Episode #344: Jared Dillian, The Daily Dirtnap, “I Think The Cardinal Sin In Investing Is Selling Too Soon”

Episode #344: Jared Dillian, The Daily Dirtnap, “I Think The Cardinal Sin In Investing Is Selling Too Soon”


Guest: Jared Dillian is the founder of The Daily Dirtnap, LLC, which provides daily market commentary and insight to a range of institutional clients. Dillian also is a regular contributor to Mauldin Economics and a variety of online business and financial publications, and is an adjunct professor at Coastal Carolina University.

Date Recorded: 8/11/2021     |     Run-Time: 51:12

Summary: In today’s episode, we’re talking all about the current market environment. Jared begins by explaining why he thinks we experienced a shift to an inflationary regime and what assets he expects to do well going forward. He shares his thoughts on gold, value vs. growth, and the low valuations in both Japan and Europe.

Be sure to stick around until the end to hear why Jared thinks investment professionals should not take the CFA anymore.

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

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Links from the Episode:

  • 0:52 – Intro
  • 1:35 – Welcome back to our guest, Jared Dillian
  • 2:17 – Why Jared wiped his butt with poison ivy
  • 3:44 – The cardinal sin of investing
  • 6:26 – Binary asset allocation in the modern age
  • 10:08 – Inflation trade and why gold is such a head scratcher
  • 11:33 – Attractive themes Jared in an inflationary environment
  • 12:49 – Potential parallels between today and prior market periods
  • 16:01 – His thesis on energy and anti-ESG trades
  • 18:51 – Jared’s thoughts on the Japanese stock market
  • 21:04 – Sponsor: NordVPN
  • 22:24 – Exciting opportunities or scary trends in the world
  • 24:56 – Jared’s experience investing in real estate
  • 27:37 – Zero commissions trading and the retail investor explosion
  • 35:14 – The ever changing world of media and the ways people consume content
  • 37:30 – How much the dailydirtnap.com newsletter has changed over the years
  • 38:25 – Some beliefs Jared has that other investors don’t commonly share
  • 39:56 – Jared’s thoughts on the sentiment indicators and government fueled liquidity
  • 42:32 – What’s on the horizon for Jared over the next five years
  • 47:08 – Jared’s new ride
  • 48:03 – Learn more about Jared; dailydirtnap.com; Twitter @dailydirtnap


Transcript of Episode 344:

Sponsor Message: Today’s episode is sponsored by NordVPN. Go to nordvpn.com/meb or just use the code MEB to get 73% off a two-year plan, plus four months for free. I’ll tell you why later in the episode.

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.

DisclaimerMeb 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: Hello, everybody. Today we have a great show. Our returning guest is an author, DJ, and editor of one of my favorite research pieces, “The Daily Dirtnap.” In today’s show, we’re talking about the current market environment. Our guest begins by explaining why he thinks we experienced a shift in an inflationary regime and what assets he expects to do well going forward. He shares his thoughts on gold, value versus growth, and the low valuations in both Japan and Europe. Be sure to stick around to the end to hear why he thinks investing professionals should not take the CFA anymore. Please enjoy this episode with DJ Stochastic, otherwise known as The Daily Dirtnap’s Jared Dillian. Jared Dillian, my man. Welcome back to the show.

Jared: Yeah. It’s been a while. It’s been like three years or something.

Meb: No. It’s been five, which is shameful because I looked it up today. I was trying to see how long it’s been. Short answer is too long. So it’s great to have you back. How’s the south? I’m wearing my North Carolina surf hat. I can’t remember if this is from Wrightsville Beach or Topsail Beach, but it’s one of the surf breaks in North Carolina. How are things going in your part of the world?

Jared: South is good. The summer in Myrtle Beach, it’s actually my least favorite time of the year. It’s full of tourists. There’s traffic. It’s noisy. It’s a bit annoying. It’s super humid. We’re going to get into September, October, November. And that’s awesome. That’s really amazing.

Meb: Let’s talk about markets and investing, but, first, I am an avid reader of your newsletter, and it includes all sorts of things about investing, but also some personal disclosures, like how you wiped your booty with poison ivy. I figured we’d start there and talk about really dumb ideas as applied to trading.

Jared: I ask people for their dumbest trades, and I’ve had a bunch of dumb ones over the years, but that was actually a great thread. Like, if you dug into it on Twitter, people just had some amazing stories of dumb trades. And most of them revolved around either selling too early or selling too late. And that’s one of the things I say all the time, is that, you know, the decision of what to buy and when to buy is super, super easy. The decision of when to sell is 1,000 times harder, and it’s really, really hard to get it right. As for the story about me wiping my butt with poison ivy, I went to Connecticut for a bachelor party. We went to the casinos, and I was doing a lot of running back then. So I got up early and went for a run, and I had to take a smash. I kind of went behind this building. I just grabbed a leaf and wipe my butt, and about four or five days later, I was like, “Oh my God, what is happening?”

Meb: I mean, look. This is a great example. There are lessons in life you learn once, you don’t have to ever learn them again.

Jared: My wife said I should grab a leaf from a tree going forward. Like not one off the ground. I should grab from a tree.

