Episode #183: Ben Inker, GMO, “The Problem With Good Returns In The Near Term Is They Have To Be Paid Back Sometime”

Episode #183: Ben Inker, GMO, “The Problem With Good Returns In The Near Term Is They Have To Be Paid Back Sometime”

 

Guest: Ben Inker is head of GMO’s Asset Allocation team and a member of the GMO Board of Directors. He joined GMO in 1992 following the completion of his B.A. in Economics from Yale University.  In his years at GMO, he has served as an analyst for the Quantitative Equity and Asset Allocation teams, as a portfolio manager of several equity and asset allocation portfolios, as co-head of International Quantitative Equities, and as CIO of Quantitative Developed Equities.

Date Recorded: 10/15/19     |     Run-Time: 1:09:37

Summary: Ben and Meb start the conversation with a chat about Ben’s thoughts on markets which include the overriding theme that non-us markets are currently presenting opportunity for investors.

Next, Meb asks Ben to get into his thoughts on current valuations and Ben walks through some ideas on high valuations for US stocks and reduced forward looking returns. On the subject of valuations, the pair then discusses interest rates and monetary policy. Ben follows that with an interesting paper he wrote that explored how high profitability has skewed toward large capitalization companies.

Ben expands on his thinking about valuations and markets outside the US, the past decade being the worst for value stocks, and being excited about opportunities like emerging market value stocks. He goes further in his discussion by getting into a concept he credits Robert Shiller with, clairvoyant fair value of a stock market, and shares that two pieces of information are critical, the starting valuation of the markets, and the return on capital.

As the conversation winds down, Ben and Meb discuss GMO’s benchmark free allocation strategy, and investing with the goal of making absolute money and worrying about absolute risk.

Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Justin at jb@cambriainvestments.com

Links from the Episode:

  • 0:50 – Welcome
  • 1:33 – Ben’s current view of the markets
  • 2:22 – Perspective on US stocks
  • 2:44 – Shades of 2000 (Inker)
  • 4:05 – Thoughts on 2020
  • 5:52 – How stocks compare to bonds right now
  • 8:51 – The trend toward negative interest rates and monetary policy
  • 12:46 – Stratification of market cap sizes
  • 12:52 – Bigger’s Been Better (Inker)
  • 19:03 – How to get 10% from stocks over the next 10 years
  • 26:25 – The optimism for foreign stocks and emerging markets
  • 32:13 – Clairvoyant fair value of a stock market
  • 36:20 – Allocating in overseas markets
  • 38:07 – Sectors and asset classes in overseas markets
  • 42:37 – Where things are in the cycle
  • 42:45 – Emerging Market Value and Margin of Superiority (Inker)
  • 45:38 – Challengers of managing a large asset manager and the problem with investing duration
  • 50:37 – Benchmark free investing
  • 59:10 – No Silver Bullets in Investing (Montier)
  • 59:22 – How do currencies play a role in portfolios
  • 1:04:02 – Up at Night (Inker)
  • 1:06:58 – Most memorable investment
  • 1:08:56 – Best way to connect and follow Ben: GMO.com, GMO LinkedIn

 

Transcript of Episode 183:

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: Hey, podcast listeners. We got an awesome show for you today. Our guest is the second instalment from Grantham, Mayo, Van Otterloo. Probably pronounced that wrong, but you’ll know them as GMO. Our guest is the head of their asset allocation team and member of the Board of Directors. He’s been with them…he’s a lifer since 1992. Please welcome, in his podcast debut, Ben Inker. Welcome to the show.

Ben: Thanks very much. Happy to be here.

Meb: Man, it’s gonna be a lot of fun today. As I sit here in Los Angeles, you’re in Boston. The summer’s over, the year’s almost over, the decade is almost over, which I am just totally not prepared for to start talking about the 2020s. What’s the world look like from your desk in that part of the world? We’re just ending a pretty monster run in U.S. stocks this decade coming out of last decade and the financial crisis. What’s things look like from your seat?

Ben: Yeah. From our perspective, things look really interesting. It’s not that there’s lots and lots of very cheap assets to buy around the world. But in the context of what’s been a pretty good decade for investors, there’s a surprising array of pretty good assets. As you were pointing out, it’s been a monster decade for the U.S. equity market, so most of those assets do not reside in the U.S. But as we tend to look at things after a 10-year-period where the U.S. just kicked butt relative to the rest of the world, our strong expectation is the rest of the world is going to return the favour as we get into the 2020s.

Meb: So let’s get a little deeper into that framework on kinda how you guys think about the world. GMO has been long a value shop amongst other things, but particularly well known for valuation. Everyone loves your seven-year forecast. Maybe we’ll start with U.S. stocks. What’s y’alls kind of perspective on there? Your most recent piece, which we’ll link to in the show notes called “Shades of 2000.” I figured we’d start a chat with everyone’s favourite investment, U.S. stock market.

Ben: Yeah, I mean, U.S. stocks, look, they have done really well. And the problem with doing really well is if you are making returns faster than the underlying cash flow of the asset that you’re investing in, that is reducing the forward-looking returns for the asset. And when we look at the U.S., it’s trading at pretty high PE multiples on profit margins that are close to all-time highs. So our framework tends to ask the question, well, what happens if PEs go to normal and profit margins go to normal?

In the case of the U.S. stock market, particularly the large caps, which have really outperformed small caps in recent years, that’s gonna be tough because the PEs would have to come down and the profit margins would have to come down. In the rest of the world, because the returns haven’t been as good, what you find is the PEs are lower and, in general, the profit margins are a lot closer to normal. So, as we normalize things in the international markets, and in particular, in the emerging markets, things look better because they don’t look different from normal.

Meb: And you make it sound so pleasant and simple. And then I look at some of y’alls expectations, and so I feel like the listener would say, “Okay, that doesn’t sound too bad.” But then as you guys think about the potential for mean reversion in valuation, what’s, kind of, as you look to the horizon, good times tend to fall off bad and vice versa? We just published a tweet. Assuming we end where we are now, this will be in the top half of the last 11 decades in the U.S. stock market on real returns, which historically has had a bit of a rubber band effect. Turn your eyes to the horizon. What should an investor listening to this start to think about as the 2020s come along with expectations? Ten-percent a year?

Ben: Certainly not from U.S. stocks. U.S. stocks, as near as we can tell right now, are priced to deliver if valuations stayed about where they are. Maybe 3.5% plus inflation. So if inflation is 2%, maybe 5.5%. Now, the issue is investors, in general, didn’t sign up for five and a half nominal returns. So our concern with the U.S. stock market is it’s priced to deliver a return that we believe is lower than the required return of equity investors. And that’s why we’re expecting the valuations to fall. So we do have a negative expected return in real terms for the S&P 500 over the next seven years.

