Episode Summary
Our focus was on how Cambria has been able to grow and thrive in a world where the ETF giants have Assets Under Management (AUM) in the trillions through offering differentiated “quant lite” strategies.
Joining us from his Manhattan Beach, California, office, Meb covered the strategies that fueled their growth, starting with shareholder yield, which goes beyond dividend yield and includes stock buybacks.
We covered factor investing broadly, and how Cambria productized some of the strategies by combining them. We also spoke about tail risk protection, and how to think about global asset allocation.
We also touched on Meb’s popular podcast and email newsletter.
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Guest-at-a-Glance
💡 Name: Meb Faber
💡 What he does: He’s the founder and chief investment officer of Cambria Investment Management.
💡 Company: Cambria Investment Management
💡 Noteworthy: Meb has authored numerous white papers and many books. He is a frequent speaker and writer on investment strategies and has been featured in Barron’s, The New York Times, and The New Yorker.
💡 Where to find Meb: LinkedIn Twitter Personal Site
Key Insights
⚡ Now is a great time to be an individual investor. Meb explains, “We live in the best time ever to be an investor in history. You can invest in a limitless buffet of choices — stocks, bonds, real estate, commodities, on and on and on — and you can do it for free. So trading commissions are zero. You can buy the global market portfolio, which is roughly half stocks, half bonds, half US, half foreign, or half ex-US, smattering of real assets mixed in for almost free, zero. It’s like 0.04%. And if you include short lending, which we may come back to later, you’re actually probably already at zero or negative. You’re getting paid to own it. It’s the best time ever.”
⚡ Opportunistic buybacks can be a great way to return capital to shareholders. There are many reasons why buyback shares are a good investment opportunity. Meg says, “If you have these flexible tax efficient dividends, and your stock is trading below intrinsic value, Warren Buffett said this — this isn’t a Meb quote — there’s no better way to improve returns. There’s no better investment opportunity if your stock is trading it in below intrinsic value than to buy back shares. So buybacks, starting in the ‘80s, started inching up and really, starting in the 90s, eclipsed dividends on aggregate as a way to return cash to shareholders. So if you’re a dividend investor and you’re ignoring buybacks, you’re ignoring half the ways that companies distribute their cash flow.”
⚡ Buy-and-hold is a good investing strategy, but it has its problems. There’s a good reason why the buy-and-hold strategy is very popular among investors. But it comes with certain limitations. Meb explains, “There are some problems with buy-and-hold, I think. The biggest one is that it’s traditionally fairly tethered to the business cycle and to what’s going on in the real world. […] It just can be challenging for some investors, psychologically and mentally, to have it all hit the fan at the same time, meaning what happens when a bear market happens? Stocks down? Think financial crisis. Well, unemployment is shooting up, recession, banks are failing, Lehman’s going under, you’re losing your job, and also, your portfolio’s going down. That’s an odd combo. Actually, you would want it to be the opposite. I would want my financial assets to go up when it’s hitting the fan in the real world. But traditional buy-and-hold portfolios tend not to have that feature, which makes it a little tough for people to really sustain over time.”
Episode Highlights
Dividend Investing Gives You a Slight Value Tilt
“Dividend investing. The best marketing strategy ever. People resonate with a concept of, ‘Hey, I’m getting checks in the mail,’ dividends coming out of the earnings of these companies, and dividend investing. Historically, investing in high-dividend stocks has been a good investment strategy. The reason it’s a good investment strategy is that it gives you a slight value tilt. So the higher dividend yields are usually simply just ’cause the price is low, but you’re also avoiding the expensive stocks.”
ETFs Are Tax Efficient
“You can launch ETFs for a low cost. They’re tax efficient. So the trading gives you a structural tax advantage over active mutual funds. I think that estimates say it’s about 70 basis points per year — just from the structure and taxable accounts — ignoring the fees. Fees add more. So you can offer strategies that aren’t market cap-weighted in general.”
