Episode #102: Radio Show: The “Stay Rich” Portfolio… A Senator Wants to Ban Share Repurchases… and Listener Q&A
Guest: Episode #102 has no guest but is co-hosted by Jeff Remsburg.
Date Recorded: 4/11/18 | Run-Time: 1:08:41
Summary: In this episode, we cover Meb’s Tweets of the Week, some write-in questions, Twitter questions, and our first-ever call-in question. We discuss the “Stay Rich” portfolio, and the unfortunate reality that even the safest portfolios can suffer ~25% drawdowns.
Next, there’s discussion of stock buybacks and a recent push from Senator Tammy Baldwin to introduce a bill that would prohibit companies from repurchasing their own shares (she claims it’s exacerbating the wealth gap).
Then, with volatility showing some life in the market, there’s discussion of volatility clustering. Next up is the investing service, Robinhood, which is now referring to calls and puts as “going up” and “going down.” Also, an ETF for companion pets filed by Gabelli.
We then dive into questions. Some that you’ll hear Meb address include:
- How do you keep a level head when markets are imploding around you?
- Meb and Elroy Dimson discussed the historical returns of housing and indicated that owning a house is not a high-performing investment, relative to other asset classes. However, if the alternative to buying a house is paying rent, often at a similar cost to a monthly mortgage payment, how does this factor in to the assessment of the investment?
- I understand that any given strategy can underperform the market for long periods of time. What is a reasonable time-frame to fairly evaluate the results of any particular strategy?
- Valuation difference in countries is often caused by sector structure. Can you explain that?
- The AUM of Target Date Funds was at $250B in ’08. Many investors were shocked at the bad performance in ’08. Target Date Funds AUM is now $900B. What’s the industry’s level of responsibility to educate?
- Is Russia worth the current political risk for long term investor (5-7 years)? If so, is it best to look at specific Russian equities or an index such as the RSX?
Sponsor: Inspirato – Experience the world’s most exclusive vacation homes, all managed, staffed, and maintained by Inspirato. As a Meb Faber listener, you will receive a credit of $1,000 towards your first vacation when you join Inspirato.
Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159
Interested in sponsoring an episode? Email Jeff at jr@cambriainvestments.com
Links from the Episode:
- Overview: Meb’s Tweets of the Week
- Questions sent to Meb’s Twitter account
- 1:45 – Welcome listeners and Meb explains HQ to Jeff (referral code ATCFaber)
- 3:05 – Thank you for the listener support
- 4:15 – New podcast app Breaker to check out
- 5:09 – Travel update: Meb in Austin, Chicago, Greece, Italy, Ritholtz Cruise
- 6:20 – Let us know if we need to save Tweets of the Week now that Storify is shutting down
- 6:54 – The Stay Rich Portfolio
- 10:50 – What’s a consumer to do when even the safest portfolio runs the risk of losing 25%
- 11:52 – Paul Merriman Podcast Episode
- 13:33 – Meb’s favorite alternative asset class
- 14:25 – Tweets on buybacks and congressional ideas to restrict them
- 15:49 – The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success – Thorndike
- 21:49 – Sponsor: Inspirato
- 23:03 – Tweets on volatility clustering
- 23:18 – “Where The Black Swans Hide And The Ten Best Days Myth” – Faber
- 24:29 – Does this volatility mean anything for market direction
- 25:52 – Robinhood tweet on going up or going down
- 28:41 – Tweets on Gabelli filing an ETF for companion pets
- 32:39 – Call-in question: How do you avoid making a hasty call when markets are volatile?
- 36:33 – Twitter question: Owning a home as an investment
- 36:39 – Elroy Dimson Podcast Episode
- 40:40 – Argument for renting
- 41:40 – Write-in question: What’s a reasonable timeframe to evaluate an investing strategy
- 42:11 – Vanguard study on people data-mining the past
- 44:55 – If a strategy can underperform for 10 years, is it still viable
- 45:44 – Any strategies that have just completely petered out
- 47:59 – Twitter question: Country valuation influenced by sector structure?
- 52:17 – Why value is the driver of dividend funds looking good
- 52:29 – Twitter question: What is the industry responsibility to educate people on target date funds
- 56:49 – Twitter question: How Renaissance Technology does so well when others fizzle out
- 59:44 – Is there a part of the market that is under-represented in terms of ability to invest in
- 1:01:12 – Howard Lindzon Podcast Episode
- 1:03:40 – “Where Have All The Sharpe Ratios (Over 1) Gone?” – Faber
- 1:04:26 – Twitter question: Is there a reason to avoid Russia?
Transcript of Episode 102:
Welcome Message: Welcome to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Sponsor: Today’s episode is brought to you by Inspirato, provider of the world’s most exclusive vacation homes. I just joined Inspirato and I can tell you they go way beyond a typical vacation rental. It’s all the best parts of a vacation house. The space, the privacy, the kitchen and dining room, combined with the service you’d expect from a five-star hotel. That means premium linens and furnishings plus daily housekeeping, an on-site concierge and much more. It really is the best of both worlds. From Turks and Caicos to Tuscany, you’ll find consistent luxury. Right now, our listeners can receive a thousand bucks towards their first trip to one of their exclusive vacation homes when they become an Inspirato member. You can call 310-773-9474 and mention Meb Faber, or visit inspirato.com/mebsentme to learn more. That’s inspirato.com/mebsentme.
Meb: Hello, podcast listeners. Welcome to another radio show. I’m here today with my twinzy, Jeff.
Jeff: What’s happening?
Meb: Jeff and I showed up today at work wearing the same outfit.
Jeff: Who wore it better?
Meb: Both just red tracksuits. It’s so weird. We had a little delay in recording this because I was playing HQ, the quiz game show. Have you ever played?
Jeff: I’ve not.
Meb: Do you know what it is?
Jeff: No.
Meb: So it’s a live app game show. They get like 1 million or 2 million people per game and the prizes…
Jeff: You’re doing this on office hours?
Meb: At lunch break. The prizes range from like $5 grand to $300 grand, and so people…they either have, like, one winner or multiple winners. And I get pretty far. They usually have, like, I think it’s 15, 12 to 15 questions. And so it goes from, like, 2 million people. It’s multiple choice, so you’d do well, and it goes all the way down…I’ve gotten down to, like, a final few thousand people.
Jeff: Must be a lot of fun.
Meb: So people win, like, $20 grand. Anyway, listeners, if you wanna download it, try it out, HQ app. My referral code is ATCFaber. It gives you a free life.
Jeff: I’ll try to take a break from working for the betterment of Cambria to enjoy…
Meb: No, well, usually the big prize is at 6 p.m., but one of The Rock’s movies is premiering, so it was a $300,000 prize.
And then also, I’m kind of fat right now because we just had a listener, a podcast listener send in a bunch of Dewey’s Moravian coffee cake.
Jeff: Dewey’s is the best.
Meb: It’s the best. And if listeners, if you have never had it, it’s basically like crack. And I’m sure it’s horrible for you because it’s bread and butter and sugar. And I actually thought my mom sent it to me, and so I had sent her a text being like, “Thanks so much,” and it turned out to be a podcast listener. So thank you.
Jeff: Wait, does Dewey’s extend beyond North Carolina?
Meb: You can order online.
Jeff: Okay.
Meb: Yeah. So they have cookies and we have all sorts of ginger. But the main thing is you want is the Moravian coffee cake. And we also got a glass mic in the mail, podcast mic. So listeners, well, I think we maybe should just move to gift-supported instead of ad-supported.
Jeff: Well, that was from our soundman, Mathew Passy.
Meb: Thank You, Mathew.
Jeff: Everybody, Mathew Passy, fantastic soundman.
Meb: Yeah.
Jeff: If you need help, reach out to him. Or reach out to me, I’ll give you his contact information.