It’s because we think valuations and profit margins are gonna fall. If they don’t fall, okay, the returns are going to be better, but the forward-looking returns will be worse. One of the things we try to remind clients, if you’re hoping for good returns in the near term, the problem with good returns in the near term is they have to be paid back some time. And so, from our perspective, hey, if we got a bear market, that’s a good thing. If you’re a longterm investor, what you want is losses at the start and then nice, cheap assets, which are gonna compound well from there.

Meb: So I know Warren Buffet has said remarks similar to this, but a lot of investors probably listening to this say, “Well, Ben, I get that U.S. stocks are expensive, but bonds are yielding nothing, so, therefore, stocks is where I’m at. This is what I should be investing in.” What would you say to that sort of comment?

Ben: Well, look, that may well be true. I said the U.S. stocks, the S&P 500 was priced to deliver inflation plus 3.5%. Well, bonds are priced to deliver inflation plus zero. And 3.5% is a perfectly decent equity risk premium. So if today’s bond yields are sustainable, if now is absolutely normal for bonds, then the U.S. equity market is about fairly priced. Now, there’s two caveats to that. One is, fine, the U.S. equity market is fairly priced. But if you think you’re gonna get 5% real or 7% nominal from a balanced portfolio, a portfolio of stocks and bonds, you’re completely kidding yourself because even a portfolio of 100% stocks can’t deliver that much.

The other somewhat tricky or problem is if you were to say, “Hey, my choice is between stocks and bonds. And relative to bond yields today, stocks look fine, so it’s safe for me to invest in stocks.” If we imagine that what happens is over the next five years, bond yields move back up to historically normal levels. The somewhat non-intuitive result of that is if equities also stayed fair versus bonds, so the expected return of both bonds and stocks were to rise by 2% over that period.

Stocks are gonna take a much bigger loss than bonds because the key thing about stocks, which is a wonderful thing when you are coming out of a recession or a crisis, frankly, in this period has been a wonderful thing is discount rates have come down is they are a really, really long duration asset. So a change in the discount rate impacts the fair value of stocks much more than the fair value of a typical bond portfolio. So, I think it’s fair to say U.S. stocks are priced at fair value relative to today’s bond yield.

If today’s bond yield is tomorrow’s bond yield and the bond yield 10 years from now, I think that makes sense. You’re gonna get a lower return than you were expecting from your portfolio because a 60-40 portfolio in that world is gonna deliver about 2.5% real or maybe 4.5% nominal. But if there is any mean reversion, if today’s world where central banks are doing nothing but ease and inflation seems completely crescent were to change and suddenly real bond yields have to be positive again, that’s actually gonna be worse for stocks than it will for bonds.

Meb: Well, we live in an odd time, and I’ve said this on the podcast that one of the biggest surprises in my career so far has been this relentless move to negative interest rates in many places around the world. If you’re a betting man, do you think there’s odds the U.S. government’s could ever head south of zero?

Ben: Well, we certainly proved that it’s possible, and so I wouldn’t wanna say it could never happen. But I think if we look at what’s gone on in Europe, in Japan where rates have gone negative, I at least think it’s pretty clear that monetary policy has hit its limits. We have gotten to a point where lowering interest rates is more likely to hurt the economy than help the economy. And that means we should really try something new. I’m sympathetic to a central banker. You’ve got one tool, you’ve got a hammer. And when the economy needs help, all you know how to do is hammer.

But I think we need to bring in another kind of contractor because with rates as low as they are, what we’re seeing in both Europe and Japan is that we’re not encouraging borrowing, which is one piece of the way monetary policy is supposed to improve the economy, and we’re not causing saving rates to fall. And that falling savings rate and increasing consumption is the other way that cheap money is supposed to help the economy. And the reason for that is when interest rates go negative, you really screw up the banking system. And the banks don’t actually get encouraged to lend, even though interest rates are really low.

But on the savings side of things, it’s a little bit counterintuitive if one thinks about traditional supply and demand because, hey, if you make the return to saving worse, then shouldn’t people choose to save less? They would if they’re thinking of saving as the direct activity. But saving isn’t a direct activity. You save for a purpose. You save to fund your retirement. You save to meet your capital requirements if you are an insurance company. And with interest rates incredibly low, and even negative, the issue is you need to save more to fund your retirement. You need to save more to meet your capital requirements as well.

And so I think we’ve hit the limit of monetary policy. I think the next downturn we are very likely to see much more active fiscal stimulus that may change the whole game in the sense that it might actually create inflation. And if inflation came back, well, the world would really change. But even if it doesn’t, as central bankers have been saying, and you certainly see this from the ECB, they’re begging governments to do fiscal stimulus so that they can raise rates at least a little bit to stop the negative impacts of their monetary policy across the economy. And so I think that, well, today, we’ve seen the playbook from central bankers. And whenever things weaken, they loosen monetary policy, and that’s always lowering rates. But I’m not sure we’re gonna be operating from that same playbook next time the world really needs it.

Meb: I was smiling as you were talking because you used a couple of words that are altogether unfamiliar with probably the millennials listening to this podcast of the past generation. I mean, we could be ending, I think, the first decade, the outer recession in the U.S. Inflation has been very tame. I was also smiling when you were talking about saving because I feel like no one wants to hear that advice. They did. It’s more of a spending issue for so many people.

But I’m going to stay in the U.S. just a little bit more and then we’ll start to get our passport out. But you wrote a fun piece recently where you were talking about bigger has been better, and we’ll link to this. This was a quarterly letter this year, but talking about the big dudes in the U.S. Maybe talk to us a little bit about the sort of stratification of market cap size. What’s going on in the stock market? Is there anywhere to hide? Are small caps looking attractive? Is it a situation that this is altogether normal? What’s your thoughts there?

Ben: Yeah, it’s been really interesting. You know, one of the topics that’s been really on the mind of politicians and academics as well is the rising income inequality in the U.S. And that’s certainly true for households, for individuals. It’s also very true for corporations. Corporate profits are near all-time highs as a percent of GDP, but those high corporate profits are really only being earned by the very largest companies. So the analysis that we did broke the market into the top 50 companies, the next 450, and everybody else. And what we’ve seen is over the last 30 years, there’s been this relentless much higher in the profitability of the biggest 50, a somewhat more gentle rise from the next 450 stocks.

