Challenging Conventional Investing Beliefs with Meb Faber

[00:00:00] Welcome to Excess Returns, where we focus on what works over the long term in the markets. Join us as we talk about the strategies and tactics that can help you become a better long-term investor. Jack Forehand is a principal at Validia Capital Management.

[00:00:11] The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital. No information on this podcast should be construed as investment advice. Securities discussed in the podcast may be holdings of clients of Validia Capital.

[00:00:22] Hey guys, this is Justin. In this episode of Excess Returns, Jack and I sit down with Cambria founder Meb Faber. Meb started an excellent Twitter thread in 2019 and has continued since then, where he looks at the beliefs he holds in investing that the majority of his peers would

[00:00:33] disagree with. And we dig into it with him in this interview. We cover the Federal Reserve dividend investing, whether US investors need international exposure, trend following and a lot more. One of the best things all of us can do as investors is challenge our beliefs and be

[00:00:43] willing to look at the evidence on the other side. And Meb helps us do that on a wide variety of topics. We hope you find his insights as eye-opening as we did. Thank you for listening.

[00:00:51] Please enjoy this discussion with Cambria's Meb Faber. Meb, how are you? Thank you for coming back on Excess Returns. We appreciate it. What's up everybody? Great to be back. One of my favorite shows. Glad to be here. Happy summer. Awesome. Looking good. Looking a little tan.

[00:01:04] Hopefully getting some surfing in and get outside and enjoying it. But one of the things that I personally appreciate about what you do on the writing side, Meb, is you, a lot of times you'll put something out there and then it doesn't just get varied

[00:01:21] and lost. You kind of resurface a lot of this content and add to it. And one of the things that we thought might be fun to do with you today is, and I think you started this tweet thread

[00:01:33] in 2019 if I'm not mistaken. So it's been a few years but it's this list of beliefs that most people hold, I guess, near and dear to their heart when it comes to investing in

[00:01:48] the markets, but that you don't really agree with or maybe have a different take on. And so I think there's like 20 plus of these so we're probably not going to be able to get through

[00:02:00] all of them today. But we thought we could just pick and choose and let you riff on some of these because I think some of them are certainly a little bit more non-consensus.

[00:02:09] Yeah. The goal when I did this, and I think as much as people love to give a hard time to the Thread Boys today in 2024, I mean we had a four-part series that must have been

[00:02:20] it's probably 300 tweeted tweets. We may have the record on Twin for longest tweet thread but this one is fun and the original goal was like if you sat down in a room of your peers so you went down

[00:02:33] to the pub, you had lunch, you're in the boardroom and you said something, the vast majority of the people would disagree, shake their heads, say no you're an idiot. So let's

[00:02:43] call it two thirds, three quarters. So on a podcast of three people I know you guys are like-minded but you know at least one maybe two of you should disagree with most of these that's kind of my

[00:02:53] intent. So listeners play along at home when you hear this think for a second and say ah is Meb an idiot or do I actually agree with this? I imagine you're going to disagree with most

[00:03:03] but keep an open mind this will be fun. Well I mean so you wrote this first one I'm just going to pull let's start like macro a little bit because that's kind of front and center

[00:03:11] in today's market the Federal Reserve has done a good job. This one might not be 75% I think this one might be literally 100%. I don't know a single person that agrees with this and you know I think

[00:03:23] it's less that I believe they've done a great job it's more that it's like talking politics everyone can look back and Monday morning quarterback and say hey this was stupid the rates were too high but they were too low for too long therefore these 20 things terrible happened

[00:03:43] and this world would be amazing only if they had raised earlier or they'd cut earlier and it's funny because Tom McClellan one of my favorite market technicians, chartists he's got a great chart where he overlays the two-year bond yield and the Fed funds rate and I will

[00:04:03] challenge any listener to be able to distinguish between those two lines now there's times when one is higher than the other such as right now recording this early August and the two-year yield is

[00:04:18] decently below the Fed funds rate but we've always joked for a long time on the podcast the Fed just gets together drinks a six pack watches Seinfeld hangs out and then they just kind of

[00:04:28] eventually peg it to the two-year eventually catch up but my point being is that I think you could probably automate it you could put it on systematic autopilot and do the same job but as far as where's your B I believe it should be cutting right now

[00:04:43] that's only because the two-year two-year says so so this one might get you a little slack on Twitter we'll see but because the dividend those that love dividends might come out of a woodworks year but number one on the list

[00:04:57] was investing based on dividend alone is tax inefficient and a nonsensical investment strategy so you know we wrote a book a decade ago called shareholder yield a better approach to dividend investing and that's a pretty ballsy subtitle right because Morningstar did a recent

[00:05:16] report where they outlined they're looking at dividend funds and there's over 300 of them managing over a trillion dollars right so you're kind of coming at one of the most beloved brands and narratives of the past 100 years right and so we're updating this book listener

[00:05:35] so hopefully it'll be out before year-end but you can download the last version free online but in the beginning we demonstrate we say hey look you know here's your return if you only had

[00:05:46] price return of us stocks for the past 100 years then here it is if you and reinvested the dividends now the key phrase in all of this is reinvested dividends and I've been combing through

[00:05:58] a lot of the academic academic literature and the consensus seems to be that most people don't reinvest their dividends at least in the same proportion of what they invested in you know

[00:06:08] and if and the fantasy I think most people have is of the dream laying in bed you're like oh I just can't wait till I get to Hawaii sitting on the beach drinking pina coladas letting that

[00:06:20] sweet sweet passive income roll in right and so there's nothing wrong with dividends they are very much a part of the investing stream but if you live in a high tax state like I do in California

[00:06:32] the last thing in the world you want is dividends and high dividends and so do dividends out perform historically meaning high dividend yield yes they do now that factor as we all call them

[00:06:46] tends to put you in a little bit junkier companies right but it gives you this value till which in my opinion is really what you're looking to get right you want to be

