Episode #129: Meb’s Take on Return Expectations, Portfolio Construction, and Practical Market Approaches

Episode #129: Meb’s Take on Return Expectations, Portfolio Construction, and Practical Market Approaches

Guest: Episode #129 has no guest. It’s a “just Meb” show.

Date Recorded: 11/12/18

Sponsor: EquityZen



Run-Time: 1:06:34

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Summary:  Episode 129 is a solo-Meb show. Meb has been out on the road, giving speeches. In this “Mebisode,” you’ll hear Meb’s most recent talk. It covers forward-looking return expectations, an offer to book some time to chat with Meb one-on-one, best and worst starting points for new investment dollars, improving upon the global market portfolio, what corners of the market to look at now, and far more.

If October’s market turbulence left you feeling some jitters, this episode will help you reorient your market views looking forward. All this and more in Episode 129.

Links from the Episode:

Transcript of Episode 129:

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’s 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: Hello, podcast listeners. It’s mid-November. Man, this year has flown by. It’s almost Thanksgiving, almost the holidays. No guest today. No Jeff. This is gonna be a Mebisode. I’ve been traveling the country. A lot of fun cities. Was in Providence, Rhode Island where I saw for the first time a bar that had a lobster tank that use lacrosse sticks to take the lobsters out of the tank. That was the most northeast thing I think I’ve ever seen. I had some really fun stops in Nashville, San Antonio, Las Vegas. And was giving a talk in variants of similar talk and I thought since most of the people in the podcast didn’t get to hear it, I’d like to summarize it here today.

And it’s a little different in the different places we gave in, and you’ll recognize a lot of the elements because I tend to repeat some of the common themes that we’ve had over the past few years. We’ve had a fairly similar marker regime that seems to be a little bit of volatility starting to jiggle recently. A lot of individual stocks. We’ve seen GE really struggle. A lot of sectors, a lot of countries, a lot of asset classes that really started to see some significant declines. A lot of the tactical strategies we run have been de-risking over the course of this year, and almost all of them that can be tactical are fairly-conservative right now. So, interesting time.

Before we get started, I say thank you. It’s a holiday thank you for being one of the over three million podcast listeners we’ve had. I’m gonna make a special offer to all the people listening today. One. If you’re an existing Cambria fund holder and are considering some year in rebalancing your portfolio, I’d be happy to get on the phone with you, discuss positioning, talk about investment ideas. If you’re not currently a client or don’t own any of our funds, but are curious about joining the more than 30,000 other investors who have turned to Cambria for investment solutions, I’d also be happy to chat about some of the stuff we do with you as well. So, we’re gonna post a link to the show notes. So, if you go to mebfaber.com and click the link for this episode, there’ll be a link to set up a call with me. And don’t worry if we’re already fully booked, I’ll open up some more, hopefully, in December and January so we can chat. But if you don’t find a spot and you’re just a burning desire to wanna chat about some ideas and portfolios and funds that we can work on, email me anyway then we’ll see if we can find you a spot.

So, what are we gonna talk about today? It’s a little bit about the way the world looks, some of the ideas about how to construct portfolios, some of the practical implications about how to put it in practice. A lot of what we talk about here today, you’ve heard me say this many times, but four of our books are free to download on the Cambria Investments’ website. You have a bunch of white papers as well. And if you’re an eBook reader, you can download those away. And so some of the themes that we’re talking about today, whether it’s asset allocation, whether it’s valuations, whether it’s 13F investing, can all be found there. So, a lot more source material. We’re hoping to update those in Q1, 2019, with a lot more updated materials. So, keep an eye out as well.

As you guys know, I mention this many times, probably to my detriment and droning on, but I think it’s important. Anytime you hear someone give a talk or talking on a podcast, understand what their angle is. Obviously, I’m a fund manager. Obviously, there’s a bias to what I have to say, intentional or not, but one of the biggest problems in our industry, in my mind, is a lot of the portfolio managers, a lot of the people selling stuff have no skin in the game. The phrase Nassim Taleb is always talking about where these people selling you products don’t actually invest in their own funds. And there’s a lot of stats out of Morningstar we’ve mentioned many times where the percent of portfolio managers that don’t invest in their own fund and some categories, it’s as high as 50% all the way up to 80% that don’t have a single dollar invested in their own fund.

And I used to shake my head and really be upset, gnash my teeth about that and then I realized after a while I said, “These mutual fund managers are smart.” They actually are smart not to invest in their own funds because they realize what they’re selling is not a great solution. It’s expensive. It’s tax-inefficient, so they don’t put their own money where their mouth is. But you guys know I put all of my investible net worth on the public side into all of our Cambria offerings. And so, I think it’s important to realize that a lot of stuff that I’m talking about, a lot of the ideas, I have very real skin in the game. So, we’re gonna get started.

As you look around the world, I think it’s important to start from a pretty macro 10,000-foot view, and you think about investing in general. I wanna talk a little bit about expectations. So, if you’re driving your car right now, if you’re on a jog, if you listen to podcasts like I do walking my dog, you can just think about this. If you’re at home, sure, write it down. I want you to think about what you actually expect your investment portfolio to return. So, let’s use a normal timeframe, 10 years. What do you expect your portfolio to return over the next 10 years? You got that number in your head? Well, there’s been survey after survey after survey all around the world, and we’ve seen many, and we used to actually do this. So, many of you have seen me speak. We used to pass round a little piece of paper and asked people to write it down.

And it was anonymous, and so we would have someone tabulate it, average it out, and the answer is always the same, so we stopped doing it. And what is the number you got in your head? Almost everyone says 10%. In a recent study from Schroders Global Investor last year, it was 10.2%. The actual millennials, you guys listening, we’re getting millennial listeners who are actually worse. So, it was like 11.7%, and we like to call that having a bit aggressive, unrealistic expectations. And we’ll talk about why here in a minute. But why do people anchor to that number? Well, people anchor to that number because that’s what US stocks, and so I’m speaking mostly to US audience, but in general, a lot of the global returns aren’t too far different. That’s what US stocks have returned for the past century plus.

If you look back to 1926, your stocks have basically done 10% a year. They did it with pretty high volatility and some pretty massive losses and drawdowns along the way, but that’s to be expected. So, people can remember the past two bare markets we lost about half investing in US stocks, but the real biggie, the granddaddy, and the great depression was over 80%. But is it reasonable? Should we expect stocks to simply return what they did in the past? Are you driving looking in the rear view mirror? There’s an old valuation model and I promise is the only formula we’re gonna talk about today. It’s a super simple formula. It’s not my formula. It’s actually Jack Bogle’s formula. Founder of Vanguard talked about this in the 90s, and it still applies today.