That breakdown happens to be the two halves of the S&P 500 by market capitalization. So half of the weight of the S&P 500 over time is the top 50 stocks, the other half is the bottom 50. But everybody below that, so the next 3,500 or so stocks in the U.S. has not seen any increase in profitability over the last 30 or 40 years. So what we’ve seen is it’s been better and better to be a dominant company and the smaller cap stocks really haven’t participated.

Meb: Give me some thesis behind that. Is there any sort of economic. I know you are an economic undergrad I believe, or is this a markets issue? Is this a tech issue? What’s your thinking?

Ben: So there has definitely been some change in the industry composition of who are the very largest companies versus the rest. So there’s some tendency for the very biggest companies to be in industries that are more profitable, but that’s actually a minor piece of what’s gone on. What we’ve really seen is that across almost every industry, there has been an increasing return to being big. And that certainly smells a lot like it’s driven by market power monopolies or oligopolies relative to kind of small price takers in the economy.

And this is a difficult one to prove because actually defining how concentrated a market is is hard. We don’t have great data on it. But certainly what you’d expect if what we’re seeing is kind of a relaxation of capitalistic competition is higher profitability from the bigger firms, not much change from the smaller firms because they can’t benefit. If you’re small, it’s very hard for you to dominate much of anything.

You’d expect to see a falloff in business investment because if it’s harder and harder for you to grow into a dominant company, there’s less incentive for you to invest. And if you’re already a dominant company, you don’t really want the world to change so much. So even though you’ve got very high-profit margins, you may not be investing so much. So what we see looks a lot like what you’d expect to see if competition has been on the wane and the larger companies are able to exert power across the markets they participate in.

One of the other pieces though, it used to be said that, hey, the problem with the monopoly is the monopolies is gonna raise prices. And so if what you’re seeing is there isn’t much price pressure, well, then there probably are monopolies. You wanna be careful in making that assumption for a couple of reasons. One is it may be harder to define the market that you’re looking at than you think. Google may have a monopoly or close to a monopoly on internet search, but we as consumers don’t pay Google for the search. We are not actually Google’s customers, we are Google’s product.

And the people who are in the market that Google is dominating are the companies who are paying to advertise on Google. And defining what the right competitive price should be for that market and where prices are relative to that, it’s hard not least because there isn’t actually that much clarity about exactly what these prices are and what you are getting for what you’re paying.

But one of the other pieces that a couple of my colleagues who think a lot about the macroeconomy have noted is the other side of monopoly is monopsony. So monopoly is when you are the sole producer. Monopsony is when you are the sole buyer. And increasing industry concentration also puts companies in a position where they don’t have to compete with that many people for their employees. And so the other thing that’s gone on as profits have gone up in the U.S. is wages as a percent of GDP have come down. And we think that that’s also consistent with the world where there are a handful of dominant companies who don’t have to compete that much for the workers they want.

Meb: That’s interesting. It’s a great new word of the day for me. I didn’t know that one. But, you know, it’s interesting because you’re starting to feel a little bit of the public perception shift certainly towards a lot of the big tech companies in the U.S. We’ll see if Elizabeth Warren becomes the next Teddy Roosevelt in trust-busting. She certainly talks a lot about it. But it’s interesting to see some of the perceptions start to shift because of a lot of these underlying currents.

So I like to get the depressing stuff out of the way early because as we look at U.S. stock and bond returns, the expectations, it seems like should be fairly muted over the next decade. And I feel like if you look at a lot of the quaint shops, and I include certainly Cambria in that group, but research affiliates came out, I remember they said the expectation of U.S. stocks and bonds hitting their historical nominal returns was about 1%. And, I laughed about that. And they had taken it up and down from 2% to 1% to less than 1%. I think they’re rounding up.

The only thing that gives me pause is when there is a little bit of agreement. Now, on the other side of that, of course, is that people still expect 8% to 10% returns. Most of the pension funds and endowments, it’s coming down a little bit, but historically that 8% return. Almost every survey around the world, people still expect 10% and more. If we were to teleport 10 years into the future and there was U.S. stocks and bonds magically hitting those numbers, what do you think the reason maybe? Is it Elon Musk invents free energy? Like, what could you possibly…because I like to, being a student of history I know you are, like to think about all the possibilities. Anything in your mind that could cause such a scenario to actually happen?

Ben: Let’s separate things between…you’ve talked about this for stocks and bonds. And for bonds, the answer is pretty simple. If a 10-year-bond is yielding 1.8% and you hold it for 10 years, you are going to get 1.8%. Even if you are rolling that bond over a period slightly longer, so two times its duration minus one year, you’re gonna get 1.8%. So the math for bonds is done. You will not get returns from bonds that are anything like we have seen historically. You can do it for a short period of time. I was actually in Germany in June, and I was talking to them about the fact that, “Hey, you know that the bonds in your portfolio are not gonna do what they used to do. And if you feel the need for that income, you’re gonna have to do something different.”

The response I got was, “Yeah, but people have been saying that for years. And look, we’ve still gotten good returns from our bond portfolio.” Well, they’ve gotten good returns from the bond portfolio because the yields gone negative. But again, if you hold a 10-year-bond that is yielding minus 50 basis points for 10 years, you’re gonna get minus 50 basis points. So with bonds, it’s done. We’re not gonna get those returns. In the long run, we could hope that yields go back up because if they go back up, you can get those returns again. With stocks, it’s a little bit more complicated. If you wanna get 10% nominal from stocks over the next decade, well, there’s a couple of simple ways it can happen. One is PEs could rise significantly from here. The other is profit margins could rise significantly from here.

I suppose there’s a theoretical other piece that economic growth could be stunningly fast, but, man, would I bet hard against that. Even in the glory days of the 1960s, the U.S. economy was growing about 3.5% real. I think from here, we’ll be lucky to grow at 2% real. And that’s not because something horrible has happened to the U.S. We used to have population growth. We used to have workforce growth of 1.5% a year. We now have workforce growth of maybe 20 basis points a year. So most of the fall-off is simply about you got fewer new people, and so economic growth is gonna come down. But what that means is that growing your way in kind of a sales growth or similar top-line growth isn’t gonna happen.

It is not impossible for today’s profit margins to widen still further. I would think it’s dangerous to bet on that for two reasons. One is, man, profits are already just about the best we have ever seen. Betting that we hit levels that we have never seen, that is a low probability bet under almost all circumstances. But the other piece about it, I wrote a piece back in 2002, which, in some ways, was one of the more disastrously wrong things I have ever written. So, happily, I think it’s even impossible to find on our website. I was talking about why profit margins, in general, were such a mean-reverting series.