Meb: But you hit it on a couple of things I think are really important. The first thing being those scars that older traders have that you’re proud of them. They’re not scars you’re embarrassed about, but you learn these lessons that you see a lot of people make that you won’t make again. And I could certainly list dozens of them, but I want to dig a little deeper on this topic because we tweeted something in this general context a while back where we said thinking about selling, people spend like 99% of the time discussing, which they buy, “Is it time for gold? Should I buy Tesla? What about crypto?” on and on. And I ask people, I said, “What percent of the time do you establish your sell criteria when you place the trade?” And no one does. And I think that’s a huge mistake because the two things you said, what happens if it works? Is this potentially going to be a 2-bagger, 10-bagger? What happens if it doesn’t work? And the problem with not having a criteria is your emotions creep in. Anyway, tell us a little bit about how you think about the sort of wholesale criteria, the thought process, how it’s evolved over the years.

Jared: I think the cardinal sin in investing is selling too soon. In a lot of those stories and the replies to the tweet were people who…this is a dumb example, but they bought Apple at 10, and it went to 20, they sold it, and then it went to 1,000. So they sold too early. So I like to say that the cardinal sin is selling too early and people do not have a big enough imagination as to how high a stock can go. You have to have a very big imagination, and then reflexivity kicks in, and it just keeps going and going.

But the problem is, is that you have this psychological urge to take profits that is so powerful. It is really, really hard to hold on to a winning trade.

Meb: It goes back to the old Ricardo quote from hundreds of years ago, “Cut your losses. Let your profits run,” and thinking about these big winners, market cap-weighted indices guaranteed to own them. But on these sort of individual positions, the hard part with the public markets is they often take time. We see a double and, like, oh, my God, thinking about going on vacation, buying a new Corvette, whatever it may be, but that’s often just on the path to a potential 5-bagger, 10-bagger, 100-bagger. And it’s so hard with the public markets.

Jared: The other thing is, is that in any portfolio of like, say, 20 stocks, you basically have 1 or 2 stocks that go up 10X, 100X, 1 or 2 stocks that go to 0. The rest of them kind of go nowhere, and all the gains of the portfolio are determined by these 1 or 2 stocks that go up 10X or 100X. And if you don’t allow them to do that, then you’re going to have pretty average gains in your portfolio.

Meb: There’s a lot of ways, I think, mentally to think about that. So many investors, and you actually touch on this in your dumbest trade ever, so many investors want to think in terms of binary all in or all out, but not only all in or out with a position, all in or out with a portfolio. And so you’re talking about the dumbest trade where a guy was like, “Put everything into Cisco in 2000.” The crypto world seems to always want to do this, right? It’s everything has to be like 100% of the portfolio whereas most of the older traders understand that even if you have a smaller position and it goes 10X, 50X, it is a huge outcome.

Jared: When you’re doing an asset allocation, if your asset allocation is you’re going to do 70% U.S. and 30% international, and you say, “I’m going to overweight international so you do 60, 40 instead, even a subtle change like that can make a pretty big difference in the returns. You don’t have to do 100% or nothing.

Even very subtle changes in asset allocation can make a big difference.

Meb: A fun aside to this dumbest trade ever, it was like two years ago, we had done a tweet where we said, “Everyone, what investment do you expect to lose to be the worst investment over the next year?” And then I tabulated the answers, and the top three were Bitcoin, GameStop was like number two, and number three was another stock that went parabolic. And I did a re-follow-up, and I said, “The point of this game is, A, it’s so hard to be a short seller, but that’s what makes this world so hard.” This was before they both went crazy during this recent time.

Jared: Let me know the next time you do that poll.

Meb: I need to do it again. I retweeted it and said it again, so it’s part of the problem was, like, I alluded to the poll, so people got to see sort of the mechanics behind it, but it was based on an old Toby Carlisle idea. It is part a sentiment which you talk a lot about in the newsletters. What should we start with? I feel like you’ve been talking a lot about inflation recently or just, like, what regime we’re in here in 2021. Everyone seems to be wanting to talk about inflation and gold. And what’s your general view of the world today?

Jared: About a year ago, we shifted from a disinflationary regime to an inflationary regime. It’s not hard to spot. I had a conversation with Peter Atwater, who you probably know. He came on my radio show, the second to last episode before the radio show went out of business. So I had him on the radio. I told him that inflation is 90% psychology, and he said no, it’s not. He said inflation is 100% psychology. It’s entirely a psychological phenomenon. And what happens is if you have an inflationary psychology, then what happens is, is that consumers act in ways to perpetuate the inflation. They act in ways to make prices go higher. So let’s just say, like a dumb example, you have to buy some fertilizer at Lowe’s. So a bag of fertilizer is eight bucks. So you’re like, “Okay, I believe that there is going to be inflation. So instead of buying 1 bag of fertilizer, I’m going to buy 10, and I’ll use 1, and I’ll just store the other 9 in my basement.” And the act of everybody doing this simultaneously overconsuming, hoarding is what drives our prices. This is the type of psychology that we have now. I mean, we’re getting used to an environment where you go to the grocery store, and you’re going to buy something, and it’s gone. It’s not there. We’re getting used to shortages. And when people see that, they say, “The grocery store might run out of X, Y, Z. I have to buy it now, and I have to buy more. I’m buying like 80 pounds of cat food at a time. There are cat food shortages. I have six cats. I go on Chewy. I go on Amazon. There’s a big sticker on the box that says heavy, and they dump it on my front step, but I have to do this because there’s shortages and it’s driving up prices.”

