Episode #120: Radio Show: Our New Trinity ETF… Egregious Hedge Fund Fees… and R&D Spending is on the Rise

Episode #120: Radio Show: Our New Trinity ETF… Egregious Hedge Fund Fees… and R&D Spending is on the Rise

Guest: Episode #120 has no guest but is co-hosted by Jeff Remsburg.

Date Recorded:9/05/18

Run-Time: 32:12

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Summary:  Episode 120 has a radio show format. In this one, we cover numerous Tweets of the Week from Meb.

We start by announcing the arrival of our new Trinity ETF next week. We’re happy it will finally be available to the public. Then there’s discussion of Meb’s upcoming travel, which bleeds into a comment he made comparing crypto and airplane travel miles which, apparently, ruffled some feathers. We then touch on Amazon hitting a $1 trillion valuation.

Then, there’s a tweet from Ian Cassel, generally:

“Berkshire compounded at 20.2% from 1965-2010. If Berkshire was a 2 & 20 hedge fund it would have returned 13.5% net to investors vs 9.4% for the S&P.”

But the more interesting part was a follow-up tweet from Steve Burns:

“If you’ve invested $1,000 with Buffett in 1965, it would currently be worth $4.3 million.  However, if Berkshire had been a hedge fund charging 2 & 20, that $4.3 million would have accrued $300K to the investor with a stunning $4 million to the manager.”

This leads into a discussion of fees. We tie in a Tweet from Edmon Rakipi, which analyzes the average expense ratios for various mutual funds.

This dovetails into a discussion of asset allocation, fees, and tax alpha with the idea “does your allocation really matter all that much?”

We also touch on a Tweet reporting how corporate R&D expense is up (which doesn’t support the anti-buyback argument that buybacks starve R&D expenditures). Then there’s discuss of a new Wes Gray paper which highlights the conflict between longer-term returns and shorter-term performance.

Then a new “speed round” of listener questions from Twitter.

All this and more in Episode 120.

Links from the Episode:

Transcript of Episode 120:

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.

Meb: Welcome podcast listeners. Summer is officially over, it’s time to get back to work. So let’s drag Jeff into the studio. Welcome, Jeff.

Jeff: I don’t wanna work.

Meb: I am aware of that. I don’t think I’ve seen you on a Friday in years. I’m kind of melancholy, I’m kind of sad summer’s over. I don’t feel like I really had a full summer. I had so much travel, but fall time in L.A. is pretty spectacular. It’s my favourite time of year, September, October, can we call it fall? There’s no leaves to change, but it’s pretty beautiful and mellow. Colorado is great as always. I love the mountains. Went up to Winter Park, hang out with all the nieces and nephews, saw some softball games, did a little fishing, and all the good stuff.

Jeff: I was talking to this guy yesterday actually about Las Lenas and how you and I had gotten a mountain pass and didn’t take advantage of any mountains, most notably, I mean, nothing around here, but something as great as Las Lenas, we could have hit…

Meb: What is that?

Jeff: It’s Argentina. It’s, like, one of the most world-renowned resorts around. You got…come on man, you know this.

Meb: There’s a good chance you’re murdering the pronunciation and, like, the real name of it is something totally different.

Jeff: You’re the one who pronounces it “Van nu-wees” (It’s “Van Nuys”).

Meb: What are we talking about today? What do you know?

Jeff: Well, let’s start with Trinity. Big announcement for all the investors who have been interested in that as an ETF.

Meb: Yeah. The Trinity ETF should finally be out next week, tentatively September 12th. As listeners all know, those things can change, but that’s the goal. It’s pretty interesting because that, we’ll write an article about this and post it on the blog like we always have with my investment portfolio, but kind of disclosing my full investment stack. Trinity will represent by far the largest of my public holdings. I would say entire portfolio, but still, plan on utilizing the automated services for the taxable portion. Still Trinity, but whether it’s the ETF or separate accounts, the ETF should be cheaper and it should be tax-efficient.

But for most people, theoretically, it could be an all-in-one fund. So I don’t wanna get into too much on the specifics of the fund because it hasn’t launched yet, but just a heads up to the listeners that it should be out next week.

Jeff: What in terms of, like, conservative to risky…?

Meb: Moderate.