And, at the time, they had been. So this was 2002, profit margins weren’t very good. I was arguing. Yeah, they’re gonna come back up because they always do. But if you look at profits relative to GDP or profits as a percent of sales, they’d been dead stable for 100 years. And I argued that you should expect that going forward because there are some natural limiters on profitability. And the most important one is that high profits beget investment. If the return on capital is really good, then, okay, I’m a smart capitalist, I should raise capital and invest more. And what I went on to say, which turned out to be disastrously wrong, at least over the next 17 years, was the only exception to that would be a sustained increase in monopoly power.

And I didn’t think that that was true because that required society to acquiesce to it, and it’s not in society’s interest to acquiesce to it. And then I said something which I thought was true at the time but turns out not to be true according to the Supreme Court. I said, “Corporations aren’t people, and corporations can’t vote. And voters will understand that the monopolists are taking money out of their pockets.” So it turns out, according to the Supreme Court, corporations are people. They can’t, strictly speaking, vote, but they can spend their money with surprisingly few restrictions to get their point across. And they’ve been very effective at it.

So relative to what I was expecting 17 years ago, voters have been surprisingly complacent as corporations have taken a bigger and bigger piece of the pie. Now, they haven’t been entirely happy about it. I think a lot of the people who voted for Donald Trump in 2016 thought they were voting for the people against the powerful. From a policy perspective, we haven’t gotten any of that, I mean, not even close. We’ve gotten the exact opposite, but I think they thought they were voting for that. Certainly, Elizabeth Warren, and Bernie Sanders, and other people running for the Democratic ticket are taking aim against the dominant companies, particularly the tech companies.

But I’d say the idea of a more robust antitrust effort is kind of a broader idea among the Democratic candidates than certainly it is among Republicans. But I can’t help but think we will reach some limits. And, you know, as you pointed out, Teddy Roosevelt came in after a period where we saw monopolies get away with things that even the most supine department of justice wouldn’t allow today. We’ll see what happens. But if I were betting over the next 20 years, I would bet the world is going to become a little bit less friendly to big, dominant companies than it’s been over the last 20 years.

Meb: Well, I’m gonna go with Elon Musk finds alien technology on Mars. That would be my answer. All right, let’s get the passport back out. Let’s talk about less friendly returns. In this year, if you find yourself, December 31st, sipping some champagne with a loved one, maybe some tea, watching the ball drop, whatever it is you do to commemorate and reflect, listeners, foreign stocks and emerging market stocks have certainly underperformed the U.S. over the past decade. But Ben, you think there might be some potential optimism on the horizon? Maybe talk to us a little bit about what the world looks like outside our shores.

Ben: Yeah. So we are quite optimistic, particularly about the emerging world, but about almost every market outside of the U.S. relative to the U.S. And the reason for that is we think, in general, stocks are stocks. Stocks give you the return that they should based on their valuation. So if you really wanna make a lot of money out of stocks, buy them when they’re cheap. U.S. stocks were legitimately very cheap 10 years ago, of course, so were stocks everywhere else. But over that 10 year period, U.S. stocks have done really well, and stocks outside of the U.S. have done okay.

And what that’s left is a valuation gap between the U.S. and the rest of the world that is the biggest we’ve ever seen. Emerging stocks were cheaper relative to U.S. stocks in, say, 1998 at the end of the Asia crisis, but the EFA markets, the developed foreign stocks have never looked this cheap relative to the U.S. And emerging is pretty close to as cheap as it was at the bottom in 1998 on a relative basis. So, we really do think that today is the best opportunity on a relative basis for non-U.S. stocks versus U.S. stocks that we’ve ever seen. And, as a result, while it’s hard to be excited about the prospects of the S&P 500 over the next decade, it’s a lot easier as you get farther from the U.S.

And it’s not that we think the U.S. is going to underperform economically or it’s not that our government is that much worse than anybody else’s. It’s not great, but most other people’s aren’t so great either. It’s that the U.S. is trading at 28 times cyclically adjusted PE and EM is trading at 14 times. And when I can get assets at half the price, man, it’s a whole lot easier to get enthusiastic about them. And in particular, not only is it the case that non-U.S. stocks are a lot cheaper, but the other thing that’s been quite striking about stock returns over the last decade is it has been the worst performance for value stocks that we’ve ever seen.

And, as a result, the spread between the cheap stocks and the expensive stocks everywhere, but particularly notably in the non-U.S. markets where the overall markets are cheaper means you can put together an emerging markets value portfolio that is priced for really bad things. And I get very excited when I can buy assets that are priced for really bad events because I don’t need a really good event to a good return out of them. If really bad things happen to assets that are priced for really bad things, you get an okay return.

If slightly less bad things happen, you get a very good return. If mediocre things happen, you can get an extraordinary return. And right now, our EM value portfolio is trading at eight-and-a-half times earnings, six-and-a-half times cash flow, one times priced to book with a dividend yield of 4.7%. And, man, I don’t need to expect really good things out of emerging to think I’m gonna get a good return out of that kind of portfolio.

Meb: You’ve certainly been through a few different cycles. And I remember going back to conferences in the mid-2000s and, my God, there’s nothing people loved more than emerging markets, maybe commodities at the time, depending on which conference you went to. But people loved emerging markets, the bricks. And fast forward to today, and even the responses I get on Twitter. I made the mistake of saying one of my retirement accounts is totally invested in emerging markets and, my Lord, the responses, which has actually made me really excited because I love to see that the sentiment is terrible in addition to all of these things that you mentioned on the valuation side.

But, man, people were just negative across the board. So the emerging value is also the largest holding in our asset allocation fund. But talk to us a little bit about how people should think about actually allocating or implementing to foreign in emerging markets. Is it something that, at GMO, you guys think in terms of countries or sectors or you could think in terms of bottom-up? What’s some general kind of guideposts that you guys think about as you put it all together?

Ben: You know, the first thing I wanna react to is what you said about conferences in the mid-2000s and talking about the bricks versus today. And it really is a fascinating difference. In the mid-2000s, and, frankly, even in 2010, 2011, a lot of the talk was about how I own equities as a growth asset and, therefore, I want to own equities where the growth is gonna be good. And, obviously, the emerging markets is going to have higher growth than the developed world. At the time, we said, man, there’s perfectly good reasons to own emerging, but that is not one of them because it turns out there is basically no relationship between overall economic growth over extended periods of time and stock market returns. So don’t invest in emerging because it’s where you’re expecting the growth.

Meb: And I have to interrupt you real quick there because that is a pretty profound statement that I think you’re not gonna hear on CNBC. In fact, you hear the opposite where people all day is what they’re talking about. But you guys maybe just to go a little bit deeper on that real quick before we continue on because I think that’s a really insightful comment that I think would fly in the face of what most listeners would expect.