Meb: I feel like the big head-scratcher for most of the people out there is they see the inflation or they appreciate that this is now becoming a narrative. How does this translate into what’s going on in the markets going forward? Gold, for a lot of people, I feel like has been a head-scratcher where they say, “Well, I’m surprised real interest rates taking a dirt nap. Why isn’t gold doing a ripper?” Any general thoughts on what’s the best way to express this inflation trade?

Jared: You know, belong stocks for sure. Stocks or inflation pass-through vehicles. I’m definitely not bearish on stocks. Belong commodities. Gold is kind of a special case. Gold has massively underperformed. It’s a huge disappointment. The thing I think people get wrong about gold is that they believe that it’s an inflation heads. And it really isn’t. If you chart gold along with a whole bunch of different economic variables, the one that it has the highest correlation to was actually budget deficits. So I’ve always said in “The Daily Dirtnap” I’ve held gold for 16 years and I’m going to continue to hold it until we start cutting the budget deficit. And that’s when I will sell gold, not until then.

Meb: I read in one of your pieces, you said you have a decade-long view with gold versus some of your other positions. What tends to be the trading horizon for most of what you talk about in the newsletter?

Jared: I would say anywhere from six months to two years.

Meb: Let’s walk through the rest. So you mentioned this inflation bucket. What are some of the ideas in there, more generally speaking, whether it’s industry, is whether it’s…to the extent you can talk about names outside of the traditional commodity world. I have some wheat that has just been harvested, and as much as I talk about being a cold-blooded quant in the rest of my world, I still get a little subjective when it comes to our farmland because I see weeds like on the just absolute verge of a breakout, it’s like 30 cents away from a high. So the trend follower in me is like, “Well, I’m just going to wait another week or two to see if this breaks out before I sell our recent harvest.” But what are some of the themes that are attractive to you in the inflation world?

Jared: One that’s kind of counterintuitive is actually life insurance. Life insurance benefits from back-end yields going up, steepening yield curve. They’re the ultimate value stocks. They’re trading at single-digit PEs. They all tanked during the pandemic for obvious reasons. It’s life insurance that people are dying. If you look at the setup for this long term, this is actually one area that I’m really, really excited about, plus you get dividends. It’s not even a six months to two-year trade. This is a core holding that you hold for like 5 to 10 years.

Meb: You mentioned dividends. That sounds like almost a novelty in 2021. We’re down scratching almost near the lows of 2000 as far as dividend yield. So the prospect of getting dividends I feel like for most investors seems like a fantasy. From someone who’s experienced the late ’90s and today, what does the general market composition look like to you? Any rhymes with other periods, late ’90s, ’70s?

Jared: I think there are a lot of analogues to the Y2K period, which is when I started working in the markets. I started in 1999. And like you said, the dividend yield was pretty much the same back then. It’s about 1.3% in the S&P. For better or worse, I’ve been a contrarian, I’ve been a mean reversion investor. It’s in my DNA. And when I was picking out mutual funds in 1997 and 1998, I would buy “Money” magazine from the grocery store. Can’t do this anymore. I would buy “Money” magazine from the grocery store, and it was actually super helpful because in “Money” magazine, they would have tables of thousands of mutual funds. So you could flip through, and you could page through the returns. And back in like 1997, they had what was called science and technology funds that were returning like 35% a year, then they had value funds that were returning like 5% a year. So I looked at this at the time, and I said, “Well, I don’t think those gains and the tech funds are sustainable.” I knew nothing about investing at this point. I was 23 years old, but this was my instinct. I said, “I’m going to invest in value.” So over the next three years, it didn’t really do much of anything. But from 2000 to 2003, value actually went up while the NASDAQ was down 80%. Like I said, I think it’s a pretty close analogue. I’m very bullish on value.

If you go back to the day that the Pfizer vaccine was announced, that was a 15-standard deviation move of value overgrowth in that 1 day. If you had to mark one day that set off the new regime, I believe that was it.

Meb: When was that? What was the ballpark on that? Do you remember?

Jared: Say October of 2020. The last couple of months, we’ve kind of been chopping and flopping around in this trade, but I do think that over the next five years that value is going to outperform.

Meb: My favorite stat from this, and, listeners, I apologize because I mentioned it a lot, it’s my nomination for chart of the year, is the guys at Robeco had…Robeco had looked at the value factor going back to the ’20s and how it performed. This is cheap versus expensive. And not surprisingly, the year that you mentioned ’99 was the worst ever for the value factor, but the best was in 2000. And, again, the experience you just mentioned, until 2020, 2020 was actually worse than 1999, and then 2021 is outperforming 2020 so far. But, again, it had a multi-year sort of move. So we’re definitely in agreement there. You know, the late ’90s period, I would have been buying “Money” magazine but doing the opposite. I’m sure I was chasing all of the hot funds at the time, all of the Internet superstars, CMGI. I’m trying to remember what else would have been in my portfolio, Lucent Technologies. I had them all, but, again, learned a lot of good lessons, I think. E-trade was our Robinhood. That’s what I like to say. You talk a little bit about energy as well as some ideas in that space. Is that a value mean reversion sort of concept, or is it a different thesis there?