Jeff: Straight up moderate?

Meb: It’s in the middle. It kind of represents the Trinity three-four that we’ve been running for years now.

Jeff: All right. So they can actually click it next week? Good to go?

Meb: Yeah. More info on the link, on the show notes but we are at cambriafunds.com.

Jeff: Cool. All right. Well, what do you have coming up, what sort of travel are you looking at?

Meb: So the Trinity has been in the works for a long time, listeners know that there was hopefully, last spring and then the summer, but glad to finally get it out. And then turn attention back to crazy research that we’re up to and some travel. So I have Nashville, Rhode Island…what else…Las Vegas, Iceland, these are all work trips. We’ll post a calendar on the blog and show notes for dates. Those are all public things, you can come out and see me talk about what you’ve probably already heard me talk about a thousand times right on here already.

But I made a joke on Twitter that was…what’s the right way to describe it…well-received and also triggered a lot of people I think.

Jeff: Triggered.

Meb: Triggered. Enraged, where I was joking and I was…the tweet was…

Jeff: Were you joking though, really? I don’t think you were joking.

Meb: No. I wasn’t joking at all. I may have joked about the response. I said, “Honestly, I think frequent flier miles are better crypto-currencies than most crypto-currencies.” And I made four points. I said, “One, they’re less volatile. Two, they’re more liquid and easier to transfer. Three, you’re less likely to be hacked, and four, you can actually transact for something useful like flying around the world.” And so, the takeaway, why I tongue-in-cheek…there’s a couple of points that I thought were really important. One, almost no one picked up on the fact that I said, “Frequent flier miles are better crypto-currencies than most crypto-currencies.”

Because most crypto-currencies are dog shit, let’s be honest. But people also forget, like, I’ve been a huge proponent and cheerleader of digital assets and currencies for a long time. I don’t own any, I don’t think it’s an attractive investment for me, but I am a proponent and I’m cheering for them. That angle being said, I think most are fairly terrible, but I joked or I said…the reference and I forgot. I had stolen this from someone and I’ve already forgotten from who it’s from.

So I apologize, listener, if this was you, but someone made the reference that flying on an airline and getting frequent-flier miles is basically mining for crypto-currency assets by taking a long flight. So I said, “I’m gonna mine the crap out of my sky miles coming up by going to all these places.” So.

Jeff: If you’re a cheerleader for them, but you don’t find a place for any of them in your portfolio what are you cheering for specifically? Is it just sort of theoretically as an alternative?

Meb: You know, there’s the little libertarian in me, I mean, I love free markets, I love the belief that…and I’m probably not the use case. If you’re in Venezuela right now or Brazil or China, all these different countries where there’s very real risk of the currencies going to pot, I think the prospect of having the ability to transact in digital currencies is interesting, but at the same time you could also just transact in the U.S. dollar or the Euro, etc, etc, the Yen.

But the problem is most people use them for speculation in our world. And assets that don’t have cash flows…there’s really only three main assets, stocks, bonds, and real estate-type assets, right, and real estate is kind of a combination of the first two and then currencies. And currencies in general, if you have money in any currency around the world, you get paid in short-term debt. You’ve got to do something with the currency, but most of the digital assets you don’t.

Jeff: Why didn’t you lump in gold into that asset class?

Meb: Are we really gonna do this on this podcast? Are you serious? We have a list of questions and topics to cover. ‘Is gold a currency?’ is not one of them.

Jeff: Not a currency, you mentioned asset classes.

Meb: We can talk about it later.

Jeff: All right. Fair enough. In the news today, Amazon hits one trillion.

Meb: By the way, listeners, it’s end of summer, which means, to interrupt Jeff, if you haven’t read our Best Investment Writing – Volume 2 book, pick up a copy. It’s fantastic, we’re very proud of it. If you liked it or hated it, we’d love to read a review on Amazon. The very first person left a review. Reviews don’t bother me, we’ve had hundreds of terrible reviews for books and podcasts. I think they’re funny in general. But something about it being the first review, the guy admits to not reading the book.

He’s like, “I just skimmed like half of it, three stars,” or whatever it was. Anyway, I think it’s a fantastic book. Anyway, read it, let us know what you think. Leave a review if you like it or hate it, we’ll read it I promise.