[00:06:56] have that value till but if you're going to do value my opinion is always just do value don't do a cousin of value dividend yield and so there's a million different ways you could do this

[00:07:07] offshoot where you know we wrote probably our least downloaded or read paper was one that was targeting no yielding stocks and we said hey if you did a value till and and targeted no yielding or low

[00:07:22] yielding stocks you ended up with a higher after tax return and a taxable count than if you invested in high dividend yield or the broad market you know so there's all sorts of different

[00:07:34] ways you can go this but the whole key being that I think you know the analogy we use in and then the book update that's an old blog post is we liken it to the old coke Pepsi taste test you guys remember

[00:07:46] that so for the young for the young listeners under here don't know what this is you know everyone prefers coke and if you do a blind taste test most people prefer Pepsi and but then you reveal

[00:07:59] it most people go back to coke and a lot of this has to do with branding I don't know commercials marketing what your parents maybe you just like Warren Buffett big big Coca Cola drinker anyway

[00:08:11] I think it's the same thing was true with dividends they have a great narrative a great story don't even get me started on buybacks because that's the next 50 minutes of this this discussion I'm trying to keep these short because we got 20 of these but

[00:08:23] it's if you do the whole column list of things that are horrific terrible no good very bad ideas and the other list is things that are probably totally fine look dividend investing is totally

[00:08:36] fine it's not the worst thing in the world but if you if you get me into the is this optimal in question and why are why is why are there better choices there's there certainly

[00:08:47] I think better choices and better ways to do it yeah we deal with this as clients like regularly like they think of like magic money or something like this money is just put in their

[00:08:55] account and it's just amazing and like there's no negative consequences to it and then when you break it down like the way I always like to ask people about dividends is like tell me what they

[00:09:03] do for you and then ask is there a better way to do that so like getting back to your point about a value factor or a dividends are a value factor but are there better value factors

[00:09:11] than dividend there are like all right I want money you know I'm withdrawing money from my account I want money put in my account well are there ways we can create like synthetic

[00:09:18] dividends you know in a tax efficient way that are better and I think when you look at it that way you realize like most of the things dividends do there's like another way you can do them

[00:09:25] that's probably superior to what dividends do you know I think the more I the more I've noodled on this I think if you had to poll most individual investors and probably not a trivial amount of professionals as well I'm guessing they don't understand that dividends

[00:09:43] are a return of capital I think they probably think that you got $100 stock and they're just paying you earnings as if like you have a house rental property or something right I think that's what they think and so that disconnect I think is is probably where 90%

[00:10:00] of it is I think they think they're getting paid to own this thing in a way that's not reducing the actual stock value by the amount of the dividend you know no one understands

[00:10:09] this more than Buffett I mean we must have you know a Buffett fanboy just like everyone else although if I had to pick one I would pick Charlie I love Charlie but you know we probably

[00:10:20] have 10 20 quotes in the book from Buffett and you know he jokes at Berkshire he said Berkshire has only paid a dividend once and he was in the bathroom you know when they decided it he's

[00:10:30] like I must I would never have chosen this because you know he understands that this he doesn't want to pay taxes on these dividends he thinks he can compound the money better

[00:10:40] internally but on the flip side they've done a ton of buybacks and buybacks you know he has a really great approach where he's thoughtful about the valuation you know it's what a 1.2 times book

[00:10:52] or below where he'll load up the truck and buyback stock which if you're going back to that whole narrative co-pepsy is really a tax efficient or flexible dividend is the best way to describe a buyback buyback is the worst way to describe it tax efficient flexible dividend

[00:11:09] that you're getting for 80 cents is a much better way so I could wear shirts that I love dividends but you know I don't want to offend too many people on my opinion you didn't even mention dividend

[00:11:21] growth which is a whole other ball wax yeah well if we do that on a different one just so I can get to number three here but uh yeah this one's good and we can get we can get a little

[00:11:29] exciting here now and get into market manipulation because uh this one which I believe you wrote in 2018-2019 was uh everyone loves to complain about manipulation the fed wall street bets yada yada markets are functioning as they always have which is normally short squeeze question mark yawned

[00:11:43] and going on forever so this was um in reference to particular I think events this was like meme stock mania and I kind of mixed it up with a lot of the the meme stock crowd

[00:11:56] it was really frustrating to me because you know there was this whole quote movement and you know a lot of what people purported to be the good guys were the wolf in cheeks clothing

[00:12:06] robin hood certainly does drawn my ire over the years um where all of a sudden you have this entire generation of young people learning about investing but learning it with all the wrong

[00:12:18] you know lessons and kind of through the casino doors they were enticing everyone to come in so that this particular one was talking about things like short squeezes you know and and

[00:12:27] if you study history and read about markets and all the famous craziness and crashes my favorite book triumph the optimus like even this past week there's people are like oh these unprecedented moves

[00:12:38] in markets I said what are you talking about markets you know like you look at the US they they've gone down five 10 20% before in a day so you know let's not um these little two three

[00:12:48] percent jiggles come on that's that's not even a top 1% down day anyway um so it's talking about short squeezes and you know looking at um some of the other events in history and and look

[00:13:01] futures always going to be different of course but it certainly rhymes in many ways I think my favorite short squeeze stories is Volkswagen which was orders of magnitude bigger than a game stop was

[00:13:12] but uh you know being aware of the history of these stories I mean look it took down multi-billion dollar hedge fund right uh you know and and um but he should have known that lesson

[00:13:25] like he should have never been in that place and if you study enough history you as a one as someone is systematic you start to build in the guardrails and understand um that having been

[00:13:35] said still got to be a comedian to understand that the future will be different but most of the things that people think are different have happened many times before deepening how do you think about this idea of like things happening in the market that have never happened before

[00:13:49] like we've heard a lot of that recently we had a day I think the Russell was up 3% and the FNT was down I think it was the second day in history we just had this blow up in the market

[00:13:56] recently with the n carry trade like people are talking about people are using options way more than they used to passive investing is affecting the market I mean do you think any

