Practical Lessons from Meb Faber | Dividends, Trend Following and a Timeless Asset Allocation

[00:00:00] If you live in a high tax state like I do in California, the last thing in the world you want is dividends and high dividends.

[00:00:09] Every investment makes you richer or wiser, but never both.

[00:00:12] Let every man invest a third in business, a third in land and a third keep in reserve.

[00:00:19] And that's actually a pretty good investing portfolio.

[00:00:23] I think this one might be literally 100%.

[00:00:25] I don't know a single person that agrees with this over a certain income and net worth.

[00:00:33] Like you want to get to that freedom level where you have freedom and capacity to choose your own path.

[00:00:39] But I would always like to ask him and say, like, Jack, you know, at what point does common sense take over and you reduce your stock exposure when it gets crazy expensive?

[00:00:49] Welcome to Two Quants and a Financial Planner, where we bridge the worlds of investing and financial planning to help investors achieve their long-term goals.

[00:00:54] Join Matt Zeigler, Jack Forehand and me, Justin Carbonneau, as we cover a wide range of investing and planning topics that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial life.

[00:01:04] Jack Forehand is a principal at Validia Capital Management.

[00:01:06] Matt Zeigler is managing director at Sunpoint Investments.

[00:01:09] The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital or Sunpoint Investments.

[00:01:14] No information on this podcast should be construed as investment advice.

[00:01:17] Securities discussed in the podcast may be holdings of clients of Validia Capital or Sunpoint Investments.

[00:01:21] So, Matt, today we're going to be talking about MedFavor.

[00:01:24] We've got lessons from MedFavor.

[00:01:25] We've got some great clips from our interview with MedFavor.

[00:01:27] But before we do that, I've got an issue I've got to address with our YouTube audience first, which is I've certainly taken a bunch of criticism.

[00:01:33] As the channel's got a little bigger, you realize the negative stuff's going to come in.

[00:01:36] So the attacks on my investing knowledge, fine.

[00:01:38] Calling me the bald guy, I was okay with it.

[00:01:40] I didn't love it, but look at all this hair.

[00:01:42] You can't call me the bald guy, but fine.

[00:01:44] I live with it.

[00:01:44] But in the most recent comment, we were called finfluencers.

[00:01:48] Oh.

[00:01:48] And I cannot accept being called a finfluencer.

[00:01:51] Why not?

[00:01:52] I can't even say the word.

[00:01:54] That's a hard, it's like the new flanore.

[00:01:56] How do you, so what were we called?

[00:01:58] What was the context of us being finfluencers?

[00:02:01] I guess it was just like, it was a negative comment.

[00:02:03] It was like, these finfluencers are always saying this or always saying that or whatever.

[00:02:06] But, you know, I hate the influencer thing in general.

[00:02:08] Like, I just hate that term.

[00:02:10] So I do not want it to be associated with me.

[00:02:12] So I do not want to finfluence anybody who works with what they're doing.

[00:02:15] I mean, I just want to be that dude who hosts a YouTube show.

[00:02:18] That's really what I want to be.

[00:02:19] That's fine.

[00:02:20] As long as you're that dude, you know, Jack Kardashian, as we know, you know.

[00:02:24] Here's the best.

[00:02:25] I'm the last person that should be influencing anybody, but nonetheless.

[00:02:28] So as we digress here, we move on in that favor.

[00:02:31] And I was really excited we're going to do this one because I don't think there's anybody

[00:02:34] who gives us like more thoughtful takes on stuff on the podcast and Neb.

[00:02:38] And as you'll see, like a lot of these are, it's great because there's a lot of depth to them.

[00:02:42] Like sometimes the people's takes are really short.

[00:02:43] Like Meb's takes are really great.

[00:02:45] Like they can span out for a long period of time.

[00:02:47] And he had a lot of, he has a lot of views that are maybe not in the consensus of what

[00:02:51] everyone else thinks.

[00:02:52] And I think that's really good because, you know, when you keep parading out guests who

[00:02:54] think the same thing as everybody else, you're not really learning that much.

[00:02:57] So part of what we're going to talk about today is an episode we did with him where he talked

[00:03:00] about things he believes that 75% of other people he thinks would disagree with or 75% of

[00:03:05] other professionals would disagree with.

[00:03:06] And then the other part is going to be his show us your portfolio episode where we talked

[00:03:09] about the way he constructs his personal portfolio, which is also very outside the norm.

[00:03:12] So we've got a bunch of clips and we're going to talk about our biggest lessons from Meb

[00:03:16] Faber from those two interviews.

[00:03:18] This is great.

[00:03:19] And Meb's with all those people.

[00:03:20] He's just the endless source of information.

[00:03:22] So what I love about this is you can go follow the Meb Faber show as you should go find his

[00:03:27] channel, subscribe, all that stuff.

[00:03:29] But then he walks away with takes like this.

[00:03:31] So throw us into our first clip, Jack.

[00:03:33] What do we got first?

[00:03:34] Let's start influencing.

[00:03:34] Let's start pissing on the second.

[00:03:36] Okay.

[00:03:36] So our first clip is actually, this is something like if you talk on Twitter, there's certain

[00:03:41] groups you want to avoid going after because they're just terrible.

[00:03:45] Like the crypto group is one that you don't want to really challenge them.

[00:03:47] The Buffett followers to some degree can be like that, although I'm kind of a Buffett

[00:03:50] follower myself.

[00:03:51] The other group you really don't want to go after is the people who love dividends.

[00:03:54] And so Meb's first take was his view on dividends and how he thinks about them in an

[00:03:58] investing portfolio.

[00:03:59] So, you know, we wrote a book a decade ago called Shareholder Yield, A Better Approach

[00:04:05] to Dividend Investing.

[00:04:06] And that's a pretty ballsy subtitle, right?

[00:04:09] Because Morningstar did a recent report where they outlined, they were looking at dividend

[00:04:14] funds and there's over 300 of them managing over a trillion dollars, right?

[00:04:19] So you're kind of coming at one of the most beloved brands and narratives of the past

[00:04:26] 100 years, right?

[00:04:27] And so we're updating this book, listeners, so hopefully it'll be out before year end,

[00:04:32] but you can download the last version free online.

[00:04:35] But in the beginning, we demonstrate, we say, hey, look, you know, here's your return if

[00:04:41] you only had price return of U.S. stocks for the past 100 years.

[00:04:45] And here it is if you reinvested the dividends.

[00:04:48] Now, the key phrase in all of this is reinvested dividends.

[00:04:51] And I've been combing through a lot of the academic literature and the consensus seems to

[00:04:57] be that most people don't reinvest their dividends, at least in the same proportion of what they

[00:05:02] invested in, you know?

[00:05:03] And the fantasy I think most people have is of the dream laying in bed.

[00:05:09] You're like, oh, I just can't wait till I get to Hawaii, sitting on the beach, drinking

[00:05:14] pina coladas, letting that sweet, sweet passive income roll in, right?

[00:05:18] And so there's nothing wrong with dividends.

[00:05:21] They are very much a part of the investing stream.

[00:05:24] But if you live in a high tax state like I do in California, the last thing in the world you want

[00:05:30] is dividends and high dividends.

[00:05:33] And so do dividends outperform historically, meaning high dividend yield?

[00:05:37] Yes, they do.

[00:05:38] Now, that factor, as we all call them, tends to put you in a little bit junkier companies,

[00:05:44] right?

[00:05:44] But it gives you this value tilt, which in my opinion is really what you're looking to

[00:05:49] get, right?

[00:05:49] You want to be, have that value tilt.

[00:05:52] But if you're going to do value, my opinion is always just do value.

[00:05:56] Don't do a cousin of value dividend yield.