Jeff: His commentary was the better part, not the rating.

Meb: Yeah. Plus, all the proceeds go to charity.

Jeff: Yeah. And by the way, let us know if you guys are enjoying the bonus episodes on Mondays. We have been honoured to have I think four or five of our authors read them so far. So, we’re enjoying it.

Meb: People love them. I get a lot of feedback actually. People love those. So we only have a few more, but maybe we’ll rope the rest of the crew into reading theirs too.

Jeff: All right. Back to Amazon, it hit a trillion today. I’ll get your thoughts on it in one second, but I’d rather jump ahead and get your thoughts on a specific angle on it. So, everybody knows Amazon’s been crashing for a long time now. A couple stats from the article, “Amazon’s stock is up about 75% this year. It’s been one of Wall Streets’ top performers since the bull market began back in 2009, up 3000% since then, currently trading nearly 100 times it’s expected earnings over the next 12 months.”

You got various analysts raising their price targets for it. So, you know, you’re a momentum guy. When you see something like this, do you sort of salivate thinking, “That’s one hell of a lot of momentum,” or does the value investor need to say, “What the hell is this? There’s no way I’m touching this thing at these valuations, it’s absurd?” Where do you draw the line?

Meb: The good news is I’m in quants so I don’t have to make that decision, but if you look at these outliers, it’s the way stocks and distributions have always been, these, you know, sort of parallel sort of returns where very few stocks have these massive gains that drive the returns of the index. It could be McDonald’s, it could be Dominoes, by the way, which has been, like, the best performing stock of this cycle, it could be Walmart, it could be, you know, yadda yadda, go on and on and on, classic American companies, Microsoft.

So there’s nothing particularly unique about Amazon in my mind other than I think they drive me insane with their fraudulent books. But, again, let’s not get started on that. So it’s just another stock and these things happen. You know, will it pass any of our value screens? I can’t fathom. Would it pass the momentum ones? Absolutely. Do I even know if we even own it? I would highly, highly doubt it, with the exception of it being in any market-cap-weighted indices.

But you got to remember, like, the funny thing is people…the media loves talking about these rocket ship stocks in retrospect, but if you look back, having to have held Amazon from the beginning means you’ve sat through many enormous draw-downs, including one I think 95%. So if you had 100 grand you would have lost $95,000 at one point. Like, think about that. Like, who can sit through that? No one can. So it’s hard. So owning it outside of an index, a lot of these…it goes to show that it’s very challenging.

Jeff: But back to market approaches, you know, you just said that given the valuation it probably wouldn’t pass any of your screens, but from a momentum perspective, sure you’d love it. So can we deduce then that you do not look at momentum in a vacuum, it’s got to be around through various valuation filters?

Meb: I think it’s fine if people did. We use momentum funds, but none of our funds are momentum only on equities only. I much prefer it to be a combination of value and momentum, in which case we have numerous funds that use both. On a cross-asset level, we have a fund that, of course, uses only momentum and that’s a little different. So, I love momentum and I think it has a place.

Jeff: All right. Fair enough. Well, let’s move on to some of the tweets of the week now. First one that caught my eye that you posted was from Ian Castle. He tweeted how Berkshire compounded at 20.2% from 1965 through 2010. If Berkshire was a 2 and 20 hedge fund it would have returned 13.5% net to investors versus 9.4% for the S&P. But the more interesting thing of all this to me was a follow-up tweet from Steve Burns. I think he was quoting Terry Smith. He wrote, “If you have invested 1,000 with Buffett in ’65 it would currently be worth 4.3 million. However, if Berkshire had been a hedge fund charging 2 and 20, that 4.3 million would have accrued 300,000 to the investor with a stunning 4 million to the manager. So it’s kind of a reminder for me about the importance of fees.” Most of our listeners write in with questions about strategies, you know, very few are commenting on the fee side of it. Any particular thoughts as you see this? I mean, does that surprise you, those numbers or?

Meb: No. We used to publish some tables. One, our buddy, Peter Mladina who was on an early podcast had some articles on this topic. He actually looked at it through the lens and not just fees, but also taxes. I mean, hedge funds are often almost always run without regard to any tax implications. So on top of these horrific 2 and 20 fees, you then pay taxes on many of these funds that have super-high turnover. And so, your returns get absolutely decimated. I mean, like this one shows, the amount that you have to outperform just to get back to break even is astonishing.