He actually updated this recently. And if you want to project, if you wanted to forecast a good example of what you think US stocks will do over the next 10 years, there’s only three inputs. So, future 10-year returns equal the starting dividend yield, the future dividend growth, and change in valuation. And that’s it. Starting dividend yield, dividend growth, and change in valuation. And so when you plug in numbers historically, and we’re approximating here, that 10% return comes from a starting dividend yield of almost 5%, so it’s 4.8%. Dividends growth, again, almost 5% so 4.9%, and a slight bump in valuation of stocks got more expensive over the course of the past century. So, 0.3% tailwind. But really it’s almost simplified to 5% dividend yield, 5% dividend growth.

Well, you can simply plug in the numbers, and Bogle did this recently, and you can plug in the dividend yield today, that 2%. We’re being optimistic. I’m rounding up. You can plug in historical dividend growth, so call it that 5%, and we’ll talk about valuation in a minute, but assume no change in valuation. So, that gets you to roughly 7%. And for the nerds listening, I don’t wanna distract anyone to crash your car, but a quick nerd alert is that you can actually deconstruct the dividend growth into inflation in real dividend growth. And what you find here is that historically over the past cycle, really over the past 20 years, you find that dividend growth has actually been a bit higher. And if you think about the reason for that, it makes sense.

If you have buybacks impacting the market in US stocks, companies behind them that now distribute half their cashflow most often than not, more than half their cashflow threw buybacks instead of dividends that has an effect on an artificially looking lower dividend yield, but a higher dividend growth. So, you could say, “Meb, this formula is biased towards dividend growth being artificially low,” and I would agree. So, maybe a point, even two points higher on that, but also inflation hasn’t been high as it was historically. So, it’s been a bit of a counterbalance. So, you could argue a little bit more dividend growth, but in general, it’s been balanced by inflation.

But let’s look at the last term because the last term has some of the biggest impact on this equation, and we’ve talked a lot about valuation on this podcast. You guys know that I love talking about price-earnings ratios, particularly one that’s a 10-year average. So, a really longterm average that adjusts for inflation. One that was made popular by Professor Nobel laureate Robert Shiller, who is really building upon work that’s been around for 100 years. So, nothing particularly new that Ben Graham was talking about 100 years ago when he was talking about averaging earnings over a period of five to seven years. And so if you look at historical data series on US stocks, you find that, in general, stock straight around a P/E ratio of around 16, 17 in lower, moderate inflationary periods of say 1% to 4% like we’re in now is they can trade around 21.

But you can see this valuation metric has been all over the place over the past 100 plus years. It’s been as low as five a number of times. It’s been as high as getting into the 30s. And, of course, the big, huge internet bubble that we had in the ’90s, my first real bubble that I got to experience hit about P/E ratio of 45 in December 1999. And we see the evaluation to right around 30 now. It’s down from a peak I think in this cycle of 32, 33 largely due to some of the carnage we’ve had over the past month. But what does that mean? Does that even matter? And I know you guys go crazy because I can check my email and Twitter reactions when I talk about this cyclically adjusted price-earnings ratio.

The Shiller tenure P/E ratio. A lot of people call the CAPE ratio as the acronym. Something about it causes people’s brains just to misfire. I don’t know why, but almost any valuation metric should agree when a market is really expensive or really cheap. Most of the time, they spend in this normal zone. Two-thirds, three-quarters time, they spend just average valuation, kind of expensive, kind of cheap. But when they get to extremes, all the valuation metrics should agree. So, in my opinion, you cannot find evaluation metric right now that says US stocks are cheap. And at a time when US stocks are cheap, you shouldn’t be able to find one that says they’re expensive. So, you can use all sorts of different valuation metrics. I’m not a particularly pick out CAPE is one example. I like talking about it because people understand it, but there’s plenty of others if you look at a chart that has S&P 500 median characteristics.

So, price to sales ratio, price-earnings casual, all those. A lot of those are hitting all-time highs. And any number of the other macro valuation metrics, market cap to GDP, Tobin’s Q, all those tend to say the same thing right now, which is US stocks are expensive. And, historically valuation has been a great indicator as to what may happen in the future. The less you pay for something when that CAPE ratio is low below 10, you have the highest future returns. And then it stairsteps down, and you have still positive and good returns from 10 to 15, 15 to 20, and then it starts to get pretty low. Plus 20 other returns start to get smaller and really start to get into trouble when we get over 25 or 30 where we are now. But it’s important to look back in history and say, “Okay. Find me some examples.”

Let’s look at some of the best starting points and worst starting points in history to invest. If you won the genetic lottery, you were born at the right time and just happened to invest when you were coming of age and had all your money, what were the three best times to invest? Well, you would have done about 20% a year for a decade. And if you listen to podcasts in the past, you know just how hard 20% returns are sustainable, you eventually end up like Warren Buffet. Become one of the richest people in the world if you can compound at 20% returns for long periods. And on the flip side, if you were just really unlucky bastard, three worst starting points, you did goose egg. Nothing for 10 years, frustrating, but if you look at the characteristics of those starting points. So, the 10 best had dividend yields of 5%, the 10 worst was much lower down around 3%. It’s actually 2.9.

But if you look at the valuations at the beginning of the three best periods, the valuation, the CAPE ratio was 11. And over the course of the ensuing 10 years, that CAPE ratio over-doubled and finished the period at 25 giving you a valuation tailwind a multiple expansion of almost 10% per year. So, half of that return was simply people were willing to pay more for stocks. On the flip side, if you look at the worst periods, the valuation started a much higher value, almost 28. Remember the cheapest periods were 11. So, we’re at 28 and then what happened over the ensuing 10 years? Valuations more than halved down to 13. And valuations, in this case, we’re evaluation headwind of minus 7% per year. So, you see the challenges where if you plug in the numbers today, 2% dividend yield starting CAPE ratio is somewhere around 30. Are we at the beginning of a secular bull or secular bear?

Odds are it’s probably not secular bull, but it’s really important when you think about investing to think in terms of probabilities. And I gave the talk in Vegas, and I said, “Look, let’s say you guys go sit down on the Blackjack table after this and you get Delta 16, and the dealer’s got a 10. Chances are you’re gonna lose that hand. It’s not guaranteed, but it’s not a great bet. You may get a five, Hallelujah. 21 and you end up winning, but the chances are you’re gonna lose. And on the flip side, let’s say you’ve got to Jacks and the dealer’s got a six, well, the odds are in your favor. Chances are you will win that hand. But how many times have you seen a bad beat at the table where the dealer pulls all the right cards and sure enough, you lose.” The same is true with investing.