[00:14:04] of these things change the way you look at investing or do you think all this is sort of consistent in what we've seen in history I mean look I think the first goal is study as much

[00:14:12] as possible I mean and not just you know a casual one market you know the dozens of stock markets around the world not just stocks bonds bills commodities real estate little bit of everything right like thing back 2007 everyone just that mindset real estate can't go down

[00:14:31] you know what a crazy input to the models like why would you ever assume that that's just totally nuts um and look at all the ways that people got upside down but it's it's true

[00:14:40] not just from the defensive side which is what we spend most time thinking about but it's true from the offense side to uh where like a good example I remember talking about during the last election

[00:14:51] two elections ago right after Trump got inaugurated I think the stock market went up like 17 months in a row or something it was it was a record I forget what it was but it was a record and you

[00:15:00] know who would have expected that I mean if you remember that night futures were kind of crashing going down Carl icon uncle Carl famously drinking martini leaving the party to go buy

[00:15:11] futures um but I think there's uh again there's there's an element of history that yes you understand that things will always be different and so you build in that buffer you know where um you

[00:15:25] don't want to be all in one country we say hey look Russia just went to zero well I mean that's happened before of course Russia's stock market's gone to zero before but um you know understanding

[00:15:36] that putting all your eggs in one basket perhaps maybe maybe not the best idea either that's the best for all my crypto friends listening uh you know putting all your money in in one investment

[00:15:47] it may work out but the amount of concentration examples where people go broke from having an obscene amount of welsh is astonishing like that always uh surprises me the the reach

[00:15:59] the recent um who just put this out you can put in the show note links maybe it's Forbes fortune somebody about the arch no I maybe I think it's Bloomberg a profile the archegos in real time

[00:16:10] kind of history I mean what a that was like a 30 billion dollar family office that just imploded over the course of like two weeks that's a really fun story but yeah again most of these lessons

[00:16:22] I think are lessons that um you know you err on the side of caution it's like buffing when he talks about like catastrophe bonds he's like look these are only going to happen a couple times

[00:16:31] a century we write this insurance and then we could basically double you know the the safety zone buffer so because we don't know exactly the the specific odds on these kind of rare tail events

[00:16:43] on both the downside as well as the uh upside too hopefully we can find some I disagree with you on here uh so far I think we're three for three with uh me agreeing with you but this

[00:16:52] next one maybe depending on how we look at it so uh the next one I'll let you explain it and then I'll explain why uh the next one is trend following strategies deserve a meaningful allocation

[00:17:00] to most portfolios you know I think this one we're probably the biggest outlier that I've ever met as far as an investment advisor and professional asset allocator as far as percentage they allocate

[00:17:19] to trend and I'm not talking about a trend following only manager that puts all their money in trend right that's that's kind of like a founder or entrepreneur putting all their money in their

[00:17:28] own company but someone an endowment an institution a sovereign family office uh our default allocation for our our what we would consider to be our flagship allocation model we call it trinity is half and I think um most people if they've got the trend following bug are probably 10%

[00:17:54] 20 if they've drank the Kool-Aid and are totally all in you know we could go down a different rabbit hole and talk about how market cap waiting is trend following but uh that's that's

[00:18:03] probably a whole another bullet point um but to me it's hard to look at the evidence hard to look at historical studies and research and come up with any other conclusion and and the

[00:18:13] reality is most academics and big banks that do the research come to the same conclusion but then they say hey well this is just un-palatable we can't we can't put this much in uh because no one

[00:18:28] would be comfortable with it so we're going to constrain it at 10 or 20 percent or something um but listeners if there's anybody out there that puts 50 percent or more in hit me up I'm always looking for like-minded crazy crazy folks but for us that seems like a sort of

[00:18:43] nice yin yang balance with the other half being a buy and hold as well yeah I think like from a theoretical standpoint it's impossible to argue with you that you've you put this in any kind of

[00:18:52] portfolio optimizer whatever I mean I mean trend following has a similar return to the market with significantly less drawdowns um you know it's hard to argue with it the the only and we run a bunch of trend following too so I'm certainly in your camp on this one

[00:19:03] the only argument I have is I've seen firsthand how tough it is behaviorally for people and so the question is you know that theory doesn't overcome the behavior that you know the fact

[00:19:12] that you're going to save tons of money in 2008 and then have all these you know small small like cuts for a period of time after that can people stick with that to be able to realize

[00:19:21] those returns yeah I mean and the cool thing about trend you know it's I love it when there's a journalist or somebody particularly the younger crowd and they're like well trend

[00:19:29] following that you know just doesn't have a long track record or whatnot and then you know you point to some of these guys that have been around since the 1980s um you know with 40 plus year track records

[00:19:41] and my favorite story of this year I think it's still my favorite story of 2024 was Mulvaney where you had a market and if the listeners that aren't that from where you know trend following being long and short trade most markets around the world you know historically

[00:19:54] Coco being a market that hasn't been particularly trendy and yet it just had this monster move this year uh in Mulvaney you know I said I don't know anyone who's got a 30 40-year track record

[00:20:08] and he posted something like 40 back to back months right just like an astonishing example of uh you know these these old school cowboys like to me most of the cowboy hedge funds the

[00:20:23] days your don't exist as much anymore and so I love that story but we're we're currently trying to produce a history of trend following documentary that's a bit AI assisted uh we'll

[00:20:36] see how the quality turns out but I'll certainly share it with you guys it's supposed to be done by year in maybe 20 30 minutes um I'm uh as with a lot of my projects yeah I got about a 50-50

[00:20:48] hit rate and whether they come out it's like my nubs half is inedible half turns out pretty good so we'll we'll see how this comes out let me um jump in with one jack because it kind of relates to that

[00:20:59] behavioral thing but um this one may be reasonable timeframe to evaluate a manager strategy is 10 or maybe 20 years well you know we just did a podcast with Ken French and he said the answer was

