Episode #464: Radio Show: The Gates Are Going Up! PLUS: The Set Up For Value & Trend-Following in 2023

Episode #464: Radio Show: The Gates Are Going Up! PLUS: The Set Up For Value & Trend-Following in 2023

 

Guests: Meb Faber & Colby Donovan

Date Recorded: 1/20/2023     |     Run-Time: 43:12

Summary: Episode 464 has a radio show format. We cover:

  • Global valuations update: where does the US rank?
  • Is it too late to jump on the value and trend-following train?
  • Private funds are gating their money
  • Q&A: listening to experts and VC fees

 

Comments or suggestions? Interested in sponsoring an episode? Email Colby at colby@cambriainvestments.com

Links from the Episode:

 

Transcript:

Welcome Message: Welcome to “The Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: Welcome, everybody. We got a new episode of The Radio Show. God, it’s been a long time. Today joining us is Colby Donovan, all the way from the East Coast. Colby, how are you?

Colby: I’m ready for the weekend. How are you?

Meb: Welcome to the show. Happy New Year. Can we still say Happy New Year? It’s almost the end of January, but I feel like it is a new year. How are things?

Colby: Everybody says that last year was the worst year ever, you need a new year. But I do think 2022 is a little crazy there at the end with SBF trying to make the whole world go crazy. So, it’s nice to turn the calendar and have a new start.

Meb: One of the nice things about shitposting on Twitter for the past decade or however long it’s been is it’s a public diary. I was actually tweeting today. I was looking for something else. And as often I do, I come across old tweets that I’ve forgotten or just have seen at some point. But I saw one from 2019 and it said, “What is the biggest and the most absurd story and character in our business world over the past five years?” And the four choices in this poll were, and I’ll go from last place winner to first place, was the Silk Road story, which, I mean, absolute preposterous story. The guy was running this, you know, marketplace where you could get anything in the world, drugs, murder people from, like, a coffee shop in San Francisco. He was worth, like, tens or hundreds of millions of dollars and he was working on a laptop in San Francisco. Anyway, that came in last.

Third was the 1MDB scandal, which, you know, involves governments and billions of dollars. I mean, there are entire books written about that. I mean, any one of these is worthy of a movie and a book. Third was Adam Neumann and WeWork, which became a movie. And first place was none other than Elizabeth Holmes on Theranos, which, again, has become multiple movies. I saw today, someone was tweeting that she was trying to escape the country to Mexico but got blocked. Anyway, and then I said, you know, none of these hold a candle in my mind to the last couple of years and this ongoing drama. My God, things keep getting weirder.

 

Colby: SBF has Florida Man written all over him. As a Florida resident, I’m very, very pleased. Bahamas can claim him or Stanford, I guess, now California where he’s writing a substack every day.

 

Meb: My favorite part of the last month where there was, like, cold waves in certain parts of the country was there was, like, a big iguana watch in Florida where the iguanas apparently, like, get too cold, hibernate, fall out of trees and hit people on the head. You ever seen that happen? Is that true?

 

Colby: I have not seen it, but my wife was very adamant. I’m careful outside when I’m with the dog to make sure no flying iguanas land on either of us. So, to me, it’s almost natural selection, but that’s for another topic.

 

Meb: Yeah. I’m just ready for a nice quiet year post-pandemic, things just… Seemingly, last year we had a war break out in Europe. This year, hopefully, it could be just mellow. I think everybody would be okay with that. Anyway, what should we talk about, man, today? There’s probably a lot. We should commit to doing these more often. I always say that. We never do, but this year that’s my new year’s resolution. One Radio Show a month. So, you heard it, listeners.

 

Colby: I said that with you last year. I said you were fake news before for saying you’d do it and now I’m fake news.

 

Meb: We should have, like, some sort of penalty to keep us honest. But okay, so what’s going on? What are we going to talk about?

 

Colby: Well, I’d love to hear what you guys got up to over on the West Coast. Little move into a new office over there?