So many people we know get so caught up in their own worldview, they don’t fathom what’s possible, and that’s where they really run into trouble with expectations and living their life and having a portfolio that ends up behaving differently than what they even thought possible. So, let me give you an example. If you plug all these numbers in the Bogle’s formula, starting dividend yield at 2%. When I wrote this when I was giving the speech, the CAPE was at 32. It’s a little bit lower now, but it’s a good example. And you model out where the CAPE ratio ends over 10 years, you can come up with some ideas of how evaluation will affect the future return stream. So, what’s the most likely scenario? You got two Jacks, dealer’s got a six, what’s the most likely scenario? Most likely scenario’s you’re gonna win.

So, what’s the most likely scenario here? Most likely scenario is the valuations will drift back down to historical averages. So, in my old inflationary times, that’s evaluation round 21. In all the full sample period, that’s down around 17. That gives you a return range for US stocks of 1% to 3% per year for the next decade. And most of you say, “Oh, that sounds awful, Meb. Why are you depressing me?” Well, that’s the same number John Bogle comes up with. So, talk to him. It’s his formula, but we also have to think. And by the way, that’s not terrible. That’s not gonna get me invited on CNBC to talk about because people love talking and thinking in binary terms. They say, “Oh, my God. That stock market is expensive. It’s gonna crash. I predict the market is gonna go to 1,000 or I think the market is a screaming by I’m a romping stomping bull.”

That’s sort of conviction and that sort of line of thinking is what gets you on TV, but it’s not what makes you a good investor. So, you have to think in your head, “Hey, there’s a possibility, by the way, that valuation sale right back through the average and something makes people not willing to pay high multiple stocks.” So, at times in the past, this has happened. People are only willing to pay 10 times earnings or five times earnings, in which case, you’re on the hook for minus 4% to minus 10% returns per year for a decade. That sucks. On the flip side, maybe Elon Musk convince free energy, maybe he finds diamonds on the moon. Who knows? I guess it’d be Mars. And let’s say valuation stay where they are. Well, then you get that 7% return from 2% dividend yield, 5% earnings dividends growth. But let’s say there’s been a time in the past when P/E is gone all the way up to 45. Late ’90s, massive internet mania.

Well, if stocks go back to the highest multiple we’ve ever seen in the US in the last 120 plus years, you only get a 10% return. Now, do you understand the problem here? Somebody else brains are slowly, the cogs are working together where you say, “Okay. Well, the problem is to get what investors expect, which is 10%, you have to have valuations increased to the highest they’ve ever been in history.” Is that a reasonable assumption? Is that likely? Is it possible? Sure. But is it likely? Probably not. So, we like to get the depressing stuff out of the way early. Stocks, we believe, are expensive in the US. What about bonds? You know what bonds are gonna do. US government bonds have like a 90% plus correlation simply with their starting yield. Unless they plan on defaulting anytime soon, which I wouldn’t bet on, US bonds will simply give the yield. The good news is that’s a little higher now than it was a year or two ago, but really about the same number that you thinking out with US stocks is about 3%. Now, bonds have their own risks. A lot of people get this wrong. We pulled this on Twitter, and almost everyone got it wrong.

Most people think bonds are not very risky, and the problem is most people think in nominal terms. So, not thinking about inflation. The problem with bonds is not the price declines like stocks like in the 1930s, the last two bear markets where the price just goes down rapidly, and you lose 20%, 40%, 50%, 80% plus. Bonds is actually the slow erosion of inflation. So, if you have bond yields at 3%, but inflation is running at three or four or five, you’re losing money. And there’s been periods where bonds on a real basis after inflation have lost half. So, if you think about in terms of actually after-inflation returns, bonds are actually just as risky as stock as far as purchasing power and preserving your wealth. It’s just a different risk. And so what do most people do?

They diversify the classic 60/40 portfolio. Bogle classically does 50% in each because that gives you a slightly less volatile returns than stocks, slightly higher returns than bonds, and you end up with somewhere in the middle. But the problem is the math right now, it just doesn’t work. It’s pretty rare in history to have a bad opportunity set for both US stocks and bonds. Often, one looks better than the other, but if you’ve got to project a 3% return for US stocks, project a 3% return for bonds, there’s no way you can average those two numbers in any possible configuration and get anything other than 3% returns.

You can’t even add them together and get up to the 8% returns that most pension funds expect. You can’t find any way to put them together to get up the 10% returns that investors inspect. So, what’s there to do? The first part of this is you need to reset your expectations. I think a lot of investors have unrealistic expectations, and it’s perpetrated by our industry because our industry, you go talk to your financial advisor, your investment manager, and I say, “You know what? I think your opportunity set is 3% returns.” They’re gonna go find a different one. Who’s gonna promise them those 20% returns? Those 10 to 20% returns? And that’s a problem. So, the base case investors, I would say, create realistic expectations. Take your medicine, and the solution for this is now spin less, save more. That’s pretty good advice anyway, and you know what? Let’s say you do all this, you get your house in order, you build a portfolio that you believe can withstand a lifestyle 3% returns instead of 8% or 10%, and you know what? If your portfolio does better, gravy. That’s awesome. Good for you.

Now, the good news is we don’t end here. I actually have some solutions, I believe, that will improve upon this 3%. Otherwise, what’s the point? I’d rather just have sounds of a chainsaw playing for 30 minutes and just be miserable for this podcast, but we obviously have some ideas we think we can improve upon that. And so the first of those is we don’t live in a world of just US stocks and bonds. Clearly, the world is your oyster. Globalization means you can travel around to hundreds of countries around the world, but also invest in many countries. And even if limit your universe to just developed and emerging market countries, that’s 45 countries to invest in, not just the US. And there’s other assets too.

It’s not just stocks and bonds, but you can get into granular size and sectors. You can get into different types of real assets like reets and gold and tips. So, the good news is there’s a lot of assets that have gone up over time. And we wrote a fun book, one of my favorites, “Global Asset Allocation.” Again, free online. And the premise of the book was the thought experiment. And thought experiment was we sat around watching TV, reading books. There’s a lot of really famous, really wealthy gurus that manage hundreds of billions of dollars collectively in the trillions of dollars and have been doing it for a long time, very successfully. And in the book, we profile probably a dozen of them, but names you’ll recognize.