[00:21:13] actually 64 years uh so you know I tend to be you know it's much much shorter I'm a piker I'm much shorter timeframe than he is you know I think we we have a new piece that should be out momentarily

[00:21:28] which we we have over 150 000 investors and we have conversations all the time with investors and you know I think most investors want to do the right thing they want to be thoughtful but we're still human right and this doesn't just apply to individuals this applies to institutions

[00:21:45] we see it all the time even at some of the biggest real money institutions all around the world and their favorite thing to do in the entire world is chase performance right you you find a shiny

[00:21:55] new object shiny new manager who's done great for the past usually it's three years um and uh and then you have your idiot college uh college friend who you allocated to and they're terrible

[00:22:10] for the last three years and then you swap the two and of course all the research shows what happens is you've probably been better off in the old one um because you get the mean reversion

[00:22:20] and there's just pounds and pages and feet of literature that supports you know kind of this concept and in bogel uh before he passed one of his my favorite you know uh in his one of his books

[00:22:33] you know he looked at the top mutual fund managers of every decade and then how they did the next decade and we all know the answer and how this is going they were amazing in the decade in the

[00:22:41] next decade the end are performed and you see it over and over and over again so we have this new new piece coming out called a guide to buying cambria ETFs and it's not in in in princes

[00:22:51] says or any investment but it basically says look let's walk through the four or five steps on how you should think about this investing decision because most people front-weight it they probably put

[00:23:04] 99% of their effort into what they buy and then as soon as they click the buy decision what's the answer is called just just wing it so the number one phrase we always hear and

[00:23:16] this is from pros too is a hey man i like your fun did the research read the prospectus visited you in california listen to your podcast read the white papers all this work bought your fun

[00:23:28] and we see how it goes right and it's that last part of the sentence that is the nails on the chalk for you say well wait what do you mean what we'll see how it goes like it's like

[00:23:39] respond like what can you i want to see this in writing put this in email because i'm going to shame you in three months when you're like oh this fund is killing me um and so we walk through in this

[00:23:48] paper we say look you know nobody has a written investing plan almost nobody establishes their cell criteria when they make a decision and so we kind of walk through how we think about it and it's

[00:23:59] funny because on the cell decision we say look there's plenty of reasons to sell an investment there could be cheaper options better exposures structural changes but for the most part on the time frame which people analyze them performance should probably not be one of them now this is

[00:24:16] total sacrilege almost no one in the world would agree with this statement whatsoever but the amount of information you're going to get from the next one three five even 10 years and an investment

[00:24:27] is probably not that useful and so if you think about all the reasons you bought an investment and it could be hey i'm going to allocate private farmland investing i'm going to buy a trend

[00:24:37] following fund i'm going to replace my s and p with shareholder yield write them all down and then kind of review them um i think it would change a lot of people's outcome and the way we describe it

[00:24:48] even the smart ones out there even the really uh honestly intentional good intentional people say look i'm process driven not performance driven and i say that's true on the buy decision

[00:25:01] it is not true on the cell decision and the best example of this i have is we manage 16 funds always something is doing great and something's doing terrible and a countless amount of times

[00:25:13] i've heard someone say hey meb i don't know buy your fund it's doing awful we're going to sell it you know it's underperforming it's underperforming the xyz index s and p our our friend whatever

[00:25:25] we're going to sell it the amount of times anyone's ever said you know what meb we bought your fund and it is just absolutely creamy the index all the categories you know and we've had

[00:25:35] these plenty of times over the past 16 years so you know what we have to sell it right no one said that ever like it's doing so great we have to sell it theoretically it should be a disqualifier

[00:25:47] on both sides but it's not it's never is so um i think uh i think writing down saying hey look i'm gonna give this a whatever no one's gonna do this but 10-year time horizon and here are the

[00:26:01] reasons that it could get evicted but uh but really i i'm putting in writing that you know analyzing this over the next year two years is probably gonna be a fool's errors now no one's

[00:26:14] gonna do that by the way i'm gonna have to force rank these 20 by the ones that the most people disagree with that might be a i have to really think about because this one you're not going to

[00:26:23] meet anyone in the world who's gonna be like you know what 10 plus here time horizon not a chance at least even if they say it they're not going to actually do it in the real world definitely

[00:26:31] right um and it's the challenge because something you know people after they make a decision like to see what's changing after they make the decision and what you see this changing after an investment decision is performance i mean that's the thing that's in your face that's changing and

[00:26:41] it's so hard to ignore that because it's it's really not a criteria you should be making decisions based on but it's what you're seeing yeah it's um it's a it's a constant struggle and i think a lot of

[00:26:51] the behavioral winks of private investments you know for all their flaws and fees and tax and efficiency on a lot of these but one thing they have going for them is you're stuck with them

[00:27:08] so part of that behavioral you know holding period is that you can't you can't do anything even if you wanted to so uh you know there's there's some there's some benefits to having these

[00:27:19] private investments too not not not one of which is 4% volatility just because you only look once a year but in fact you can't sell it maybe a feature not a bug this next one's interesting because we might

[00:27:30] challenge jack bubble a little bit here it's two that are combined together so it's us investors should be allocating a minimum of 50 of their stock allocation to non-us countries and it doesn't affect your investment outcome if you own us stocks you could own 0% and do just fine

[00:27:43] you know um we did a recent post which is called what if you own no us stocks it's a riff on an old post we did we love to do these little thought pieces particularly on twitter to get the pot

[00:27:55] stirred up and you know um let me lay a little foundation first you know i think one of the the biggest benefits of investing is you're putting money to work right and i actually

[00:28:08] don't think it matters the biggest decision of all is the decision to save and invest in the first place and the younger you are and the sooner you do it the more you do it with the better

[00:28:19] this is one reason housing is such a great investment uh it's reason stocks are such a great investment is because if that money's in your account let's be honest most of us are