 

Meb: Yeah. I mean, look, we’re going to hit a 10-year track record on our ETFs this spring, which is crazy to think about it. I don’t feel that old, but that’s, like, having lived through multiple cycles. And we still get referred to in the media at some points as, like, an emerging manager. I mean, we’re almost $2 billion in assets at this point. I don’t know what size we graduate from emerging, but, you know, I’d like to think 10 years and $2 billion, hopefully, we’re there. But anyway, we’ve kept out on offices near the beach. So, we found one and we’re making it our new home here in Manhattan Beach. So, listeners, if you find yourself in the neighborhood, or it’s a great place to come visit, we’ll take you out for a surf or a coffee or a beer or food or just a walk on the beach, whatever you’re in the mood for. But we’re right down very close to the water and, hopefully, we’ll be in by the time this publishes. As usual, we had to renovate. A lot of the stuff near the beach is kind of old and gross and ’70s sort of vibe to it, kind of surf rundown, but we’re fixing it up and, hopefully, it’ll be a new home by the time this hits the tape.

 

Colby: I mean, I, obviously, have not seen it, but your pictures on Twitter look pretty sweet.

 

Meb: We’ll definitely have some surfboards for everyone. The big issue in the renovation with the city was putting in an indoor shower where I said, you know, like, “All these people are going to be on the beach. They want to come off the beach.” There are three yoga studios within one square block. I’m not sure how capitalism and free markets allow that to happen, but apparently, everyone loves yoga. So, anyway, it’s a great place, so, y’all can come visit. But if we know anything from psychology, you know, is you don’t want a big, terrible commute, particularly in LA. So, a lot of our folks are pretty close, so it’s a good spot. We’re happy about it.

 

But we’re also going to start travelling a bit more this year. So, listeners, if you happen to be in, let’s see, it’s mostly West Coast for the first quarter or two this year. We got Park City, Colorado, San Diego. I haven’t been in New York in, like, four years. So, New York in the spring, a few others sprinkled in. I know part of the team is going to be in Miami. But listeners…Las Vegas, that’s another one. Listeners, if you want us to come to your city, reach out, shoot us an email, feedback@themebfavor.com, and we’ll come say hi.

 

Colby: Lots of airline points for you.

 

Meb: Oh, man. Well, you know, Southwest. We’ll see. I don’t know. We’ll see how many of these turn into Zooms. Anyway, should we talk markets at some point?

 

Colby: Let’s do it. So, we just sent out some global valuation updates on The Idea Farm. I think that’d be a good place to start. Median CAPE Ratio is a 16 around the world now, 25% cheapest countries or CAPE of 10, 25% most expensive, or a 25? What’s your thought when you kind of look at the valuations around the world today?

 

Meb: Yeah. Two parts to this, listeners. First is The Idea Farm, if you’re not familiar, is a research service we’ve been running, I think, also for over a decade. We used to charge 500 bucks a year and we eventually said, “Look, as we get bigger as an asset manager, let’s make this free.” So, we did. I think we got about, I think, over 100,000 email subscribers now. And if you just go to theideafarm.com, signup, you get one email a week on Sunday, authored by none other than Colby and edited by the team here. But we include the one, two, three best professional research pieces of the week. This will be from, like, Goldman, it could be from AQR, it could be from a closed-door newsletter, some of which are paid, some of which are proprietary. We always ask for permission, of course. We include the curated top two or three podcasts of the week. Those also have Spotify playlists going back to, I think, 2017.

 

And on top of that, there are the global valuation updates every quarter for 45 countries around the world. And the cool part, for people who haven’t been listening, we have all the archives online for free. So, we’re talking, I don’t know, 500, 1,000 pieces of research over the years. I think it’s probably better than getting an MBA. I’m surprised no one hasn’t downloaded every single piece of content that we’ve published there and put them into a Dropbox somewhere, but maybe listeners will at some point or curate them in some fashion. But there is a wealth of resources there. Anyway. So, that’s free now. So, Happy New Year’s, everyone.

 

As we look around the world…so, you started off as an optimist. When I talk about the same topic, I often get labeled the pessimist and I’ve been getting ratio’d on Twitter for the last few months talking about the S&P 500 and U.S. stocks market cap-weighted. And you have to really distinguish because last year was a stinky year. It was actually one of the worst years on record for traditional portfolios, whether you are 60/40 or however you diversified. Most of our listeners are mostly U.S. stocks and bonds. And of that, it’s mostly U.S. stocks. So, if you just had 60/40, I think we clocked in around -17%. And that puts us top three worst years ever, ditto for real. I think the worst year ever in the past 100 years was maybe about -30%. And obviously, the calendar year is arbitrary.