[00:05:58] And so there's a million different ways you could do this offshoot where, you know, we

[00:06:05] wrote probably our least downloaded or read paper was one that was targeting no yielding

[00:06:12] stocks.

[00:06:13] And we said, Hey, if you did a value tilt and targeted no yielding or low yielding stocks,

[00:06:18] you ended up with a higher after tax return and a taxable count than if you invested in

[00:06:25] high dividend yield or the broad market.

[00:06:27] You know, so there's all sorts of different ways you can go this.

[00:06:30] But the whole key being that I think, you know, the analogy we use in the book update

[00:06:37] that's an old blog post is we liken it to the old Coke, Pepsi taste test.

[00:06:40] You guys remember that?

[00:06:42] So for the young, for the young listeners under here, don't know what this is.

[00:06:45] You know, um, everyone prefers Coke.

[00:06:48] Uh, and if you do a blind taste test, most people prefer Pepsi.

[00:06:53] And, uh, but then you reveal it.

[00:06:55] Most people go back to Coke.

[00:06:56] And a lot of this has to do with branding.

[00:06:58] I don't know, commercials, marketing, what your parents, maybe you just like Warren Buffett,

[00:07:02] big, uh, big Coca-Cola drinker.

[00:07:04] Anyway, um, I think it's the same thing was true with dividends.

[00:07:08] They have a great narrative, a great story.

[00:07:10] Don't even get me started on buybacks because that's the next 50 minutes of this, uh, this

[00:07:15] discussion.

[00:07:15] I'm trying to keep these short because we got 20 of these, but, uh, it's, if you do the

[00:07:21] whole column list of things that are horrific, terrible, no good, very bad ideas.

[00:07:26] And the other list is things that are probably totally fine.

[00:07:30] Look, dividend investing is totally fine.

[00:07:32] It's not the worst thing in the world.

[00:07:34] But, uh, if you, if you get me into the, is this optimal question and why are, why is,

[00:07:40] why are there better choices?

[00:07:41] There's, there's certainly, uh, I think better choices and better ways to do it.

[00:07:44] So this is like everything in investing is some degree of nuance.

[00:07:48] So the idea here is not dividends are the worst thing.

[00:07:52] Dividends are a terrible thing.

[00:07:53] The idea is there's some people who believe that the first thing you should use when you

[00:07:58] build your investment strategy is dividends and it should be the primary thing.

[00:08:01] And when, when you think about it that way, those arguments break down pretty quickly because

[00:08:06] dividends, as Meb talked about, dividends really are a value factor and there are better

[00:08:10] value factors.

[00:08:11] And there's also other ways to get your money out of your portfolio.

[00:08:14] You don't have to just get a dividend.

[00:08:16] It's not like if you're in retirement, the only way you're possibly going to, you know,

[00:08:19] solve the 4% rule or whatever is because you're getting dividends.

[00:08:22] So I think the problem with dividends is not that they're bad.

[00:08:25] If the people raise them up to this level, that's not appropriate given what they actually

[00:08:29] are.

[00:08:30] Dividends are one of those things.

[00:08:31] And I think this, this follows through and we see this way more generationally.

[00:08:35] Uh, I think this is, this is an important point to make on this.

[00:08:38] When we talk to people and less and less, cause there's less and less around like silent

[00:08:43] generation, people will go back to depression era or a depression era parents.

[00:08:47] That was the, you can spend your interest, but never spend your principal crowd.

[00:08:52] The post-World War II era, especially the baby boomers and beyond, they were in the,

[00:08:57] my parents kind of got it with the don't spend your principal, but the whole like, you know,

[00:09:01] scrounging of canned goods and other stuff feels a little weird.

[00:09:04] So how about we just spend our dividends?

[00:09:06] Like whatever it pays us is the updated variation on that.

[00:09:10] And this is kind of in the system.

[00:09:12] And again, we see this a lot generationally where people are like, if I'm spending the

[00:09:15] dividends and I'm not selling anything, I still have control of this appreciating asset.

[00:09:20] And to your point, to Meb's point, there's kind of a lot of logical flaws inside of that

[00:09:26] argument.

[00:09:27] You want to break down just kind of what the math is on like why this is foolish?

[00:09:31] Well, the other thing to keep in mind, this kind of gets at the math is the idea that

[00:09:35] people don't realize dividends are a return of capital to you.

[00:09:38] So in other words, people think it's free money on the dividend date.

[00:09:41] Like there's a reason stocks go down on the ex-dividend date.

[00:09:44] Capital is just being returned to you.

[00:09:46] And in some ways, it's not that different than a buyback.

[00:09:48] They're really the same thing.

[00:09:49] It's just being returned to you in a different way.

[00:09:51] So with a buyback, you're increasing your ownership of the company.

[00:09:54] You're not actually getting cash sent to you.

[00:09:56] With a dividend, you're getting cash sent to you.

[00:09:57] And in a lot of ways, you can argue a dividend is worse because it's less tax efficient

[00:10:00] if you're in a high tax bracket.

[00:10:02] But people just think it's like this magic money.

[00:10:05] Like you just suddenly like this money just appears and it's great.

[00:10:08] And like the stock didn't go down, nothing changed.

[00:10:10] And it's just fantastic.

[00:10:11] But that's not the way it is in the real world.

[00:10:14] The shareholder yield book.

[00:10:15] And I highly recommend if you haven't read that book, especially if you're a value oriented

[00:10:18] investor, that's profoundly important.

[00:10:20] And I don't know if they might even have a new edition of that out.

[00:10:22] So another way that I think it's important to look like this, and we deal with this all

[00:10:26] the time with business owners.

[00:10:28] Like the idea is you have the company, the company distributes salary and bonuses and

[00:10:32] maybe dividends.

[00:10:33] The question before there's a dividend distribution for a company somebody owns, and this doesn't

[00:10:38] have to be a fancy company.

[00:10:39] This can be, you know, a dentist's office or an HVAC company or take your pick.

[00:10:43] The idea here is to your point, like you have extra cash that the company has now made.

[00:10:48] Should that money be reinvested in the business?

[00:10:51] If we don't need it for consumption, if we don't need it to distribute to the owners to

[00:10:55] go pay our mortgage or send our kids to college or, you know, buy a new sports car or something,

[00:11:00] then in many cases you go like, no company, I don't need this for consumption.

[00:11:04] Hold on to this.

[00:11:06] And that may not, you know, increase, you know, it's not technically increasing my ownership,

[00:11:12] but it's increasing the value of the thing I own by not distributing it out.

[00:11:15] I want to distribute it out.

[00:11:16] I'm not actually decreasing the amount I own, but like there's, there's quirks to all this

[00:11:20] stuff.

[00:11:20] Read a book on it if you really care.

[00:11:22] But it's this logic.

[00:11:23] When the company distributes out that, that dividend, they're actually taking away from the

[00:11:27] ability of some of that cash flow to reinvest in things that they're doing.

[00:11:30] For companies, depending on their life cycle, see the Aswath Demeteron episode.

[00:11:35] If you're at a part of your life cycle where there's no longer great new projects to reinvest

[00:11:39] in or to drive that business and profitability forward, it might make a lot of sense.

[00:11:42] But at the early stages or whatever else, there's a lot of times dividends don't really serve

[00:11:46] you.

[00:11:47] You'd got to be on board with what the logic is.

[00:11:50] Yeah.

[00:11:51] And the only other thing I'll say before we wrap up is this might seem negative on dividends,

[00:11:55] but like we run strategies that use dividends.

[00:11:56] Um, and, and I think the big separator between like the theory here and the real world is

[00:12:02] behavior.

[00:12:02] And some investors love dividends.

[00:12:05] They just, they just really like them.

[00:12:06] They're more likely to stick to an investment strategy that includes dividends.

[00:12:09] Those people should invest based on dividends.