Meb: Yeah. Other than that, you guys wanna sponsor the show through cookies or real sponsorship, hit up Jeff. And always, we need some more questions for the Q&A. It’s feedback@themebfabershow.com.
And I would suggest, by the way, checking out and downloading a new app for podcasts. I’m experimenting with it. It’s called Breaker. You guys have heard me complain and moan so much already about the lack of curation. I have something like 200 podcasts in my queue, and nothing upsets me more when I’m walking Deacon [SP] in the morning on The Strand here when I listen to a really terrible podcast.
Jeff: Maybe you shouldn’t be playing so much trivia and you could have had more time to listen to your podcast.
Meb: I listen to enough podcasts, but the problem is I would like a simple way to sort them by quality. And all these apps are obsessed with discovery. You don’t need to discover more podcasts. There’s enough out there. You need to discover the quality ones. So Breaker at least is the first one that allows for ratings. You guys download it, check it out. It’s free. Start rating all the great Meb Faber Shows and other good podcasts. And that way hopefully we’ll build up enough of a crowd base to be able to start listening to the good ones and ignoring the bad ones.
Anyway, I’ve got some travel coming up. If you are in Austin, Texas, first week in May, I’ll be down there. Chicago, the 14th to the 16th of May, I’ll be there for the Swan Global Conference. Hit up those guys if you want an invite. I’ll be in Europe, Greece, and Italy first week of June. Then there’s the Ritholtz crew’s IMN Conference down here in SoCal. It’s a lot of fun. Great lineup as always, and come say hi. That’s not too far from the office.
Shall we move on to Q&A?
Jeff: Let’s do it. Well, we have a lot before just Q&A. So let’s do some tweets of the week then let’s do some write-in Q&A then let’s do a couple Twitter questions.
Meb: Oh, the tweets of the week are not Twitter questions. Okay.
Jeff: Yeah.
Meb: By the way, I think we’re gonna have to shut down tweets of the week. The platform we’ve been using is called Storify, which is great, but like a lot of apps that work perfectly fine, they make no money, so they’re shutting down. And there’s another one that supposedly can do it, but despite it being one of the most useful things I produce, I don’t know that anyone cares. I don’t know that anyone listens, so we may stop doing it. There’s probably a better way to curate it and publish it. Maybe we should just do an app. I don’t know. Listeners, do you guys like the tweets of the week?
Jeff: [crosstalk 00:06:22].
Meb: If you do, do you have any better suggestions? Because we just curate them, publish them. And it’s funny because I go back and look at things that I favourited and saved and probably half of the time I don’t end up reading the article. So in the review process, I say, “Oh, man, I wanted to read that.” And it ends up being a really interesting article that I just kind of archived and never got to. So if y’all have any suggestions, let us know. All right, well, let’s…
Jeff: Let’s go.
Meb: …dig in while we can.
Jeff: All right, so the first one is about something that you wrote recently called the Stay Rich Portfolio. It’s based upon a couple polls that you had done about drawdowns and bonds. And just give us the whole takeaway.
Meb: Well, you know, we talk a lot about struggling with financial education, and I think one of the biggest gaps is people thinking…people always think in nominal returns, which means there’s nominal returns on say stocks if stocks have done 10% historically but there’s inflation of 4% in the U.S. and stocks historically have done 6% real. And real means it’s the money you can eat and spend. If your stocks go up 10%, but if you have 10% inflation, your net worth hasn’t gone up at all, right? You merely kept up with inflation. And inflation means a lot of different things, but just simply stated.
And so there’s a lot of challenges because…why do people think in nominal terms, it’s a lot easier. Because inflation is different over different periods. It’s been super low in the past few years, but it’s been as high as the high single digits, double digits before in the U.S., different countries have different inflation. It’s just complicated. And so it’s a lot easier just to look at nominal returns.
But the problem is if you look at actual real returns historically, and we always go back to our old 5:2:1 rule. If you haven’t listened to the Dimson podcast, which was episode number 100, it’s a must listen. It’s really wonderful. But in their book “Triumph of the Optimists,” they look at equities historically. And equities historically across the globe have done about 5% a year, bonds around 2%, bills around 1% after inflation. And we’re rounding up. But in the U.S., people are more familiar with…it has done closer to 7% real, which is more of a outlier. But really, globally it’s about 5%.
Well, the thing is is so most people think in nominal returns is something like T-bills or bonds. They assume they’ve had very little to no losses. And on nominal basis, that’s probably more accurate, but if you look at a real after inflation on bonds, and so we did this as a Twitter question, and it was something like 60% or 70% or 80%, I can’t remember, vastly underestimated the real losses in bonds. And so treasury bills…and I think this was, the peak of this was during the ’30s, lost about half after inflation. So if you just put your money in T-bills and expect it to keep up with inflation and you did over time, you had a real return, but there was one point in history where you lost half your money.
And so I think that’s a big surprise to a lot of people. And it’s the same thing with treasury bonds, and even worse with, of course, stocks, which lost 80%. But if you think about it that way and people start to reflect and you start to think as a wealthy person, so if you have a million, $10 million, $100 million, whatever you consider to be wealthy, $100 grand, and say, “You know what? I don’t care about making any money, literally zero, but how do I bulletproof my portfolio so I can just not lose any?” And the problem I think for a lot of people is they assumed that was like T-bills or, “I’m gonna go put my money in a CD at the bank.” But if inflation is higher than that amount, you’re actually losing ground.
Jeff: Are you making any distinction from TIPS? Where does that fit in?
Meb: It doesn’t fit in because they’ve only been around not as much recently. And even TIPS, if you look at on a real basis, lost, in the past 34 years, they lost I think it’s 20% or 30%.
So that’s the challenge. And so I had tweeted, I said, “Look, you know, find me a portfolio.” It’s almost impossible to find an asset allocation portfolio. So if you think from the starting point of stocks having lost 80% and bonds having lost 50%, then find me a portfolio that hasn’t lost at least 25% on a real basis. And it’s nearly impossible. There’s some that are close. So the permanent style portfolios in the U.S., which is a quarter each stocks, bonds, gold, and cash or T-bills, that one is pretty close, but the problem with that is it’s not really robust because if you take it globally, it’s closer to 40%, 50%.
Jeff: So what do you do with this, though?
Meb: I don’t know.
Jeff: I mean, it can’t just be, you know, gloom and doom. You’re gonna suffer 25% regardless. I mean, as I think of this, it seems like there’s an issue between the portfolio you need to accumulate assets and the portfolio you need to preserve your assets. But if you’re saying that even the best preservation portfolio still is vulnerable to 25% drawdown, what happens to people who are 60, 65 and can’t afford that?
Meb: [crosstalk 00:11:17].
Jeff: Eating cat food? Eating cat food in retirement?
Meb: You touched on two different things. One is the get rich portfolio, you know, there’s a couple ways to do it. There’s the, you build a business, there is…or you invest in potential businesses that have the ability to go exponential, and usually that requires concentration, or you invest at a reasonable rate of return, let’s call it 10%, even better if it gets up to 15% and let that compound for a couple decades, and you’ll get rich. On the Paul Merriman podcast, he talked about how he is gifting his children, I forget what it was, thousand, ten thousand dollars. And by the time that they were 65, it would have grown to a million or whatever it was, right? And it was a really cool episode as well.
So compounding works as well, but yes, then there’s the flip side. So that person who bought a bunch of Uber stock and is now worth millions says, “You know, I just wanna bomb-proof this. I just don’t wanna lose it.” You know, I think it’s gonna be really hard still not to lose 25% at some point. Now, that mean…when I say at some point, this may not be your lifetime. You know, for bonds, it was back in the ’30s, for stocks, same thing, Great Depression, for other types of bonds, it would have been leading up to the ’60s and ’70s.
Jeff: Well, actually, now that I think about it, why not just put everything into CDs?