 

I’m a little surprised the sentiment wasn’t worse. We did polls throughout the year, and near the end of the year we said, “Is your portfolio up or down in 2022?” And it was something like 90% said it was down. The other 10%, you know, whether they read the survey correctly or they’re just lying or we joke that they’re all Canadian or Australian because they must have had all natural resources. But anyway, the vast majority of people were down and that goes along with just ETFs in general. I think that if you screen for 2022, it was, like, 90% of ETFs were down on the year because both bonds and stocks were down so much within the U.S. and then, of course, global. So, don’t feel bad. Everybody else stunk it up with you.

 

The downside, you know, you had this crazy environment from 2020, 2021, the culmination, but years kind of leading into it. And we did…if you look back at our stock market outlook at the end of 2021, so, leading into 2022, it’s a good video, it’s on YouTube, but we talk about a lot of the craziness, I mean, things like, you know, investor expectations was 17% a year for your portfolio, right? So, forget the fact that, historically, the best you’re going to do, like, is 10%. Seventeen was where it grew to. And also the topic of people no longer caring about valuations. So, we do these polls and we said, “Ninety percent of people own U.S. stocks. How many of you would hold U.S. stocks if they hit a long-term Shiller CAPE Ratio 10-year PE ratio of 50?” Right? So, higher than it’s ever been in the U.S. including the Internet bubble. So, this most recent, in the last couple of years we peaked at 40%. We didn’t quite hit the Internet bubble highs. I was kind of thinking we might, given the craziness and the SPACs and the meme stocks, but we got to 40%, which is pretty close.

 

And 75% of people said they would continue to hold U.S. stocks if they hit 50%, so bigger than 140 years of market history, which felt crazy to me. And then I said, “Well, would you continue to hold them if they went to 100 PE? So, higher than any market’s ever been in history, including the granddaddy of all bubbles, Japan in the 1980s.” And half the people said yes. So, half the people out there in this entire cohort will own stocks at any valuation multiple, you couldn’t have anything crazy enough. And to me, part of that is just the sign of the times and the cult or brand of stocks at any price.

 

Now, let me be clear. “Stocks for the Long Run,” a new book just came out, Jeremy Siegel. I think it’s an absolute treasure. I think owning stocks for the long run is absolutely a fantastic piece of advice. But even John Bogle himself, there’s a video we posted on Twitter from him on YouTube talking about just using common sense and saying, you know, in the late ’90s, he would calibrate his portfolio. So, A, you can rebalance, which always is going against trend when prices go up or down, but also you could trim even more. And, you know, the two investors that talked about that on the podcast, Howard Marks and Rob Arnott, you know, kind of consistently saying, “Hey, if things go crazy, you can over-rebalance or, you know, sell even more.” So, Bogle himself was in favor of maybe what Asness would say, “Sinning a little,” or just using common sense in my head.

 

So, things got a little crazy. U.S. stocks got to 40%. They got hammered last year. I think the Q’s were down like a third. The growth stocks, you know, many of these crazy multiple ones that were…I mean, forget about 10 times sales, like 50, 100 times sales are now down 70%, 80%, 90%, 100%. So, part of that’s come out of the market. And the good news is U.S. stock valuations are down to around 28%, 29%. That’s still very high, historically. It’s particularly high if inflation sticks around. We’re down in the sixes, I think, now. And my horse rate bet from last year where I said, what’s going to cross 5% first? Bonds, doesn’t even matter, two-year tenure Fed, or CPI? And so back then, you know, bonds were at 2 and CPI was at 10 or whatever or 9. And so they’re both coming down very close. So, bonds are, like, in the foreign change and CPI is cruising down on six. We’ll see which one does it. The expectation is that it’s going to be CPI. Most of the derivatives out there are pegging a 2% to 3% CPI by this summer, which to me sounds incredibly aggressive, but that is consensus. So, we’ll see if that happens or not. Now, amazing if it does. If it doesn’t and inflation sticks here…these high multiples are challenging at any point, they’re particularly challenging if inflation stays high. The multiple historically is half of where we are now at inflation that’s above, let’s call it, 4%. So, not 6% but 4%. We’ll see, though. It’s who knows.

 

Colby: You mentioned before you were surprised that sentiment wasn’t worse last year. Any thoughts on why it wasn’t?