Some of them have been on the podcast like Rob Arnott who runs Research Affiliates but other such as David Swensen at Yale, his famous endowment, Ray Daleo who has the largest hedge fund in the world at Bridgewater, of course, Warren Buffet, and others like Mohamed El-Erian, who ran Harvard and PIMCO. And all these guys at some point, let me say, guys because it’s mostly men in our world. All these guys at some point have recommended an actual asset allocation to investors publicly, whether in a book or an interview or a speech and in some cases, they get pretty granular. Some will say, “Here’s how much you should put in these very specific investments.” Now, we’ve narrowed it down into the book, we get very granular with the book, but we’ll talk about it here on a broader level, three main asset classes, stocks, bonds in real assets.

An interesting takeaway is these guys have hugely different allocations. So, in some case, the range on how much they think you should put in stocks ranges from 25% all the way to 90%. How much did you put in bonds ranges from 10% to 50%? How much you should put in real assets ranges from 0% to 50%. So, totally different asset allocations and you would expect them to have vastly different returns. Well, the interesting part about this, and we updated this on a tweet storm I did. So, if you don’t follow me on Twitter, go check it out @mebfaber. We did a tweet storm where we updated these numbers through 2017, and we’ll update it again to 2018 at the end of the year. But what you found is all these portfolios made money. That’s good news.

They all went up into the right. Many of them struggled in the ’70s. ’70 is really tough time to invest. Pretty high inflation, not a lot of assets did well. And while you had all these assets that took vastly different paths from the early ’70s to today, and you can actually take this back to the ’20s, by the way, if you exclude some assets like reets and hopefully, it will include a much longer dataset in our next update of the book. But what you find is that, in general, they all make money. So, it’s a good thing, but they do take different paths to get there. But to give you some colour to the numbers, you find that these portfolios, and even if you just go back to ’73, do almost hit that 10% return number.

So, that anchoring on the 10% return makes some sense to people. The good news is the volatility almost across the board is a lot lower than just stock. So, if you’re looking at standard deviation of say 15 or 18 for stocks, was these asset allocation portfolios get you down around 10, in some cases, a little bit less. Sharpe ratio is a good rule of thumb. You get about 0.2 for individual asset classes, maybe 0.3. And then once you have portfolios, you get up to 0.4, 0.5. Sharpe ratio for those who aren’t familiar is a measure of risk-adjusted return. In general, a higher number is better. And then the drawdown meaning maximum loss at some point. You really can’t find an asset allocation portfolio that doesn’t lose a quarter at some point.

So, most of this loss is somewhere between a quarter and 50% at some point. But here’s the interesting takeaway. And the tweet storm, we said, “I’m gonna give you a financial genie. In this genie, you rub the lamp, comes out and says, ‘I will give you a wish, and the wish is that you can go to 1972, and I’ll let you pick the single best asset allocation portfolio on returns from Meb’s book.'” That’s a pretty awesome gift. That’s worth probably billions. If you’re a money manager if you’re a Blackrock or Vanguard or PIMCO today, you’d probably pay many, many billions of dollars to have that information. But like most genies, they come with a caveat, and he says, “You know what? Here’s the challenge. I’m gonna give you this amazing knowledge, but you have to implement it using a mutual fund. The average mutual fund of today.” We’re not talking the average mutual fund in the 1970s or 80s, they charged even more, but the average mutual fund today, which charges 1.25% and you have to implement it using a mutual fund. You say, “All right. I’m still taking that bet. I’ll give you $100 billion, PIMCO.”

It turns out what was the best performing portfolio, the horse race in 1972, Mohamed El-Erian’s was the best. And that’s not surprising because his portfolio was very heavy in equities. It’s an endowment-style allocation, which we talked about a lot than our first book, the IV portfolio. So, you have a pretty heavy equity exposure, and equities did great over the past couple of decades. Obviously the ’80s and ’90s, one of the best performing bull markets in history. And so his portfolio has half in equities, a third in real assets and a smattering in bonds. And if you actually look at the worst performing portfolio is the permanent portfolio, which is a famous Harry Brown portfolio. Puts half in bonds and then a quarter each and equities in real assets.

Now, the challenge is that it’s a little bit unfair because if you’re putting half in bonds and T bills, so short-term bond measures, you end up with a similar Sharpe ratio, but quite a bit lower volatility as well. And it’s actually one of the few portfolios that had positive returns on after inflation basis in every decade. But just to give you some comparison, permanent was the worst. So, going back to our genie, the genie that you said, “All right. You’re gonna invest in El-Erian’s portfolio.” Gives you almost 10% a year. By implementing it with the average mutual fund of today, it takes the performance of the best performing asset allocation portfolio and makes it almost as bad as the worst, the permanent portfolio.

These are all the portfolios in the book. Many, many different portfolios, many, many different applications. And to me, that’s a fascinating takeaway because by implementing the best performing asset allocation portfolio was simply an average, average mutual fund fee. You render the entire asset allocation decision meaningless. So, how much do you have in equities? What’s the Fed doing? How much do you have in gold? Are stocks expensive? What about bonds? What about the Fed? Yadda, yadda. All those questions, all those implementation issues of how much you have in your portfolio simply by implementing it with an average mutual fund, you destroy any possible benefit of having a crystal ball for 40 years. And that’s a crazy takeaway. It gets worse.

And if you say, “You know what? I don’t trust myself. I’m a bad investor. I chase returns when times are good, I wanna buy at tops when times are bad. I always wanna sell, so I have to hire a financial advisor to keep me out of harm’s way.” And the average financial advisor charges 1% a year. And I’ve said this 1,000 times. So, if you’re just new to the podcast, I love financial advisors, but I think the vast majority of their benefits is in behavioral coaching, is in all the wealth management services that are value-added, such as insurance, such as taxes, state planning, all that good stuff. But let’s say you’re implementing this investment portfolio, the average mutual fund, the average financial advisor. So, 1.2% of the mutual fund and 1% for the advisor. You take the crystal ball genie, best-performing asset allocation with perfect foresight and turn it into far worse than the worst performing asset allocation in the book.

And so this is, to me, a pretty profound takeaway. And the challenge is what everyone as an investor tends to spend their time worrying about. All the stuff we mentioned before, geopolitics, we just went through an election. My God, I had to mute every single word on Twitter. I can’t take it. All the things that people were worrying about or stressing about Zika, the economy, what’s going on in Europe, Asia, Africa, who knows? Aliens, all that stuff. What actually matters to your portfolio is actually the boring blocking and tackling. How much are we paying to implement that portfolio? And God forbid. We’re talking about people where they’re paying one and a half to three percentage points per year because there’s plenty of funds that charge that.