Market cap-weighted Equites Are Not the Only Passive Portfolio
“We love to say that market cap is the only passive portfolio, and so people think of stocks, but then there’s the global passive portfolio. So if you went out and bought all the public assets in the world, what does that look like? It looks like roughly half stocks, half bonds, half US, half foreign. And it shifts over time a little bit. But it’s actually been a really great portfolio historically; it’s hard to beat. I think it’s better than 60/40.”
When the Buy-and-Hold Strategy Is Doing Terribly, Trend Following Usually Does Well
“Trend following is simply combined with momentum; they’re cousins in that you want to be invested in things that are going up and out of them when they’re going down. Sounds simple and a lot easier than in reality. But trend following and practice when you buy funds, or funds that do trend following, traditionally does similar to buy-and-hold. I think it’ll outperform buy-and-hold over time, but it’s similar. It traditionally does it with less volatility and drawdowns, but most important is that it does well usually. When buy-and-hold is doing terrible, trend following usually does great.”
Top quotes:
[05:07] “We tend to look a little bit different, and that’s a part of being away from Wall Street. We like to say we’re quants that have a big appreciation for history, and we put it into practice.”
[09:00] “So if you are a dividend investor, and you are ignoring buybacks, you are ignoring half of the way companies distribute their cash flow.”
[21:25] “I think about what’re the main issues that people come across, and a lot of it’s behavioral. It’s messing up your investing program that you established ahead of time. Usually, people don’t really have a written investing plan. You should. Listeners, if you don’t, and you don’t ’cause we do polls, and it’s like 95% don’t have a written plan. They just kind of wing it. They don’t establish sell criteria when they buy a position, which I think is foolish because what happens when it goes wrong, and you become emotional, but also what happens when it goes right?”
Full Transcript
[00:00:00] Meb Faber: So we tend to look a little bit different, and that’s part of being away from Wall Street.
[00:00:03] Intro: Hello and welcome to Signals by AlphaSense, where we hear thoughtful insights from business leaders, investors, and experts.
[00:00:14] Nick Mazing: Hello and welcome. You’re listening to Signals by AlphaSense. I’m your host, Nick Mazing. Today we’re joined by Meb Faber, who is the Founder and CEO of Cambria Investment Management. Cambria is a niche ETF manager with 12 ETFs and around a billion in AUM. So we’ll discuss how Cambria has been successful,
[00:00:33] either world is really dominated by the big three indexing ETF companies. And Meb is also the author of several books on asset allocation. I was an editor one of them years ago on Global Asset Allocation. He’s also the host of the Meb Faber Show, which is a great podcast. I strongly recommend that. And he has a weekly newsletter from the Idea Farm.
[00:00:55] I read that as well. He links to a lot of interesting research papers that he curates, and we have all the links in the show notes. Meb, can you tell our listeners a little bit more about you and about Cambria?
[00:01:07] Meb Faber: Sure. Well, it’s great to be here. I love, as we continue to grow and get bigger, I’m looking forward to losing the company descriptions. I was talking to Wall Street Journal this morning, and, you know, people describe us as an emerging manager. I’m like, “Yo, we’re 15 years into this. We, our ETFs, are now 10 years old.” And in any other part of the asset management industry, $2 billion. Almost,
[00:01:30] I’m rounding up. 2 billion in AUM. You’re no longer niche. But, but the problem with asset management, you’re talking about some firms with a T at the end of their name, like Vanguard, where they have trillions in assets. So it’s a big space. But yeah, look, we’re, we’re a little California, Los Angeles space boutique here in Manhattan Beach.
[00:01:49] If listeners, if you’re in the neighborhood, come say hi. We’re pretty different. Uh, we tend to be, we like to say concentrated and weird. The reason being is we live the best time ever to be an investor in history. You can invest in a limitless buffet of choices, stocks, bonds, real estate, commodities, on and on and on, and you can do it for free.