 

Meb: Yeah. I think two reasons, one, is investors are just fat and happy and complacent. And so you had a 10-year bull market. Pandemic was just weird, like, people didn’t even really know quite what to do. You had this, like, really fast bear market then back to bull. But that was, like, 3 times that happened the “buy the dip” in the 20-teens, right? I’m going to get the dates wrong at this point, but it was, like, near the end of the year in, like, 2014, 2018, and then again in 2020. So, people were just like, “All right, anytime the market goes down, “The Fed’s going to save them,” whatever. The Fed doesn’t care about your portfolio, let’s be clear. And so, you know, I think they were just kind of complacent, they made a ton of money. On top of that, the amount of stimulus we had, like, record savings during COVID, which is going to bite everyone in the butt, right, it’s going negative now because people hedonically adjust, right? They say, “Oh, I got all this money.” Three months later, you’ve mentally spent it or adjusted to your new lifestyle and Peloton.

 

So, the good and the bad. We’re sitting back at U.S. stocks. U.S. stocks, market cap-weighted, are still expensive and vulnerable in our opinion. The good news is value stocks within the U.S. is still a massive opportunity. I think if you look at the research from AQR, from Research Affiliates, GMO, stuff we’ve put out, Wes, others, you know, you’re, like, top decile still for the cheap stuff versus the expensive, you know, despite how nice of a run value has had the last couple of years. So, we expect that to continue for the foreseeable future, which would be awesome, you know, a nice tailwind to continue investing in the cheap stuff. But no, I had a quote in the journal the other day where it said something along the lines of, you know, they’re asking about risks and where are the big risks. And I think they were talking about foreign markets and emerging markets and, “Aren’t those risky, Meb?” because I said they’re a lot cheaper. I said, “Foreign developed is cheap.” Foreign emerging is screaming cheap, particularly the value cohort in both, I mean, they’re like in the bottom couple decile. So, forget top 10%. It’s like bottom 5%. I mean, some of the dividend yields and these are 5%, 6%, 7%, 8%.

 

But they said, “Isn’t that risky, Meb, you know, looking at what happened in Russia and just foreign markets in general?” And I said, “The real risk has been and will always be buying expensive investments.” And so you look at a chart of, like, what happens when you buy price-to-sale stocks above 10 historically and it’s awful. I mean, it’s like it doesn’t even keep up with T-bills and yet people were doing it hand over fist. We have a great Leuthold chart that’s top 200 tech and internet companies trading at price sales over $15. And you saw it go nuts during the internet bubble and then nothing, and then this last blow-off in 2021, go right back up crazy. And so that’s always been a horrible idea, but we seem to not learn that lesson.

 

So, anyway. So, I think there’s a major opportunity in foreign developed and emerging. Oddly enough, it feels like the emerging market narrative is shifting. I’ve noticed the sentiment in the past few months and nothing shifts sentiment quite like price. So, you know, we talk often about value and then momentum and trend as the yin and yang of our investing universe. And often they don’t overlap, but sometimes they come together. And over the past three or four months, we’ve really seen a lot of foreign and emerging start to make it into the momentum models, particularly on the value side. And so as those have started performing nicely, I think the sentiment seems to be shifting. So, we’ll see if it lasts. I don’t know. But for now, at least, the cheap stuff seems to have the tailwinds. So, I like to say I come across as a pessimist because I always say U.S. stocks market cap-weighted are expensive, but at least right now I’m hugely optimistic on foreign and emerging, particularly the value side.

 

Colby: Listeners, we’ll add in show notes the links to the GMO and AQR pieces he’s talking about. So, just to confirm too, you don’t think value had too big of a move in 2022, and I guess trend following too. I mean, both of those did well last year. You don’t think it’s…what if I’m sitting here and I’m like, “Dang, I missed it. Let me go get back into maybe not Carvana, but some of these other wonky tech names.”

 

Meb: You want the same characteristics you always want. We talk a lot about shareholder yield. One of my favorite papers of 2022 was from Robeco and they called it Conservative Investing. And they took this sucker back to, like, 1860s globally. Okay? And they took the top 1000 stocks. They’re a low-vol shop, so they took top half of that from low-vol. They choose the best 100 stocks by shareholder yield and a sprinkling of momentum. And they found that conservative formula, it’s what they called it, outperformed, I think, every single decade. But the interesting part was, you know, when did the outperformance really come versus, like, the speculative names? And it underperformed in these romping bull markets, not surprising. It still did well, but it underperformed the speculative, but in moderate and particularly bear markets is when it really made a huge difference. And so you saw that in 2022, value creamed market cap-weighting in 2022. But if you think back to the internet bubble 2000-2003, like, small-cap value beat market cap-weighting by, like, 150% points, just an absolutely astonishing amount till 2003, and then for the better part of a decade. So, these things can last a while.