Jared: It’s that and something else. I mean, you’ve been reading the newsletter for a while. Are you familiar with my theory of constraints? Basically, this is an anti-ESG trade. You have two portfolio managers, portfolio manager A and portfolio manager B, and portfolio manager A can invest in anything in the world, and portfolio manager B can invest in anything in the world except for energy and guns and stuff like that. Portfolio manager B has constraints. They can’t invest in certain stocks. So this is like a logic puzzle, and the way this goes is you can’t expect portfolio manager B to outperform portfolio manager A over the long term given that they are constrained. They cannot invest in the entire universe of stocks.

Meb: Quants are called breadth. You’re reducing your breadth.

Jared: What that means for the stocks that are constrained is they must offer the prospect of higher returns in order to induce investors to buy them. And usually what that means is a lower starting point. So this has really happened over the last year. I mean, if you go back to 2020 when we had negative oil prices and the Saudis were pumping and it was just like hell for energy stocks, that was the point at which the constraints trade started to kick in. Energy became uninvestable. Not only did people have explicit constraints, they were forbidden to own them, but they also had implicit constraints. They were embarrassing to own. So what you saw at the end of 2020 was a lot of portfolio managers kicking energy stocks out of their portfolios so they wouldn’t have them under 13 apps or in their prospectuses. It was the perfect storm of constraints, and that’s why you’ve seen this performance into 2021.

Meb: We’ve done a lot of work sort of looking at things that have gotten bombed out down 60%, 80%, 90%. I mean, energy, my goodness. One of our favorite stats was just the percentage that used to be of the S&P. It got up to darn near, I think, a third at one point, certainly over a quarter and then bottomed out at what, like 2% or 3%? I have an ESG stat. You’ll love this. I did a poll on Twitter back to back because I asked people, I said, “Would you invest in tobacco stocks?” And people are like no. I was like, “Would you invest in tobacco stocks if you knew they were going to be the S&P?” and everyone was like, “Yes.” So it’s the morality, I think, is relevant.

Jared: That’s the thing about ESG. I mean, ESG is a very popular strategy while it’s delivering returns. And the returns for ESG have been good for reasons that have nothing to do with ESG. It’s been a growth value trade because most of the ESG stocks are growth, and growth has been outperforming.

Meb: It’s a challenging world. It definitely receives a lot of media attention and narrative, but it’s complicated. You’ve written quite a bit about one of my favorite places in the world, almost go about every other year to go skiing and have been interested as a student of history with investing in markets because it’s been a fascinating five-decade plus, I mean, really the entire history is fascinating, but that’s the empire of Japan. What’s your thoughts and thesis of that country?

Jared: I don’t really have a lot of strong feelings about Japan right now. I’ve been investing in Japan since 2012 when Shinzo Abe became prime minister. When I first heard of Abenomics, I actually put on the FX trade. I shorted DN, I bought DXJ. DXJ was just an incredible ETF. I mean, talk about something that was launched at exactly the right time. So I was buying it when it was a brand new ETF, and I’ve literally held it for nine years. Here’s the thing. If we’ve entered an inflationary environment globally, it’s going to benefit deflationary economies the best. I think that Japan has the most gearing to reflation than any other developed economy. You’ve heard all this nonsense about the Olympics are over and stocks are going to tank in Japan. When I’m just holding like index Delta, just dumb equity risk, I generally don’t hold it in the U.S. And for the most part, I’m holding it in Japan.

Meb: We do quite a bit both top-down and bottom-up, and Japan has been one of those stories where you’ve started to see in the numbers a decent cultural shift in how they think about corporate finance. And I’m referring specifically to buybacks and just approaches to stocks over the past decade. It’s such a fascinating example because it’s a top-five economy in the world and at one point the world’s largest stock market. So it’s not some tiny backwater, there are thousands of Japanese securities, and I think it’s certainly a pretty interesting place to check out.

Jared: And it’s mostly value. It’s mostly a value market.

Meb: Which is odd to say. Looking back at the 1980s, arguably the biggest equity bubble in history, we would probably argue that. And just how long that took to work off, you know, being 30 years, essentially for that thing to come back.

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Meb: As we go around the world, anything else looking interesting to you or looking scary as far as equity markets or opportunities around the globe?

Jared: I had you on my radio show a couple of months ago, and you mentioned to me that an investor should have 50% of their allocation to foreign stocks. That kind of stopped me in my tracks. I had the Japan exposure, but I really didn’t have anything else. I’ve been adding some EM. I added some European banks. I would say that at this point I’m up to 25% international. It’s still a little bit light relative to your benchmark, but, I mean, just if you look at valuations globally and you just put a chart of Europe versus Japan, I mean, you’ve seen this chart a million times, U.S. equities are trading above a 30 PE and European equities are trading into 10 PE. Not to be one of these dumb people that, like, travels to Europe and makes all these kinds of assumptions about the stock market and stuff like that, but, you know, I went to Greece over…it was back in June, and I’m kind of looking around, and everybody’s smart, the infrastructure is good, everything is great. I don’t understand the valuation differential.