Meb: It’s the same thing because if inflation is higher, if you’re in a time of what they call financial repression, which means bonds are…the yields you can get are lower than inflation, and…I mean, that’s not the way the world has been. It’s been the opposite, but it’s potentially…I mean, in other countries around the world too. So, I mean, I think the same general advice works. You could have a permanent style portfolio, which is just…I mean, my…older and older I get, the more and more I think the default is the global market portfolio, which is half stocks and bonds, half global, and just go from there. You want more cash added to that, great, add some. If you wanna add a blueberry farm and all sorts of different bunch of housing and some TIPS, like, cool. But I think the nature of markets is that there’s no bulletproof portfolio.
Jeff: Do you have a favourite alternative? I mean, I know you love trend-following as a strategy, but in terms of alternative asset classes, is there one that you really like the most?
Meb: I mean, I really like the concept of farmland, but it’s one of the hardest to allocate to. So maybe in another life, we’ll launch some farmland REITs or some private funds, but it’s pretty hard publicly.
Jeff: We need some pictures of you on your farm dressed as a farmer on a combine.
Meb: I have some. I have some great ones. Shot my first pheasant there a few years ago. Cooked it for Thanksgiving dinner
Jeff: I didn’t know you were a hunter.
Meb: As of like three years ago. I love shooting, like, trap and skeet, but I’m not as much of a hunter. I grew up as a fisherman. But I like being out. I mean, I like being out in nature.
Jeff: You are a skier. I’ll give you that.
Meb: Okay. [crosstalk 00:14:23].
Jeff: All right, next tweet, you had a handful that touched upon buybacks. So let me just sort of read a few things here and then I’ll let you run with it. Listeners, that’s a LaCroix, by the way. Sadly it’s not a Fat Tire.
Meb: Pop ’em if you got ’em.
Jeff: A record amount was spent on dividends in the first 3 months of 2018. According to data from S&P, Dow Jones indices, net dividend increases for U.S. common stock rose by $18.8 billion in the first quarter compared to a $10.9 billion rise in the first quarter of 2017. Senator Tammy Baldwin plans to introduce a bill on Thursday that would prohibit companies from repurchasing their shares on the open market. Critics say this trend is deepening the chasm between America’s rich and poor because affluent families own the vast majority of stocks. They argue the money would be better spent by investing in the future, paying workers more, or offering better benefits and retraining programs. All right run with it.
Meb: You know, the media gets this wrong. And I don’t fault these senators. And Elizabeth Warren was one of these co-sponsors. I don’t fault their intentions, but just picking something out of the air, this is one of the dumbest proposals I’ve ever heard. And let me explain why. As we’ve talked about many times in this podcast, one of my favourite book, “The Outsiders,” talks about capital allocation is a CEO’s job. Only five things he can do, right? It’s reinvest in the business, pay out a cash dividend, acquire another company, buy back stock, or pay down debt. And that’s it. There’s no other choices. And so it’s his job to do whatever combination he thinks is best.
So the media, which really, really does not understand buybacks, it’s so bad. Because financial, freshman year finance is “buybacks and dividends are the same thing.” Ignoring taxes, ignoring the valuation of the company, they’re essentially the same thing. And a lot of people don’t understand that. They’re actually much more tax-efficient. So I was joking with on Twitter, and it’s funny because a professor chimed in and said, “Coming from a professor, this is true. I teach freshman-level finance and this is a fact.” You know, they wanna scapegoat. And look, is it true that there’s this wide gap between wage earners and the top moneymakers in the country and world? Yes. You know, is it true…Now, I don’t think it’s true that investments simply benefit the super-rich because how many investment plans and pensions, you know, are invested in stocks? Most.
Anyway. But looking at buybacks as a scapegoat because, and there’s so much misinformation. So for example, why are they attacking buybacks? Well, they say the main reason they’re attacking them is they say CEOs tie their compensation to buybacks, to EPS, and they get more options, and so they try to drive up EPS, and buybacks are artificially inflating EPS. Well, first of all, [inaudible 00:17:39] that true. Cliff Asness wrote an article about it and said, “By the way, ironically, companies that are not buying back stock have higher EPS growth than companies that are.” You know, so they’re already backwards on that.
Jeff: But you pointed out many times about how high conviction buybacks are usually done at great levels.
Meb: Okay. So we’ll get to that in a second, but one more comment about the EPS and options, that’s not a buyback issue, that’s a really idiotic, stupid investment compensation committee, board of directors issue. So if you have a company and your idiotic board is tying the CEO’s compensation to short-term EPS, that’s the board’s fault. That has nothing to do with buybacks. Buffett has talked about this for years. It’s not that hard to design a compensation structure for the CEO that’s long-term focused, that’s focused on the actual fundamentals of the business, not necessarily the short-term stock price and things that they can manipulate. It has nothing to do with buybacks, absolutely nothing to do with buybacks.
So there’s lots of stuff you could do. You could hold the boards more accountable for coming up with idiotic compensation schemes. And so it’s just…you know, it’s frustrating because there’s so many…you could probably get, you know, 20 of the top financial minds in a room and say, “All right, an hour, write down 5 sort of proposals that would actually make a difference,” and probably crank it out in an hour. But instead, politicians gonna politic, right? And it’s frustrating because it has nothing to do with the real world.
Now, what you mentioned, so from the investment standpoint, think about if they outlaw…so I said if you’re gonna outlaw buybacks, you might as well outlaw dividends.
Jeff: And debt paydown.
Meb: Well, then yeah. So then should a company not pay down debt? All of a sudden you’re now just gonna only allow companies to issue stock? That’s horrible for investors.
Jeff: That wasn’t even necessarily the argument. One of the arguments was use that money to benefit the workers themselves. So they want more investment in the company.
Meb: Well, and the problem then is you have situations, and they’ll complain about this too where they say, “All these companies, they took on debt or they did this and they’d spent it foolishly and did all these dumb projects.” Well, that’s what people do when they have money sitting around and they can’t do anything with it. So if they have to spend it, they’ll spend it on something idiotic.
Jeff: Well, it also makes no sense to me because an investor has different motivations obviously than a salaried employee. An employee from an investor perspective is a line item expense, salary expense. So if you as an investor are gonna take the risk of putting your money in, and yet you only have limited benefits if that investment goes well, what happens if you have your investment go down? The worker still made a salary during all that time and yet is the worker gonna somehow be called upon to offset the losses of the investor? I mean, obviously not. It just makes no sense.
Meb: That’s the free market economy. If the workers are underpaid and there’s another company paying them more and they’re looking for talent, you better bet, they’ll leave and join the other company. And that’s how companies succeed and fail. I sympathise, though, with the huge wealth gap and that trend over the past few decades, you know, and I think there are plenty of policy ideas you could come up with. Banning buybacks as some, you know, just sound bite is just, it will make no difference.
Jeff: Well, it’ll get latched onto by a certain part of the population and yeah, they’ll just cause a stink and it’ll probably blow over.
Meb: If they just wanted a sound bite that wouldn’t make much difference, they should make dividends tax-free. Stupid, already stupid, dividends are taxed multiple times. And remember, from the investor standpoint, the Alpha Architect crew looked at this and said, “Fine, let’s look from an investor standpoint. Let’s sort companies into companies that are doing high internal investment and low.” And the ones that had the highest internal investment had the worst stock performance. But it’s been long kind of well-known that the companies that are, you know, not building up, empire-building, typically do better.
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Jeff: All right, next topic is volatility clustering. We’re seeing a lot of these pretty heavy up-and-down days recently. You tweeted about this. Remind us what the subject is and what the significance is.