 

So, we have some charts, but, like, there’s AQR just put out, you know, global. And they all do it a little differently, so they do it industry and dollar neutral. That’s still on the top 94 percentile. If you look at GMO, they put the U.S.’s top 90 percentile emerging in Europe, again, top decile. I mean, they’re all still really crazy widespread. So, I think value investing and the way we do it is, obviously, we want cash flows, we want companies that, you know, return those gobs of cash to shareholders, but are also trading at cheap valuations and not doing it with a ton of debt. To me, that’s good for all the time, but particularly right now, it was like we were tweeting… We wrote an email last year or maybe the year prior, they’re starting to blur together, but it was called something along the lines of, like, “If not now, when?” Right? If you’re going to do value, like, you’re going to do it last year or the year before, or you’re just never going to do it. There’s never a better opportunity. And I think I like to pick on them, but there’s a particular robo-advisor that, like, literally at the peak of the turn in value was like, “We’re removing value from all of our models because it’s demonstrated, like, it doesn’t work anymore or something.” And I was like, “Oh, my God. I can’t believe you timed this as perfectly as you did, but thank you.”

 

My favorite stat of 2022, which sounds so fake I had to test it myself, was from a podcast guest, Chris Bloomstran. And he said, “Berkshire Hathaway has had classic value manager who’s been buying some foreign stocks, by the way, a recent Taiwan semi and others, Japanese companies, said, “Berkshire Hathaway stock could decline by over 99% and still be beating the S&P since inception.” And I said, “There’s no way that’s true.” And I went and looked at it and it was actually, like, more. It was like 99.5% or something and I said, “That is astonishing.” It just goes to show a little compounding edge over time makes a huge difference. Anyway, so, the long part of that is we think the value is a huge opportunity. Interestingly enough, this is mid-end of January, you know, U.S. stocks, when we do the quadrants, right, were expensive in a downtrend and they look, starting 2022, to be re-entering an uptrend, which surprised me as well as anybody, but who knows? And then foreign is cheap uptrend, emerging cheap uptrend. To us, that’s really where you want to be, but, you know, kind of with your lead to trend, you know, trend dominates our models. Our flagship strategy called Trinity puts half in trend, which I think is more than any advisor I know in the country. And trend as a strategy is one of my favorites and, statistically, I think the hardest to argue with as the best diversifier to a traditional stock-bond portfolio. Why it hasn’t been commonly embraced across every advisor in the world, I mean, I have my thoughts, but it’s odd. And 2022 is another monster year. It goes through its periods of underperforming or going sideways, but when it hits the fan, it almost universally really shows up in a big way. So, 2022 is a great year for trend styles.

 

One of my favorite examples is, you know, another podcast alum, Eric Balchunas, you know, was talking about it this year on Twitter and he was like, “Are there any good examples, though, of trend followers that have, you know, been around for a long time, like, 30-plus years?” And I was like, “Yes, actually there are.” And I made a list. It was, like, Dunn, who we’ve had on the podcast, that group, Chesapeake, Jerry Parker, some others, Transtrend, I think, maybe… Who else? EMC. Anyway, I looked it up because I was going to post something because that’s almost 40 years now for Dunn. Dunn did 60% last year, like, just astonishing to me, just a monster year. And everyone gets excited about trend often because, you know, they get long the weird stuff, whether it’s commodities, which most people don’t have, or other weird markets.

 

Colby: I remember Eric Crittenden talking about carbon credits too, some wonky stuff.

 

Meb: The wonky stuff, but even better is the examples of being short too. So, being short bonds in this particular cycle was a monster trade, which really would have hedged a traditional portfolio, which is why it’s so beneficial because everyone has U.S. stocks and bonds. Anyway.

 

So, trend had a really fantastic year, which is good to see that all our trend friends are surviving and thriving, but, you know, we think…people always email me and they’re like, “Well, Meb, what do you think about this fund? What do you think about that fund?” I say, “Look, I’m not here to give advice. We never talk specific funds.” But one way I think about managed futures as a trend strategy to include is say, “Look, buy a handful of them.” Right? I don’t think you are ever going to pick the best manager, like, you’re not going to go put all your money if you’re going to buy, like, active stock pickers. You’re never going to go just invest in one, maybe Berkshire, but really if you’re going to buy, you diversify. And so in my mind, like, you want ones that look like the SocGen, Société Générale has a few indices that go back many decades that track the CTA industry. They have one called the CTA index. There’s the Trend index. There’s BTOP50. But you want ones that track the broad indices, right, because they’re ones that track a lot of the major CTA players. Anyway, there are a handful of funds out there and I want kind of a high correlation to that. I want the beta of the trend world. I think 2022 was…after living through the craziness and the meme stocks and SPACs and the insanity, I feel like the world is sobering up a little bit or feeling a little more rational, which I think is a good thing.