So a lot of the literature shows that in many cases hedge funds can add value, but they take all the value as fees. But again, there’s nothing special about the hedge fund concept other at this point than the fee-structure. We have heard a lot of analogies like, “It’s a compensation scheme masquerading as an asset class.” You know, things like that. Someone had a great analogy the other day about hedge funds are an amazing way to transform your wealth into essentially, like, you know, Wall Street BMWs, like, it’s a one-way street.

But a lot of the hedge fund strategies are totally viable, I think the high fees set a really, really high bar. You know, we go back to this whole discussion where nowadays the default is you should pay no commissions in your investment account to trade. You should pay essentially, nothing for market cap-weighted beta, it’s essentially free. You should use Vanguard. Like, those are all the defaults, and if then you go decide to move away from that, that’s fine, but you need to have a reason to do so.

So if you’re gonna go allocate to a private equity, a hedge fund vehicle that’s tax inefficient, that’s fine, but you better darn have some great reasons to do it.

Jeff: That ties into the next quote, Edmond Rekepy [SP]. I’m Not sure if I’m butchering his last name, but he tweeted about how according to the ICI, the average expense ratio for the following style of mutual funds is…and he delineated a bunch of them. You’ve got large caps at 1.25%, mid-caps 1.35%, small caps 1.4%, foreign stocks 1.5%, and bond funds at 0.9%. That’s a lot higher to me than I anticipated. I’m more used to just straight up equity funds around, you know, 0.2%, 0.3% or a little lower sometimes for again, beta I guess.

But is this surprising to you at all?

Meb: Two comments. It’s not surprising because we’ve done a ton of work here. But second, is also that asset-weighted is a bit lower. So this is average across all the funds, but asset-weighted ends up bringing it down quite a bit. But mutual funds are expensive. Going back to the comment earlier, like, the default is ETFs. Why in the world would you ever have a starting point of 1.25% fees in a very tax inefficient vehicle? It’s crazy, but people have done it because they have been sold them over the past 30 years and some have capital gains embedded that they don’t wanna sell them. But other than that, it’s, yeah.

Jeff: Well, speaking of capital gains and tax inefficiencies, why don’t we actually jump ahead a topic we were gonna hit, later on, Harbor replacing Northern Cross as the subadvisor. And a pretty sort of egregious outcome there. You kind of wanna walk us through what happened there?

Meb: Yeah. This is Jason’s [inaudible 00:15:45] article and the funny thing about this is this is not an outlier. This shit happens all the time in mutual fund lands. And we’ve talked about this on the podcast many times. You could buy a mutual fund, have a loss, and then still have to pay capital gains at the end of the year based on what people are buying and selling. That’s the most ridiculous possible situation I could ever think of. And a lot of these funds that have held stocks for long times have embedded capital gains and at some point they sell them and they create capital gains distributions.

Why would you ever own that in a taxable account? You should basically never own, certainly, an active mutual fund in a taxable account in these situations. Harbor, so they switched the manager. So the incoming manager says, “I don’t wanna own this crappy portfolio. I’m gonna do my portfolio.” So they sell all the stocks. They then had to do a $23 to $27-share capital gains distribution on a $64 NAV. That’s about 40% of your investment is coming back to you as a capital gain. You’re being forced to pay an enormous tax bill.

I mean, that’s the most ridiculous situation, but none of this atypical. This happens all the time in mutual fund land. It’s usually not 40% of the NAV, but it may be 4 or 14. But it goes back to why would you ever own a mutual fund in today’s’ day and age?

Jeff: The best you’ve got in this year could not have enjoyed those gains, but still be stuck with that.

Meb: Yeah. They could have a loss and have to pay a capital gain. I mean, it’s a big fat, “That’s what you get,” if you’re an individual and you did that. If you have an advisor they should be fired, immediately.

Jeff: All right. Tell me this, sort of related to this, but slightly ancillary, you know, in your book Global Asset Allocation, you looked at the allocations of some of the most respected investors around the world, Buffett, Dalio, Alerian, and one of the takeaways was over…what was it, 40 years… 40 years you found that the difference between the highest performing return and the lowest performing was less than two percentage points. And that’s despite very different asset allocations…

Meb: If you exclude permanent portfolios less than 1%.