Meb: Yeah. So we wrote a old paper on this called “Where the Black Swans Hide.” There’s still a lot of misinformation that pops up every two, three, four years about this, where most of the good and bad days happen when the market is already declining. And that’s simply because volatilities stretch because people are fearful. They don’t know what’s going on. And you have worse both up and down days. So as measured below the long-term trend, something like 200-day moving average, 10-month moving average. And if you can kind of avoid those days, there’s this old article that used to float around, and it’s in the media always, and you find a lot of buy and holders justifying it and saying, “Well, if you just missed the 10 best days, this is how hard it is to market-time, your return would be terrible or zero. So you can’t market-time because…” Well, it turns out, if you also miss the 10 worst days, your return is amazing. And almost all of them happen at the same time, which is markets are already declining. It’s just volatile.
So anyway, the takeaway is if you wanted to be a trend follower, you can apply simple trend-following techniques and you’ll miss most of the good and bad days. And by doing that, you lower your volatility, you lower your drawdown. Historically, you can increase returns a little bit, but that’s usually not the biggest benefit.
Jeff: I’ve read some stuff recently that’s trying to draw parallels between the volatility that we’re seeing now in the last few weeks and traditional volatility as a bull market kind of sputters to its end. Do you put any stock in that or is this just standard?
Meb: I was laughing. I think I heard a sound bite that said John Bogle was talking about this being one of the most volatile markets he’s ever experienced. And I was like, “What are you talking about?” We just had 15 up months in a row where volatility is at some of the lowest levels in history, and we had a minor jiggle in February that was like the quietest little back-and-forth, and then again in March.
But there’s not a whole lot of markets that are in downtrends. The real estate was an early one in the U.S., REITs, to start to kind of roll over, and you’ve still had the outperformance of a lot of foreign equities. And you’re starting to see commodities pick up to the upside. But that doesn’t mean that the U.S. won’t officially roll over and start to hit a bunch of the…it’s nipping at a lot of the trend lines. It’s already passed through some. So we have one fund that hedges somewhat in little pieces, and so it’s started to hedge some on the trend-following side. But in general, most of the world is still in an uptrend in most asset classes.
Jeff: Where are we relative to the 200-day, ballpark?
Meb: Wow, I mean, depending on when we’re recording this, when it gets published, we’re either above or below, but I think…
Jeff: Oh, well, great. Thanks for clarifying that.
Meb: Yeah. I think we’re slightly above right now. It’s close.
Jeff: All right. So next there’s a great tweet from…Robinhood had that graphic of “going up or going down.” Talk about this.
Meb: [inaudible 00:26:01] explaining it well. They introduced a new feature where instead of options…
Jeff: Well, explain Robinhood first.
Meb: Robinhood is the no-fee brokerage which just got valued at $5 billion, by the way. You can open an account there and trade stocks for no cost. It’ll be curious to see how they make money at some point. But they also just introduced crypto trading, I think. But they decided that it was too complicated for their investors to execute options. It was too confusing with all the nomenclature and Greeks and everything else, so they just changed…instead of it saying calls, I think they changed it to “going up,” and puts was “going down.” So just trying to dumb it down as much as you can to incentivise you to use derivatives and explode all…lose all your money.
But, you know, I have nothing bad to say about Robinhood. I’ve never used them. I have a dummy account there, and I logged in the other day and they had an interesting feature where it showed the distribution of where all their clients bought a particular stock. So you could look at, “Hey, they bought one of Cambria funds. Here’s where everyone bought it,” or, “Here’s where they all bought Snapchat.”
Jeff: That’s interesting.
Meb: Yeah. You know, it’s interesting. I don’t know what happens. Like, I guess I assume it’s dynamic, so if they all sell, it updates to the new cost basis. But I don’t know how useful that is other than determining levels maybe of supply and demand. But I would love to see a lot more kind of OkCupid-style…OkCupid is a dating site that publishes a ton of fun kind of econometric analytics into their users and behavior and everything else. I would love to see brokerages do more of that. I think they do that already internally, but the reason they don’t publish it is because they know that most investors would be far better served by not trading and not being active, which is not good for them because they make money from commissions. And I would bet my house on that. I don’t have a house, but if I did have a house, I would bet it on, you know, most of the results.
So the forex brokers have to publish it, and they have something like a 95% client failure rate, where they just lose…the amount of money that each new client loses it’s like $10,000 or something. Like sign up, lose $10,000 and they’re out. You don’t see people talking about forex trading as much anymore.
Jeff: How does your wife feel about you being so knowledgeable about OkCupid dating apps?
Meb: I missed it by like two years. One of my biggest life regrets, honestly, is just…watch the regret just pour over my face right now.
Jeff: You heard it here, Jackie.
Meb: Yeah. She doesn’t listen.
Jeff: All right. Next one, Gabelli filing an ETF for companion pets. What’s going on here?
Meb: You know, I mean, it’s a lot of fun to talk about the thematic stuff, you know, in our world of investing. You know, it makes great headlines, people love herding into whatever the hot theme of the day. And you can go back decades. It used to be electronics, it used to be television in the Nifty 50. It used to be…the most familiar to kind of my generation is all the internet stuff in the late ’90s, and then BRICs and electronics, and now it’s robotics and AI and self-driving cars. And so all of the fund companies are, so many of them who are late to the ETF game and also feel their world shrinking because of the race towards low fees, they don’t know what to do. And so so many of them are just kind of throwing darts against the wall to say, “Hey, I’m gonna come up with these thematics,” and the problem is a lot of them stick. Like you see these robotics ETFs and they go to a billion. And that’s…I’m happy for those. You know, that’s fine.
But again, it’s not a serious investment strategy. You know, if you’re putting 20% of your portfolio in some theme, like, you’re just making a gamble, unless you think somehow that you have some really amazing…and the problem with a lot of these is they’re market cap weighted. And the market cap weighted in some of these areas, we were talking about the marijuana one the other day, where you look at two or three of the companies in the market cap weighted, and Barron’s just wrote a great article about this, is like they’re probably zeros. And they’re $800 million, $2 billion market cap and they have no assets.
Anyway, so Gabelli put out a…let’s see. I was gonna read the description. It was a “Philosophy with respect to securities to identify assets that are discounted to private market value in the pet industry. Companies that offer service, support, and products for pets and pet owners, including food, healthcare, vets, pharmaceuticals, wellness, nutrition, equipment, medical, dental, and services, rec, entertainment, ag, infrastructure related to parks, toys and games, exercise, consumer products and any other sector which supports the well-being of pets and pet parents.”
Jeff: Like, trying to defend it, could you argue that pets is like an inelastic service good-type thing where, you know, even if things roll over people are gonna keep spending money on their animals. I mean, is it…
Meb: You can make an argument for any theme or industry or sector or sub-sector. You can make an argument for biotech. It doesn’t mean it’s not gonna have a 70% drawdown. You can make an argument for any thematic sector. And unless you are, you know, a thematic expert, in that sector, which you might be, in which case you’re a stock picker and you’re actively managed it based on fundamentals or whatever, could you generate alpha? Sure. But again, to me, so much of that doesn’t really fit under the banner of, for vast majority of investors, of being serious. They wanna do it because it’s fun. So, “Yeah, you know, I have an investment in biotech ETF,” or, “I have an investment in, you know, this AI self-driving cars because they’re gonna be huge in the future.” It’s a marketing game, not, in my mind, a serious investment philosophy.
Jeff: That feels a little different, though, those comparisons. So let’s go back to robotics that you mentioned, robotics versus self-driving cars. To me, it seems like the potential future of those industries is a lot larger than pets. I mean, I might be somewhat wrong.
Meb: Well, what does the future of the industry have anything to do with the price of the stocks in the future?
Jeff: Well, I mean, we’re not getting to valuation. I have no idea what the valuation of the pets ETF is, but if you’re looking at simply a rising tide floats all boats, I would think that the rising tide of robotics and whatnot is gonna rise a lot higher than pets. But hey, I don’t know. It could be.
Meb: What about if we combine them? Pets in space ETF?
Jeff: Robotic dogs. All right, let’s move on. Meb, I am excited, man. We have gotten our first ever call-in question on our phone line, which everybody has been ignoring for forever.