And so one of my favorite examples is, to illustrate this, is a tweet that Bill Gates sends out usually once a year during mosquito week, which talks about the world’s deadliest animals. And a lot of stuff that people are scared of, sharks, wolves, lions, they don’t kill that many people. Sharks and wolves only kill about 10 people per year, although it’s a little bit close to home here in Los Angeles because you’ve got great whites swimming around every day. But what actually kills the most people, top five, number one is mosquitoes. Number two is other people. Number three is snakes. So, that one is fair. I hate them. They’re awful. Number four is man’s best friend, dogs, traditionally through rabies. But numbers five through 10 are things you’ve never heard of and would never be scared of because you don’t even know what they are. Certain types of flies, bugs, snails, and worms.

And so taking this back to asset allocation, the challenge for so many people is they spend 99% of their time thinking about the drama, all the stuff they read in the newspapers that they think matters in a portfolio. But in reality, you could have picked any of those portfolios in the book. And as long as you implemented them in a thoughtful manner, you would have done better and it wouldn’t even mattered what your allocation was as long as you had some of the main ingredients. And I talk about this in the book where we said the analogy is baking cookies, where as long as you have chocolate chips and butter and flour, all the main ingredients, eggs, chances are the chocolate chip cookies are gonna come out all right. But if you exclude an entire category, you don’t include any chocolate chips, you don’t include any flour, then maybe it’s gonna be messed up. But if you have some global stock, some global bonds, some global real assets, chances are you’re probably okay.

In the speech, I had a Gif of Matthew McConaughey from Wolf of Wall Street where he had a good scene where he’s talking to Leonardo Dicaprio, and he says the name of the game or is this a couple of old-school brokers, is moving the money from your client’s pocket to your pocket. And so the good news is we live in a world where costs have just been gutted. So, you can implement a global portfolio, stocks, bonds, real assets. Our old guest, Matt Haugen talked about this per five basis points. That means 0.05% to buy a basket of ETFs that represents a nice global asset allocation. That’s essentially free. And once you include the fact, the most ETFs do short lending and pass along that revenue.

I got into this a little bit with Elon on Twitter because most of the good guys out there pass along the short lending revenue to the end investor. You end up with a portfolio that actually probably has a negative expense ratio. That means that portfolio is paying you to own the portfolio. Now, comparison to the average mutual fund of 1.25%, which would you rather have? But how many of you, and be honest, how many of you still own these old school portfolios of mutual funds or other funds that charge 1.25, one and a half, two? And so we talk about a lot of…you here every day in the news about all these flows going into low-cost funds, and that’s awesome.

That makes me happy. I think it’s a one-way street. I don’t think people go back to paying 1%, 2%, 3%. But I don’t think it’s actually even started the major flows. The dam hasn’t broken. A good example I give is there’s about half a dozen ETFs that charge less than about 0.3%, 0.4% for an asset allocation portfolio. And they manage $3, $4 billion. So, pretty good, but there’s well over 500 mutual funds that charge more than that. So, 0.5, one, one and a half, two. It still manages a trillion plus dollars. And I think that’s a generational transfer that only happens in time because people are lazy. They don’t really care about fees, and it’s the most brilliant thing Wall Street has ever done is come up with a yearly fee that no one sees because it just gets skimmed off the top. You don’t notice the money coming out of that fund. But I guarantee you over 10, 20, 40, 60, 80 years, that 1.25% fee versus a 0% fee is a massive, massive difference. Let’s pause for a moment to hear from our sponsor.

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Meb: My first comment in this first session as we’re trying to build a portfolio moving away from these crappy opportunities in the US to globally is yes. You should absolutely think in terms of this global market portfolio, which, by the way, is roughly half stocks and half bonds, and all of that it’s roughly half US and half foreign. And that’s a pretty damn good portfolio. That’s always the starting point because that is the portfolio. If you went out and bought the entire world of every single public asset, that’s what you get. That’s the average of what everyone owns in the entire world, and that’s a great starting point. However, I do think you can improve upon that. So, in the next part of this is talking about moving from the US to the global market portfolio and then starting to tilt away from the global market portfolio. That confuses people sometimes. I will tell you why in a second.

As you think about your portfolio, the second question we used to always give listeners and our audience is we’d pass around a piece of paper. Some of you will remember this, and we’d say, “Okay. Think about your stocks, your stock portfolio, how much do you own?” And we’ll angle this towards US investors first, and then we’ll go global. Global can just think of it in terms of your own country, but US, how much of your stock portfolio is in the US? And in for the same reason we did the expected returns, we stopped doing it. We also stopped asking this question because all the answers were the same. Then the number always ended up around 80% invested in US, 20 foreign. And what we’d call that and we’d do this in real time, and it’s fun because we could say, “Hey, look, you guys said 80%.” Everyone else says this too, but here’s why, and here’s why it’s a problem. It’s called home country bias. Meaning,” if you were to look at the global portfolio of stocks, US is only half. GDP weighted, it’s only a quarter, but most of you put 80% in the US when it should be only half by pure indexing rules.

So, everyone that’s doing that is making a massive, massive active bet to overweight stocks. Now, if you’ve done that in the past 10 years, pat yourself on the back. Hallelujah. Good job for you. You got lucky because that’s worked. But that’s pretty rare. Traditionally, US stocks for foreign stocks is a coin flip. Now, my international listeners, you are even worse. Canadians put 60% in, Oz is two thirds, Japanese over half. Because in those markets, their home equity market is less than 10% of the global market cap. In some cases, as low as 2% or 3%. So, you’re doing a huge overweight, but everyone thinks they’re doing the correct thing because they think artificially, that’s what they know. That’s where they’re comfortable with. But in reality, it’s a horrible idea. So, let’s talk about why. My favorite example is always looking at the S&P 500 versus the largest stock in the S&P 500 when it’s the largest in the world. So, right now think about Apple, but in times in history, it’s been Cisco, Exxon, GE.

I think that sucker is down around eight now. IBM, Microsoft, Walmart. If you invest in simply in the larger stock when it was the largest stock, it’s a horrible investment strategy. And the same applies to the largest stock within any sector and the largest stocks within any country, they usually underperform their index by about three percentage points per year for the following decade. And if that scratches your head and say, “Why is that the case?” Well, it’s simply capitalism. It’s creative destruction. By the time that you’re a massive company like Cisco. And, by the way, do you know I was listening to a great podcast with the founder of Cisco the other day, this lady and loved the podcast. We’ll put a link in the show notes. But Cisco stands for San Francisco. I never knew that. It’s very obvious in retrospect.