Jeff: All right.

Meb: So permanent’s not really fair, because that’s half cash and bonds.

Jeff: So the point is despite very different asset allocations, over 40 years they all roughly ended up in the same place. So if you look at then basically effective tax treatment like [inaudible 00:18:08] basically tax alpha and you look at reducing fees, let’s say you effectively do both of those well, why does anybody fret about what their specific asset allocation is? Does it make any real difference?

Meb: Jeff, I mean, young Padawan, I mean, you’ve been listening to me preach for too long because you know…

Jeff: This might be the first time Meb has ever called me young.

Meb: Padawan. I just wanted to use Padawan. Do you know what Padawan is?

Jeff: I’m not a Star Wars nerd like you are.

Meb: Do you know that there’s a Star Wars pop-up bar in Holly Wood? We may have to go see that one day. Hopefully, they play that ridiculous song. Anyway, yeah. I mean, look, that’s one of our themes in the past five years and no one seems to really find this conclusion that interesting. And part of the reason why is it’s boring to talk about taxes, to talk about fees, but it’s reality. And your asset allocation, it’s one of my least popular opinions, I don’t think it matters hardly at all if you’re doing buy and hold as long as you have the basics.

My caveat is you always have to have the basics. So, some global stocks, some global bonds, some global real assets. But the percentages don’t matter. So, yeah, once you think in that context then, what does matter? Fees and taxes, but also you can kind of set it and be done with it. That’s why target-date funds, that’s fine. That’s why you tell me you’re doing a 50-50 stock-bond allocation, that’s fine. It’s not ideal in my mind, but it’s fine particularly if you don’t pay much.

But again, going back to this whole topic about fees, I mean, we have said this many, many times. If you look at…people are pulling their hair out and gnashing their teeth about, “Oh, my God. All these flows into an index fund, it’s gonna change the market, it’s crazy.” Index funds are, like, 15% of total assets, it’s meaningless. But if you look at the example we always give on the asset allocation ETFs or asset allocation funds, there’s about five ETFs that manage like three billion.

We manage one. That’s less than 30 basis points in fees, but there’s something like 600 mutual funds that manage almost a trillion that charges a lot more than that. So when people talk about the change in flows and behaviour, everyone loves using the baseball analogies and say, “It’s not that we’re in the third or fourth inning, we’re still in batting practice.” Like, you can’t even find a sliver on a map if you do a pie chart of the cheap funds versus the rest of the world. Like, it is so ridiculous still the amount of fees being charged in these tax-inefficient vehicles.

Jeff: All right. Well, fair enough. All right. So just a quick…another tweet from you. This one is about the big spenders, so those companies reporting large R and D investments. And the only reason I really wanna mention this is it seems like a great rebuttal to a topic which we’ve actually talked about more often recently, basically the villainization of stock buy-backs. And, you know, proponents of that concept have pointed toward diminished R and D as, you know, one of the sort of negatives of buy-backs, you know, managers instead of using that money toward R and D are using it to buy back stock. And this tweet seems to really off-set a lot of that. It’s saying that U.S. companies’ investments in research and development are rising at the fastest pace in 12 years. And it points towards some big companies, Amazon, Google, Microsoft, compared to a year earlier over the past 2 quarters. We’re looking at up 35% for Amazon, up 25% Google, up 11% for Microsoft.

So it really doesn’t seem to be holding weight, that argument doesn’t seem to be holding weight. Does this surprise you at all?

Meb: I think the media’s inability to understand how companies spend their money is really unfortunate. And politicians I’ll lump in the same basket because there’s a lot of sound bites that sound good but are just so poorly researched or naive. Like you mentioned, I mean, R and D hitting new highs. Companies, if they think they can pursue R and D and make more money they will. Like, no one’s sitting around at a company, I mean, CEOs want to empire to build, they love M and A and spending money on R and D. That’s what they want to do and it shows. They spend a ton of money on R and D and investments. And it’s only the case when they can’t find anything else to spend on or good uses of cash that they distribute it through dividends or buy-backs.