Meb: I think it ends up being one of these, kind of what we were talking about at the beginning of the episode, investments that just take the time horizon versus what people expect. You know, it used to be quarters and years. Now, it’s days and months for most people. And I was tweeting about this recently. I said a lot of the countries in Europe and elsewhere are breaking out. You know, the UK just kind of broke out to all-time highs and is trading at less than half the valuation in the U.S. It’s interesting world is your oyster, as we say. It’s a little more incestuous than it was 50 years ago because domicile, I think, can be a little less relevant to where the revenues are, but the point being back to breadth and ESG, there’s so many choices out there around the world. One of my favorite things about your ideas is there’s often a handful of names that I’ve never heard of, which is fun. And talk to us about anything we haven’t covered yet as far as the ideas and thesis that you’ve been working on.

Jared: I’m investing in anti-ESG, but I’m also investing in ESG. I’m playing the pass and the don’t pass. There are a couple of names that do some pretty fantastic stuff, environmentally speaking, some high-growth names. Some of these are SPACs that were de-SPAC’d, and they’re kind of suffering under the SPAC liquidation. It’s pretty exciting stuff. That’s the kind of thing when you’re building a portfolio, you can’t have everything in one factor. You have to spread yourself out across ideas. So that’s what I’ve been doing.

Meb: One of the areas that you and I were talking to leading into this I would like to hear your thoughts on is I try to get a gauge on sentiment and just in general. And sentiment’s always tough because it’s squishy and it can always get worse or better depending on what your perspective is. But if I was to say the dominant conversation over the past year other than Corona with all my friends have been…and people not necessarily involved in investments is just how bananas real estate has gone kind of everywhere, particularly not the major cities, but even in many of the major cities still. Talk to us about your experience. And is there a thesis there? Is it something to be excited, worried about?

Jared: Real estate is another place to hang out. And one of the things we talked about on our show was the awesome portfolio with that asset allocation. So 20% stocks, bonds, gold, cash, real estate. I think everybody should have a 20% allocation to real estate. That allocation could take the form of equity in your primary residence or a second home or something like that or rental properties. But in the absence of all those things, you can have REITs. And we were talking about dividends before, and that’s one of the few places in the market to get dividends. Dividends on the REITs are lower than they used to be. I mean, it used to be able to get 6%, 7%, now you’re getting 4%, 4.5%. That’s a place to be. But, you know, in terms of residential real estate, it’s starting to slow down a little bit. I mean, it was red hot for about six months. Here where I live in South Carolina, you know, Myrtle Beach is the number one destination for people moving in in the entire country. It’s the fastest-growing geographical region in the entire country. And home prices have come up a lot, least 100% in 10 years. They could have gone up a lot more. They’ve been doing a lot of building. They’ve been dumping supply on the market, but the average house in Myrtle Beach in 2010 was $150,000. Now, it’s about $320,000, which is still below the national median. But, I mean, it’s hot here, you know, and before we jumped on the show, I told you about a piece of land that I bought for my next house that increased in value 100% in 6 months.

Meb: Is it about more? That’s the simple answer. I was smiling as you were talking about this because I was thinking of, “I love that portfolio, and we’re going to include it the next time we do the update to our asset allocation book,” which I was supposed to have done each for the last four years. But I was trying to think of the ticker I would go with, it’d be there. For some reason in my head, I had it as a rad portfolio, not the awesome portfolio. So as I was like RID ticker, but AWSM or DIRT. DIRT would be good if they had it. I wonder if that’s taken by anything. Talk to us about, you know, someone who’s been a ETF trader, who’s been on essentially trading desk and then has been at the turret for 20-plus years now. This last year has been pretty interesting with some similarities but also, I think, some differences between times pass with a Robinhood experience and the zero-cost trading to the ’90s. I was joking with someone the other day. I said, “In the late ’90s, all of us thought we were geniuses. Everyone believed they were really brilliant.” The interesting part about a lot of this cycle is a lot of people are fully aware. They don’t know what they’re doing and do it anyway, which is an odd sort of difference. Talk to us about what that part of the world, the impacts it’s having. I saw you screen grabbed a little bit of a Bloomberg article that you had put together on Twitter. Any general thoughts?


Zero commissions has been the worst thing that happened to retail investors in my lifetime, for sure. When something is free, people tend to over consume it.

If your office has a buffet and they have sandwiches and potato salad and stuff like that, at the end of the buffet, what do people do? They bring like bags, and they take all the free food, and they take it home. You know, this is what happens if something is free. Trading is not free. There’s not an explicit cost, but there’s an implicit cost, and that comes in the form of payment for order flow that Robinhood receives from market makers. So it does cost something, but people think it costs nothing. And because there is no explicit cost, they over consume it, which means that they trade too frequently, and they’re truncating their gains, and their performance is worse. And all of this happens to the benefits of, you know, not just Robinhood, but Schwab and TD Ameritrade and all the discount brokers.

When this happened, this was back in 2019. I remember when Schwab dropped their commissions to zero, you had a group of people on Twitter, it was like, “Yes. This is good for retail investors.” You dummies. It’s not good. It’s actually really, really bad. I actually have a brokerage account with a full-service broker. I didn’t use to. I used to have an account at Fidelity, and Fidelity was like 895-er trader or something like that. And I actually switched to a full-service broker on purpose so that I could pay higher commissions. I pay 5 cents a share. If I’m trading 10,000 shares of something, it’s a $500 commission, which means that I have to think pretty hard before I either enter a trade or exit a trade. I have to think very hard about that. My commissions generally make up less than 1% of my portfolio a year.