Ben: It is really funny. I loved this idea that Robert Shiller came up with back in the 80s where he talked about the clairvoyant fair value of the stock market. You know, the problem with investing in stocks is you don’t know the future, so you don’t truly know what the fair value is. But he went back in time and said, “Okay, if I’m sitting in 1920, I know the next 50 years of dividends and earnings, so I can calculate a clairvoyant fair value for the market.” And he went back and did that. And the intriguing finding was that actually the fair value of the market is incredibly stable because the underlying earnings and dividends are quite stable over time. But this idea of investing under clairvoyance I think is a really fun one.

And one piece of kind of analysis we did on that was we transported ourselves back to 1980 and we said, “All right, you are in 1980, and somebody is going to give you information about the future that you’re gonna use to invest. And they’re not gonna tell you what actually happened to the stock market. That would really be cheating. But what kind of piece of information would you wanna have to be able to make money?” And one obvious one is, “Okay, well, I’d like to know which economies grew the fastest from 1980.” And it turns out if you did that, if you took the actual growth over the next now 39 years and you tried to use that to invest to make money, you could do it. You could make money through using that information.

The non-intuitive thing is what you would have wanted to do is invest in the slower-growing countries. The fastest-growing countries, whether in the developing world or the developed world, underperformed. The most important piece of information you could have had at the time turned out to be a piece of information you did have, which was the starting valuation of the markets. If you bought the markets that in 1980 were the cheapest, you could make a lot more money than the average of MSEI world or the average of each of the individual countries.

And it turns out what really matters for long-term returns are two pieces of information. One is the valuation. The other is the return on capital. And the reason why GDP growth turns out not to be useful for forecasting the stock market is the easiest way to grow quickly is to invest a ton. If you think about the places that have grown the most quickly over the past years, well, obviously, China comes to mind, but before that, places like Korea, Taiwan, Japan. What they had in common was they had very high investment rates. And if you invest a lot of capital, that’s gonna depress the return on capital.

So what all of those countries had in common was a lousy return on capital. And as an investor, a lousy return on capital is going to hurt your return over the long run. It can be saved if you’re trading cheap enough. But in general, those fast-growing economies haven’t traded that cheaply. So GDP growth has historically been slightly negatively correlated with stock market returns. And on a forward-looking basis, our assumption is that the correlation is gonna be basically zero. We do not attempt to forecast GDP in order to forecast returns in the stock market. I don’t think I’m very good at forecasting GDP. But even if I was, I don’t think it would have much bearing on stock market returns. Historically, it certainly hasn’t.

Meb: I love it. All right. We’ve got a little off track. We were talking, I think, a little bit about emerging markets, foreign markets, sectors, and countries. How do you guys think about actually allocating? Is it just you just go by the ACWI ex US, or how do you drill down and think about the best opportunities outside the U.S.?

Ben: I think there is a meaningful difference between the developed world and the emerging world. In one sense, in an emerging economy, the country you’re in matters a lot. It’s not just that you are a car company, it’s that you’re a Chinese car company. It’s not just that you’re a bank, it’s that you’re an Indian bank. So the country that you’re in really does matter in the emerging world because the emerging economies are so volatile. If things are really falling apart, doesn’t matter how well managed you are as an Argentinian company. If Argentina really falls apart, that’s gonna be bad.

But if after Argentina falls apart, they slowly get themselves back on track, you can have extraordinary returns. So we do have a tendency to look at countries first within emerging markets in a way that we don’t tend to in the developed world. That’s not to say that stocks and sectors don’t matter. They do. And, in particular, we’re always interested in kind of finding cheap, high-quality companies everywhere we look. But in the emerging world, in particular, we’re more interested in taking significant bets on the places that are cheaper, the places that have been having the most problems of late, and, in some cases, the places where the return on capital is really superior.

Meb: The pushback we often hear from a lot of investors when we talk about valuations is they say, “Well, Meb, yeah, but the sector composition is different. And therefore, the evaluations, you can’t. It’s comparing apples to oranges.” Any thoughts on the way you guys think about that in general? And I hate giving two-part questions, but any countries in particular that you think are interesting and standouts as far as opportunities?

Ben: Sure. So sectors definitely matter. If you’ve got a stock market like Russia, which is dominated by commodity companies, you shouldn’t expect that to trade the same way that a Taiwan that is dominated by IT companies or the U.S. But actually, even if you normalize for the sector compositions, you see really big gaps. Russia, at the beginning of the year, was really cheap, even relative to its sector composition and Taiwan as well, frankly, and the U.S. look pretty expensive relative to its sector composition. So the sectors matter, but it’s so often used as an excuse to own whatever market is more expensive and has been doing particularly well of late.

In terms of countries that we like today, well, frankly, we do like Russia because it’s very cheap. Some of that is for a pretty good reason. Gazprom is not anybody’s idea of a company that is really run for the benefit of outside shareholders. It is primarily run for the benefit of the Russian insiders who control it, but that doesn’t mean you necessarily don’t wanna own it if the valuation is cheap enough. And right now, I think it’s trading at 2.2 times earnings with a dividend yield over seven. So maybe that’s not cheap enough to cause you to be willing to own it, but it is certainly the case that Gazprom isn’t trading at similar valuations to Exxon, or Total, or other energy companies.

It’s priced for, again, really bad outcomes, and there is a certain charm to owning things that are priced for really bad outcomes. When you look at the pricing of Taiwanese IT today relative to U.S. IT today, wow, you’ve got a lot of companies that are really important to the IT value chain that are trading at very cheap multiples. Another country that I think is actually quite interesting today is China, and it’s not so much because China is profoundly cheap or doesn’t have problems. China’s valuations look fine, and China does have problems. Obviously, the trade war is one, but it’s also a slowing economy.

There’s a couple of cool things about China. One of them is it’s a very broad market. There’s a lot of stocks in there and those stocks really are real companies, and the spread in valuation between the in-favour and the out-of-favour companies is really wide. So cheap China is really pretty cheap, and that’s pretty exciting. The other thing that’s quite interesting is the onshore Chinese market. The China A-shares is one of the last markets out there that is really dominated by retail investors.

And, as a result, there’s a lot of techniques that used to work really well most places but don’t work so well anymore because we’ve got so many sophisticated investors that are dominating the trading, and they still work in China. So I think the scope for adding value within China is really quite good today. But in terms of individual countries that we quite like, Russia and Taiwan are a couple of them. We did like Turkey earlier on in the year, but it did pretty well and we’re less excited about it today.