[00:02:16] So trading commissions are zero. You can buy the global market portfolio, which is roughly half stocks, half bonds, half US, half fore, fore, uh, foreign, or half ex-US, smattering of real assets mixed in for almost free, zero. It’s like 0.04%. And if you include the short lending, which we may come back to later, you’re actually probably already at zero or negative.
[00:02:41] You’re getting paid to own this best time ever. So in a world of 10,000 plus funds, why in God’s name do we need anymore? We probably don’t need 1000 funds. Well, as you look around the landscape, the basics are covered, but there’s a lot of areas that if you plan on moving away from market cap, waiting from the basic indexes, and you want to be an active manager who want to try to generate alpha, right, you have to be weird and concentrated and different. And the problem is a lot of the strategies out there, they say they are, but they really just look like a closet index. So we try to exist in this tiny little dark corner of the investing world where we have no competitors. And so, uh, we have 12 funds.
[00:03:29] We, uh, we like to say we’re quant, but it’s really quant light. Those funds range from very plain vanilla strategies, like long-only equity to, to much more esoteric and niche things like tail risk and trend. But there’s four criteria that we use when we launch funds. First being, what I alluded to, the strategy can’t exist, right?
[00:03:53] So, can’t already be out there. And if it does exist, it has to be something we consider to be, we’re gonna do it much better or much cheaper. All right, better? Look, subjective, lofty goal. Cheaper? All 12 of our strategies are cheaper in the category average. A couple are the cheapest funds in the category. Now that’s only because Vanguard’s not around, but we’re happy that’s the case.
[00:04:15] Most funds are just too expensive. Um, two, it has to be something where we’ve published our own research or there’s a lot of academic and practitioner research already. So two of the biggest pillars we focus on or value on one side, and then momentum and trend. Both of those have a hundred years worth of academic and practitioner research.
[00:04:35] We put our own spin on it. Third, it has to be something I wanna put my own money into. The vast majority of mutual fund managers, I shouldn’t say the vast majority, the majority of mutual fund managers have $0 invested in their own fund, which I think is a travesty. And lastly, it has to be something investors actually want.
[00:04:54] We have a handful of ideas that Meb thinks is brilliant, and we may put out one day now that we’re getting to size, maybe 1 or 5 or 10 billion. But, uh, I don’t think anyone else on the planet would like them, or at least not yet. So we tend to look a little bit different, and that’s part of being away from Wall Street.
[00:05:10] But, we like to say we’re, quants that have a big, uh, appreciation for history and, and put it into practice.
[00:05:16] Nick Mazing: Mm-hmm. And now, let’s talk about the different strategies that, that you offer. Now, you, you build a business really around shareholder yield. And when you look at like different investment concepts, so you look at tail risk, that’s the black swan, that’s the lab, right? You look at risk parity, that’s rate value.
[00:05:35] You look at, you know, the endowment model that Swensen. I think of you as the shareholder yield guy. And it certainly takes a more holistic approach to really capital return. So can you tell us a little bit more about shareholder yield and how you productize the, the strategy because you started with, with dome US domestic and then you expanded to developed markets and emerging markets?
[00:05:59] Meb Faber: Yeah. So, um, we launched our first shareholder yield, it’s gonna be 10 years ago this spring. So I’m getting old. We’ve been in this business a while. But it’s, uh, it’s fun to see. So we have three, we have the US which is SYLD, and the Foreign and Emerging, which are FYLD and EYLD. And look, we don’t claim to invented this concept.
[00:06:19] In fact, it’s an idea that has been well documented in research in the financial literature from James O’Shaughnessy on his classic, what works on Wall Street to academic papers, on and on. But at its core, the big phrase of 2022. First principles, if you go to first principles, what do you want when you own a company and a stock? You want a great business that’s high quality, that’s generating a lot of cash,
[00:06:46] Meb Faber: um, and sloughing off this cash, returning it to shareholders, so keeping management honest through dividends and buybacks. They’re not doing it by loading up a ton of that. That sounds like a good business. That’s like a Warren Buffett as business-like Security Analysis 101. And what’s important about this concept of shareholder yield is that in the financial markets, sometimes the rules change, or sometimes the landscape shifts.