Anyway, you invest in the largest thing is by the time you become Walmart, by the time you become Apple, there’s companies around the world to say, “Hey, I’d like to make billions of dollars too. So, we’re gonna compete with you.” And over time, also market cap weighting, if you’re not familiar, that is the market. That is the index. That is the only index, by the way, passive investing. Anything other than the market cap weighting is active. So, if you are the index, there is no tethered to fundamentals. People often get this wrong. It’s simply size. It’s priced some shares outstanding. And so a lot of times these big companies, they get 2%, 3%, 4% of the S&P. And usually, in the US, that’s kind of the upper ceiling. Internationally and in sectors, it could easily get 20% plus. That’s been a hard ceiling. But by the time you get there is because the price goes up of the stock, not necessarily that the fundamentals are great. It’s simply that the price is going up. So, you invest more and more regardless of fundamentals. Now, the fundamentals could be good, but more often than not, they get more and more expensive as they go up.

So, as you think about valuation around the world, and we were the first to do this, but many others have since. We created these long-term price-earnings ratios for 45 countries around the world. You can now find them for free on many resources. My pin tweet on Twitter shows my favourite top 10 valuation resources, but places you can find CAPE ratios globally from Barkley’s, from the Idea Farm, from Shiller, from Research Affiliates, from Star Capital. There’s a lot of places you can find them now, but we wrote a book on this called “Global Value.” Another one of the free downloads. And what it showed historically was that when you invest in cheaper countries, not rocket science, but your returns were better than when you invest in expensive countries.

And again, if you rank them, so we actually track on the Idea Farm about four long-term valuation metrics like price to cash flow, also dividends and there’s a high correlation. So, usually, the cheap countries are cheap across all the metrics or expensive across all the metrics. Because, again, going back to what we said earlier is valuation is a pretty blunt tool. And in some cases, you wanna use multiple metrics because there are structural differences in some of these countries like Australia that predisposes companies to pay out higher dividends. So, they’ll always look like they have higher dividends. And I forget who said this, but this is one of my favourite comments about investing that says, “Mean version is the most powerful force in investing.”

And so we look back during history at extreme cases of cheapness and expensiveness. PIMCO and Research Affiliates have followed this up with the study, so confirming it. But when you had true blood in the water when markets are trading at P/E ratios below seven, future returns for those stock markets surpassed 20% plus per year for the next five years. And when you had true bubbles talking about 45 P/E ratios where the US hit the highest bubble valuation in late ’90s, future returns were Zippo. Okay. So, where do we look now? People love talking about this. They love examining this. We publish this once a quarter to the Idea Farm. And not surprisingly, after some of the carnage in foreign markets, a lot of countries are pretty cheap. Cheap and getting cheaper. Russia down around a P/E ratio of six, Turkey, eight, Czech Republic, 10.

There’s actually a handful of new names creeping into the really cheap basket including Korea, China. But globally, foreign-developed is totally reasonably priced at around 20 foreign emerging as sub 15. Depending on the index, it’s actually quite a bit cheaper. The cheapest quartile or 25% of countries is down around 10. So, if you compare that to the US, probably around 30 now, still not at 30, some pretty big valuation spreads. And there’s a couple of things to think about as you think about a global deep value approach. Historically, it’s worked great. You can find quite a bit of outperformance in alpha by tilting towards value. In our case, we’re talking about buying some of the cheapest countries or tilting away from the expensive ones.

The US isn’t always one of the most expensive. In fact, for most of the ’80s, it was one of the cheapest in the world. And on the flip side, you had one of the most expensive, the granddaddy bubble we’ve ever seen was Japan when it hit a P/E ratio of almost 100. That’s twice the P/E ratio bubble valuation we saw in the US, and that’s not some backwater economy. That was the number two economy in the world until very recently. It was the largest stock market in the world in the 1980s. And so if you were a market cap weighted indexing investor, you invested most of your money in the 1980s in this single most expensive bubble we’ve ever seen in history. But that’s what you’re supposed to do according to market cap weighting rules. So, we often say, if you do anything, any investment strategy, it’s breaking that market cap related link. I don’t care if you equal weight, if you invest, whether that CEO wears a bow tie or regular tie or no tie, CEO eats hamburgers or cheeseburgers. Any investing methodology, preferably it’s one that involves fundamentals like value should outperform a market cap weighted index over time.

Now, why is this challenging? We always love talking to investors who often have unrealistic expectations. They’ll say, “Meb, I don’t understand why X, Y, Z strategy is underperforming this quarter or even this year.” And I often chuckle, and I say, “Oh, it can get way worse than that.” This active strategy can go years of underperformance.

In many cases, there’s times we could underperform for an entire decade. If you look at a basic asset allocation strategy like we talked about earlier, a simple global asset allocation versus the S&P, at one point in the ’40s and ’50s, is that at a point 13 out of 15 years. So, the challenge with any active strategy not just value, is you’re gonna look different. And so the challenge with value is looking different means you’re often buying what looks awful.

So, the names on the left side of the chart that are cheap, Russia, Turkey. A lot of these names now in Asia is probably making your stomach turn thinking about going and buying those. And I guarantee you if you go home, you get off this podcast and you say, “Wife, husband, daughter, neighbor, client, I just heard this really soothing voice at four times speed on the podcasts, and he’s really smart. And he says, ‘We need to go buy Russian stocks.'” Understand the problem there is let’s say you do that and it works out. You get a pat on the back, good for you. You made a little extra money over the next few years. You do that and you’re wrong, it’s a massive amount of career risks, matrimony risk. You underperform. Everyone says that was stupid. Why would you ever buy Russian stocks? That’s so dumb. Everyone knows you shouldn’t be buying those. And so, of course, you should buy a basket. You should never just by one country as same way, you’d never buy one sector or one stock. You don’t have to rebalance as much.

Actually, the more you rebalance it, it hurts. Once a year is probably all you wanna look at. In many cases, you’re gonna be holding these countries for years and years. Some of them probably even a decade. And the reason they get down to these cheap P/E ratios, it’s the P, not the E. So, the way you get to a P/E ratio of 10 or five is usually because the stock market is down 20%, 40%, 60%, 80% already. And people have a really hard time investing in those countries because the news flow is always terrible. If you flip it on the other side of the charter, we often tell a lot of people this. So, we, look… By the way, a lot of people get this wrong. It’s all well and good to invest in the cheap stuff, but that’s only half the battle. Value investing also works because you’re avoiding the really expensive. And now the good news right now is there are not a lot of really expensive around the world.