I don’t trade very frequently, but the behavioral coaching that fees does… If you go back and see what I’ve written on Bloomberg over the last couple of years, there was a piece that I wrote a couple years ago that talked about how fees are not the enemy of investors. You know, we’re talking about mutual funds. People are like, “Well, why would I invest in a load mutual fund when I can invest in a no-load mutual fund? Why would I pay for something if I can get it for free?” And it’s because of that behavioral coaching of fees. If you pay a 3% load to get into a mutual fund, if you put in $100,000 and you pay $3,000, you’re going to stay invested in that fund for at least 10 years in order to amortize the cost of that fee over time. And what people don’t talk about is that if you pay 3% on the way in and you hold it for 10 years, then it works out to 30 basis points a year, which is really not that bad.

Vanguard, they did studies on their own accounts. I mean, I’m sure you know about this. They came up with this concept known as Advisor Alpha. And what they found was that their own customers in their mutual funds were underperforming to the tune of 3% because it was frictionless, it was costless to move money around between different mutual funds, and they were chopping themselves to bin. What Vanguard figured out was if you gave these people a financial advisor and you coach them to not trade their mutual funds, then their returns go up. So getting back to the original point, zero commissions have been the worst thing for retail investors in my lifetime.

Meb: An analogy as soon as you started talking about this, I remember I was staying at a hotel in Melbourne once, and I check in, and the pleasant check-in host was like, “Just so you know,” and pointed to this like, it was like the, if you’ve ever been, listeners, to the Bloomberg offices, anywhere in the world, they have, like, this unbelievable spread of free food and drink. So, “Just as you know, this is complimentary, all these snacks, free happy hour, wine, beer, everything.” I didn’t even want anything, but every time I passed, I would have to grab something. I just felt like it was foolish of me to pass up this opportunity cost of… And then, so I was eating. Not normally a sweets guys, picking up cookies, and beers are five bucks normally, why would I…you know, and so the mindset, we said this the other day on TV, and I said, “Look, Robinhood could choose to do the right thing by their customers and implement all these nudges to try to push them in the right direction if they really believed in their mission of democratizing investing and doing the right thing.” I said they won’t though because their income is directly tied to a different outcome, which is having you trade dogecoin and options. I mean, they’re essentially an options market brokerage at this point. So it’s frustrating. So there are opportunities somewhere for somebody to get it right. But I love your ideas because listeners can think about this in every aspect of life, whether it comes to going to the gym, you pay a trainer 100 bucks a session versus just doing it on her own. What do you think is going to have a higher compliance? It’s going to be the trainer. Somebody will figure it out, and it’ll be a multi-billion dollar business. You have a good post recently, article post called “My ego is not my amigo.” And I think for traders and investors and really for many aspects of life, this is a pretty important and deep philosophical post. Do you want to talk a little bit about that idea?

Jared: One of my favorite sayings is this too shall pass.

Whenever things get really, really bad and life sucks, you say this too shall pass, and it does. Things will get better. Whenever things are really, really great and you’re making tons of money and all your trades are working, say to yourself, this too shall pass.

It will get worse. I would say the 12 months from May to May of 2020 to 2021 were some of the best months I’ve ever had investing. And I was saying to myself, “This is not going to last forever.” And I’m not a genius. Long stocks and stocks went up. That does not make me a genius, right? Like, it really… So you just have to have a lot of humility.

Meb: This is a hard lesson, I think. And it’s one that you see not just from the manager side, but also the investor side. Bogle was writing about this long time ago, looking at the top-performing funds in each decade and how they did in the next decade, and, not surprisingly, the best tended to underperform the next decade and vice versa. And you could see this on so many different time horizons. And the challenge is, of course, always going back to the Advisor Alpha you were talking about earlier is what do people want to do is they want to chase the hot performers, and it happens over, and over, and over. You can now apply it to asset classes too and indices. We talk a lot about, like, the mid-2000s. Only thing people wanted, only thing, was emerging markets, bricks, and then the really hot institutional product was commodities, right? Before they peaked and went down for 10 years. And so it’s sort of rinse, repeat, and it’s both frustrating and sad, but also an opportunity, I guess, for other people to take advantage of. From someone who’s been on the media research side for a long time, I mean, you’re not that old, but you’ve been writing a newsletter for, what, 13 years. That’s a while on this business. Surviving is just a compliment in and of itself. You’ve done podcasts, which is coming back, I’m so excited about, done radio, all the different mediums. How’s this world evolving for you? How do you see it kind of playing out? Have you noticed any differences in the business, in your ideas, approaches, thoughts about how people consume or want to consume content?