 

Colby: Or maybe they just have a bunch of VC and private equity investments, maybe some private REITs and those are still just crushing it in the last year, so they’re happy because of that.

 

Meb: We had another tweet today where… Your reference to the private REITs, you know, there’s been a handful of people that have been kind of all over this topic where, you know, I consistently get spam emails from asset manager marketing and I say, “Look, if you’re bold enough to put me on a spam, you better at least…you’re going to get it if you send me something sketchy.” And so over the years, you know, I have no problem calling out the kind of bad behavior. We had one on Twitter that we revealed to be a fraud that ended up being a $250 million scheme out of Texas. No whistle-blower award for me because I did it on Twitter, right? I didn’t go through the SEC. Darn it. But at least we got that shut down a week later, by the way, which was cool. But we regularly talk about others that are doing really sketchy stuff. And there was one today, the private real estate space and the private space, in general, does this sort of wink-nod behavior.

 

And Cliff Asness just put out a paper where he’s got a great phrase called volatility laundering. So, if you’re investing in U.S. stocks or REITs, I mean, you’re looking at 15, 20% plus volatility. REITs in 2008 went down 70%. So, they’re not without volatility. So, forget that notion. But also included in that is private equity. These things get valued once a year, and so a lot of people can kind of claim, “Hey, this has a vol of four and biggest drawdown ever is, like, 5%.” And I’m like, “Look, you can’t say that with a straight face.” And I would guess that the SEC and FINRA gets a lot more considerate about the claims that they make about some of these because they know it’s not true, but they get away with it because people have done in the past. Anyway, Dave Waters tweeted out from a private REITs website, A, they included a testimonial, which is already used to be illegal and now is already kind of sketchy. I don’t think you can do this at all. But they said, “Look what some of our satisfied REIT investors are saying. “I have never lost money with RAD Diversified. I know that no matter what, they’re not going to let me lose money” as if, like, that’s what they get to choose.

 

Anyway, it’s affecting the big boys too because Blackstone and KKR both have these giant REIT funds and they’re having to gate them, which by the way, listeners, another benefit of ETFs is you’re not going to have someone tell you when you can have your money back. And it becomes a big problem because there was a chart where, like, Blackstone was like, “We’re up 10% on the year.” And everyone else is down 20%. You’re like, “Hmm.” You just haven’t marked them yet. And so the same thing happens in private equity. There was a group we were chatting with the other day where they said the bid-ask spread on a lot of venture capital, secondary market transactions is one of the highest it’s ever been. It’s 20%. Now, in this case, it’s a little different because it’s the employees or people who mentally have anchored to the valuation they had. “So, hey, my Peloton…” It’s not private, but let’s say a private company that was doing well that’s no longer, “Hey, this company is worth $1 billion, but people are only willing to buy it for $300 million. I’m not selling. I’ll sell it for $900,000,000.” And so people get this, you know, sort of endowment effect.

 

Anyway, it’s a problem in the private markets where unscrupulous people will use the fact that they can price these sort of casually the way they feel like. The knock-on effects you’re going to see is that all the institutions, usually, that only report once a year report in June or July of each summer. And so the marks that didn’t hit last summer are going to start to hit this year. So, you’re going to see some of those portfolios get marked down this year would be my best guess. I don’t even know what led into this conversation, but we ended up on REITs and Blackstone.

 

Colby: It’s funny because the other day I was going through doing a little January cleaning and found some of my old baseball, football, basketball cards from when I was younger, and I was like, “Oh, these are going to…” It still has the sticker of what I, you know, bought them at some trade show for, like, 50 bucks when I was a kid and now it’s $25 on eBay and I’m like, “It’s not $25, it’s $50,” because I bought it 30 years ago and it’s…instead of the Kobe Bryant rookie card, it’s actually, you know, Blackstone with BREIT.

 

Meb: Yeah. Yeah. Well, I mean, that’s the thing. We get attached and, you know, it drives a lot of human behavior as investments. I mean, we did a poll on Twitter. We said, “Do you establish your sell criteria for when you make an investment?” And it was like 95% said no. And, you know, that’s important, not just from the bad side, if something goes wrong or goes down, but also the good side. If something doubles or triples, are you going to hold it? Are you going to sell some or? It causes so much unneeded anxiety. I don’t wish it upon anyone.