The US, however, is one of those countries. We have one of the largest valuation gaps we’ve ever seen between US versus foreign markets. The last time it was this bad was in the 1980s, but it was on the other side where the US was cheap, and a lot of foreign markets including Japan was more expensive. And so if you implement a value approach, a deep value approach or value approach across all your equity is the example we give in the book. You can call it smart beta, you call it tilting, call it whatever you want, but it’s breaking that market cap link and applying factor-based tilts. You can add a couple of percentage points or performance historically over market cap weighting. Well, that’s worth doing. But again, the problem you have to deal with is you have to be able to sit through long periods of underperformance for any factor or strategy.

And again, so let’s say you add a percent outperformance by buying a bunch of values, funds instead of market cap weighted funds, but then you implement that with expensive mutual funds that charge a percent or two, you defeated the whole purpose again. Remember, if you’re only generating so much finite alpha or benefits, you can’t pay that much for it. So, again, be very mindful of cost. We’re not gonna talk about it today because I’ve talked about it ad nauseum, but we focus on value. There’s other factors, in particular, we love momentum and trend. We’ve talked about this many, many times on the podcast and books.

Of course, there’s a white paper online on Cambria Investments called the “Trinity Portfolio.” The white paper that walks you through a lot of our trend following ideas. So, we’ll consider that a supplement otherwise this podcast will be three hours. But we like to do the lens of value investing because people understand it and then get it and it makes sense to them. And so adding some factor tilts through portfolio I think improve the portfolio, but you got to give them both. I’ve actually changed my opinion. People ask me, “Meb, how long should I give a strategy before I know if it’s good or not?” And I used to say a decade. In which case people would just shake their head and, of course, they’d say, “That guy is crazy.” Actually, now I usually say 20 years. And let me tell you why.

So, the biggest challenge about everything we’ve talked about today, it’s pretty simple. The return equation only had three variables. It’s been around for 20 plus years from Jack Bogle. Investing, pretty simple. It’s like baking. Remember? Put together some good assets, tilt away, use trend following if you want. I do, but don’t pay that much for it. Be mindful of taxes. We didn’t get into taxes today, but that’s equally as important as fees. If you wanna read a fun companion paper to this, we have a white paper called the “Investing Pyramid” that talks about comparing investing to the old school food pyramid. You guys remember?

But speaking of food, there’s another area where there’s an equation that’s pretty damn simple. It’s called “Weight Management.” And I’m pretty sure the equation is change in weight is calories consumed, minus calories burned. And I understand there’s a gazillion to use. No. Meb, the food composition matters, and my thyroid and yadda yadda. I guarantee you, if you’re eating 500 calories a day, you’ll probably lose weight, or if you’re eating 20,000 calories a day, you’ll probably gain weight, regardless of everything else you’re doing. So, simple equation, simple formula. But how many books have been written? How many fortunes have been made based upon Bowflex, Oprah, cabbage soup diet, Atkins, Paleo, Keto, south beach, the zone? My God. But still, how is it one of the hardest things that humans have to deal with?

Well, it’s because we’re human. We’re genetically predisposed to eat a lot of delicious food or not eating delicious food, just food when it’s around. High in salt, sugar, fat, and it’s pretty close to Wall Street analogy where the food companies are gonna sell you what you wanna consume. That’s not necessarily the healthy stuff, right? It’s Doritos versus Broccoli. But so the equation and the implementation is pretty simple. You have a plan, you burn more calories than you consume, you’re probably gonna be happy with your weight and lose weight. Not Complicated. Same thing with investing. The problem is we’re human. So, I learned this thankfully as a young man. I have all the behavioral biases, that’s why I eventually became a quant.

I think it’s really important to understand all the challenges. Most of this phase are old podcasts with James Monterey is a really fun one. He has a test on there that even if you know you’re taking a test about behavioral biases, you still fail the test. It’s hardwired into us. And my favorite example, and I’m retiring the speech by the way, after this. Is the last time I ever gave it. My favorite example is the American Association of Individual Investors does a survey. It goes back to the ’80s where they ask people, “Are you bullish or neutral or you bearish on the stock market?”

And over time, there’s some averages, and there’s…we’ll post links to it on the blog. You can find it my tweetstorm. Most of the time, people spend in normal average range. But when you get to extremes, people start to behave like lemmings, and they go crazy. So, there was a time when the people were most bullish in the entire history of the survey was in January of 2000. These single worst month in the entire history of this survey to be bullish was the month they chose to be bullish that the peak valuation we’ve ever seen in the history of US stocks. It’s exactly backward. The time that people were most bearish, March of 2009, the literal stock market bottom.

And this goes to show just how hard emotionally it is to be on the right side of investing in history. There’s another survey put together by, I think it’s Institutional Investor…Investor’s intelligence. Excuse me. This goes way back to the ’60s. Luther Hold, one of my favorite groups. You can see the old Doug Ramsey podcasts. They massage the data a little differently. They say they take the average sentiment over the course of a year. Are people bullish or people not that bullish? And so if you look at the top 10 highest bullish readings in history back to the ’60s, and next year’s stock returns, you find that stock when people are most excited about the stock market, top 10 years, next year returns on the stock market was zero.

On the flip side, when people are most despondent, that 10 worse years, next year stock market return is 17%. It’s amazing. Guess what? In a year that we just completed last year of the first time in history, the stock market was up every single month when the lowest volatility periods in history always makes me laugh. When you hear the commentators last year say these volatile times is literally the most least volatile market in history. Went up every single month. Never happened for us and not surprisingly, people were fat and happy. It was the second highest average sentiment reading ever. And so I was scratching my head until September saying, “You know what? Survey is gonna be wrong this year.” Which by the way, there’s no reason it can’t be wrong.

There’s times when it was wrong. There was 1971, people were not that bullish and the market at 15%, but guess what? Price can move pretty quick. Take the elevator down right here. Stock Market returns have gone from having a great year in the US to being right around flat. So, it’ll be fun to see how that ends up. We got a month to go. But again, people getting exactly right in the exact wrong sign, 180 degrees backward. So, this problem of emotional investing, a lot of the institution that I talked in, they looked down on individual investors, believe me, they’re just as bad. They frame it differently. They use bigger words. They have a lot more money and sound sophisticated, wear nicer suits, but they have the exact same problem the individuals have.

There’s some famous academic studies that looked at this selection in termination of investment management firms by planned sponsors looked at over 8,000 hiring decisions by some of the biggest investors around the world, and you can see these examples all the time. And found that, in general, when they would hire manager versus firing one. So, the manager coming in had a great track record. The manager going out has obviously struggled. Else, why would they fire them? Sure enough, ensuing three years what happened, they should have stuck with the old guy. The manager coming out had positive returns going forward that were more than the manager coming in. Is that old, mean reversion concept.