Jared: I will say it’s gotten a lot more crowded. Back when I started in 2008, there were nowhere near as many newsletters. I mean, there was Jim Grant, and there was Dennis Gartman, and there was a couple others, and there was me. It was that way for a while, and now I have lots of competition. There’s Tommy Thorn, and Tony Greer, and Larry McDonald, and Grant Williams. I mean, there are a lot of people out there providing content. Now, I welcome the competition. I’m not really worried about the competition because I do something that’s unique that nobody else does. It’s gotten more challenging over the years. One thing about being in the financial media is that a very cheap way to draw attention to yourself is to make an outlandish claim. The European debt crisis is going to blow up the planet. Claims like that. Like Tesla is going to go bankrupt, stuff like that. Generally, those claims turn out to be wrong, but those people get a bunch of subscribers, they get a bunch of followers. And, you know, I’ve always sort of acted on principle. I said, “I’m never going to do things like that.” I think I’ve grown more slowly as a result of that, but I think my reputation has probably been enhanced over the years because I think I have a reputation as somebody who’s a deep thinker and is reasonable about things.

Meb: I think that’s accurate. I mean, again, some of these cycles and going back to the ego and thinking about how to approach markets in general, I mean, just not getting taken to the woodshed is probably like goal number one, like I do no harm. A lot of the people making some of these predictions and claims, certainly, they know better, but they do it anyway because they understand that’s sort of the metric. How has the newsletter changed over the years? Is it pretty similar? I saw you tweet now that the website hasn’t had one iota of change, which is, listeners, if you haven’t checked it out, go to it. What’s the domain? Is it Dirtnap? The Daily Dirtnap?

Jared: dailydirtnap.com.

Meb: We’ll put it in the show note links. Check it out. It’s definitely a different website. Did you design it?

Jared: I designed it. Yeah.

Meb: You could probably sell your drawing as an NFT at this point. Maybe as an animation.

Jared: That’s so good. Business has been pretty good. You asked how it changed over the years. In some ways, it has, in some ways, it hasn’t. I don’t get involved in stupid arguments anymore. I’m not going to, like, dive into this debate. I’m much more humble. I’m, look, “The purpose of this newsletter is to help people make money, and let’s stay focused on that,” and just ignore all the noise.

Meb: One of my favorite questions to ask people, and this may take a second so you can think about it, is as you look at your investing peers or just the investing markets in general, the professionals that are out there, and you had to say you probably hold some beliefs that the majority of your peers do not hold or said differently, you believe something is not true that most of your peers do believe is true. So let’s call it two-thirds, 75%. Is there any sort of defining principles or ideas in general that you have that you would put stand out in that category? And we talk about a couple if there’s more than one, but anything come to mind?

Jared: People should stop taking the CFA.

Meb: Oh. Well, CFA is no longer sponsoring this podcast.

Jared: I have a methodology. My methodology works. I think it’s the best way. I think everybody else should do what I do. I don’t think there’s any evidence at all that the CFA helps somebody become a better investor. I don’t know if they’ve done research on this, if they’ve examined returns of portfolio managers with the CFA or without the CFA. My guess is there’s no advantage at all. How do you outperform? And it’s in ways that are not covered by the CFA. And what I do in particular is sentiment and psychology. And that’s a constant throughout time. Go back to 1929 and shoeshine boys and indicators like that. I mean, what I do is it’s a very soft science. In fact, it’s not even a science, it’s voodoo, but it works. It absolutely works.

Meb: One of the odd things about this cycle, thinking about sentiment, you had various surveys, and if you look back at December ’99 was the highest ever on the AAII bullish sentiment reading. Like, it literally top ticked to perfect the month on bullish sentiment. For much of this bull market post-financial crisis, I used to call it the Jay Cutler bull market because, like, he just was always, for listeners, he’s now retired, but kind of a quarterback, didn’t really care about anything. He always looked like he was very just disinterested. And so I said, this bull market was just romping and stomping, and it didn’t feel like anyone was getting euphoric. Now, the last year or two has been a little different, but on a different survey, the Institutional Investor, they look at average sentiment over the course of a year, and they can take this back to the 1950s, and then you can bucket it where you… This is a loopholed study. You can bucket it where if you look at the 10 highest sentiment years going back to the 50s, the returns on the stock market the next year were on average 0 and the 10 worst sentiment, the average return in the stock market next year was like 20%. But in the last like five years, you’ve ticked two or three or four years where the sentiment has just stayed sort of elevated.

Jared: I think I’ve seen that actually.

Meb: So what’s your take-away? What’s your general vibe on the sentiment indicators or anything you’re picking up?

Jared: I think this is a different sort of environment. It’s just really hard for stocks to go down when you’re pumping this much liquidity into the system and the government is handing out free cash. I mean, it’s just really hard for stocks to go down. I think in the short term, I think we had a top in sentiment in February or March when Bitcoin was peaking and SPACs were peaking and you had a lot of IPOs. I think that was sort of a local top in sentiment, and I think we’ve spent the last six months working off that top in sentiment. And I think we’re going to have another leg higher and we’re going to make another top. And, by the way, what we had in March of 2020, I mean, that was the opposite extreme. That was extremely pessimistic. That’s where I think we are right now in terms of sentiment.

Meb: We monitor these surveys. And, again, their surveys are sort of taken with a grain of salt, but, in general, they tend to get the turning points decently right in retrospect. They tend to be backwards-looking, but a couple of the big inner surveys in the U.S., they survey investors all around the world, and the U.S. is now consistently the highest expectations.

Jared: We expect like 15% returns.