[00:28:29] going to spend it i know my family will 100% if there's money in our bank account like that's out the door so having money put to work already to me is is trump's everything i'm about

[00:28:39] to say so yes yes us stocks have been one of the best performing assets over the past 100 years now it's not the best i think south africa and australia actually has better equity markets

[00:28:51] but uh it's certainly been one of the best um and so most us investors particularly over the past 15 years us stocks have creamed everything we wrote another piece called bear market and diversification looking at us stocks and they've done 15% a year since the

[00:29:06] bottom in 2009 just astonishing performance uh pat yourself on the back and so that's led most investors particularly in my country uh to put most all their money in us stocks and you know it's been fun and it probably will be fine over the next 50 100 years but it's led

[00:29:22] them to be expensive and the us is only one of let's call it 50 investable countries around the world but just to do a little fun thought experiment i said okay uh let's look at the global

[00:29:35] market portfolio so if you buy every public asset in the world that's roughly half us half foreign half stocks and half bonds now it's a little more us now and the stocks and a little less

[00:29:47] than the bonds but let's it's simplicity sake it's around that and i said you know what let's just kick out the us stocks so you're not even allowed to own us stocks whatsoever

[00:29:57] how does that change things and the answer is hardly at all and uh i think that would surprise most people to understand that you could simply invest in all these other assets our friends

[00:30:08] at lutho call this the donut portfolio so if you just x out us stocks and own everything else the equity curve line is near indistinguishable and i think the difference was about half a percent per year less than half is actually 0.3 percent per year over the last 50 years

[00:30:24] very similar risk numbers very similar drawdown numbers and then there was another thought experiment which you know we went through and we said could we replicate the characteristics of us stocks so

[00:30:37] the return the volatility of the drawdown but with no us stocks and it turns out you can't you know you do foreign stocks bonds reeds gold in this case we used a little leverage

[00:30:47] and you come up the exact same return string not i shouldn't say exact because that's totally different correlation but but i think that the takeaway for all this is you want to be asset

[00:30:58] class agnostic which i think is hard for most investors you know they they they want the warm fuzzy feeling of investing in what they feel comfortable with in their own country but to

[00:31:08] try to really drill this home with people we always use these little experiments where i say another favorite reason when i said hey 60 40 is because people love to rag on gold you know

[00:31:21] canadians they love it australians love it but the rest of the world loves to dunk on gold and they're like ah it's shiny metal can't do anything with it no yield but i say you know that the

[00:31:34] gold star institutional portfolio in the u.s and kind of everyone talks about is 60 40 still can't really find out where the origin story of 60 40 is but one of a very famous

[00:31:46] friendly investor that i know on twitter was talking about dumb gold was and you know i said i'll tell you what let's just go and replace the 40 and 60 40 with gold instead of bonds that must just

[00:31:59] totally destroy your return right like that's got to be what a dumb decision and it's indistinguishable you cannot tell the difference on the historical return stream if you replace your entire entire us bond allocation with gold and i think that would surprise basically everyone but but again

[00:32:18] it's another example is i don't think there's any single investment that is is you know required that you have to have and particularly right now the kind of the reason that we were discussing

[00:32:31] this is have to have at any price you know that's that's the thing that really kind of trips up i think a lot of people is that you know every investment is going to have its time in

[00:32:42] the sun and day in the shade but particularly when it when it gets expensive you know even bold will talk to god there's great video from the late 90s where he talks about market timing based on

[00:32:52] valuations which i know the bubbleheads don't want to hear but it's it's fun youtube so you can't just can't argue with it do you think there's anything to this idea that the us is

[00:33:02] just you know because of what we're doing on the technology side like going forward the us just has better companies like the innovations coming out of here so therefore you know the

[00:33:09] us dominance is likely to continue no and that's a simple answer but uh you can look at a lot of industries and and the top company is not in the us and if you look historically stocks by

[00:33:21] decade it's super fun you can find other decades where the list is dominated by other countries the favorite example course is japan and the 80s right top 10 market cap was mostly

[00:33:30] japanese companies at that point biggest stock market in the world in the 1980s um but look i i was joking on twitter the other day i say i'm so bullish on us stocks i'm going to put double

[00:33:42] the amount of any other stock market around the world i say screw that you know what i'm so bullish on us stocks i'm going to put five times as much as in us stocks as any other country in

[00:33:52] the world i said actually you know what forget it i just been watching cnbc ai special i'm going to put 10 times as much in the us as any other country in the world i go wait congrats you've

[00:34:04] just gotten to the market cap weight all right so like right there two thirds in the us one third and four and that's the market cap weight that's the starting point right you have 10 times as

[00:34:14] much in us as any other country and you know my example though of my friends talking about tech and whatnot i mean i was seeing looking at it was zimpic and and uh nobo and all these other

[00:34:25] countries i said i don't know why you would assume that big ai developments are guaranteed to be us companies you know to me it seems like uh you know that these discoveries if you said this is coming

[00:34:37] out of china or india or singapore or brazil argentina africa who knows um anyway uh but people would love to give me crap and say meb this proves last 15 years proves international investing doesn't work i said it absolutely proves international investing does work because

[00:34:56] if you were located in 49 of the 50 countries in the world god bless you you put two thirds your money in us stocks international investing has been a screamer there's only been one country that international diversification didn't help and so i'll take that hit rate 49 out of 50 to

[00:35:13] me seems like a pretty good uh batting average so international investing has worked particularly good uh the past 15 years so i'll do a couple more and then i'll hand it back to justin this

[00:35:23] was really interesting because there's a lot of people talk about the idea and rates have come up since you wrote this but they talk about the the relationship between low interest rates and what

[00:35:31] the stock market's doing and so your your statement here was high stock market valuations are not justified by low interest rates you know this this was a little bit of a nerdy wonky post it

[00:35:42] was actually one of my favorite posts of the past um five years and i think almost no one read it and if they did read it i didn't get any feedback i mean you guys can resonate with this you do