Meb: It’s interesting if you look back, I think the Russian broad mark cap index has been outperforming the U.S. going back to maybe 2016 or 2015, I can’t even remember at this point, and you see some of these countries that have at least started to kink as far as outperformance. But yeah, essentially, on the valuation side we often say, Look, you know, the question isn’t, is the U.S. trading at 28, or 26, or 30, or 32? Is it trading at 28, or is it trading at 7?” Which is kind of what we were talking about on the Russian side. Russia maybe five, I can’t remember as far as P ratios.

So thinking about valuation, you know, in one of your pieces, you talked about the Oliver Cromwell risk, and GMO has been pretty honest and refreshingly so for a very large asset manager about value and the cycles. So maybe talk a little bit about, we have this opportunity set, and it’s pretty awesome to say it’s one of the highest percentiles ever of opportunity to be making some of these changes. But also talk about how this plays out in cycles and maybe your recent piece, “Shades of 2000” would be a good place to start, too.

Ben: Yeah. So I’ve been lucky enough to be at the same place for 27 years now, and so I’ve seen a few cycles come and go. And the late 90s was a very tough time for anyone who was a valuation-driven investor. And frankly, in general, it is a time that I prefer not to think much about because of how unpleasant it was for us. And so when I had a colleague ask me, “Okay, so compare where we are today to what happened in the late 1990s. Was this similar or not?” And my first thought was, “Well, of course, it can’t be because nothing will ever be as bad as the late 1990s were and so nothing could ever really be that extreme.”

And then I started looking at the data. And certain things aren’t as extreme. Value stocks are not quite as cheap as they were in 2000. You know, in 2000, they were the cheapest they had ever been relative to the market. But they’re pretty close if that was the 99th percentile we’re today and the 95th percentile, the 96th percentile, so it’s gotten pretty extreme. But from a valuation-centric investors standpoint, the other thing that’s gone on is the U.S. versus non-U.S., which is even bigger than it was back then and has led to bigger valuation gaps. So this has definitely been a painful decade for us as value investors, I think for a number of other players in the market who think about the world similarly to how we do.

But one of the tricky problems of being a value investor is your best opportunities come about after the worst things that ever happened to you happen to you. Because the only way you get a stunningly good opportunity is if you had a very good opportunity that continued to get cheaper. And so, the last 10 years, we’ve never had anything quite as bad as what happened from 1994 to 1999, but it’s been pretty bad. We have underperformed by considerable amounts, but the opportunity we have today, the gap between what we think we can do and what a traditional portfolio is priced to do is about as wide as we saw in 2000. And that is something I never thought I would see again.

Meb: You mentioned kind of the struggle is not as bad in magnitude but worse potentially in duration. When I was chatting with a couple of friends about questions to ask on the podcast, and Justin and I were talking about it, one of the questions that came up was actually a lot of friends were pretty interested in kind of the business of money management and, say, the challenges of managing a large asset manager when so many investors.

And we’ve seen time and time again, their focus on, not just decade, and not even yearly, but maybe quarterly, monthly performance. Talk to us a little bit as someone who’s been through it, I imagine it doesn’t ever get less painful, but about how you guys think about and the discussions you have with investors about these periods that, in many ways, are necessary to set the stage for the next period of outperformance.

Ben: Yeah, it’s never fun doing a client review after you have underperformed, and particularly after you’ve underperformed for a number of years running. And that’s the situation we’re in across a lot of at least our asset allocation portfolios at GMO. So I definitely understand why clients are frustrated, and I can understand why some clients have fired us.

But it’s this fascinating dilemma that when we went in to talk to these clients before we got hired, and we talked about the late 1990s and the 2000 event, and how you really had to stand your ground, and you had to do the work to make sure you understood that despite what’s going on in the prices, if you look at what’s going on with fair value, the value stuff was getting cheaper and cheaper. And if you hold on, you’re gonna get spectacular returns.

And at the time, people said, “Yes, we love that. We love the idea of being longterm investors, and we would have held on. And, we wanna hire somebody who’s going to think longterm.” It’s a lot easier to say when you’re hearing the story than it is to live through. And that’s the unfortunate reality of it. And the difficulty is you are at your most persuasive when your recent returns have been the best, and you are at your least persuasive when they have been at their worst.

Actually, GMO is a little bit different that way because our founder, Jeremy Grantham, can be an extraordinarily persuasive guy under pretty much any circumstances. And one client, who then proceeded to fire us, disinvited him from investment committee meetings in 1999 on the grounds that he was dangerously persuasive and utterly wrong. And so, she was worried that if he came and spoke to the investment committee, he would persuade them to follow value investing, which, of course, would destroy the institution.

So it’s tough. I wish there was some way, as a value investor, to avoid the pain of the cheap assets getting cheaper and the expensive assets getting expensive. I haven’t learned it in the last 27 years. Maybe in my next 27 years, I will find the secret. But frankly, as an investor, I get excited by times like this. I get very excited in a situation where I don’t have to imagine good things happening to the assets I like in order to get good returns out of them.

And if we look at the way the U.S. market is priced today, is it possible to get good returns? Sure, but we’re gonna get good returns if surprisingly good things happen. And people are forecasting better times for the U.S. than they are for the rest of the world. So I’d much rather be invested in a place where, even if bad things happen, I’ll get a good return. And I can do that today. And frankly, I couldn’t do that three or four years ago. Emerging markets are a lot cheaper today than they were then.

Meb: The behavioural side is something I struggle a lot with, certainly with having public funds where you get to watch people play out every day in the sad, long history of public funds certainly is people chasing performance. And, as you mentioned, the easiest thing to sell is what’s working, but the opposite is probably the best advice. And, I think it’s something that at least we’d have no easy answers to it.

I wish we could obviously lock up people for 20 years by trying to set expectations. Hopefully, the podcast helps listeners, but it’s a struggle. And I know the challenge I imagine from your seat is you’re dealing with these institutions too, and the institutions, the literature often says they’re just as bad about the hiring and firing decisions as individuals are. So I don’t have any good answers, but it’s a challenge as usual.

All right, so we’ve got some more questions before we start to let you go. One of the questions is you guys famously have what you call, I think, a benchmark-free approach. And we tell investors often and say, “Look, 2019, you can invest in a global market portfolio for basically free.” But if you wanna be weird and different to generate some outsize returns, like, you have to be pretty weird and different.

Adding 1% or emerging markets probably isn’t going to change your return. Debating about whether you should have gold or not in your portfolio and then you’re gonna move it up or down, you know, by a percent, it’s not gonna move the needle. Talk to us a little bit about just how concentrated and weird people can get or should get and how you guys think. If you were to say what would be my extreme weird concentrated portfolio in 2019, how would you go about putting it together?