[00:12:11] There's nothing wrong with it.

[00:12:11] Like, like Meb said, it's not a bad thing.

[00:12:13] It's not like you're dramatically underperforming the S and P by using dividend yield, whether

[00:12:17] you use dividend growth or dividend yield or whatever you use.

[00:12:19] It's not like those are terrible strategies.

[00:12:21] There just might be more optimal ones.

[00:12:23] But if you're a believer in dividends and there probably aren't more optimal ones, it's probably

[00:12:26] the right one for you.

[00:12:27] Yeah.

[00:12:27] Or you mix it with something else because at the end of the day, you just have to ask why

[00:12:31] you're doing it.

[00:12:32] You shouldn't accept.

[00:12:33] And I think this is Meb's big point.

[00:12:35] You shouldn't accept dividends just because they're, you know, fun or exciting, or you

[00:12:39] have no real understanding of how they work.

[00:12:41] You should, if you understand the purpose that they are serving for you, lean into the purpose

[00:12:45] that they're serving for you.

[00:12:46] Because in, in cases like that, they can be a really effective tool.

[00:12:49] And Hey, there's lots of people with lots of good reasons to love dividends.

[00:12:53] Just like there's lots of people who are like, you really don't want to do the net.

[00:12:57] So one of the questions we always ask in our show is your portfolio is like, how do you

[00:13:00] think about building your asset allocation?

[00:13:02] And, um, Neb was the first person who ever told us that Talmud plays a role in that.

[00:13:06] But, uh, here's Meb talking about his asset allocation and how it goes way, way back

[00:13:09] and how he does it.

[00:13:10] We looked at a lot of the top asset allocation strategies in history, but there was one that

[00:13:14] was motivated by the Talmud.

[00:13:16] And it's like 2000 years old and it has a quote in it and I'm going to murder it, but

[00:13:21] it says something along the lines of let every man invest a third in business, a third in

[00:13:26] land and a third keep in reserve.

[00:13:29] And that's actually a pretty good investing portfolio.

[00:13:33] Now the modern interpretation is something like, um, a third in stocks, businesses or private,

[00:13:39] public, whatever, a third in land.

[00:13:41] So real assets, commodities, real estate, uh, tips perhaps.

[00:13:46] Um, and lastly, a third in reserve.

[00:13:48] That's kind of like bonds, you know?

[00:13:50] Um, now what we'll get into is much more modern interpretation of that.

[00:13:55] Uh, but that's a pretty good starting point in a, in a close cousin of that is what I call

[00:14:00] the global market portfolio.

[00:14:02] The global market portfolio is the ultimate index portfolio.

[00:14:06] And technically it's the only index portfolio, the truly passive index.

[00:14:09] And that's if you just go out and buy all the assets in the world.

[00:14:13] And this is now, this is publicly traded only, but it, but if you were able to replicate the

[00:14:18] world, that's roughly half stocks and half bonds.

[00:14:21] And of that it's half us and half foreign.

[00:14:23] Now, most of our us friends don't invest in foreign anything.

[00:14:27] Really?

[00:14:28] They may invest a smidge in foreign stocks.

[00:14:30] They certainly don't invest in foreign bonds, but that's also a pretty good starting point.

[00:14:34] And it doesn't, uh, have enough in real assets partially because a lot of the real assets,

[00:14:39] um, there's two big categories we'll get to that aren't well represented in the global

[00:14:44] market portfolio.

[00:14:45] That's farmland and single family housing.

[00:14:48] Uh, most of that's private, but, but, but that broad approximation to me is a pretty

[00:14:53] good starting point for the way that I want to view how I invest all my money.

[00:14:58] Yeah.

[00:14:58] So if you think about this, this is not too bad.

[00:15:00] Like a third in business, a third in land, a third in reserve, you, you translate it to

[00:15:03] today stocks, bonds, commodities.

[00:15:05] Like it's probably not the optimal portfolio, but it's, it's amazing.

[00:15:08] It's stood the test of time.

[00:15:09] I mean, that's, that's not a bad starting point.

[00:15:12] No, I, I mean, I go to Jared Dillian in the awesome portfolio with the, the, you know,

[00:15:17] the fifths where it's a similar variation on this or the permanent portfolio or any one of

[00:15:22] these things.

[00:15:23] It's actually not bad advice.

[00:15:24] And Hey, great to say, I get my investing advice from the Talmud.

[00:15:28] I mean, that's, that's like OG authority stuff right there.

[00:15:32] Well, one of the things I like is Med does the barbell portfolio.

[00:15:34] So he has, you know, he basically has a lot of startup type investments with a small portion

[00:15:39] of his portfolio.

[00:15:39] And he talked about this, you want to, you can watch the full interview if you want to

[00:15:41] see it, but he also has like a lot of things he's doing.

[00:15:44] And we'll talk about trend following later, but this, this asset allocation trend following,

[00:15:48] he does a lot of things to protect his money, but then he also on the end, like he

[00:15:51] enjoys the startup investing.

[00:15:53] And so he does that too.

[00:15:54] And I think that's an interesting like barbell approach to managing a portfolio.

[00:15:58] And we see this a lot, especially as the investor base.

[00:16:01] If it, for people where it skews younger and you think of people like you or me, where

[00:16:06] you have private business ownership things in the business you run, or, you know, our

[00:16:10] wildly growing a YouTube channel here that is, you know, super high return potential.

[00:16:16] You look at those things and the barbell approach just says like, how do these things

[00:16:19] weigh off each other?

[00:16:20] One of the great things that he's talking about, this is one of the ideas from the Talmud,

[00:16:25] presumably, but again, like a Jared Dillion speaks really eloquently about this in the

[00:16:30] awesome portfolio.

[00:16:31] Is there are things that are just like plainly not related to each other?

[00:16:34] Like that, that chunk of gold versus the real estate versus the stock versus the debt versus

[00:16:39] the cash.

[00:16:39] They have some relation to each other and that they exist in the world, but there's lots

[00:16:43] of reasons.

[00:16:44] You can look at them and go like, if one of these things is doing poorly, hopefully something

[00:16:49] else just isn't doing as poorly.

[00:16:52] Any methodology you have to ask yourself that question, that's true diversification and

[00:16:55] that's really respectable.

[00:16:57] So this next was a really short clip, but I put it in here because I thought it was really,

[00:17:00] really insightful.

[00:17:00] So here's Med talking about how every investment makes you richer or wiser, but never both.

[00:17:05] If you've got a bunch of donuts in the fridge and pizza, what's going to happen?

[00:17:08] And you know, they're probably going to get eaten.

[00:17:09] Same thing with investing.

[00:17:10] Like if you're left to your own devices, like you're probably going to do the dumb stuff.

[00:17:15] And we all have, like, that's something to be proud of.

[00:17:17] There's a great quote.

[00:17:19] I attribute this to Mark Yusko, but I attribute all my unknown quotes to him.

[00:17:22] It's like Mark Twain.

[00:17:25] He says, every investment makes you richer or wiser, but never both.

[00:17:29] And to me, that's something that I think like you want to embrace the losers and learn something

[00:17:34] from it as opposed to just trying to avoid them.

[00:17:37] So I don't know that you, this has been true in my career.

[00:17:40] Like I think about it, like you need the bad investments to have the good ones, but they

[00:17:43] both are somewhat problematic in some ways.

[00:17:45] So like, I don't know if I've told this story before, but like the first stock I ever bought

[00:17:49] was because my uncle's stockbroker told in college, told him that this garbage company

[00:17:53] in Canada was going to be a huge hit.

[00:17:56] Garbage, I mean, why am I buying a garbage company in Canada?

[00:17:58] I wish I'd known you back in the day.

[00:17:59] You probably could have told me not to do this.