[00:35:53] podcasts and sometimes you're like oh man this one was amazing and then it's just crickets or you do some dumb tweet you know making a joke about the u.s or canadian prime minister or something

[00:36:04] and you know it gets a zillion views so um we wrote this paper which i thought i was like oh man this is peter butter jelly like this thing is is as good as it gets um and the takeaway was that for

[00:36:15] a long time uh i'm gonna try to get the exact title of this so i'm pulling it up it said stocks are allowed to be expensive because bonds yields are low and that's what everyone kept saying there i go

[00:36:30] stocks it's okay stocks are expensive because bonds are zero there's the tina trade there is no alternative and so we said okay well let's go back and actually just test this like what is what does

[00:36:39] this mean and i was like first of all this doesn't really this it's not what people really mean when they say this what they mean when they say this is stocks are expensive all right stocks are allowed

[00:36:49] to be expensive because bonds are yields are low therefore future stock returns are going to be okay and what we looked at and so we looked at this like 20 different ways is we said okay um

[00:37:00] you know historically when bond yields were low were stock future stock returns okay you know or good and it turns out they were and however historically the reason bond yields were

[00:37:14] low was because you had um a garbage last decade uh meaning the the stock returns on average when bond yields were low were awful the economy was awful you know you had um all these terrible

[00:37:30] starting conditions but the most important one was the valuations were low so we like to talk about the k per ratio but any other valuation metric so the starting p e ratio and a lot of these periods

[00:37:43] was around 10 and you can do this with almost any other study about anything looking at sort of these initial conditions you know we were talking about the roaring 20s the other day people kept

[00:37:54] making the roaring 20s comparison of this decade i go yeah the big difference in the roaring 20s is i think that the p u ratio at the start of the decade was single digits uh and it had this

[00:38:05] massive p e expansion whereas today we're sitting in the mid 30s you know so it's a totally different starting point as far as multiples and you know to even get to normal stock returns

[00:38:19] you don't need multiples to stay where they are they have to go up and so anyway the whole post walks through this there's a lot of great graphics and stats um uh and and i think this was published

[00:38:30] in 2021 and ironically the the valuation was 34 then uh and so you had kind of a full round trip because that 2022 was awful but then it rebounded uh but it's a really fun wonky long

[00:38:46] post so listeners you'll have to go uh spend some time on it because it would take us another 45 minutes on this on this one item that i i'm sure you don't want to don't want to stand on well this

[00:38:57] this next one is really interesting to me because it's something i struggle with all the time because as an investment advisor you want to invest in the same stuff you invest your clients in but then there's the other side of it is from your own personal perspective

[00:39:08] you're putting all your risk in the same stuff so uh what you wrote here was financial advisors and asset managers are forex leveraged the stock market and could slash should hedge that exposure

[00:39:18] or even own no u.s stocks yeah you know this is one that um i can kind of see some different perspectives on this i know kori our buddy has talked about uh you know he kind of takes

[00:39:30] a different angle than i do my whole my whole point of being with this is like we alluded to the home country bias earlier so if you're american you tend to put most your money in

[00:39:39] us stocks if you're canadian japanese on and on you put most your money in those markets but it's not just countries it's also sectors so people that live in the northeast the u.s put most their money

[00:39:50] in financials people out here in cali put most their money in tech people in texas put the most their money in energy on and on and so um i think that's a that's a leveraged bet but on top of

[00:40:02] that you know we were trying to make the argument i say let's say you're a financial advisor merrill lynch you know your revenue your fee based is directly tied to uh your investment portfolios

[00:40:15] and because your u.s base and home bias you put most of money in us stocks and because us stocks are more volatile volatility that portfolio is dominated by stocks even if you have something

[00:40:25] like a 60 40 so your portfolio is essentially us stocks um in addition to that you own us stocks in your own portfolio so your double leverage there so your revenue and your own

[00:40:36] net worth is tied to this third you go into a recession or a bear market all these things go down on top of that uh your clients love to freak out when the market's down 50 they may

[00:40:48] withdraw so your revenue goes down even more on top of that if you don't own your own company you might get fired because of downsizing or things like leaman happening where the entire company goes under so theoretically you know to me that sounds kind of crazy um

[00:41:04] and this has led to a whole slew of papers which i should probably update with this non-consensus views one of which being um you know the the what should you do with your safe money what should

[00:41:14] you do with your investment money and we walked through one paper that was talking about you know people assume it's short term bonds or t-bills and we said a diversified portfolio is probably

[00:41:23] safer but ironically you should want your investment capital to be doing great when your human capital is doing poorly right so at the bottom of 2009 it it you don't want your portfolio to be cut in

[00:41:37] half like that sucks it's like a triple weight that you're right so um there's things that I think that's particularly where things like trend following and other ideas come in um and and

[00:41:48] just to show you we put our money where our mouth is you know our our balance sheet at cambria uh you know we we put half of our um investment portfolio in currently is in trinity so our

[00:42:04] flagship allocation strategy so we invest it and the other half currently not quite half it's a little bit less is in us tail risk um and so because majority of our assets and exposure

[00:42:16] is us stock related our shareholder yield fund I think is a billion two or something which is you know almost half of our assets and so we we try to mentally edge now we own all of our

[00:42:25] own funds of course um but uh but it's it's a it's sort of a orbrit it's sort of a similar philosophy as michael sailor except he puts all of his money in bitcoin so it's the same

[00:42:37] same diagnosis same thought process but he comes up with a totally totally different conclusion you can you can even argue with respect to like the types of stocks too like I wish I had done this

[00:42:48] but like as someone who's a factor investor investing based on fundamentals you could argue like I should have held the mag seven or something in my personal portfolio just to give me like a completely different outcome than what i'm seeing you know in terms of

[00:42:58] like the stuff that actually it's tied to my human capital now I didn't do that uh but it's you could make the argument you should do it yeah you know I think there's um