Meb: Do you still publish it or did you just put it up like once?
Jeff: No, it’s in every show notes.
Meb: Every single show notes? All right, listeners, if you wanna leave a message, we will play it on air, and…do you know what the number is?
Jeff: We’ll add it. It’s in the show notes.
Meb: But it’s in the show notes of every single podcast episode. If you wanna start asking questions, call in, leave a question and we’ll ask it. Do we have one?
Jeff: Let’s see. Here we go.
Man: Hi, Meb. I thought I’d take you up on the voicemail. So my question is when your portfolio or some investments are blowing up, what do you do to get away from the situation so you don’t make a hasty call or do something that’s irrational? Talk to you later. Thanks.
Meb: Well, that’s a little too hypothetical a question for me because my portfolio and investments never blow up. Just kidding. That’s like the response that Tim Cook, when they asked him about what he would do if he was having the same problems that Zuckerberg is having with privacy, and he said, “We would never have those problems.”
Look, you know, many of the things that we’ve talked about to date here and understanding history of the investments, having realistic expectations, putting together a written plan, automating it, so all the things put together. And the automation to me, it’s interesting because when you have a brokerage account or you just have a set account that you look up every once in a while and, you know, place trades, it introduces breakage points. Meaning anytime you need to make a trade or rebalance or do something, it gives you the opportunity for error. Maybe I’ll be lazy, maybe I’m not gonna rebalance, maybe you’re just gonna see how it plays out or whatever it may be. If you automate it, and this is what I’ve done with all my public investments, it transitions it to almost being like a retirement account.
A lot of people have a different mental approach to retirement accounts because they see it as, “Look, this is for 10, 20, 40, 50 years away. It’s something that I’m contributing to and, you know, I don’t even look at it. You know, I just keep dollar cost averaging and it automatically invests and I don’t have to do anything.” You know, if the world is going crazy, might you look it up and see how it goes and might you do something stupid still? Probably. A lot of people will. And I think that’ll be a struggle for a lot of robos that don’t have a human element. So if you don’t trust yourself, you can certainly get a in-between person to be that barrier. But for me, it’s been all those things we mentioned. You know, putting together the plan ahead of time so if and when it does underperform or blow up or whatever it may be, that at least you understood it or you have the next play already.
We talked about this where, you know, when Peyton Manning used to walk up to the line of scrimmage. It’s not like he knows what he’s gonna call ahead of time in any scenario. And so if you face that with your portfolio, you already know what you’re gonna do or not to. In most cases, it’s not doing anything.
Jeff: I mean, I think that’s the spot-on answer because if you think about what causes so much stress and anxiety in the market, it’s that idea of, “What do I do now? I don’t know what I should do.” But if you’ve taken the time ahead of time to know what you will do under various situations, well hell, the market could be down 20%, which obviously is terrible for your portfolio, but if you know that you’re gonna hold despite that, but if it hits, call it 30%, you’ll get out or whatever you’re gonna do, it takes away a lot of that anxiety.
Meb: What’s the quote? “Don’t just sit there, do nothing?” Is that right?
Jeff: I don’t know.
Meb: I’m think I’m murdering that quote. Okay. Next.
Jeff: All right, we’ve got a couple Twitter write-ins now. “On a recent podcast with Elroy Dimson, Meb and Elroy discussed the historical returns of housing and indicated that owning a house is not a high-performing investment relative to other asset classes. However, if the alternative to buying a house is paying rent, often at a similar cost to a monthly mortgage payment, how does this factor in to the assessment of the investment?”
Meb: We’ve gotta make a distinction here because we’ve also mentioned on the podcast, or maybe in an intro or a sponsor or something that real estate is also one of the world’s best-performing asset classes, from the academic literature. So we need to differentiate between say just buying a house and living in it versus buying a house and renting it to someone, okay? So that transforms it from being simply an appreciation to something where you’re getting income from it. So it’s totally different.
So if you were just investing in housing, it has about the same return as bonds, or bills, somewhere around there, right? Historically it’s that.
Jeff: In your primary house.
Meb: One percent return over time. And a lot of people will always…here’s where they get caught. Going back to that old nominal versus real discussion earlier, they say, “Oh, man, well, my mom bought her house. It was $20k and now it’s worth $500,000, one of the best investments ever.” Totally true, but if you look at it on an after-inflation basis, it’s probably did about the same as bonds.
You know, now caveats. This is location-specific, it’s time-specific, yadda yadda but over time and across geographies, real estate does about 1% a year real. I think it’s 1% or 2%. I can’t remember which, but somewhere in that ballpark. People always forget the expenses, you know, there’s so many expenses involved in real estate, so many problems. We had to move out for termites and mould and all that good stuff. And I think it’s our buddy Jason Zweig, I may be misquoting him, he says, “There’s, like, 10 reasons to own a house but none of them are financial.” No, he has a different phrase. What does he say? He says, “The house is a…it’s not an investment, but it’s an asset.” We’ll see how many things I just misquoted to Jason, but I think that’s accurate.
And so if you think about the buy versus rent decision, the good news is now you can go online and there’s 1,000 different calculators. You just Google “buy versus rent calculator.” But it’s usually kind of an equivalent, which makes sense in a free market where it’s a bit of a trade-off. It’s kind of like the old dividend equivalence in…or sorry, the Modigliani-Miller equivalence about how you fund a company, whether it’s through debt or equity. It’s the same thing. So it’s the same thing as applied to leasing or buying a car, in general. You know, you can find situations where one is vastly preferred because of incentives and taxes and local supply or whatever it may be, and the same thing with real estate. You can find times when it’s hugely distressed and it makes it a great deal of sense. But in general, and I have the flip side, I’m in a current situation where leasing it is far cheaper than buying anything, right?
But I think the best reason, one of the best absolute reasons to buy a house is it keeps you…it’s almost like a savings vehicle. So you’re socking away a monthly payment on a mortgage or whatever it may be instead of spending it on that trip to Cancun. You know, and so it’s like a default. People bucket housing as a different mental, I think, capacity than they do say dollar cost averaging into stocks, despite the fact stocks will do better, probably, over time. So it depends what you do with it is, I guess going back to the original question. And that’s why REITs historically have stock-like returns, as does commercial real estate or single-family housing if you rent it out.
Jeff: But assuming that the mortgage payment was roughly comparable to the rental payment, as the guy indicated, so the same amount of money is gone, wouldn’t it be preferential to buy for the point you made, which is it’s sort of a forced savings program so you’re gonna get that money back to some degree in the future?
Meb: No. I don’t know. To me, it’s 50/50.
Jeff: Well, what’s the counter-argument?
Meb: For renting?
Jeff: Yeah.
Meb: Well, you don’t have all the extra expenses. You don’t have the homeowner’s cost. You don’t have to pay for…I mean, people really underestimate, I think, the cost of living in a house and the maintenance. But remember, and this is the same thing that goes back to dividends and buybacks and debt and all this stuff, so that money you put down for the mortgage payment, remember, you buy a million-dollar house, you plop down $200,000, $300,000, that money would be sitting in the bank account earning interest and/or be sitting in stocks.
Jeff: The opportunity cost.
Meb: Opportunity cost. So you factor all those things in and I think it gets sort of [inaudible 00:41:23], which is why I always say it’s much more of a personal preference. It’s not as much of an investment one, where it comes down to, “Hey, do you wanna live in this house for the next 10 years?” I think that’s a totally reasonable idea.
Jeff: All right, next one. “I understand that any given strategy can underperform the market for long periods of time, but what is a reasonable timeframe to fairly evaluate the results of any particular strategy?”
Meb: Ten years.
Jeff: Is that based on just one business cycle?
Meb: I mean, you can look at any strategy over a week, a month, a year and describe what just happened, you know. And it’s funny because you see a…Vanguard put out a study that showed, you know, a number of these indexes where people were basically just data-mining, optimizing the past, and it showed the performance in the index and then the performance of the index once it went live was exactly what you’d expect. It’s like a steep hill up, you know, great performance, then it goes live and it’s more of like a plateau.