[00:18:00] But nonetheless, as you can imagine, the garbage company in Canada went to zero and a couple

[00:18:05] thousand dollars or whatever I invested in the garbage company was gone.

[00:18:08] But I was wiser because of that.

[00:18:10] Not just about investing in garbage companies in Canada, but about maybe taking advice from

[00:18:13] stockbrokers, taking advice from family members.

[00:18:16] Like a lot of that, there were a lot of lessons packed in that.

[00:18:18] But then on the other side of it, when I started doing factor portfolios was 2003.

[00:18:22] And 2003 was about the best year you could possibly ever start like following factor portfolios

[00:18:28] because anything you did doubled the S&P 500.

[00:18:31] So that investment made me richer, but it did not make me wiser because I was a lot less

[00:18:36] wise, because I believed that what happened in that year was probably what was going to

[00:18:40] happen in other years.

[00:18:41] And I overstated my own skill.

[00:18:42] So like in my life, this idea of it either makes you richer or you're wiser, but never

[00:18:46] both is played out.

[00:18:49] I got a Canadian garbage stock to tell you, Chad.

[00:18:52] Let me tell you about this.

[00:18:53] Hopefully I've learned that lesson.

[00:18:54] Yeah.

[00:18:56] Um, I think with this, and I completely agree in the sense of it's the Jesse Livermore ism,

[00:19:03] the cost of tuition.

[00:19:04] When something goes wrong, you have to say, this is the cost of tuition.

[00:19:07] I played the cost, paid the cost of tuition because this thing went down, went sour.

[00:19:12] What did I learn from it?

[00:19:13] Because there's, there's no reason to pay a Harvard size tuition and not get the Harvard

[00:19:18] network or something like that.

[00:19:19] Right.

[00:19:19] So you want to benefit from your pain, benefit from your losses in a productive way.

[00:19:24] And this whole, like, it makes you richer or wiser thing leans into that.

[00:19:27] It's eloquent.

[00:19:28] I appreciate it.

[00:19:29] The thing I'll take that's my counter to this is I think this is very true in financial

[00:19:34] capital, but from a more holistic financial planning perspective, when we think about

[00:19:39] this in like social capital, like your friends can actually make you richer and wiser at the

[00:19:45] same time.

[00:19:46] We think about like your intellectual property that can make you richer and wiser at the

[00:19:51] same time.

[00:19:52] We think about like taking care of your kids.

[00:19:54] They might make you a lot poorer today, but years from now, when they're, you know, visiting

[00:19:58] you in the nursing home or something, or you're taking good care of them and they're taking

[00:20:01] good care of you, like good things can come of this.

[00:20:04] So in financial capital, I think this holds very true.

[00:20:07] I do think there's some best of both worlds that exist out there when you expand the definition

[00:20:12] of capital.

[00:20:13] I think you're true.

[00:20:14] And that's true.

[00:20:14] And also in the world of investments, I think that's probably true as well.

[00:20:17] Like it's just not true for most people.

[00:20:18] Like, so it wasn't true for me, but a lot of people can have success in investing and still

[00:20:22] dig into why did I actually have the success and learn positive lessons from that.

[00:20:27] It's just a lot of times people, including myself, learn the wrong lessons from the success.

[00:20:31] And so it does not make you wiser, even though it made you richer, but it's not impossible.

[00:20:34] I mean, some investors probably do do that.

[00:20:36] Some investors, and we've had a lot of thoughtful investors on the podcast.

[00:20:39] They do look through their winners and say, why did I win?

[00:20:42] Did I win because I was lucky?

[00:20:43] Did I win because I was smart?

[00:20:44] And they do learn something going forward from it.

[00:20:46] I can't remember if it was Robert Cialdini or somebody else, but this is thematically

[00:20:50] true of a lot of those finance or business industry adjacent people who got sucked into

[00:20:57] the Berkshire Hathaway stuff, you know, like 40 years ago, where it's just like, they just

[00:21:01] were doing something cool that Warren or Charlie thought was cool.

[00:21:04] And then they got pulled into the network and they made that investment.

[00:21:07] And they were like, I got smarter being around these guys that I got a heck of a lot richer

[00:21:11] because I had those sweet, sweet shares.

[00:21:14] So let's draw on some controversy here, Matt, because this one that this take Meb had, and

[00:21:18] it wasn't like a strong take he had, but this is probably something he mentions in the clip,

[00:21:22] you know, probably 100% of people will disagree with.

[00:21:24] So here's Meb talking about the Fed has done a good job.

[00:21:27] This one might not be 75%.

[00:21:28] I think this one might be literally 100%.

[00:21:31] I don't know a single person that agrees with this.

[00:21:36] And, you know, I think it's less that I believe they've done a great job.

[00:21:40] It's more that it's like talking politics.

[00:21:44] Everyone can look back and Monday morning quarterback and say, Hey, this was stupid.

[00:21:49] The rates were too high, but they were too low for too long.

[00:21:53] Therefore these 20 things terrible happened.

[00:21:56] And this world would be amazing only if they had raised earlier or they'd cut earlier.

[00:22:02] And it's funny because Tom McClown, one of my favorite market technicians, chartists, he's

[00:22:10] got a great chart where he overlays the two-year bond yield and the Fed funds rate.

[00:22:16] And I will challenge any listener to be able to distinguish between those two lines.

[00:22:22] Now there's times when one is higher than the other, such as right now, recording this

[00:22:27] early August and the two-year yield is decently below the Fed funds rate.

[00:22:34] But we've always joked for a long time on the podcast, the Fed just gets together, drinks a

[00:22:38] six pack, watches Seinfeld, hangs out.

[00:22:41] And then they just kind of eventually peg it to the two-year, eventually catch up.

[00:22:44] But my point being is that I think you could probably automate it.

[00:22:48] You could put it on systematic autopilot and do the same job.

[00:22:52] But as far as where's it be, I believe it should be cutting right now.

[00:22:56] That's only because the two-year says so.

[00:22:59] So I think ultimately everybody thinks the Fed has done a bad job in all situations, in

[00:23:03] all cases.

[00:23:04] But I actually think, and who cares what I think about the Fed, but I think I would agree

[00:23:09] with this for the most part.

[00:23:11] The Fed, at least the current Fed, I mean, they were certainly late on inflation.

[00:23:15] They didn't get rates up fast enough.

[00:23:17] But I can understand that to some degree.

[00:23:18] I mean, we hadn't seen inflation in 40 years, whatever it's been, like some massive number

[00:23:22] of years.

[00:23:23] So it might take a little while to get caught up.

[00:23:25] And again, the other thing is you always have to have the caveat that we don't know what's

[00:23:28] going to happen beyond when we make this video.

[00:23:30] So as of right now, they were able to raise rates a massive amount.

[00:23:34] They were able to slow inflation down.

[00:23:36] It's not to their target, but they were able to get it down.

[00:23:38] We haven't had a catastrophe.

[00:23:39] You know, if you had asked me if they're going to raise the rate, if they're going to

[00:23:42] raise rates that much that quickly, like I would have thought something would have broken

[00:23:45] and it hasn't yet.

[00:23:46] That's not to say it's not going to.

[00:23:48] But I think right now, like saying the Fed has done a good job is actually a reasonable

[00:23:51] take.

[00:23:53] And I like the way that Meb says it.

[00:23:55] It's saying they did a good job is not saying they've done a great job.

[00:23:58] It's not saying we did a terrible job.

[00:24:00] It's like, we're going to give them a pass.

[00:24:02] And my sympathies to this kind of fall in the line with how much credit do I give my doctor

[00:24:09] for me being healthy?

[00:24:10] You know, it's like, I'm not dead.

[00:24:13] My doctor, no offense, doctor, if you're watching, doesn't deserve like a Nobel prize

[00:24:18] or something, but they've managed to keep me alive.