[00:43:07] um it's tough because it also goes with you know what kind of quarry talks about is this concept or like I say like skin in the game where the average mutual fund manager has no money

[00:43:18] personal money invested in their own fun and I'm like that's crazy like why why would you invest in someone if they don't have any money invested in their own strategy and so but at

[00:43:28] the same time that's kind of where I get the argument from quarry where he's like well it's because you're the same thing mev you just talked about like you're all in

[00:43:36] you're doubling down on your own kind of strategy so anyway it's um you know I this is one of those ideas that I think is is fun to think through just on your personal and work level I think the

[00:43:48] most egregious example is someone who puts you know invest their entire 401k in the company's stock you know like the enron example where hey you work at enron and then you put all your money

[00:43:58] in enron uh that can work out you know a couple different ways one of which is you you everything goes to zero which is probably not the outcome that you know you really want mev don't you I remember from our last conversation don't you do like an annual

[00:44:15] submission of your resume to calpers huh I've applied like four times each now and and I posted a screenshot because I was like have I applied I was like yeah and um listeners you know Calpers is a good example of I think

[00:44:31] a real money institution that very publicly has all the struggles that most individual investors do it's just an example of like more money more problems uh and so they kind of just bumble along with this massive portfolio and we've written a series of articles I think the last

[00:44:50] of which should was called you know should Calpers fire everyone and just buy some ETFs and you know the conclusion is yes by the way um but uh but I tell them I said I'm going to

[00:45:01] apply for your job and I'm gonna um you know fire everyone sell all these high fee uh private equity funds that you guys are locked full of and and buy some ETFs and then just you know

[00:45:14] rebalance once a year etc um and we'll see how it goes and and they have yet to agree to even interview me they just send me these very polite we declined to interview again mev um and so

[00:45:31] they've forced my hand and I gotta be careful what I say but there there will be a very public investable benchmark comparison to Calpers uh hopefully coming out soon that they can then either with pride or embarrassment point to every year I come when they post their numbers

[00:45:50] and see if uh see if I joke I want to take out a big billboard right outside their office be like all right guys it's time can you beat me can you beat a low-cost ETF let's let's find out

[00:46:01] and uh but my my point being is a lot of these um big money institutions you know particularly when you're in the buying a hold world uh you know that we did a podcast with a Nevada uh guy who

[00:46:14] runs the Nevada pension fund and he's like the exact barbell offset Calpers and was so fun kind of refreshing uh to have the discussion with him um but yeah they they they're a fun punching bag

[00:46:27] for me for sure um you mentioned the caper a show earlier and you highlighted it in that article and by the way I just want to say I think you know what's great about this is every one of

[00:46:37] these points you know seems to be tied back to some type of article or content many of them are so you know our listeners can kind of dive what's neat about this is you can

[00:46:51] dive into these and then kind of go into something in a lot more detail on Cambria site because a lot of this is backed by research and articles you guys have posted but just I you know the

[00:47:00] caper a show is something I feel like we used to I used to hear a lot more about it and I just I haven't I mean you we're going to talk about here you brought up in the article but

[00:47:11] I don't hear a lot about it much lately am I right about that I got a couple I got a lot to say about this uh we have an old post where I eventually gave up talking about the

[00:47:18] caper a show because it like there's two things that fry people's brains in my world is buy backs and caper a show and we have an old post called um you know basically like FAQ on the caper a show

[00:47:30] and this has got to be like five seven years old now at this point so um it was like all all the questions you have about about a caper a show oh no this is from 2014 lord have mercy 10

[00:47:42] 10 years uh there's a picture of a young med camping and fishing in kings canyon in the sierra it's on this post anyway you know the first part is there's there's nothing particularly

[00:47:53] sacred about the caper a show I love it I think it's great but you could replace it with any other valuation metric and on average it should agree so we track cape we were I think the

[00:48:03] first to do this you can find this on a number of places online now uh we track caper a show for 45 countries around the world but we also track cap b cap s cap cf so 10 year price

[00:48:17] of sales price to book price to cash flow dividends all these different metrics they all say the same thing by the way they're on occasion they'll you know disagree a little bit but usually the

[00:48:27] correlation the aggression is is extremely high because if you have a country like today like india it's expensive on everything if you have a country like columbia it's cheap on everything

[00:48:36] sometimes in the middle you know they're they may disagree a little bit but the whole point of this discussion is you know how are you looking at value in general and you know um most countries

[00:48:50] most sectors spend most of the time chilling out in the totally reasonable range right uh and it's only on kind of rare occasions do they go totally baddie to one side of the other

[00:49:01] and we have plenty of examples in history where you get countries and sectors that get up into what is like true bubble territory to me which zero countries in the world are today which is over

[00:49:13] cape ratio over 40 um so just for prospective listeners on average capes around 18 uh you get low inflationary times it's around 22 23 um we publish we have an email list called the idea farm and we publish quarterly uh public uh cape ratio updates and i think the last one

[00:49:35] which isn't on the side for some reason but um you can you can go and download or look at all these different countries and so right now is an example where there's uh plenty of countries

[00:49:47] that are totally reasonable to totally cheap you got a handful that are kind of on the expensive side i mentioned india and then of course you gotta know a little bit about construction

[00:49:58] and what's going on you say wow Denmark seems expensive well it's like 70 percent of the index in Denmark is uh you know the company that makes ozimpic so um much bigger countries like the

[00:50:08] US which has thousands and thousands securities doesn't matter if you look at it on price to sales price to book cash flow if you look at it on any of the metrics they say the same thing

[00:50:17] and on average because it's a um you know infinite stream of future cash flows you know it it's uh it's a pretty good indicator of future returns now it's not guaranteed and things can always

[00:50:32] you know people assume that if price multiple ratio goes up that cape ratio has been invalidated so an expensive market going up they say ah you've been wrong i said no that's exactly how

[00:50:47] that's exactly how it's supposed to work is the valuation metric you know is either a headwind or tailwind and so if it goes from 34 to 10 that's going to cost you 10 percentage points per year