And we’ve seen both sides. You know, we’ve published a number of papers, books, where post-publication it had the best performance it’s ever had. So our old…our very first white paper came out in ’06, and it had the best performance of the 40-year backtest literally like a year or 2 later, you know, during the global financial crisis. One of the reasons this became popular when we wrote the 10-year retrospective, we laughed because we said, “Had we published in 2010, no one would have read it because they said, ‘No crap, Meb. This is obvious in retrospect.'” But Shareholder Yield, I mean, that’s a well-known strategy. Lots of people have written about it. It actually had the best performance of the entire backtest the year after I think we published it.
But a lot of that is just a coin flip. You know, the U.S. has been outperforming foreign stocks from 2009 to about 2015. That’s usually 50/50. And so that’s a good example. If you were just to look at the last 10 years and say, “This is our entire history of investment knowledge,” you would say, “The U.S. always outperforms foreign. Why would you ever invest in these dumb countries around the world when you could invest in the U.S.?” And in reality, it’s just a cycle. So I think, you know, the advice of tilting towards what makes sense, particularly when things get really, really stretched, makes a lot of sense. But there’s two types of confidence on looking at strategies. There’s the sort of rules-based quant index and then there’s the active manager. And so the rules-based quant index is hard enough. The active manager is an order of magnitude harder.
So like look at Dave Einhorn, for example. Famous manager, World Series of Poker, seems like the nicest guy on the planet, had phenomenal run in the early 2000s, published books, does lots of these charity conferences where they publish the ideas like Ira Sohn, and he’s had horrible returns, I think, for the past, like, 10 years. So do you say, is the question, has he lost his edge? Is he bored? Has he turned into a macro tourist and now he’s talking about inflation and gold? Is he comfortable in his wealth? Has he just made too much money or have we been in a cycle for the past 10 years where value hasn’t really particularly worked and it’s not his style? So you have two levels of really hard…so the quant stuff is hard enough but then adding on an active manager on top of that is nearly impossible.
Jeff: Perfect segue way into the follow-up part of this question, which was…
Meb: You’re supposed to read the Twitter person’s handle by the way when you ask the questions.
Jeff: All right, we’ll get there.
Meb: So you could say like, “This is Ed from Minnesota.”
Jeff: All right, we’ll get there. This actually was a write-in. I got it wrong earlier. The follow-up was, “If a strategy can underperform for 10 to 15 years, is it still a viable strategy and a reasonable consideration for portfolio construction?”
Meb: I think you wanna put as many of these little anomalies in your favour that you can. I mean, that’s what we’ve tried to do in our Trinity Portfolios and so stuff like value. I don’t really know what the alternative is. Buying expensive things, that just seems kind of stupid to me. So yes, I would still want to have a number of those in my corner. I don’t know what the alternative is. I mean, the alternative is doing the opposite but the opposite, in many cases, is really dumb.
Jeff: Can you think of a time when a respected strategy that had done well turned out to completely peter out and just lose everything and it’s no longer effective?
Meb: Price-to-book is a good example of something that’s really struggled in the last couple decades. Price-to-book is one of the first anomalies to value investing. And then you had, everyone knew that, right? And so did that cause the price-to-book to, you know, all the money to go into…I mean, DFA managed like $400 billion based on price-to-book, right? So does that change the dynamics of the market? Or there’s been some other good follow-up articles about price-to-book being not a particularly good indicator for XYZ reasons. Too long for this podcast, but there are things like that.
Jeff: My impression was price-to-book was largely a relic of, like, the railroad era, when you had a lot of these capital-intensive businesses that required it and it’s no longer as relevant no.
Meb: And then there’s others like dividends, where, you know, we’ve talked ad nauseam about this, but dividends, for example, used to work, not particularly great, but they’re fine. Better than market cap weighting. But because of a structural shift in the past few decades, they’ve become much less relevant. And then on top of that, like any factor, there’s times when they’re super expensive and times when they’re really, really cheap. And you’ve had a huge run over this decade where dividends went from cheapest they’ve ever been in the late ’90s to everyone in the search for yield piling in over the past decade to where they got the most expensive they have ever been in history. And that’s, dividends have been awful the last three years and they’re still expensive.
We said this, I mean, people now associate me with the guy that hates dividends. People are always on Twitter like, “Oh, you hate dividends.” I’m just stating the obvious. Put a dividend ticker of your dividend, mutual fund, or ETF into Morningstar, click on holdings, look at the aggregate valuation, and most of the time, they have a higher valuation than the S&P, and half the time it’s a lower dividend than the S&P. It literally makes no sense. You’re just buying expensive stocks at this point, and then pull up a chart of the dividend funds versus something like a Shareholder Yield or anything else, and, don’t take my word for it, but just go look at it.
Jeff: I can see him getting angry, folks. I’ve gotta watch this.
All right, let’s now dig into the Twitter questions, replete with the actual handles as you requested.
Meb: I was actually turning red from this kale juice I just drank. It’s the most LA thing ever done. One of our co-workers bought a ton of green juice.
Jeff: This first one comes from Ole Petter. He basically asks about an article which states that country valuation is influenced by the sector structure. Any particular thoughts on that? You wanna explain what he’s referencing?
Meb: Sure. So first of all, that’s true. So let’s say you have a country, a lot of people don’t know this, but financials in the U.S. are what? Twenty percent of the U.S., and in foreign, particularly in foreign emerging, it’s like 40%. And there’s roughly, let’s call it 10 sectors now, and, you know, some are really small. Some, like utilities, I think telecom are like 1% or 2%, they’re tiny, and then some are very large. And obviously different countries have different sector compositions. So you’ve seen a lot of people come out and say, “No, no, no. So the U.S. we think is expensive, and a lot of foreign markets we think are cheap. Average price to cheap to really cheap to really, really cheap.” And people saying, “No, no, no.”
It’s so funny, by the way, to watch people see something that’s expensive and then come up with a million reasons to justify why it’s wrong. And the same exact thinking being people see a million things that are cheap and justify why you can never buy it. Like, people just justifying their market position. So this is an example. I actually disagree with about 90% of the people talking about this.
So let’s say…the argument they make is that, so let’s say you have a country like the U.S. that has a sector that’s over-representative and it’s expensive in another country that has a very small exposure to that sector, that expensive sector, say, “Well, if you normalise the sector exposure, they’re not that much difference in valuation.” But that’s the entire point. You want to invest where the stocks are cheap.
So here’s an example. So let’s say you just had all the countries are comprised of two sectors, we’ll call one tech, because it’s historically often will get bubbly, and the other we’ll call staples. Tech, let’s say it’s at a 40 P/E and staples is at 10, okay? So four times the valuation. And just say same growth, yadda yadda. And so you have two countries. Country A has an 80% tech weighting at that 40 P/E multiple and a 20% staples weighting at that 10 multiple. So the average P/E for that is about 34. And then you have the flip side, so 20/80 instead of 80/20, the P/E ratio of that country is 16. So which country would you rather have? I would rather have country B every day of the week. But people say, “No, no, no, Meb, you need to adjust. So you need to adjust those sector weighting so they’re similar, in which case you’ll have the same P/E ratio and why would you ever buy one country over the other?” And I said, “Well, that’s the entire point. You want to buy the value.”
Now, the question they should be asking is, does it make more sense to go top down and pick country A or country B or to go bottom up and pick cheap stocks wherever they may be? And I think they end up in the same place. So we run funds on the exact same methodology. So we have an ETF, our largest, that does top-down. Actually it does bottom-up too but in general starts with top-down, meaning it picks country-level, based on long-term valuation metrics, like CAPE. Then we have other quant funds that are go-anywhere, and they pick just stock bottom-up, wherever that stock may be.