[00:24:21] And they're there when I need to check in with them or whatever else.

[00:24:24] And that's point about like, yeah, they more or less just like follow the two.

[00:24:26] So they watch Seinfeld and eat pizza or whatever he said, which is fantastic just to think of

[00:24:32] because there's so many things that inside of the Fed that I think we can draw from Seinfeld

[00:24:36] episodes.

[00:24:37] But I think it's this kernel of truth where it's, we've talked about this before.

[00:24:42] People place maybe an inordinate amount of emphasis on how important Fed policy is.

[00:24:47] And it can be very, very important in the short run.

[00:24:49] But how much the Fed actually controls in this stuff, it's an important function, like my doctor

[00:24:55] or maybe like my vitamins.

[00:24:56] Like I take a daily vitamin.

[00:24:57] Is that keeping me alive?

[00:24:59] Does it even matter?

[00:25:00] Probably not.

[00:25:01] But does it make me feel a little bit better?

[00:25:03] And does it offer some cushion?

[00:25:04] Yeah.

[00:25:05] I'm glad the Fed's there.

[00:25:06] I'm willing to give them the good job stamp of approval.

[00:25:09] I'm with them.

[00:25:10] Well, to your point, I mean, maybe a B is like the best grade you can give them.

[00:25:12] And like, maybe you give them a B, B minus for what they've done here.

[00:25:15] Solid B.

[00:25:16] That's not too terrible.

[00:25:17] Good attendance record.

[00:25:18] Lots of things.

[00:25:19] They're always there at the meetings.

[00:25:21] They show up at their meetings.

[00:25:22] Hello at them.

[00:25:23] Cullen Roche has made this point when he comes on, which is they have a really, really tough

[00:25:26] job.

[00:25:27] You know, they're trying to go through all kinds of data.

[00:25:29] And also by their nature, they have to be backward looking and they have to be data driven.

[00:25:33] So a lot of times what they have to react to, because they're accountable for what they

[00:25:37] do, what they have to react to are these reports or this data that is by its nature

[00:25:41] backward looking.

[00:25:42] So it becomes very hard for them to be out ahead of inflation, like, and to be raising

[00:25:46] rates aggressively, like when maybe the signs aren't there in the data yet.

[00:25:50] It's something like politically would have been very hard for them to do if they had started

[00:25:53] really cranking rates up early before, you know, the data was showing that.

[00:25:57] So it's a very hard job.

[00:25:58] So you have to give them a pass to some degree.

[00:26:00] Like, I certainly would not want to be the chair of the Federal Reserve.

[00:26:02] But also to Mev's point and Cullen made the same point when he was on, like, you could

[00:26:05] argue, basically just automate the things and just follow the two years or something

[00:26:08] like that.

[00:26:09] You know, if the two years telling you to cut, go ahead and cut.

[00:26:11] And I guess the downside of that is you'd be moving the rates around a lot more than

[00:26:14] they are now.

[00:26:15] There'd be a lot of cutting and raising and all kinds of stuff, you know, and maybe the

[00:26:18] forward guidance part, it wouldn't be great, but it would be an interesting experiment.

[00:26:21] And I think I'm of the view that.

[00:26:26] It's a perception thing like that, not not purely automating.

[00:26:31] Yeah, the circus is a little bit overdone, but I mean, come on, we're America.

[00:26:35] What circus do we not have around policy decisions?

[00:26:38] That's not overdone.

[00:26:40] Take that from a, you know, Finfluencer jash.

[00:26:42] You know, but the media circus is real and this is just the performative value of the thing.

[00:26:47] I don't know.

[00:26:48] Maybe we should host a Seinfeld watch party around one of the Fed meetings and we'll invite

[00:26:52] Mev and whoever else wants to come watch Seinfeld and then judge the movements.

[00:26:56] We'll get Mev and Cullen on for it.

[00:26:57] What do you think?

[00:26:58] Well, yeah, no, that'd be great.

[00:27:00] And I guess in retrospect, me calling myself not a Finfluencer and then trying to talk

[00:27:03] about the Fed in my opinion, it was probably not the greatest choice for this episode.

[00:27:07] But, you know, I never connected those two things when I was putting the agenda together.

[00:27:10] Oh, yeah, yeah, yeah.

[00:27:11] Seeing the matrix now, it's all coming together.

[00:27:13] So back to more relevant stuff for people.

[00:27:16] This is really great.

[00:27:17] We always ask this first question in Show Us Your Portfolio, which is sort of what are

[00:27:21] your goals with your portfolio?

[00:27:23] What does your portfolio mean to you?

[00:27:24] And that's always my favorite answer because we get a lot of these people that are very

[00:27:27] sophisticated, smart investors that operate in our world and we get to see a different

[00:27:31] side of them and we get to see a different take on what money means to them.

[00:27:34] So here's Mev talking about wealth and freedom.

[00:27:37] I want to be on that first rocket spaceship to Mars with Elon.

[00:27:41] That's what I what's the ticket going to be like 100 million.

[00:27:44] Um, I think, um, there's a couple of things and these obviously can change throughout time.

[00:27:55] You know, a 20 year old me is going to have a different answer to this than a 40 year old

[00:27:59] me and 60 and hopefully 80, 100, 120 year old me.

[00:28:02] Um, and, uh, laying the foundation I think is, is really important because on Fentwit and

[00:28:12] elsewhere writing academic papers and books, like we tend to argue like the final 5% because

[00:28:19] a lot of the, the base case, the foundation is assumed.

[00:28:22] Um, and, um, a good example will be, you know, I think over a certain income and net worth,

[00:28:30] like you want to get to that freedom level where you have freedom and capacity to choose your own

[00:28:35] path.

[00:28:36] Those old choose your own adventure books.

[00:28:38] Right.

[00:28:38] Um, and I think that's important for a lot of people and that number, whomever you ask is,

[00:28:44] is different.

[00:28:45] The challenge, of course, and you see this in all your neighbors, all your friends, people

[00:28:50] that, uh, come into money, people that bought Bitcoin at a hundred, uh, on and on you adjust.

[00:28:58] There's the sort of hedonic treadmill of income and wealth.

[00:29:02] And that I think is, is a problem for a lot of people.

[00:29:05] Uh, and then you see all the polls is like, how much money do you need to retire?

[00:29:09] How much money do you need to be happy?

[00:29:11] And it's always like twice as much as everyone currently has.

[00:29:15] Um, the good news is I'm, I'm a, I'm a very content human.

[00:29:19] Uh, you know, I, I, while I work in the financial world, it doesn't necessarily, um, I'm at the

[00:29:25] point where I feel a great deal of contentment and peace and freedom.

[00:29:30] And I think, um, you know, the, a lot of the literature shows that, uh, you need to get

[00:29:36] to like that 75 K amount of income, like, like the happiness curve really plateaus after

[00:29:42] that with inflation printing, maybe that's going to be a hundred K, but let's just round

[00:29:46] somewhere in there.

[00:29:47] And then above that, it's, it's sort of gravy.

[00:29:50] And then it gets into Jay-Z problems or excuse me, biggie problems.

[00:29:53] Um, both of them, uh, but, but more money causing more headaches.

[00:29:58] And so, um, a lot of people who invest and get wealthy, this is one of the key things you

[00:30:08] have to avoid too.

[00:30:09] And William Bernstein talks a lot about this.

[00:30:11] He's like, once you get to a certain amount of wealth, and this means different levels,

[00:30:16] different people, um, you've won the game.

[00:30:21] And he says, you don't have to keep playing.

[00:30:24] He's like, once you win the game, you don't have to keep playing.

[00:30:26] And one of the biggest mistakes people make is they get wealthy or super rich and they

[00:30:29] still risk it all.