[00:50:58] if it goes from 34 to 54 nothing's stopping it i mean china has been up there india has been up there japan hit almost 100 in the in the 80s so there's all these times where they can get

[00:51:09] nuttier uh you know and we've seen sort of this ai boom but it was cheap it was low teens in 2009 and it's been five a number of times before in the us and so you know i think there's a lot to dig

[00:51:22] into it there and my favorite response to people which gets them irritated i say just because you don't know how to use it doesn't mean other people don't it's not what most people want it to be

[00:51:33] so what they want it to be is okay stocks are expensive so i got to sell everything the market's going to crash that's that's a crazy way to interpret this concept right um you thinking in

[00:51:45] terms of probabilities a whole spectrum of outcomes i had a tweet a couple years ago where we walked through this and i said look um for us to hit you know 10 returns like history the k-pration

[00:52:00] has got to go up multiples got to expand and sure enough it did um and people were like oh it's good for you to admit you're wrong and i was like well hold on a second like i i admit what i'm wrong

[00:52:11] all the time i am wrong all the time but in this case just i fully am aware that the multiple can go to 50 or to five like i have no uh strong belief i think on average it is more likely to go back

[00:52:26] down to low 20s than it is to the high 50s but um you know i think that the real discussion is you could scratch out the word cape and just say valuation any valuation metric you know where

[00:52:40] you know that the prior decade 2000 to 2010 was the total opposite where us stocks stunk it up and pretty much everything else did better sorry funny bone topic for me i could go on this for

[00:52:52] a long time so yeah by the way that's on idea farm it's uh you just go on the home page and like you said i mean like the it's updated through that's think april or something like that i got

[00:53:03] to get on with we do it every three months so we uh somebody shouldn't be yeah somebody's like it but um well let me i mean i think we've got we've hit most you know there's there's been elements of

[00:53:16] things that you said where we kind of i think hit most of these 21 interestingly enough but i'm you know what would be and maybe i'm taking a little thunder away from you here but if you

[00:53:28] if you were to put three new ones on the list what would be like top of mind for you to today i don't even remember what's on here but i posted a great tweet from

[00:53:42] 2022 i was talking to anti uh elman and murder your name sorry anti uh from this very great book but it was a uh circled page on there that showed you know returns in various markets for the

[00:53:57] past 100 years and um he was trying to demonstrate when when things hit the fan with us stocks like what helps and i think there is an assumption in the u.s that that bonds always help and you know

[00:54:14] we saw in 2022 that wasn't the case right bonds did very poorly and in the first three quarters of the 20th century during most of these stock bear markets and poor returns

[00:54:29] bonds either didn't help much or um they certainly didn't help a lot gold is kind of like your crazy cousin who knows what's going to happen with gold trend we believe certainly is is the

[00:54:41] premier way to kind of to hedge us stock down drafts um and then obviously things like puts but puts are costs and expensive um so i think that assumption that the bonds are always going to be

[00:54:54] your savior is a dangerous one uh it's true for really any allocation you know that that you counting on something to be guaranteed is is certainly a dangerous uh dangerous way to build

[00:55:06] out it on your point like we we've we do some like permanent portfolio like stuff for clients and uh you know one of the things we did is we ran like some long-term data on putting taking the permanent portfolio but putting a sleeve of managed futures into it

[00:55:19] and it improves everything like everything about the permanent portfolio gets better now you do have your gold in the permanent portfolio but as you mentioned like gold sometimes is good and these kind of things like in 2022 gold wasn't that great as an inflation hedge so like when you

[00:55:33] put these things in like managed futures is one of those assets that like no matter what you do what you do with it it all automatically like improves theoretically like all the returns

[00:55:41] yeah you know and and when you talk about permanent and these types of strategies that the best thing going for them i think the average investor always just assumes it's more bonds versus stocks but it's

[00:55:55] you already start to include all the other things whether it's foreign stocks foreign bonds but the biggest one to me that's always missing from investor portfolios uh almost always is real

[00:56:06] assets so real estate commodities tips being a big one and we saw you know over the past few years with certainly inflationary pressures you know those were essential but managed futures helps to capture that because traditionally managed futures targets those allocations right and and managed futures

[00:56:27] has the one property that most don'ts where they can be short bonds i mean they'd be short anything but you know in 2022 as an example one of the rare exposures that would have helped would be

[00:56:40] to be short bonds and you know no other strategy for the most part would have been short bonds right like it's usually not a uh an allocation that people target so listen med thank you very much

[00:56:53] for coming on and joining us um as this list grows um please you know we'd like to try to continue to talk about this stuff with you and when you get the second edition of shareholder

[00:57:03] yield out definitely hit us up because you know that's a popular stride yeah let's do it you know the hard part about this list that i keep coming back to is by definition it has to be

[00:57:17] most of our peers and so there's a lot of things that i think are screwy or crazy but y'all and everyone else listening will agree with where if i say it you're like oh yeah

[00:57:27] that totally makes sense so it's a high bar to get into this list because it really has to be something that when people are listening is oh that crank med favor it's at it again he doesn't know what he's

[00:57:38] talking about so it should elicit that uh that emotion and that response but you've already you got my mind coming i got a few more i may tweet out today thank you we'll definitely have to do a follow-up we only got what we got through 10 just in

[00:57:51] the end of the 20 like i said there was you know he some of it was in you know answered in multiple things he gives us an opportunity for a follow-up episode that's a nice way of saying that

[00:58:01] is rambly and uh you know i can say it's a lattice word it just covers lots of different disciplines and all right man thank you very much appreciate it man all right it was a blast guys thanks this

[00:58:11] is justin again thanks so much for tuning into this episode of excess returns you can follow jack on twitter at practical quant and follow me on twitter at jjcarbone if you found this discussion interesting and valuable please subscribe in either itunes or on youtube or

[00:58:28] leave a review or a comment we appreciate you