 

Colby: Agreed. Well, how about we do some Q&A? We got a lot of questions to the…

 

Meb: Sure.

 

Colby: I know you posted you got some DMs on Twitter. We’ve got a ton of emails at feedback@themebfabershow.com. So, I’ll ping you with a few real quick here before we wrap up. How do you reconcile the differing opinions from global macro experts? And I think this is, like, people in general. Zeihan and Gave had different views on China. So, how do you kind of listen to folks for those sorts of things? And I know, obviously, you’re not trying to time the Chinese market, but just in general.

 

Meb: I mean, look, macro is endlessly entertaining because it’s full of interesting narratives mixed with history and intrigue. Some of the listeners, if you haven’t read the old Adam Smith books, they’re fantastic, you know, macro stories, fiction, of course, but they’re really awesome. And it’s coupled with the fact that most macro players that are still in business are wicked smart, some of the smartest people in the world, they’re confident, they have a lot of money. So, all these things combined make for a great story. I like to poke ones that make claims at times. And co-CIO of Bridgewater, Bob Prince, had said, 2019, a very strange statement given the fact that Ray Dalio is such a student of history. He’s like, “The boom-bust cycle is over.” And I was like, “What in the entire arc of history would give you a hint that somehow capitalism and free markets and the way the world is progressing is not continuing along this…like, every year there’s boom-bust going on. What are you possibly talking about?”

 

And, of course, it was in Davos. And Davos is going on again. And I saw a headline that, like, it says, “Bob Prince has exclaimed that the boom-bust cycle is back.” And I was like, “Immediately after you said this we had a bust boom, we had this giant COVID pandemic, you know, that was, like, most life-changing economic environment, you know, and, like, now you’re saying…” Anyway. So, the macro crew is always fun to listen to, but to me it’s like the exhaust, right? Like, you got to have your rules and your systems, otherwise, you’re just kind of, you know, wandering alone in the wilderness. And so do I listen to all of them? I do. Do I incorporate ideas or concepts into our business? I certainly would if I thought they were structurally useful. But the vast majority of what we do is built with the intent of incorporating what we want to incorporate already.

 

So, trend following, my favorite quote on that, I think it’s Ned Davis where he says, “Price is unique as an indicator and that it can’t diverge from itself.” So, you got value. Value spreads can always get wider. You’ve got interest rates, they can always go up and go down, right? Like, yield curve. Like, all these things, fundamentals, sentiment, they can all be a good signal, but they can all get crazier. Price is the only one that, you know, is the determinant, right? And so we like to listen, but none of that has any impact in what we do. Now, again, if there was a structural change, and so I say this with shareholder yield strategies, there’s a reason why shareholder yield, we think, is a superior strategy to classic dividend strategies, and it’s because it incorporates pieces of structural change in markets in the 1980s that changed markets forever that people are now ignoring, which is crazy to me. So, if we saw something structurally happen, we say, “Okay. Well, let’s incorporate that information.” We’re not going to ignore it, we’d be ostrich investors. But as far as all the narratives and opinions, it’s fun to listen to, and it’s good theater, but we certainly don’t use it in any way to run our business or investments.

 

Colby: Let’s do one more here. This is from someone, “I know you talk about your venture experience in terms of education, but to the extent you see it as an asset for long-term allocation, how do you think about the high fees?”

 

Meb: So, I’ve chronicled this quite in detail over the years. We had a post that I think summed it up nicely called “Journey to 100X.” I think I’m up to, like, 350 investments over the years. There have probably been about 40 exits. I’ve detailed really at length the reasons why. And listeners, there’s a podcast too, “Companion for Journey to 100X” if you want to go deep on it. I think everything needs to be viewed… As much of a proponent of low fees as I am, and I am, everything needs to be viewed through a lens of net of all fee returns. So, I often get tweeting about the boring stuff on Twitter about mutual funds versus ETFs, that, “Hey, it’s a fee difference, but also a giant tax difference.” And talk about how boring, like, what a most boring thing. So, you do have higher fees in angel investing if you’re paying someone carry. Twenty percent carry is significant, right? That’s a fifth of all your future profits get locked off. But there’s two parts. Like, if you’re investing in companies that are $10 million to $15 million, I wouldn’t have access to those otherwise. And those often are small enough, they give you the room to really grow. And if a company goes from $10 million to $1 billion or $5 billion or $10 billion in market cap, I don’t want to say it’s not going to matter if you paid carry or not, but it’s not the determinant if the choice was, “Do you see this investment or not?”