[00:30:30] And that to me is insane.

[00:30:32] And so you see example after example, after example, wealthy people that have all this

[00:30:37] leverage and crazy concentration.

[00:30:39] And then boom, the regime shifts and it's all gone.

[00:30:42] Not like part of it gets gone, like all of it's gone.

[00:30:45] And so, uh, part of the wealth building, what we call, we wrote this four part series

[00:30:52] last year or excuse me, last year is 2022.

[00:30:55] Now during the pandemic 2020, we wrote a four part series called the get rich portfolio,

[00:31:00] the stay rich portfolio, which is interesting, particularly with what's going on right now

[00:31:05] with interest rates and bonds, uh, how I invest, which is what we're going to talk about today.

[00:31:11] And the last was investing at a time of Corona that was specific to some opportunities back

[00:31:16] in March, 2020.

[00:31:17] Um, but, but part of those buckets mentally getting rich and staying rich are different

[00:31:24] for a lot of people.

[00:31:25] And you see this a lot with business owners, they build their career, they do this business,

[00:31:29] they sell it.

[00:31:30] And then all of a sudden they have all this money and kind of the life they had before

[00:31:34] and the life they had after the, um, mental approach and the accounting and even the portfolios,

[00:31:42] uh, are very different.

[00:31:43] And this gets on to spending too.

[00:31:44] So any long-winded answer, which is what you get with me, but basically, you know, I

[00:31:48] think about, um, wealth as freedom, uh, you know, and we talk a lot about bemo and the

[00:31:55] fact they don't teach personal finance or investing or money in schools, which I think is a tragedy.

[00:32:01] But I think that narrative is changing.

[00:32:03] You're starting to see a lot more states adopting that curriculum.

[00:32:07] Um, but really reframing, you know, this concept of money as, as freedom and wealth as the

[00:32:13] ability to do, uh, kind of what you want, live where you want, make the life decisions

[00:32:17] you want and not, uh, be beholden to, uh, you know, um, be structured in a way where

[00:32:24] you're forced to make, uh, uh, uh, opportunities, turn down opportunities or make life decisions

[00:32:30] you don't want to.

[00:32:30] I thought this is a good take.

[00:32:31] Cause if, if I, you know, if I have to break it down for myself and I could not say it as

[00:32:35] eloquently as he does, but I think this is kind of the way I look at it too.

[00:32:38] I mean, I think wealth is probably there to allow you to do the things you want to do

[00:32:43] and to do it with the people you want to do it with.

[00:32:45] Um, so I think this idea of like a fleeting wealth and freedom, and then thinking about

[00:32:49] how you construct your portfolio in that context is, is really smart.

[00:32:54] This is a, I think I'm really happy that we're doing this clip because I think this clip holds

[00:32:59] the kernel of a, of a much more profound truth that it echoes all across Meb's work and it

[00:33:05] echoes through this entire conversation.

[00:33:06] And it's just this idea that wealth is something that we've accumulated over time.

[00:33:12] It's an accumulated savings.

[00:33:14] It's an accumulated asset and not just financial.

[00:33:17] It can be an accumulated asset in all sorts of areas of life that can then be distributed

[00:33:21] back into our lives for certain things.

[00:33:24] And once you've accumulated an asset to a size or distributions from it, maybe even

[00:33:28] dividends from it, but maybe not.

[00:33:30] When you can distribute from that wealth to add a level of comfort, flexibility, or extra

[00:33:37] George Michael's freedom, then yeah, that's, that's, that's kind of the goal.

[00:33:41] And the most forward thinking people we've met in these interviews, in these conversations

[00:33:46] are people who go, I can check that financial box in.

[00:33:50] This gives me freedom in these ways.

[00:33:52] I can check this, you know, social box.

[00:33:54] I have friends.

[00:33:55] This is what contributes to these parts of my life.

[00:33:56] I have the family.

[00:33:57] I have the other stuff.

[00:33:59] It's a network of consuming wealth to give you freedom in all those categories.

[00:34:03] That is a profound and beautiful statement from Meb on that one.

[00:34:07] And I hate that YouTube has all these copyright things because I really would have liked to

[00:34:10] have played the George Michael song right there.

[00:34:12] Unfortunately, I don't think that's going to fly.

[00:34:13] I think our, our video would get downgraded if we, if we did that.

[00:34:16] But that's okay.

[00:34:17] Fine, fine Meb telling is a George Michael concert story at some point.

[00:34:20] It's worth it.

[00:34:21] Yeah.

[00:34:22] But the other thing, the other take I have on this is I think so many people like look

[00:34:26] at wealth as a number.

[00:34:27] They look at wealth as like, I want number to go up.

[00:34:30] And this gets to the exact opposite side of that.

[00:34:32] And I think, I think that's so important.

[00:34:33] Like we always look at our portfolios and we're like, oh, did it get higher?

[00:34:35] Did it get higher?

[00:34:36] Did it get higher?

[00:34:36] And then like suddenly it's like, well, I'm going to get buried in the casket with this

[00:34:39] Vanguard statement or whatever.

[00:34:41] It's like, that's not what we're trying to achieve.

[00:34:42] You know, we don't want the number just to keep getting higher and higher and higher

[00:34:45] at a certain point.

[00:34:45] At least we want to spend some of the money.

[00:34:47] So we actually get enjoyment of our lives.

[00:34:49] So we have the freedom to do the things we want to do.

[00:34:51] And I think so many people miss that because they just get trapped in this number, go up,

[00:34:54] number, go up, number, go up thing.

[00:34:56] Couldn't agree more.

[00:34:57] I think that's a perfect segue to the next clip when Meb takes Jack Bogle to the grave.

[00:35:01] I think that's where we're in love with this, right?

[00:35:04] This is what, this is like, basically, I think it was, if he wanted to have dinner with

[00:35:08] anybody, um, who would it be?

[00:35:09] And he talked about some other people, but one of his was Jack Bogle.

[00:35:12] And he had a very specific question he wanted to ask him.

[00:35:14] That old question about who would you like to invite to dinner?

[00:35:17] What, like what five guests?

[00:35:18] And people are always like, you know, the Dalai Lama, Jesus.

[00:35:21] Jack Bogle would be up there for me, the late Jack Bogle, because, um, he talked for a long

[00:35:26] time.

[00:35:27] He had this great equation.

[00:35:28] It's called the Bogle formula.

[00:35:29] It's very simple.

[00:35:30] It's starting dividend yield plus earnings growth or dividend growth plus change in valuation.

[00:35:35] And you can come up with a pretty good expectation of U.S. stocks.

[00:35:39] And he showed it throughout history and does a good job of, he wouldn't say forecasting,

[00:35:43] but he might would say coming up with expectation of what stocks would do.

[00:35:47] And before he passed, he's like, look, I think U.S. stocks can do about 4%.

[00:35:51] And then the market kept going up.

[00:35:52] Now, the challenge with that is that he would say, well, the behavior is to, you just buy

[00:36:00] and hold and you weather the storm and maybe you spend less and save more.

[00:36:04] But I would always like to ask him and say, like, Jack, you know, at what point does common

[00:36:10] sense take over and you reduce your stock exposure when it gets crazy expensive?

[00:36:15] Is it a P ratio of 50, which is higher than they've ever been in history, including the

[00:36:20] late 90s internet bubble?

[00:36:23] Would it be a hundred, which is what Japan hit in the eighties, in which case they had no

[00:36:28] returns for multiple decades, decades of no returns.

[00:36:33] You know, to me that like doesn't check the common sense box.

[00:36:38] So that's who I would like to invite to dinner, Jack, and bring him back just to ask him that

[00:36:42] one question.

[00:36:43] So I put this in because I think about this all the time myself.

[00:36:45] I mean, Meb's done this as a poll on Twitter a lot, like a thought experiment.