Ben: Yeah. I think that the most important thing to start your portfolio with is answering the question, what are you trying to do? If what you’re trying to do is beat the global portfolio by a little bit, well, your starting point should be, “Great, I’m gonna own the global portfolio, and then I am gonna tilt a percent to emerging. And maybe I’m gonna buy two points of gold if I like gold.” I don’t even know how you decide to like gold, but find some people who may know how to do that.

Meb: You just offended all of our Canadian listeners.

Ben: If your goal is to generate a return which looks like the global portfolio, then you wanna make your bets around that portfolio. What we decided in our benchmark-free allocation strategy was, “We’re going to invest, not with that goal, but with the goal of making absolute money and worrying about absolute risk.” And the reason why that winds up with very different portfolios is if you’re concerned about the global portfolio, well, the single biggest piece of the global portfolio if you’re starting with, whatever, 60-40, is the U.S. large-cap stock market. It is 57% of the global stock market, so you better start out owning a lot of that.

Now, if you’re starting out asking the question, “Where can I invest to get returns, and where can I invest to control risk,” the fact that the S&P 500 is the largest piece of the global securities market isn’t really that relevant. What’s relevant is how risky is it, and what kind of returns is it priced to give? And we think right now, it’s not priced to give a particularly interesting return. And, therefore, in a benchmark free portfolio, we don’t own any. Because if we’re gonna own risky assets, we’d rather own the risky assets that are priced to deliver a strong return. That, at some level, is a portfolio that automatically looks weird.

How could you not own any U.S. stocks? But it’s not that weird if the problem you’re trying to solve is, how much risk is it appropriate to take, and where can I get paid the best for taking risk? So it’s really just about changing your mindset. And the way we got to it actually, and this goes back to the late 1990s. And in the late 1990s, we got a lot of complaints from our clients when we managed global balanced portfolios for them because the benchmark was about 50% U.S. stocks, and we had about 25 points in U.S. large-cap stocks. And we got two complaints from the clients, and they were both very valid.

One group of clients said, they looked at the portfolio, and they said, “Oh my God, you’ve got a 25 point bet against the S&P 500. I know you don’t like it, but your bet against the S&P 500 is going to be the overwhelming driver of the success or failure of this portfolio versus my benchmark. How can it possibly make sense to take all of your risk on a single bet?” Then we had another group who looked at our forecasts and looked at our portfolio and said, “Wait a minute, you’ve got to forecast a minus 2% real for the S&P 500 and you’re wasting 25% of my capital in a risky asset with a negative expected return? What are you doing?” And we realized, well, we’ve got two clients trying to solve different problems in the same product. So the benchmark-free allocation strategy was our answer for those clients who were really just interested in real returns and not so interested in tracking error to a benchmark.

And we build both portfolios using the same expected returns but solving a different problem. And, as a result, in our benchmark-free strategy, we own a fair bit of equities. It’s about 43% equities today. None of those are in the U.S. More than half of the equities we own are in emerging markets and the rest is international value stocks. We’ve got another 30 points or so of the portfolio in alternative strategies. These are liquid alternatives, so things like merger arbitrage, puts selling, systematic global macro. And the way we think about those strategies is not that they’re magical alpha machines or anything, but they’re different ways to take the kinds of risks you should get paid for.

And so, the charm of them today is we think you’re getting paid okay for taking risk. The difficulty with doing that in equities is equities are a really long duration asset class. So if discount rates were to go back up, valuations could really come down. The good news about, say, merger arbitrage is if discount rates go up, you don’t care because you’re managing a long-short portfolio. All you care about is the question of, is the economy gonna be so bad that the companies that have announced these merger deals are gonna think conditions are so horrible that we’re gonna back away from the deal?

That is really the systemic risk in something like merger arbitrage. Sure, you’ve got situations where an antitrust trial can come out and department of justice could block a merger. That’s much more of an idiosyncratic risk, which you should get paid for, but it’s not that big a deal. The big deal with something like merger arbitrage is it’s gonna do badly in an economic catastrophe, and you should get paid for that. And so, we like alternatives today as a way of getting paid for taking risks without taking as much duration and valuation risk as the stock and bond markets have today.

You know, you raised the very relevant point of time horizon. Today, I have real trouble imagining what could happen that would be so bad that EM value stocks would not deliver at least 5% real over the next decade. We think they’re priced to deliver about 10% real, so a really bad outcome. Yeah, we’ll still probably be okay enough for them to deliver 5% real. Now, over the next year, they could do quite badly. At the end of 1997, emerging markets were pretty cheap, and they still managed to go down 40% over the next nine months. And they could do that again.

Now, from the end of 1997 to the end of 2007, emerging did wonderfully well. So if I could guarantee to lock up the money for 10 years, I don’t think EM has much risk today simply because the valuations are so cheap. If I’m concerned about the next year, yeah, there’s a lot of risk. And so the question of how much of my portfolio I can afford to have an EM, we’ve got a bit over a quarter of the overall portfolio in emerging market stocks. That’s an uncomfortably large amount for a daily priced mutual fund. But if I had guaranteed 10-year lockups, I could readily imagine having twice as much.

Meb: Wow. I love it. As my grandmother would say, “Lord of mercy.” I can’t imagine too many of our listeners would say they own zero U.S. stocks. But it’s interesting because, you know, one of the biggest feedbacks we get to people when talking about a lot of the valuations around the world, and they say, “No, no, no, Meb. A lot of those countries are risky because everyone wants to think in terms of politics, geopolitics, what’s going on in those countries.”

And you know, my response usually is say that the big risk, at least historically, has been paying a really expensive amount for a market because one of your coworkers, Monte, I think published it with you guys, were looking at future drawdowns when markets were particularly expensive, and you had a bigger chance of a big, fat drawdown when you start paying 30, 40, 60, 80 times PE for a market.

A question on implementation that I think we get all the time, I’d be curious to hear your thoughts, how does currencies play a role? A lot of people say, “Yeah, but these currencies go up and down 20% a year, and the returns are dominated by currencies, this, that, and the other.” How do you guys think about thinking about FX’s role in a portfolio?

Ben: Foreign exchange tends to matter a lot more in the short run than it does in the long run. There can be a lot of volatility to currency movements, but it’s really hard to get profound moves over long periods of time relative to kind of the real price level. When the U.S. dollar hugely appreciated in the early to mid-80s, it became excruciatingly expensive to produce anything in the U.S. And so, the U.S. economy very significantly suffered. As a result, the dollar was pushed back down and things got back into equilibrium. So if the concern is, yeah, but what happens if the U.S. dollar appreciates a ton?

