting this one but you kind of led us off today with a little bit of a summation on where we’ve come and where we’ve been with our podcast around six months or so. I’m curious. In all the podcasts, we’ve done so far, is there any advice or perspectives that stand out in your mind as especially noteworthy or on the money or something that really has influenced you?
Meb: Yeah, I mean, look I think the most downloaded often correlated some of the most interesting but for the people that have joined us in the last few months, you know, you may have mentioned some of the early ones with Wes Gray or Jerry Dilian [SP]. And a lot of those early ones are equally as interesting they just, most people kind of start at the newest and keep up or go backwards. But some of the early ones are really a lot of fun and you can probably also notice quite a difference in the quality and hopefully, we’re getting better, not worse.
You know, but the podcast space is interesting. I was actually reading an article on this guy who’s a supernatural thriller writer and works as a graphic designer and in his day job to be able to support his writing. Because most us know writing for the vast, vast long tales writers is not a career not a profitable endeavor and we’ve learned that through five books. But it goes to show that…so he would do a lot of deep dive research into things when he was writing his books. And then so he’d learn a bunch of interesting stuff but then you know, he’d say, “What am I gonna do with this? This is kind of useless.” And so, he wrote up like a PDF on…so he was researching like vampires and New England in the 19th century or 18th century or something.
So, he wrote a PDF, and just, you know, it was like five pages and so it was really interesting, but what am I gonna do with it? I have nowhere to put it so he tossed in the trash can you know, of his laptop. Then he said, “Oh, I’ll just send it to a friend maybe he might find it interesting.” And the friend was like, “Oh man, this is really cool maybe you should turn this into a podcast.” And the guy’s podcast is named Lore. I actually listened to it yesterday it’s not my thing. But he now has 5 million downloads per month. Quit his job. Now just runs this podcast doing research as a way to promote his books and Amazon just bought the rights and is turning it into a TV series.
Jeff: It’s all about, it’s about vampires? The whole podcast is just vampires?
Meb: I don’t know you have to look it up. I think it’s just about his research and the supernatural kind of thriller ideas and putting that into…I don’t know but my whole point is look, we would love to expand, listen to any ways that I think readers find interesting and it’s funny because like going back to early days when we were doing some of these written or sorry, audio books where I would just read a research piece. We would get emails in from y’all that would say, “Oh my god that was awesome I loved it I never would read your book, but so glad you did this audio version.” And a of bunch of other people would say, “Oh my God, Meb this is so boring your monotone reading this book this is like my worst nightmare don’t ever do that again.” So, you never know but we have a lot of material and ideas that we could [inaudible 00:52:33]. So, send us your ideas. If you guys got any thoughts we would love you hear your feedback of our favorite show and we can incorporate ’em.
Jeff: All right Meb, last conversation topic. You had been chatting with me the other day about Tony Robbins. I think you had some opinions on that. Do you wanna share those with us right now?
Meb: You know, Tony, I think, is a very decent individual and he sounds like a very thoughtful person, has helped a lot of people. You know, he put out a book that we reviewed last year called “Money” and it was like 700 pages. Kind of scattered but in general had some good elements to it. And he was adopting sort of the risk parity ideas of Ray Dalio, who I think is stepping down from Bridgewater. But he just put out a new book and podcast as well called “Unshakable” and it’s interesting. And we’ll read the book and do a longer kind of [inaudible 00:53:25] on it on the blog.
But you know, so he ended up partnering…so in his first book he had this kind of questionable relationship with a money manager he was sending people to but you know, it was very unclear. And so, in this new book which he co-authors with a big money manager called “Creative Planning” it’s kind of like a long [inaudible 00:53:46] and what’s interesting is that, if you look at his message, you know, we say that he gets the diagnosis correct, but the prescription wrong. Meaning he says, “Look, you know, most people use advisers that aren’t fiduciaries.” So, check box absolutely agree. Second is that most of the fiduciaries charge way too much and you should use index funds. Check the box, absolutely agree. So, all these things and I think he has honest intentions and then…but the problem is he partnered with this group then he says all right, well the solution is to invest with our offering you know, and for people, I think under like $2 million the charge is 1.2% per year. And it’s not like it’s not a horrific…like it’s not the worst thing you could do. You could go find someone that you could pay 2%, 3% a year…
Jeff: Are they purely active?
Meb: No, it’s buying [inaudible 00:54:43]. So, that’s the adviser fee and they still additionally charge fees on a portfolio which is you know, traditional index-based Vanguard, Schwab, yadda, yadda. So, it’s not awful but like if you follow the diagnosis, the natural conclusion would not be his offering, it would be a robo adviser, a buy and hold asset allocation, ETF all these other things. And 1.2% is you know, the average for advisers 1% and most now are below that 80 DIPS and in many cases below that. So, Schwab and Vanguard, very good. So, like then once you see it through that lens, you’re like okay well how much of this is just marketing for his new offering?
And he’s a little Trump-like. Like he makes a lot of claims in the podcast and stuff that just you know, aren’t really true. He’s like well, with volatility at an all-time high, and volatility exploding. And you know, we talked about it earlier in the podcast well no, it’s actually… this is like the lowest volatility markets have been in you know, many years, and in some cases back to the 60s. You know, and other things like he’s like, “Paul Suter Jones has never lost money.” Well, that’s also not true. So, there’s a lot of things and claims but again I go back to look, yeah, I’m sure he has good intentions, he’s donating all the books to feed the poor, a wonderful, probably a decent human being, but I don’t know if it’s a question of just simply you know, this is an offering that he believes in, and thinks it’s worth 1.2%. But and again, I hold my final judgment till I go read the book. But in general, it doesn’t seem like if you’re a doctor that the diagnosis really matches up with the prescription.
Jeff: Yeah. I mean sounds like you know, caveat emptor. Just everybody do your research and make your own final decisions based upon everything that you know to be true, and don’t take somebody else’s word at it as sort of bible. All right Meb, well, we’re right here at an hour, why don’t you take us out.
Meb: Listeners, thanks for taking the time to listen today we always welcome feedback and questions for the mailbag at firstname.lastname@example.org. As a reminder, you can find the show notes at mebfaber.com/podcast. You can subscribe to the show on iTunes and if you’re enjoying the podcast hey, Jeff requests please leave a review. Thanks for listening friends and good investing.
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