[00:36:48] The idea is as the market, I mean, obviously all of us want to be buy and hold investors,

[00:36:53] but as the market gets more expensive and more expensive and more expensive, would me, would

[00:36:58] Matt, would Jack Bobo say, you know what?

[00:37:00] Enough's enough at any point and say, you know what?

[00:37:03] Enough's enough.

[00:37:03] I'm not going to be in equities anymore.

[00:37:05] They're just too expensive.

[00:37:06] So how do you think through that?

[00:37:09] This, I actually think kind of goes back to the Talmud portfolio way.

[00:37:14] All in and all out is not a good strategy is my view.

[00:37:18] You should have some core exposure to the thing.

[00:37:21] If it still fits into your broader framework, if you still believe in the experiment, that

[00:37:25] is, you know, democracy and capitalism and relatively free markets or whatever, if you

[00:37:30] still believe in that, you're probably going to have some baseline exposure.

[00:37:33] I don't think it's ever, hey, sell all my equities.

[00:37:36] It's overvalued thing.

[00:37:37] To me, that just seems a little bit insane unless, you know, the world's ended or something

[00:37:42] else is clear and evident to me.

[00:37:45] That's kind of the way I think about it.

[00:37:46] Yeah.

[00:37:46] Rebalance back to target or think about the relative weights to everything else.

[00:37:49] But why would you zero it out?

[00:37:52] And I mean, I like to think Jack Bogle would say something about the same around the same

[00:37:56] lines.

[00:37:56] What do you think?

[00:37:57] How do you think through this?

[00:37:58] Yeah, I think you're right.

[00:37:59] I mean, I had the same thing.

[00:38:00] I was thinking about like not making binary choices, but it's also important to recognize,

[00:38:04] as you said, you can make choices around the edges.

[00:38:07] So if you're somebody who doesn't need, like, let's say you've got all the money you

[00:38:10] need.

[00:38:11] You don't need to have the kind of returns of equity and your equities in your portfolio

[00:38:14] and the market keeps getting more and more and more and more expensive.

[00:38:17] You could own the permanent portfolio.

[00:38:18] You could slowly shift towards something like the permanent portfolio.

[00:38:20] You still have equity exposure, but you're de-risking yourself somewhat using some sort

[00:38:24] of systematic process as the market gets more and more expensive.

[00:38:28] It's just whenever you think about like, I'm going to use valuation as a timing mechanism,

[00:38:32] it just always ends badly.

[00:38:34] And I know people look at Japan and it's right that if you had sold out when the PAPE was

[00:38:39] 100 of Japan, that was obviously a very good decision.

[00:38:41] But like a lot of stuff happened on the way up to 100.

[00:38:44] A lot of people thought 50.

[00:38:45] We're not going over 50.

[00:38:46] That's too much.

[00:38:46] We can't, you know, 60, 70, 80.

[00:38:48] And so I don't know personally if I would ever have no equity exposure, but I think

[00:38:53] I would probably have, if it got really, really expensive, if the market really got to levels

[00:38:57] it's never seen before, I would probably have some sort of, especially if I didn't need

[00:39:01] the kind of returns that equities can generate, I would probably have a systematic process

[00:39:05] where I'd be moving into more of a multi-asset portfolio to diversify a little bit.

[00:39:09] Understanding that behaviorally, I'm probably going to be wrong.

[00:39:12] I'm probably going to hurt my returns, but I could live with it to protect from the

[00:39:15] downside.

[00:39:16] I don't know if you think that's sensible, but that's the way I would think it through.

[00:39:19] I do because it's always an, and then what?

[00:39:21] So let's say, you know, you're in Japan and the Nakai is trading at a hundred times earnings

[00:39:28] or whatever else.

[00:39:28] And you're like, this is crazy.

[00:39:30] I'm going to sell all of it.

[00:39:32] Okay.

[00:39:32] Then what?

[00:39:33] I'm going to go buy what, what?

[00:39:36] JGBs.

[00:39:37] I'm going to go buy, you know, Chinese equities.

[00:39:39] Like what am I doing with that money?

[00:39:41] Then you have to be able to answer that question.

[00:39:43] And that's where I'm in the camp that you should have some form of a policy portfolio

[00:39:47] that you tack back to.

[00:39:48] And it's just a big difference in like where you are in life and what the goals are.

[00:39:52] If you're trying to make money, then you're taking some more concentrated risks.

[00:39:55] And you're thinking about where am I emphasizing that?

[00:39:57] Which, you know, spoiler is not like I'm taking a huge risk usually in like one market or one

[00:40:03] stock or one, you know, cryptocurrency or coin or something.

[00:40:06] It's like, oh yeah, I'm investing in my career.

[00:40:09] I'm investing whatever else to make my money.

[00:40:11] But then once you have the money, that's why.

[00:40:12] And this is that whole like get rich versus stay rich portfolio that Meb talks about too.

[00:40:17] You got to broaden out your thinking about this stuff and say, even if I believe way overvalued

[00:40:23] is bad, then what?

[00:40:24] What am I going to do about it?

[00:40:26] And does it still make sense?

[00:40:28] And this was kind of applicable because we just put out an episode of Mike Green today.

[00:40:30] And if you look at his research, what we're talking about in the episode is his idea is

[00:40:34] the market's going to keep if his passive thesis is right, the market's going to keep getting

[00:40:38] more and more expensive as the passive percentage rises and the biggest companies are to get

[00:40:42] more and more expensive.

[00:40:43] But also he thinks at some point it's going to end with some sort of, you know, major market

[00:40:47] move to the downside.

[00:40:48] And so that fits in really well with this idea.

[00:40:50] Like you might see something like this.

[00:40:52] If he's right, you might see something that's in the real world where the market just keeps getting

[00:40:55] more and more and more and more expensive.

[00:40:56] And like, you don't want to be the last one standing.

[00:40:58] But it's like the way to deal with that is, and it might even admit this, the way to deal

[00:41:02] with that is to have your equity exposure and move on.

[00:41:05] But you also could think about it from the perspective of what you and I just talked

[00:41:08] about, which is if that ever did play out and we're not, the market's not, the market's

[00:41:12] expensive right now, but it's not, it's not.com expensive yet.

[00:41:14] It's not crazy expensive yet.

[00:41:16] But if that ever did start to happen, if we started seeing 60 and 70 and 80 capes and you

[00:41:20] were a believer in that type of work, one of the things you can do is just slowly start,

[00:41:24] you know, diversifying more as we get up and up and up rather than trying to make some

[00:41:28] binary decision.

[00:41:29] Well, the 70 cape is the end of the road.

[00:41:30] So I've got to get out of equities.

[00:41:32] I mean, I think if you are a person and I'm a believer buy and hold is a very smart

[00:41:36] thing as well in this.

[00:41:37] If you just say like, I'm going to buy and hold no matter what the valuation is, I think

[00:41:40] that's a reasonable way for a lot of people to behave because when you start making changes,

[00:41:43] it becomes very, very tricky.

[00:41:45] But if you are going to make changes, like systematically reducing your exposure as we

[00:41:48] get to these crazy capes would probably be the best way to do it.

[00:41:52] Crazy capes, buy and hold, such a Jack Finfluencer thing to say.

[00:41:55] I know, God, I got to stop Finfluencing.

[00:42:00] So thank you for the audience.

[00:42:01] We only have one more clip and then I will be done with my Finfluencing for the day today.

[00:42:05] But this is another one that I thought was a great take from Meb.

[00:42:09] And it's very interesting because it's a very sensible strategy, but it's not a strategy

[00:42:13] that a lot of people employ.

[00:42:15] So here's Meb talking about why he thinks trend following should be a meaningful allocation

[00:42:18] in most portfolios.

