Episode #178: Nobody Wants To Invest In Your Sh*t
Guest: Episode #178 has no guest, It’s a Meb Short.
Date Recorded: 2/27/19
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Summary: Episode 178 is a Meb Short. In this episode, you’ll hear Meb discuss the transactional nature of investing, finding an investment approach that works, and deploying an objective framework to govern removal investments and considering new ones.
All this and more in episode 178.
Links from the Episode:
- 1:06 – Nobody Wants to Invest in Your Shit
- 1:16 – Nobody Wants to Read Your Sh*t (Pressfield, Coyne) Writing | Book
- 1:41 – The War of Art: Break Through the Blocks and Win Your Inner Creative Battles (Pressfield)
- 11:07 – Global Asset Allocation: A Survey of the World’s Top Investment Strategies (Faber)
- 11:20 – The Trinity Portfolio (Faber)
Transcript of Episode 178:
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. We have another “Meb Short,” this one should be quick. It’s kind of fun, but I think it’s important. Today’s topic is nobody wants to invest in your shit. A lot of you probably read this on the blog. This is a recent one I pinned in February. But I think it’s a really fun topic that hopefully will let you think about investing differently and become a better investor. So, let’s get started. Nobody wants to read your shit. This is not an email I received from an angry reader. Though, I’ve received many similar ones over the years. Although my stuff is pretty boring and quanty, so I don’t get as much hate mail as probably a lot of people do. But that’s actually the title of a fun book on the topic of writing that was published several years ago by the author of “Bagger Vance” and other titles, Stephen Pressfield. He also wrote a book that I haven’t read yet that a lot of people have mentioned since this article called “The War of Art.” That was great.
But here’s a passage from “Nobody Wants to Read Your Shit” that explains the general takeaway. “When you understand that nobody wants to read your shit, your mind becomes powerfully concentrated. You begin to understand that writing, reading is, above all, a transaction. The reader donates his time and attention, which are supremely valuable commodities. In return, you the writer must give him something worthy of his gift to you. When you understand that nobody wants to read your shit, you develop empathy. You acquire the skill that is indispensable to all artists and entrepreneurs, the ability to switch back and forth in your imagination from your own point of view as a writer, painter, seller to the point of view of your reader customer. You learn to ask yourself with every sentence and every phrase, is this interesting? Is it fun or challenging or inventive? Am I giving the reader enough?” And by the way, this is a really fun short book. If you’re particularly a writer, it’s totally changed the way I think about writing and reading.
But before writing anything else, a quick apology. As you guys know, I’m the author and editor of seven books, a dozen white papers, thousands of blog posts. What do we have, 150-plus podcasts at this point? It’s dawned on me I’m a veritable shit storm myself. So, thanks to all the survivors out there still brave enough to read and listen to my work. I am gonna tie this all into investing shortly. But for the moment, consider the enormity of this prior passage I just read. If you ask someone to listen to this podcast or read your blog, or God forbid, your 400-page book, that’s a huge ask. It’s expensive on a time-value-money perspective, but also an opportunity cost perspective. What else could the listener or reader be doing with that time? Cooking dinner, hiking, learning a new language, working overtime, taking a nap, playing Fortnight, or even just spending some time with some loved ones. Instead, they’re reading your shit.
Of course, they may not be reading your shit for long. As that quote points out, this relationship between the author and reader is a transaction, the readers time and attention exchange for the author’s gift of words. Unfortunately, the transaction often breaks down. How come? Well, let’s consider the reasons most people wanna be an author. They include, among others, they wanna get rich, which is funny to all the authors that are listening to this because most don’t…even a lot of articles have shown that the many “New York Times” bestselling full-time writers barely make medium wage. Another reason you wanna get famous, you want celebrity status. You wanna market a brand, which seems to be the biggest one these days, build a following. Some people out there enjoy writing so much they simply can’t not write. Some people actually really wanna educate and/or tell a fun story.
Now, why do most people pick up a book? Perhaps to learn something new and/or something interesting, to experience enjoyment and pleasure. In other words, for fun. Lastly, to escape from reality, maybe you do wanna avoid your family. Where’s the Venn diagram overlap between why writers write and why readers read? Basically, it’s wanting to educate/learn something new and interesting. And also wanting to tell and experience the enjoyment of a fun story. That’s it. None of the readers give a shit about making you rich, or making you famous, or building your damn brand. Most the books that are written based on an author’s desire to make money, achieve fame, market a brand, so on, they often fail to make good on the unspoken contract between writer and author, time in exchange for value. Many authors make the book about them rather than writing for the reader. The result? The reader puts down the book after a few pages never to return.
Now, what does any of this have to do with investing? Let’s make a few tweaks to the book title passage from the book and you’ll see. Let’s rephrase it, “Nobody Wants to Invest in Your Shit.” This is my quote, but we just changed out a few words. When you understand that nobody wants to invest in your shit, your mind becomes powerfully concentrated. You begin to understand that investing is, above all, a transaction. The investor donates his money, which is a supremely valuable commodity. In return, you, the portfolio manager, must give him something worthy of his gift to you. When you understand that nobody wants to invest in your shit, you develop empathy. You acquire the skill that is indispensable to all investors, the ability to switch back and forth in your imagination from your own point of view as a portfolio manager to the point of view of the investor. You learn to ask yourself with every sentence and every phrase, is this return enhancing? Is it risk-reducing? Am I charging too much? Am I giving the investor enough?