But we’ve said enough on that topic. Cliff Asness wrote a nice article about it recently in the journal that we can link to, but we may have to write a buy-back FAQ at some point just because it’s so frustrating the misinformation and misunderstanding about it. I had got into Twitter the other day about it and I just kind of threw up my hands.

Jeff: Who were you going at it with on Twitter?

Meb: Who knows? Who knows? Probably some anonymous troll, but speaking of, you know, what might be fun… I know you have some other questions, but I actually asked on Twitter for some radio show questions. So I thought it might be fun live to just ran through these and read them and just answer them with, like, one sentence…

Jeff: Go for it.

Meb: It’s like a speed round. And not have really any filtering on the questions, okay?

Jeff: You need to buy me a sound effects machine so I can sort of have the bell and things like that.

Meb: All right. You ready?

Jeff: No.

Meb: Terric [SP] says, “Could the lack of strict governance for corporate bonds cause another recession?” My answer is, “doubtful.” Next is… I’m not gonna answer this. This is from @commicabbage [SP], it says, “Dear Meb, I would like to know what you think will be the most appealing of our future communist utopia. Your comrade always, Commi Cabbage. CFA, PS #feeltheburn2010.” All right. We’ll skip that. Actors over gardeners [SP] asks, “What is the strategy to invest a million-dollar lump sum in the current economic environment?”

Well, you know what I would do, I would put it into our Trinity ETF. But a second question for people that often ask me is they say, “If you had to pick one fund, Meb, what would it be?” And it’s usually two or three answers. One would be ignoring that you have any allocation already, but saying, “If I had to close my eyes, hold my nose, what do I think the best performer over the next decade will be. I think it’s a basket of the cheapest global value equities. Hold that for 10 years, I think that’s a double-digit performer.

Obviously, we have a fund that does that. I think, however, a nice companion to that would be a sort of a dual-momentum and trend following fund that acts as a desert island portfolio because it has the ability to be invested 100% in cash and bonds. That way if everything goes to hell over the next 5, 10 years you have the ability to sit that out, hopefully. I mean, those two would be good companions and, of course, a global asset allocation portfolio, not market cap-weighted with tilts towards value and momentum. That was a really long answer to that one.

Got to keep these to one sentence. @joepelussi [SP] says, “What is the best way to gain exposure to disruptive tech in the public markets?” I’d say own the index. Market cap-weighted indexes are guaranteed to own disruptive tech. Next, @billkelly says, “What isn’t every investment professional practising the art…” why, I think he meant why isn’t every investment professional practising the art of alternative investments as a CAIA, C-A-I-A, [inaudible 00:25:32] to alternative investment analysts? #belikeMeb.” I think it’s a great designation. I loved when I went through it 10 years ago, probably a lot harder now. I’m not sure. All right. @briansoka [SP] says, “Why does Blue Horseshoe love Anacott Steel?” @jdp223, “Is trend following becoming too popular thereby losing its effectiveness?” No. Next, @dannamove [SP], “Getting to your first $100,000 assuming an average income, how?” Work your ass off. Work weekends, work nights. One of my favourite advice that was…we’ve mentioned many times on the podcast is the Theo Epstein advice of going into your boss and saying, “What is the 20% of your job that you hate the most that I could take over?”

I think that’s the best career advice I think I’ve ever heard. Not only do you learn on your boss’s job, you make him really happy and you pick up some probably skills as well. One or two more. @howardlindson, “Who’s the handsomest 52-year-old male with two kids and lives in Coronado on Fin Twit?” Come on Howard, we all know you have at least more than two kids somewhere in China.

@teddarling, “Best way to protect downside risk.” Not take the risk in the first place is my answer, has always been. If you have the risk and you can’t trade it because the capital gains or something else, then get something like a tailor-risk idea or trend following or not buying something really expensive in the first place. Let’s do one or two more, and then we’re gonna close it down on this Q and A speed round. @ericknight [inaudible 00:27:08], “What is your take on investing outside of the coasts? Is the idea of geographic arbitrage fair or flawed? If you were starting a scalable tech company would you launch it in Silicon Valley or elsewhere?” I don’t think it matters. This goes back to the old conversation of…quote I have of you can make the cliché either way. I’m sure there’s thousands of incredible companies in the middle of the country as well as all around the world. I don’t think there’s anything special necessarily about the coast other than just concentration of money as well as mentors and people that have done it before and potential sort of incubators etc.