[00:42:19] I think this one, we're probably the biggest outlier that I've ever met as far as an investment

[00:42:28] advisor and professional asset allocator as far as percentage they allocate to trend.

[00:42:35] And I'm not talking about a trend following only manager that puts all their money in trend,

[00:42:41] right?

[00:42:41] That's kind of like a founder or entrepreneur putting all their money in their own company.

[00:42:45] But someone, an endowment, an institution, a sovereign family office, our default allocation

[00:42:52] for what we would consider to be our flagship allocation model, we call it Trinity is half.

[00:43:00] And I think most people, if they've got the trend following bug are probably 10%, 20%.

[00:43:11] If they've drank the Kool-Aid and are totally all in, you know, we could go down a different

[00:43:15] rabbit hole and talk about how market cap weighting is trend following, but that's, that's probably

[00:43:19] a whole nother bullet point.

[00:43:21] But to me, it's hard to look at the evidence, hard to look at historical studies and research

[00:43:27] and come up with any other conclusion.

[00:43:29] And the reality is most academics and big banks that do the research come to the same

[00:43:35] conclusion, but then they say, Hey, well, this is just unpalatable.

[00:43:40] We can't, we can't put this much in, uh, because no one would be comfortable with it.

[00:43:45] So we're going to constrain it at 10 or 20% or something.

[00:43:48] Um, but listeners, if there's anybody out there that puts 50% or more in, uh, hit me up.

[00:43:53] I'm always looking for like-minded, crazy, crazy folks.

[00:43:56] But for us, that seems like a sort of nice yin-yang balance with the other half being,

[00:44:01] uh, buy and hold as well.

[00:44:02] I 100% agree with this, but I also disagree with this.

[00:44:05] And so let me tell you why.

[00:44:06] I 100% would agree with this because based on the data, trend following should be a significant

[00:44:10] exposure in everyone's portfolio.

[00:44:12] I mean, trend following, if you just think about it, people refer to trend following as

[00:44:14] just two different things.

[00:44:15] Like one thing is trend following.

[00:44:17] Basically, I've got some sort of system with the S&P 500 with moving averages.

[00:44:20] When it breaks the moving averages, I'm going to reduce my equity exposure.

[00:44:23] I'm going to get rid of my equity exposure.

[00:44:24] The other one is like these things like managed futures, where you've got, I'm buying in a

[00:44:28] long and short, a bunch of different things simultaneously.

[00:44:30] Like that's the type of trend following like Jerry Parker would do.

[00:44:33] So I'm talking about the first kind of trend following.

[00:44:35] So I think that that first kind of trend following, if you look at it, it basically

[00:44:39] has over the longterm, effectively the same return as the S&P 500 with about half the

[00:44:43] drawdown.

[00:44:44] So if you look at that, like there's no model I could put that in that'll tell me I shouldn't

[00:44:48] be doing that.

[00:44:49] I should obviously be doing that.

[00:44:49] There's the same return with half the drawdown.

[00:44:51] The problem is, and why I would disagree with Ned, and Ned would agree with this too, is

[00:44:55] the behavioral part is really, really challenging.

[00:44:57] You've got to size it right if you're going to do it.

[00:44:58] And you can't be one of these people who looks at the line items in your portfolio because

[00:45:02] the nature of trend following is it's wrong a lot successively, and then it's right in

[00:45:07] a massive way.

[00:45:08] So a great example is like if you use a trend following strategy, like the 200 day or something

[00:45:12] on the S&P 500, you lost almost nothing in 2008 when everybody else lost almost 50% of

[00:45:17] their money.

[00:45:18] But since 2008, there's been so many false signals over small loss, small loss, small

[00:45:23] loss, small loss relative to the market.

[00:45:25] And you have to be the type of person who can sit through that to follow it.

[00:45:28] So I think it's 100% correct that people should use trend following more in their portfolios,

[00:45:33] but you just have to know that you're the right type of person behaviorally and you have

[00:45:36] to size it right to use it.

[00:45:39] Behaviorally right, sizing it right, and aware of how it applies to which thing you're thinking

[00:45:44] of. I'm also in this camp, I think trend following can be really useful and it can be really useful

[00:45:50] in the preserving wealth as well as growing wealth phase two, because if you reduce those

[00:45:54] drawdowns, you compound better.

[00:45:55] So that's an obvious one.

[00:45:56] But you have to know what you're getting yourself into.

[00:45:58] And there's just examples.

[00:45:59] This is an extreme example, but it's like you can't trend follow on the value of your house.

[00:46:04] You can't look at the value of your house on Zillow and then be like, oh, the value dipped.

[00:46:08] I'm going to sell my house and what?

[00:46:09] Rent, you can't buy the house back.

[00:46:11] There's all these like complicated things that come into place.

[00:46:13] So philosophically, it makes sense.

[00:46:16] If you have assets that you're exposed to where you are to reduce the downside, you should

[00:46:20] have ways that you think about reducing that downside, especially, especially, especially

[00:46:24] when you're onto that like consumption phase or you want a tighter risk control on it.

[00:46:30] I am always baffled by that conversation, not being a regular part of like an investment

[00:46:36] conversation for people and thinking about strategies that might help them in this way

[00:46:40] when they're actually helpful.

[00:46:41] It doesn't mean they'll do it, but it's just worth at least talking through.

[00:46:45] So should I tell my wife we're going to trend follow the house?

[00:46:47] We're going to be like, you know, when the Zillow number breaks the moving average, we'll

[00:46:50] be like, all right, we're out of here.

[00:46:52] We're moving.

[00:46:53] Listen, I think this is the way to go.

[00:46:55] This is the influencing future we are after, or we're going to start trend following on,

[00:47:01] yeah, less liquid, more damaging assets like, yeah, your residential real estate that

[00:47:05] you live in.

[00:47:06] Well, the belief influencer, you have to have like some sort of thing you do, right?

[00:47:09] That other people don't do.

[00:47:11] And so maybe that, even if it's a ridiculous thing that makes absolutely zero sense.

[00:47:14] So maybe that's going to be our thing.

[00:47:15] Like we're going to be talking about like trend following your house.

[00:47:18] Yeah.

[00:47:19] Trend following your house.

[00:47:19] And I do have to say after that Talmud clip, I've been, is this book over here has been,

[00:47:23] I'm knocking everything over.

[00:47:24] I've been thinking if he could do the Talmud, I could probably do, I've been reading this

[00:47:29] Prince book.

[00:47:30] So I was thinking like, maybe my version of the Talmud is like, I'm going to equally

[00:47:35] allocate to dance, music, sex, and romance.

[00:47:37] Do you think I could, can I finfluence that?

[00:47:39] That would be the perfectly fitting portfolio for you.

[00:47:42] All right.

[00:47:42] We're trend following houses.

[00:47:44] We're putting the Prince portfolio together.

[00:47:46] Watch out now.

[00:47:48] The finfluencers are here.

[00:47:49] That's, yeah, that's probably a good note to wrap up on.

[00:47:51] I hope you've enjoyed being finfluence today and we will see you next time.

[00:47:55] Hi guys.

[00:47:55] This is Justin again.

[00:47:57] Thanks so much for tuning into this episode.

[00:47:59] You can follow Jack on Twitter at practical quant.

[00:48:03] You can follow me on Twitter at JJ Carbono and follow Matt on Twitter at cultish creative.

[00:48:08] If you found this discussion interesting and valuable, please subscribe in either iTunes

[00:48:13] or on YouTube or leave a review or a comment.

[00:48:16] Also, if you have any ideas for topics you'd like us to cover in the future, please email

[00:48:20] us at accessreturnspod at gmail.com.

[00:48:23] We would like this to be a listener driven podcast and would appreciate any suggestions.

[00:48:28] Thank you.