Meb: And people will say, “Well, that’s crazy, Meb.” The sentiment, I say, “Well, no, but it’s not always that way if you look back in history and read the surveys. They kind of notch up over time.” You look to the horizon next five years for Dillian and The Dirtnap, other than spending all your time with a shovel and a, what else ever you need, a level to build a house, what’s on the horizon for you? What’s on your brain? Anything you’re confused about? Anything you’re scratching your head, excited, sad about when it comes to markets or anything else that’s just keeping you up at night?

Jared: Just on a personal level, you know, I did the radio show for two years, so it was a Jared Dillian show. So I did live radio. It was fun. It was a huge amount of work. I had to prep about three hours a day for the show. I mean, it was like six hours out of my day. It ended up not being profitable. That’s why we stopped. So like you said, we’re moving to a podcast. The podcast is going to be fantastic. I think we’re going to kill it, but this is all part of… So I have “The Daily Dirtnap,” but I have another entity called Jared Dillian Money, which is personal finance education. And we were building that entity around the radio show, and that failed. So now we’re building it around the podcast. I’m going to have a book coming out, hopefully in about two years, I think, would be a good time horizon. So that’s what I’m really excited about. I’m getting an MFA, a master’s in fine arts in creative writing right now.

Meb: When you’re talking the radio show, with radio, you have Clubhouse being valued at $4 billion and a lot of these other startups that are sort of combining the live aspect of radio, Rocket’s another one, there’s probably…Call-In is another one. Obviously, you have the live streaming on YouTube and elsewhere, and there’s this greater competition for mind space across everything, you know. And so you’re talking about the newsletter. The nice thing is it feels a little bit old school. I print mine out. I actually don’t read it on the computer. Sorry, trees, ESG. But thinking about the competition for attention and how all of these sort of mediums are kind of merging to where what does it even mean to have radio anymore versus something you could do on your own in a world where Dave Ramsey makes…I mean, I think he’s like 300 million in revenue last I checked. It’s a lot. I’m excited to see is there going to be a specific slant to the pod or is this one going to be focused on personal finance or what?

Jared: It is. I’ll occasionally talk about market stuff. I mean, my whole philosophy when it comes to personal finance is, well, first before I say that, let me just talk about what everybody else’s philosophy is. Okay? So the goal for everybody else is to get a seven-figure bank account. Everybody can be a millionaire. There’s a ton of books in the bookstore. You go to Barnes & Noble, look at the shelf, “Seven Easy Ways to Become a Millionaire.” That’s not what this is about.

The goal is to be happy and to live a life with less stress, in particular, less financial stress. The sources of stress generally are debt and risk.

Dave Ramsey is the expert on debt. So he gets people to cut up their credit cards and go off the grid and use cash and stuff like that. I think that’s an extreme solution, and I don’t think everybody needs to do that. But on the risk side, people construct portfolios with 1 stock, with 100% stocks with all growth stocks, and they experience this volatility is sort of on purpose, and it freaks them out, and you have episodes like you did March of 2000, and you take a 50% drawdown. Who needs this stuff? I like to have everybody construct their affairs so that they have…it’s not even so that they have the less stress, so they don’t even think about money. I work in money. Like, I work in the financial industry, so I have to think about it all the time. I would like to not have to think about it. And I think a lot of people have that luxury if they build their life in such a way that they don’t have to think about money.

Meb: I saw an academic paper across…I don’t know where it was, on Twitter or my inbox, but it was talking about SSRN abstract-style academic paper, and it was the inverse correlation between success in marriages and how…I mean, this is obvious, how much the wedding and engagement ring cost. And it was like an inverse correlation, but thinking about so many areas of this world, one area in particular that I think people spend…it’s kind of like the buy stock and sell stock mindset, is I don’t think people really optimize their spending for happiness. They tend to default into certain spending categories versus if you were to say how could you spend your money to best equate to a happy life and then also the same thing with the risks, which is what’s so nice about the awesome portfolio, is it’s sort of this all-weather type of portfolio that I think most people would be much better off than trying to maximize gain. It’s a much more asleep at night sort of idea. Jared, we’re going to start wind down. I’ve kept you over an hour already. How is your new ride? Is it everything you were expecting? My old man had a late ’60s split-window Corvette, and I said one day I’m thinking more like resto-mod. I don’t want a 60-year-old car. I’ve had one of those, and it’s a lot of work. How is your new wheels?

Jared: It’s awesome. I’m really glad I did it. I had been sweating the new mid-engine models for about a year. I put in an order for one, and basically, I got boxed out because of the pandemic and the order never came in. Went into the dealership one day, they had this black 2020 Corvette mid-engine with red stripes. It had all the bells and whistles. It was used. It had 1,000 miles on it. Somebody was just flipping it. I said, “Okay. That one’s mine.” I struggle not to drive it every day. I don’t want to put 100,000 miles on it. I really enjoy driving it.

Meb: Jared, it’s been fun as always. We need to do this more often than twice a decade. Best place people to go find you, where’s the spot?

Jared: So you can follow me on Twitter at @dailydirtnap. That’s easy enough. Go to the website, check out the newsletter, dailydirtnap.com. There’s a little nap bar on the left. Just click on Subscribe. An email will pop up. You’ll email me, and I’ll get you set up.

Meb: Jared, it has been a blast. Thanks so much for joining us.

Jared: Thanks.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.