I think you could probably do it everywhere. It’s probably easier in some cases to have access to talent and partners in some of the coasts. All right. How long did that take? Like five minutes?

Jeff: About five.

Meb: All right. You got some more questions?

Jeff: We’ve got one more.

Meb: You got some speed round questions of your own?

Jeff: I have no more speed round questions. I got one more tweet from one of your articles. You wanna hit that?

Meb: Sure.

Jeff: All right. This one is from your buddy, West Grey. He wrote an article called Academic Factor Portfolios Are Extremely Painful Unless You Are an Alien. Basically, the gist of it is how, if you started back in 1927, you had perfect foresight, momentum would look pretty good to you as an investment, and he goes through the returns and the draw-downs and what not. But then it says, “From a managers’ perspective and if not getting fired is your goal, things look very different.”

And from the article, I’m gonna quote them really quick. He writes, “The asset manager comes to similar conclusions, value and momentum are the most interesting from a compounding perspective. However, the asset manager recognizes that her investors are anchored on the S&P 500 as a benchmark. She knows if she underperforms for a five-year period she’ll be fired. By year five of underperformance there are always 100 other competing asset managers lined up telling her client it’s unacceptable to underperform for five years and all their clients have done much better.”

So, I mean, we can talk about this from the managerial perspective or really sort of the flipside of the same coin from an investor perspective, where you get antsy and you move on too quickly. I mean, we’ve talked about this before, but is it anything new for you to add in this case? Anything that you saw from the article that kind of looked at it from a different angle?

Meb: No. I’m gonna start being the Charlie Munger to your Warren Buffett and then ask some of these questions. I’ll be like, ” No, you got it.” No, I mean, I think West may be co-opting an earlier article he wrote. It was basically along the lines of, “Even God would get fired as an acting manager.” So now he’s on to aliens, maybe it’s a little search engine optimization-wise. But the point is that even some of these incredible strategies…and we had talked about Amazon earlier, but stuff like value or momentum, whatever it may be, go through these just miserable periods and people give up on them and move on to something else. Trend following is one people talk about now, emerging markets is another one that people don’t want right now, didn’t want them a couple years ago, but it cycles through, commodities, yadda yadda, over and over. But that’s kind of the whole point, you got to be asset classic gnostic.

Jeff: Let’s go on all the emerging markets, it was hot for a little while and now it seems like it’s kind of pulling back some.

Meb: Business as usual. Like, nothing you see at all, and even in my whole career, has really been that interesting, and I include 2008. I don’t think that’s that surprising. If you’ve studied the Great Depression in other countries, I don’t think that’s anything that’s that crazy. I mean, there are things that have been slightly surprising to me, but that’s not one of them.

Jeff: All right. Suck it market, Meb is unimpressed.

Meb: Yeah. What have you got now? 50% decline, boring.

Jeff: Meb, I think that’s it for me today. We have a short one, we got some great interviews coming up over the next weeks.

Meb: You guys, Jeff has totally depleted his question bank. So feedback@themebfabershow.com. Send us as many questions as you can, we will answer them, ask them on air, we promise. So send as many as you can. In the meantime, go pick up a copy of the book, check out the new fund. Is that it?

Jeff: I feel the need to sort of disclaimer your comment. If the questions have not been asked a ton, we’ll read them on air, but…

Meb: Yeah. We were…

Jeff: Sometimes Meb is a little prickly about having the same questions.

Meb: We were thinking about just doing a question bank almost like FAQs, to go edit all the old podcasts and turn that into an FAQ.

Jeff: Yeah.

Meb: You wanna do that?

Jeff: I think it could be a good idea.

Meb: Okay. Okay. Take us out.

Jeff: All right, listeners. Thank you so much for joining us today. Come see us in one of the cities we mentioned, shoot us an e-mail, leave us a review, the book, the podcast, anything else you feel interested in. By the way, we now do podcast of the week to the Idea Farm. Check it out. People love it, we send it out every week and it’s probably one of the biggest benefits of being a member now. You can always find more info on mebfaber.com/podcast. Thanks for listening friends and good investing.