And the funny part is if you look at a lot of the value stuff with totally different methodologies, like you go type in our fund, you go type in Wes’s fund, totally different methodologies, end up in the same place. And it’s because the whole muscle movement is you’re using value in the first place and you’re avoiding the expensive. So I think almost everyone gets this argument, kind of discussion wrong. And I think that the key metric is really, are you using value at all? And I don’t even think it matters that much if you’re doing it top-down or bottom-up or both, I think you end up in the cheap stuff as opposed to being average or expensive.
Jeff: Value seems to be such the driver of success in the long term. Reminds me of the article we did which sort of back-ended into value as the driver of why a lot of dividend funds actually look pretty good in the long term because they’re really sort of proxies for value.
Meb: They get a little tilt, a little value tilt, kind of a crappy one, but a little value tilt, so it works.
Jeff: All right, next Twitter question. This is from…let’s see what’s the name. DRock_a.
Meb: Great handle.
Jeff: There you go. All right, so he says, “AUM target funds were about $250 billion in ’08. Many investors were shocked at the subsequent performance. Today the same target date funds are around $900 billion. What’s the industry’s level of responsibility to educate here? Seems like some major players could see some damage to their brands if/when people realise how much risk they have.”
Meb: You know, I like, I’m totally fine with target date funds. Target date fund, listeners, is something like a mutual fund where it’ll, say you buy it when you’re 20, and it’ll say, “Target date, 2060,” and over time it’ll reduce the equity exposure as you get older to, you know, being mostly in bonds with the theory being that, you know, as you get into your older age, you don’t wanna take as much equity volatility risk. So whatever, I’m fine with that. And traditionally, it seems like people that invest in those funds behave better because they don’t have to do anything. It’s kind of by design you’re hands off. I’m surprised you haven’t seen any target date ETFs. Maybe you have, maybe they have them. I don’t know that you do, but should be some.
Anyway, I don’t know that somehow the…people are always talking about distortions like in ETFs, and granted, this is in mutual funds where they’ll say stuff like, “You know, these ETFs are gonna totally distort the market and, you know, these passive funds.” And I was like, “Bro, ETFs are one-fifth the size of mutual funds, which are also smaller, you know, compared to all the institutions around the world that direct and it…” Anyway. But so worrying about target date funds having a impact on the market, I don’t see it.
Jeff: Well, I don’t know if he’s asking about the market impact as much as the responsibility to, you know, let investors know that they’re not as safe as they might think.
Meb: Yeah. I mean, that’s an age-old question. I mean, the age-old investment gap of…I mean, where was it talking about where if you…I was complaining on Twitter, as I’m apt to do, about bemoaning public education in finance. I said it’s a shame that personal finance and investing is not taught in high school. People are teaching calculus, which 99% of people won’t ever use again. No one teaches personal finance. It’s like 10% of schools…
Jeff: [inaudible 00:55:01].
Meb: Right. But someone tweeted to me and said, “Well, Meb, actually, you know, there’s been studies that show that the education really doesn’t even help people make decisions. They said where it helps most is point of sale.” So if you’re maybe the target date fund and you had, like, almost like a cigarette warning, where you had to read this one-page, five-minute presentation before you bought it, and it’s like, “Look, here’s the probabilities. There’s a probability this fund will do 5% a year, it may do 10%, it may do 0%. Here’s the probabilities it will decline 25% and you at some point will probably lose 30% to 50%,” would that make them behave better? I don’t know. I mean, it’d be fun to A/B-test. I don’t know if you can really do that.
But, you know, that just goes back to the old problem about expectations. You know, and we’ve been talking about this for the last year, where almost every survey shows that people expect 10-plus percent returns. Y’all millennials, it’s like, I think it was 12%, which is crazy. There’s zero chance of that. Not zero, there’s 0.01%.
Jeff: I’m reminded of being in your kitchen with you back in like maybe, I don’t know, 2010 or something like that.
Meb: Great vintage.
Jeff: Right when I moved out to California. I was asking you what you thought the market was gonna do. And I remember your response…
Meb: Was my answer “which market?”
Jeff: Your response was something to the effect of, “Well, it could go up 90% from here or it could go down 73% from here.” I’m like, “What are you talking about?”
Meb: “Thoughtful as always, Meb. Thank you.”
Jeff: And you were like, “Well, that’s historically what’s been possible.” So I think I just wandered away from you and got a beer.
Meb: You started trading options. See, if I had just answered normally, you would have been…saved yourself seven years of option trading.
Jeff: All the millions I’ve made.
Meb: Yeah.
Jeff: All right, next Twitter question from @thefuncooker. “How does renaissance technologies do so well consistently when all these other hedge funds fizzle out? What strategies do they use?”
Meb: Renaissance, RenTech, as it’s known, one of the most famous hedge fund managers of all time, likely the best performing hedge fund manager. They used to charge 4 and 40, or whatever it was.
Jeff: Four and 40?
Meb: It might have been 4 and 50. And the reason when they asked Professor Simons because he was a math professor, later he said, “It’s what we determine the upfront management fee, annual management fee because that’s what we needed to pay for staff and computers, 4%.” And he actually started out as a fundamentalist guy, and he said, “Fundamentals gave me ulcers, so I became a quant.” He has a really interesting background. I actually ran into him in the woods in Stony Brook on a hike.
And he’s also the…I can attribute one of my favourite quotes of all time in life, not just investing, to him, which was, “I can make the cliché either way.” Do you remember this? This was someone asked him about math. “Should I study math really deeply on one topic? Should I study it really broad, Professor, and learn a little bit [inaudible 00:58:02]…” So he said, “I can make the cliché either way. I can show you examples where, you know, it worked out great or terrible for, you know, numerous people.”
I apply that a lot to investing and life in general. Like, you can show…people always wanna hear advice, they wanna hear the hack. You know, “What are the 10 traits of billionaires?” And then you can show an example where, “Hey, that guy put all of his retirement savings into Litecoin and now he’s retired.” And I can show you another example of a guy who put all of his life savings into Litecoin at a slightly different time and is now broke. And so with so much of advice, you know, you can say, “Look, here’s what I think,” or, “Here’s probably the better advice,” but I can show you either way. You don’t hear that advice much. People love conviction. Everyone is looking for confirmation bias of what they already believe.
So RenTech, you know, they’re famously…they manage mostly their own money. Their flagship fund is called Medallion and it’s been the best returning fund for decades. My guess, and they cap it at size, because they can’t trade enough with it, is that it’s a market-maker. You know, essentially, it’s a market-making business, intraday kind of high-frequency trading but nothing more than that. Now, I could be wrong. And they hire gazillion Ph.Ds, scientists. A lot of their other funds haven’t been that great. They launched a managed futures fund. They launched a institutional equities fund. They launched a bunch of other funds and they haven’t stood up to what Medallion has done.
So I think…I don’t know, by the way. And that’s not a knock on them because they make 40% a year or 20% a year, whatever it is, but if I had to guess, if I had to take a multiple-choice quiz on HQ, I would say it’s kind of like a market-making.
Jeff: I don’t know what I just thought of this. Is there a part of the market that you feel is underrepresented in terms of options available?
Meb: Choices or are you actually talking about derivatives?
Jeff: No, no, no, no, choices, not options…not derivatives.
Meb: For what?
Jeff: Well, that’s the question is like do you think there’s something that should have more options for investment but doesn’t?
Meb: Yeah, we talked about farmland.
Jeff: [inaudible 01:00:03].
Meb: I mean, I would love to see that. What else? I mean, there’s a number of strategies that it would be nice to see more collateralised. Like, we talked about catastrophe bonds. I mean, do individual investors need to be investing in catastrophe bonds? Probably not, but as an asset class, like, I think it’s, talk about all time non-correlation.
Jeff: [crosstalk 01:00:22] Sharpe ratio.