Continuing the parallel, think about the reasons most investment professionals want to launch a fund and be a portfolio manager. They include getting rich, that seems to be the biggest one. Achieving fame and status, everybody wants to be Bobby Axelrod and Stevie Cohen. Marketing a brand and building a following. And then, of course, improving returns for the client, reducing risk for the client. Now, think about the reasons most people wanna invest in a fund or an investment. To be fair, there are many stupid reasons to invest in a fund. I’m gonna ignore those, bragging rights, something to talk about, scratching a gambling itch, greed, fear, envy. I’m gonna ignore those.
There should really only be about four legitimate reasons to invest in any investment or fund. One, to improve your returns. Two, diversify your current portfolio and/or reduce risk. Three, improving the chance of a positive outcome, which means something like helping you behave well. And lastly, to reduce your fees or taxes. Here too, we see only a small overlap in the Venn diagram. It’s at this point when a comparison between reading a book and investing in a fund breaks down a little bit. You see, when picking up a new book, whether or not to stick with it is a relatively easy decision. Consciously or not, you weigh the other activities you might be doing with your very valuable time relative to how interested or hooked you are in the book. If the book hooks you and delivers lots of fun pleasure, then it means the centre of your attention in the to-do list. We’ll just have to wait. On the other hand, if the book doesn’t snag your attention, it gets tossed. I remember I think one of the only books I read cover to cover was “The Road.” What a wonderful book.
Investing is different. The reality is that too many people remain wedded to awful dog shit holdings they should have sold a long time ago. Take a moment and think about what’s in your portfolio right now. I’ll wait. Can you say definitively that every investment deserves to be in there? You’re certain of this benefit and value? If the answer is, “I’m not so sure,” you might as well consider that a no for the purpose of this exercise. Go take our old article, “The Zero Budget Portfolio,” for a spin for more on this topic. This put your book down moment isn’t as clear to many investors for a handful of reasons. We become emotionally wedded to certain investments. We see them lose tons of value and hold on to them hoping they’ll come back. We see them gain tons of value and hold on them hoping they’ll gain even more. We buy based purely on the greed of riches from a hot tip. Often we forget the reason we bought the investment in the first place. The list goes on.
Given this challenge with booting an investment from a portfolio, what should be our criteria for putting the book down, or alternatively, for even picking up the book in the first place? Do you know there’s over 10,000 mutual funds and ETFs? And that’s just in the United States. We live in a world where you can essentially invest in the global market portfolio, stocks, bonds, real estate commodities for a very low cost. Let me repeat that. You can buy one, we manage one, or multiple ETFs that will give you access to the global market portfolio and this portfolio sets a very high bar for historical risk-adjusted-performance, and it’s basically free. To include short lending, some of it may be free. In fact, some of it may pay you to own it.
Historically, those portfolios return about 9% per year, 8% vol, 0.55% Sharpe ratio, mild drawdowns of about 25%, 30%. The global market portfolio becomes the investable benchmark base case portfolio from which all their portfolios should be judged in funds and investments. So, as an investor, any new potential investment needs to clear one or more of the following four objectives to warrant an inclusion into this global market portfolio. Likewise, any current investment needs to clear them to remain a holding. Let’s revisit. First one, does the new fund or investment improve the absolute returns of my global market portfolio base case? Two, does the new fund or investment reduce the risk of my portfolio? Three, does the new fund or investment improve the chances of my sticking to my plan? And four, lastly, does the new fund or investment reduce the cost or tax efficiency of my portfolio? That’s it.
Does your new 2 and 20 shiny tax-inefficient hedge fund check that box? Unlikely. Does your flashy new thematic sector fund check any of the boxes? Fat chance. What about investing in your cousin’s hot new startup? Probably not. Taking a fly in your neighbours favourite stock pick? No way. My guess is if you were to take your roster funds and holdings and evaluate whether they hold up to the aforementioned objectives and criteria, most, if not all, would fail. This does not mean that the global market portfolio is the only reasonable choice for investors. Lots of asset allocations in our free book, “Global Asset Allocation,” are probably just fine. Again, you can download that for free, cambriainvestments.com.
Many times I’ve also made clear my beliefs, there are value-added departures from this base case allocation. In fact, I clearly outline them in our white paper, “The Trinity Portfolio.” For example, I believe in tilting towards value or carry and momentum, which check box one and perhaps two of improving absolute returns and reducing risk. Everyone, long-term followers know I also believe in trend following, which is probably boxes two and three. So, reducing risk, help me sticking to my portfolio, it may increase returns, but I wouldn’t count on it. Tail risk even, that helps to improve my chances sticking to my plan, may reduce risk. I also like angel investing, that’s maybe boxes one, three, and four. And even farmland, two, three, and four.
These departures from the global market portfolio work for me. Doesn’t have to work for everyone. There’s probably no one else they work for. I believe they’re additive and worth the effort to include in the portfolio. However, I do my best to implement them in a systematic, low-cost, tax-efficient manner. After all, building an automated process using tax-efficient ETFs sets a very, very high hurdle for the addition of anything new, funds, investment strategies to that portfolio. Wrapping up, what’s most important is you find an investment approach that works for you. Yet, it should set a high bar for after-tax, after-fee measures of risk and return. And when you’re talking to one of these new mutual fund managers where 60% to 80% of them have nothing invested in their own fund, let me repeat that, nothing invested in their own fund, and they come and pitch you the latest super proprietary, rigorous, high-tech, alpha fund, you can politely reply, “Hey bud, no one wants to invest in your shit.”
Hope you guys enjoyed another short “Meb” episode. You can leave us firstname.lastname@example.org. We love hearing your suggestions, complaints, criticisms, all that fun stuff. You can subscribe to the show, leave us a review, we love when our listeners leave reviews. We read them all, I promise, on iTunes and also any of the other podcast apps. Thanks for listening, friends, and good investing.