Then my favorite example of this, and it ties a lot of what we’re talking together is uncle Warren Buffet, who just plopped down a big buyback, stock buyback, probably no one understands capital allocation better than uncle Warren. You don’t see him paying a dividend. I think Berkshire only paid one dividend in the entire history of this company and when it did, Warren Buffett famously said he must have been in the bathroom when the board decided to pay a dividend long time ago. So, it’d be funny to see Berkshire qualify for shareholder yield portfolios or buyback portfolios, but not dividend ones.

Anyway, everyone has known Buffet as a great investor for a long time with his partner, Charlie Munger. And in our book, “Invest with the House,” again, free download. We went and tried to answer the question, “Could you replicate Buffett’s returns just by following his public stock picks through the SCC databases?” It turns out if you simply updated your portfolio once a quarter, it takes five minutes with Buffet’s holdings top 10, equal weighted back to 1999, you’d beat the S&P by about 4% points per year for the past 18 years. That’s a massive amount. That would probably make you one of the top performing mutual funds in the country, beating 99% of all other mutual funds. Required no work. You paid no fees. You could tax manage it.

It takes about 20 minutes a year. Now, like the old genie, herein lies the problem. It’s like the genie going back say, “You know what? I’ll give you the top mutual fund track record for 20 years. You’ll have 4% outperformance of the S&P. However, at some point, you’re gonna have to go eight to 10 years underperforming stocks.” How many of you would take that bet? Well, everyone will take it in retrospect. Zero of you would take it in real time because the market underperforms one year, you’re grumpy. Two years, you’re looking for a new manager. Forget three out of four, four out of five, no chance in a view. And when I say in a view, I’m including institutions.

There was a great survey from State Street where they said 89%, 99% of the respondents said that they would look to replace their manager after two years of underperformance. Buffet did eight out of 10, but that’s the timeframe you need to have to give a strategy to work. They go through many, many periods outperformance, underperformance, all that good stuff. And so if you’re not willing to suffer that pain for a decade, go market cap weighted and get on with your life. Go sign up for a Robo advisor, be done with it. Go Play Golf, go work on your job, go spend time with your family. You shouldn’t be stressing moving away from market cap weighting if you’re not gonna give it that long of a time to work its magic.

So, we did a depressing tweet the other day, which I asked my audience where thousands of people responded. A very simple question. I said, “Do you have an investment plan?” Over three-quarters of you said no. And that is a bummer. And why is that a bummer? For the same reason, if you don’t have a diet plan, you’re gonna wake up 2.00 in the morning and go make a dagwood south sandwich. You may go get a piece of pizza. It’s morning. I said, “Oh, wait, you guys are going to get breakfast burritos, I’m getting a breakfast burrito. You’re going to Shake Shack today? Okay. Fine. I’ll skip my salad.” Because you don’t have a plan. And the same thing with investing.

And so we’ve done these hundreds, if not thousands, probably thousands at this point, office hour calls and again, Y’all hit me up on my offer at the beginning to do a call if you wanna talk about our services, you’re in. Chat about some investment ideas. But it’s a problem because we did all these calls and people thought that their problems and desires and situations were all unique. Turns out they weren’t. Almost everyone had a similar situation. They owned an investment salad, meaning it’s this patchwork portfolio, bowl soup, random investments they’ve cobbled together over time. And once you buy something, we all know from the liberal literature, you become more wedded to it psychologically speaking. So, people have this portfolio that owns 10, 20, 50,100 names. We’ve seen 100 funds. It’s crazy. And most people we speak to have a binary view investing. They’ll call me and say, “Meb, should I own stocks? Should I sell them? What about gold? Do you think I should buy it? I have this old GE holding, should I sell it?”

People think in binary terms. They always wanna think 100% in or out. And people almost always will have a secret desire to wanna complicate the process. Everything we talked about today, which may sound complicated, is really damn simple. You could buy a cheap asset allocation portfolio and be done with it for the next 20 years. That takes five minutes, but people don’t want to. They wanna complicate it. And a lot of these problems persist and are made worse because you don’t have a written plan. We’ll add some links from Morningstar. They have a lot of great templates. Your plan could be complicated, could be basic. I’ve spoken many times on the podcast than on the blog about what I do with my own money, and portfolios.

You can follow those as well. No need to rehash now, but having a written investing plan is important. Otherwise, you get into trouble because you’re human. So, we’re gonna wind down today. We talked about a lot. Again, going back to the old Luke Skywalker quote from the last Star Wars. He’s talking to Kylo Ren, and he says, “Amazing. Every word of what you just said is wrong, so you don’t have to believe me.” You can take your own interpretation on what we’ve talked about today, but there’s some fun ideas. You don’t have to take all of them. You can use the implements some, you can think about some. Some of them are just a thought experiment. But a quick review, it’s important to have realistic expectations.

In this case, we talked about lowering your expectations for US investments, spending less, saving more. And then we talked later about valuation. So, looking beyond our borders, a lot better opportunities where right now if you’re investing in the global opportunity, half of that is going to US stocks, which is one of the most expensive countries in the world. So thinking about being closer to the market cap weight or tilting towards value puts you in a lot of countries away from the US. So, diversifying into this global market portfolio I think is important. Getting rid of that home country bias, but also buying other assets. We talked about real assets. We’ve talked about the largest asset class in the world that almost no one owns, like foreign bonds.

And then once you get that great base case that becomes the table stakes portfolio that’s free, you can tilt away from that. You wanna tilt towards value? Awesome. You wanna tilt towards momentum and trend? Good on you. It works for me. I love that area. So, then you can start to tilt away from that base case portfolio. And lastly, please, please have a plan. Write it down, share it with your spouse, children, neighbor, someone. That way, when it eventually hits the fan, which I hadn’t in a long time in the US.

We’ve had this awesome bull run. When it does hit the fan, and your investments are down 10%, 20%, 50%, 80%, you’ll have a plan for what to do. We’d love some feedback, guys. Send us some emails. It’s gonna be holiday time. We’re running out of all the wonderful gifts you guys have sent, Virginia peanuts, Winston Salem coffee cake, Moravian coffee cake, all sorts of delicious drinks. Y’all send some in. We love sharing them with the office and friends. Send us some questions, feedback@themebfabershow.com. Leave us a review. It’s holiday time. We love to hear from you guys. We really appreciate it. We read all of them. We’ll find show notes in mebfaber.com/podcast, of all the different podcasts. I love to hear your suggestions. You guys got any ideas for us? New questions for 2019, send them in feedback@themebfabershow.com. Reserve a spot to talk to me on the idea I posted. We’ll put it in the show notes with a link to get on my calendar. Thanks for listening, friends, and good investing.