 

But the big takeaway, and I did a tweet where it’s, like, here’s the best to worst structures if you’re going to invest in equities from a pure after-tax benefit. And one of the best…in a taxable account, so ignoring tax-exempt accounts, obviously. But number one was sort of QSBS. And listeners, if you’re not familiar, you can Google our old episodes, Qualified Small Business Stock. There’s a big tax benefit if you’re an angel investor investing in companies under $50 million and you hold them for a long time. And I think this is one of the most impactful pieces of legislation. I think it was under Obama and Cory Booker helped get this through that really, I think, is a monster benefit to early-stage entrepreneurs as well as investors. So, I think the tax benefit outweighs as well as the structural setup, the carry.

 

Now, would I prefer, if I ever get to size, to be a direct family office investor that doesn’t pay the carry? Maybe. But also, I wouldn’t… Mark Cuban said this, he’s, like, talking about investing in a fund. He was like, “It gets me in rooms I would never be in.” And so I’ve reviewed 10,000 decks over the past decade. Would I have ever seen those otherwise? No. And so I give credit to AngelList and all our friends we’ve had on the podcast that are angel investors that, you know, share these opportunities that we wouldn’t otherwise see. And then there’s the tangible benefits of, you know, adding products and services that we love that help the company and personal life and everything else in between. We even added a few of them. Colby put some discounts on, I think, the blog called Meb’s Deals. So, if you guys want some mushroom coffee or some other discounts…

 

Colby: At-home male fertility kits. Go ahead.

 

Meb: There you go. I’m going to give a shout-out, FabFitFun. My wife loves Kencko. It’s an amazing smoothie company. Massive success, by the way.

 

Colby: My wife loves them.

 

Meb: Oh, my God, it’s so good. Most people haven’t heard of them. They’re actually rolling out…I hope I’m not spoiling anything, I think they’re rolling out on Walmart this year. Walmart or Target. Anyway, check it out, listeners. There’s some cool stuff on there.

 

Colby: All right. Well, before we sign off, anything you watch lately, read lately, anything worth shouting out for people?

 

Meb: I think the two best things I saw in 2022…my wife always gives me crap. She’s like, “What do you want to watch?” And then she was, like, “You just want to watch Marvel or, like, you know, science fiction,” which isn’t true, by the way. But she’s a German philosophy major, so she will reluctantly admit that “Andor” was one of her favorite pieces of content last year. I thought it was really well written. One of the best Star Wars sort of series or movies that’s been out. We recently watched Banshees of … or something, the Colin Farrell, a really fun movie that we saw. And I’m blanking on one. There was another show that was fantastic or a movie that was fantastic. And what was it? I still haven’t seen “Top Gun.” I’ll tell you what, I couldn’t get through “Knives Out.” And that’s kind of ruined Rotten Tomatoes for me. Like, usually, I think Rotten Tomatoes is okay. And “Knives Out” had, like, a 90-something. And I was like, “What?” because I couldn’t even get halfway through this movie. Did you see it?

 

Colby: No. I feel like Rotten Tomatoes is more of, like, the… Is it the AAII sort of indicator? I feel like it’s a great contrary indicator.

 

Meb: I don’t know. So, listeners, you’re getting a good…

 

Colby: I’m mixing up what the pundits say and what Rotten Tomatoes says, so I’ll take that back.

 

Meb: Well, they have both. They have the critic score and the audience score.

 

Colby: Yes. Yeah, yeah, yeah. It’s the critic score, I think, is the reverse indicator. Audience score is you trust it.

 

Meb: And there was something else I’m blanking on it. This is a hard question for me, but other than that, listeners, come say hi in the real world. Check out our Idea Farm list. And we did a fun piece. If you want to get triggered, recently…maybe we’ll read it too, on the podcast. It’s called “Things that Meb believes that 75% of my peers, professional peers don’t believe in.” And we’re up to 20 of them now. So, if you want to find some non-consensus views, certainly there’s a long list as well. Colby, anything else?

 

Colby: That’s it.

 

Meb: All right, my friends.

 

Colby: See you in a month.

 

Meb: Yeah. Thank you. We’re going to keep our feet to the fire, listeners. Thanks for listening and good investing. 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.

 

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