Well, if the U.S. dollar appreciates a ton, the good news about owning non-U.S. assets is they have become a lot more competitive, and the U.S. has become a lot less competitive. And on the flip side, if you were to choose to hedge currencies, you can do that. And, the near term volatility of a hedged equity portfolio is lower than an unhedged equity portfolio. But there are circumstances where you will get a permanent impairment of capital, which is otherwise unnecessary.

So if we think back to 2015, the Swiss central bank had been operating with this floor on the Swiss Franc versus Euro exchange rate. And, everybody figured that that was going to be stable. But at some point, the Swiss decided to give up, and they just couldn’t maintain it anymore because it was putting so much stress on their economy in terms of money flowing in. So they let it go. And in that one day, the currency appreciated by 15%, and the stock market went down by 15%. So if you owned Swiss stocks on an unhedged basis, it was actually not that interesting a day. Not much happened. If you had owned the stocks and hedged the currency, you would have faced a giant loss because as the currency and the stock market moved in opposite directions, you got hit with a double whammy.

So there is the possibility. It doesn’t happen very often, but there is the possibility of a currency move and a stock market move in opposite directions such that the economic reality hasn’t changed for most people, but it really has for you. So our bias is when we own equities, we don’t tend to hedge them. And the reason why is, hey, if the currency falls, the good news is that has made that country’s companies more competitive because costs are lower in that country. So, yeah, you take a near term loss but you’re going to get back in the end.

If we’re talking about owning non-U.S. bonds or kind of a long-short portfolio, we think you do wanna hedge. Because if the underlying asset is not a real asset, that currency move won’t necessarily be counteracted by a move in the opposite direction by the market. So if you’re gonna own non-U.S. fixed-income assets, and I’m not entirely sure why, as a U.S. investor, you particularly want to do that. But if you wanna do it, by all means, hedge them. If you’re gonna own non-U.S. equities, my bias is not to hedge unless the dollar is incredibly cheap at which point you could do it as kind of a speculative thing. But I think the longterm risk of unhedged equities is actually lower than hedged equities.

And the other piece is, frankly, for most portfolios, your aggregate holdings of non-U.S. equities aren’t that big if they’re in aggregate, about 25%, say. It turns out the volatility associated with the foreign currencies doesn’t actually show up in your overall portfolio volatility. So up to about 25%, I would say don’t bother hedging because you’re not even gonna notice it in your overall risk. And even beyond that point, and Lord knows we are in a lot of our global portfolios, be careful about hedging real assets because you can get yourself into trouble in circumstances where an unhedged portfolio wouldn’t.

Meb: We could spend probably two more hours on currencies, but I wanna squeeze in two more questions if we can real fast before we can to let you go. First, you mentioned in one of your papers that the number one question you get sitting down with these institutions around the world is, “Ben, what keeps you up at night?” You got anything for us or you sleep like a baby?

Ben: I mean it’s hard not to be more worried about the geopolitical risks today than I used to be. The world is a less predictable place from a geopolitical standpoint than it used to be. And one of the things we’ve said for a long time is that people spend too much time and attention on politics as investors, that at the end of the day, it doesn’t really much matter whether it’s a Republican or a Democrat in the White House.

It doesn’t actually matter that much if tax rates go up or down. The stock market’s worth what it’s worth. The exception to that…there’s been some exceptions to that on either side. Singapore is an example of a country where good aggregate management created an extraordinary amount of value. They used to be as poor as India, and now they are as rich as Switzerland. And that happened over the course of a couple of generations. That’s pretty cool.

On the other side, well, Argentina used to be as rich as Switzerland and is now not much richer than India. And Venezuela used to be a pretty wealthy emerging economy, which is now an utter disaster. Sufficiently bad policymaking can cause problems. And frankly, ill-advised wars and things like that can cause, in addition to the horrible human costs, can create a significant economic cost as well. So I will admit to staying up at night worrying about what tweet will come or what foreign government is going to be invading what country in a way that I didn’t worry about so much five or seven years ago.

But when I think about our portfolios, there’s the near term risks and the longterm risks. In the near term, I worry about what happens if the trade war gets even worse, what happens if there’s a hard landing in China, what happens if EM does badly. From a longer-term perspective, I’m simultaneously worried about, do we own enough emerging? Do we own enough of the stuff that is really cheap today? And with a long-time horizon, we can be very confident it’s gonna deliver a good return. So I not only am losing sleep, but I am losing sleep on both sides of the same issue, which is not the most pleasant place to be.

Meb: I love it. The last question we ask our guests is, if you look back over your career, what’s been your most memorable investment? Good, bad, in between? First thing that comes to mind. Any ideas?

Ben: You know, I think the investment that I lost the most sleep over but enjoyed the most in the end was buying into emerging equity and emerging debt after the Asia crisis and the LTCM event. And that seemed so scary to do. But from the standpoint of kind of the subsequent returns, nothing before or since has generated quite those kinds of returns. That was of the most memorable thing over the last 27 years. There were some things that, in contrast, were dead easy.

I remember in only a year later when we were piling money into real estate investment trust, they were yielding 9 and the S&P was trading at 30 odd times earnings. And I can remember saying, “Yeah, this may turn out badly from a relative standpoint, but how can you not love an asset which is guaranteeing you more or less 9% real at these valuations forever?” So there’s some times where it’s easy to buy the cheap thing, and there’s some times when it’s hard to buy the cheap thing. The most memorable ones, I mean, are the ones where you really losing sleep over what you’re doing.

Meb: Gone are the days of 9% yields certainly. I was laughing because I thought you may have said your decision to exclude AOL. Listeners, well, we’ll have to save that story for later. We’ll show a link in the show notes. Man, so much we didn’t even get to today, timber, private equity, cryptocurrencies, all sorts of fun stuff, tips. Ben, it’s been so much fun. Where can people find more if they want to keep up to date with all your goings ons?

Ben: Yeah, so if you go to our website, www.gmo.com, you can see my quarterly letter as well as lots of other pieces that my colleagues write over the course of the year. We try to come up with stuff we think is interesting and impactful for investors.

Meb: Awesome. Ben, I love it. Thanks so much for joining us today.

Ben: All right, thank you.

Meb: Listeners, we’ll post show note links at mebfaber.com/podcast. Subscribe to the show, give us a review, let us know what you think. Shoot us feedback@themebfabershow.com, questions, comments, complaints, everything in between. Thanks for listening, friends, good investing.

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