Meb: Correlates to nothing. A lot of money has moved into that, but I would love to invest in cat bonds. Problem is a lot of these esoteric asset classes charge high fees. I was listening to a fun interview on Patrick’s Show where they were talking about new and innovative asset classes, and one of the guys was rolling up a bunch of high-follower Instagram accounts. And so giving them a way to have equity where he would essentially invest in these, you know, accounts that have a million or 2 million followers and have a revenue stream but no way to monetise it. So they would take some stake in it and turn…that’s essentially an asset class, right? So you can kind of parlay in that into some other ideas. And that’s sort of a new world asset class.
I just saw, and I think this one is a terrible idea, but Howard, when we had him on the podcast, he was talking about a new startup that lets you invest in classic cars, a fractional classic car. And I said I own a classic car and it’s the worst investment I’ve ever made. Listeners, if you want a 1967 FJ40.
Jeff: Is that still listed on…Is that on eBay still?
Meb: I’ve tried to play both games here. So I said, “Okay, you know, I’ll put it on eBay, I put it on Craigslist, put it on for like $20,000. Maybe I’ll anchor it and then I’ll list it again at $40,000.” I’m gonna list it at like $85,000 just to anchor or try to, you know, see if I can behaviourally get someone salivating. But it doesn’t have any doors, which I think…I need to maybe will invest in doing, like, a beach shoot and get a bunch of pretty girls, like, sitting in the car or get a bunch of people…
Jeff: [crosstalk 01:02:03].
Meb: …driving it down the beach or something. Because I think the photos of my driveway are not doing it justice. But the point is there’s so many asset classes that don’t correlate.
So going back to the Get Rich Portfolio, and if you start with that global market portfolio with tilts towards value, with tilts towards momentum, there’s only two reasons to add something to that portfolio, and it’s a really high bar, by the way, is it add returns, so is it return-enhancing to the current portfolio, or is it risk-reducing? So usually that’s non-correlation or it’s a combination of both, could be, right? And so you can plug in some historical asset streams into that historical simulation back to the ’70s or whenever it is and it’s probably 90-plus percent of investments would fail because it’s already a great allocation.
Jeff: Are you measuring the risk part or just through Sharpe or something?
Meb: There’s a million. I mean, I think in our first book, we had Sortino, we had ulcer index and, like, gazillion others and skew, and people were just eyes glazed over. But Sharpe ratio is actually not bad. I mean, there’s some outlier examples, so vol selling is like…will seduce people into thinking it’s a great strategy but it’s…you know, have a Sharpe ratio of two until it goes to zero. But in general, you can make some good rule of thumbs. Most asset classes sit around 0.2, 0.3. Portfolios get into that 0.4 to 0.6 range. If you have some really high quality or lucky or a good period, you get into about a 0.8, you know, and one’s hall of fame. We ran an old article and said, “Where have all the high Sharpe ratio managers gone?” And it showed, you know, managers that have been around for decades and there are no Sharpe ratios above, I forget what, certainly none above two, but not many above one.
Jeff: Is that a reflection of managerial prowess or a change in the markets or what?
Meb: No. It’s just it’s incredibly hard to sustain high returns with low volatility and drawdowns.
Jeff: Well, people did it before, why not now?
Meb: Well, they did it before but they no longer do. So what I’m saying is there’s no…people that are around, at some point you’ll have a drawdown. At some point, you will have a high volatility.
Jeff: My question is, did that not exist back when those guys were posting the one Sharpe ratio?
Meb; It’s the same guys that are around.
Jeff: Oh, I thought you were saying it’s before.
Meb: No, no, no.
Jeff: Okay, I got you.
Meb: Because people, it’s just the longer you’re around that it’s just math, the higher your chances of having big fat drawdowns are.
Jeff: All right last Twitter question here. This is from @THEShaneMartin. “Is Russia worth the current political risk for long-term investors, say five to seven years? And if so, is it best to look at specific Russian equities or an index such as RSX?”
Meb: This is a good companion question to the sector question we had earlier, which is, you know, people find excuses to hate things when they’re cheap and love them when they’re expensive or whatever. Russia, people, everyone hates on it. They’re like, “No, Russia is always cheap. It’s always gonna be P/E, trading at a P/E ratio of five.” Pretty sure that’s what you would have said about the U.S. when it was trading…it traded at a P/E ratio of five before. And now that it’s trading at a P/E ratio of 30, everyone loves it and they find a million excuses that it should be, stay expensive. GMO actually just came out this week. Russian stock market, by the way, went down 10% in 1 day, which is a good example of why…
Jeff: I’ve been in RSX and I saw that [crosstalk 01:05:24].
Meb: …why you don’t want to ever invest in just one country but diversify. And so GMO came out and kind of laid out an article and said they’re, you know, why they’re buying more. “And we think it’s one of the cheapest countries in the world. And so part of a lot of our value portfolios.”
Jeff: Yeah, I mean it’s the whole thing of…
Meb: And so, and by the way, the question asked of, do you wanna use just stocks or a fund? I think you wanna use a fund, but I would also say you don’t just wanna use Russia. You wanna buy a basket of cheap countries so you never have to ask the question.
Jeff: Well so you wouldn’t have a problem, though, with a direct investment in RSX as long as it was complemented by other emerging markets, or would you say…
Meb: No, but I’m saying listeners should buy our Value Fund that does it for you, that way you don’t have to buy RSX.
Jeff: All right, all right, fair enough.
Meb: Ours is certainly cheaper too.
Jeff: We’re tapped out here on questions and we’re over an hour. You wanna take us out here? Anything else?
Meb: Yeah, listeners, thanks for listening. Shoot us emails with questions at feedback@mebfabershow.com, and…
Jeff: Oh, actually real quick. There’s a handful of guys who wrote in, asked us good questions, problem is is that we’ve answered a lot of questions many times. So if you wrote in and didn’t hear your question asked, unfortunately, it’s one that we’ve answered over the, you know, last hundred episodes.
Meb: Sometimes it gets repetitive and boring, so you guys have gotta start…you’ve gotta up your game and start answering better questions. By the way, we stopped doing the beautiful, useful, magical about a year ago, but Jeff, have you seen the beautiful, useful, magical thing that’s on my desk? The new addition?
Jeff: The floating plants?
Meb: I have a levitating plant…
Jeff: [crosstalk 01:07:03].
Meb: …and it cost a fortune.
Jeff: …try to stick my pen under there.
Meb: Listeners, this is a great story. So I bought this magnetic levitating plant, so there’s like a wood block and a white sort of hexagon planter, and you put air plants or something in it and it levitates like an inch above. It’s the coolest thing. I could stare at it all day. And Jeff came in one day and he said, it’s called the Lyfe, L-Y-F-E Planter by Flyte, F-L-Y-T-E. They also have bulbs, by the way, that levitate and light up. It’s really cool. Anyway, Jeff comes in and he’s like, “No way, that’s awesome. There’s nothing under there?” And I was like, “Yeah, it’s a magnet, science.”
Jeff: No, no, no, no, no, you did not say anything about magnets at that point. You just like, “Yep, yep, just floating there.”
Meb: So Jeff is like, “Oh.” So he takes his pen and swipes, you know, to feel that there’s nothing underneath it without remembering that this pen was made of metal. So the whole thing crashes down and the pen was stuck to the base.
Jeff: I just like to destroy Meb’s stuff.
Meb: My poor plant.
Jeff: You didn’t explain it well enough.
Meb: My air planter.
All right. So yes, send in feedback@themebfabershow.com. You can also call the phone number. Not sure what it is, but it’s in the show notes. Leave us a message. We’ll read it live on air. There’s only been one, so your chances if you have a question and leave a message is that it will get answered.
You guys check out Breaker, the new app that I’m gonna be using on the podcast to listen to my episodes. You can always find the show notes and more at mebfaber.com/podcast.
That’s it. Thanks for listening, friends, and good investing.