[00:07:11] So dividend investing. The best marketing strategy ever. You know, like people resonate with a concept of, “Hey, I’m getting checks in the mail.” Dividends, right, coming out of the earnings of these companies. And dividend investing, historically, investing in high-dividend stocks has been a good investment strategy. The reason it’s a good investment strategy is it gives you a slight value tilt. So the high higher dividend yielders are usually simply just ’cause the price is low. But you’re also avoiding the expensive stocks. It’s not a particularly good value tilt, but what’s important to notice, and there’s thousands of dividend funds. What’s important to notice is the shifting sands. So companies have always been doing buybacks despite what the politicians say. It’s been going on for a hundred years. Share counts can go up when they issue shares to executives to fund the business, they can go down when they retire them. But it really started to change in 1980s.
[00:08:06] 1980s, companies started to feel like they had safe harbor for buying back shares. So, stock buybacks, which are very maligned and particularly misunderstood, or nothing more than a tax-efficient dividend. Just scratch buybacks from your memory and say, tax-efficient dividend, flexible tax-efficient dividend.
[00:08:25] And so executives and companies are well-suited to use whatever tools to maximize shareholder return. And so if you have these flexible tax efficient dividends, and your stock is trading below intrinsic value, Warren Buffet said this, this isn’t a Meb quote, “There’s no better way to improve returns.
[00:08:45] There’s no better investment opportunity if your stock is trading it in below intrinsic value than to buyback shares.” So buybacks starting in the 80s, started inching up. And really starting in the 90s, eclipsed dividends on aggregate as a way to return cash to shareholders. So if you’re a dividend investor and you’re ignoring buybacks, you’re ignoring
[00:09:04] half the ways that companies distribute their cash flow. You can’t do that as an investment analyst and be honest and say, “I’m incorporating all information.” What’s interesting, and you have to use net buybacks, is ’cause some companies will just issue a ton of shares to execs, and then buyback, and you have a zero net difference.
[00:09:22] But also think about the dividend investors. You’re excited, you see this fat 4% yield, but because you’re ignoring buybacks and issuance, what if that company’s issuing 5% shares per year? Well, really you have like a zero yield. And so the dividend strategies all miss this. So we launched this and we expected there to be dozens of competitors to these funds and strategies, which have, have performed great over the past decade.
[00:09:46] And there’s hasn’t been really any, which half of me is elated, uh, you know? Our, our largest one is about to hit a billion in assets. But also, I scratch my head a little bit ’cause once you take the pill and you say, “Oh my God, how could I be avoiding? How could I be not using this information of how companies distribute cash?”
[00:10:06] I don’t know how you go back to saying, “Okay, that’s fine to just ignore. Let’s, let’s ignore that piece of information.” So we’re obviously biased, but we think it’s a very sound investing methodology. The great news, huge news right now, 2023, is this value trade is one of the best times in history, we think to put on this trade.
[00:10:25] So, values had a nice run the past two years, really peaking in the craziness of February 2021. But if you look at the spreads, particularly globally, but also within the US, you’re still top decile in some cases, top couple percent in history for the value spread. So a lot of the expensive stuff has got crushed, but a lot of the cheap stuff, particularly in emerging markets and foreign developed, we think could be the trade of the next decade.
[00:10:52] So we’re excited.
[00:10:53] Nick Mazing: Yeah, and it’s interesting that a number of companies that when you look at companies with the largest shareholder return in the last sort of 10 years, 20 years, they’re, they’re the share cannibals like all result. Right? They’ve been buying back stock forever, how fee they pay a dividend, right? It’s very interesting to see how, you know, is the share
[00:11:12] it’s a little bit of a moment of truth, right? When they, when you have on the call, when executive say, “Oh, you know, we are initiating a buyback, but it’s offsetting dilution.” And then share count actually goes up and up and up and up. And then you have companies where every year or almost every year, the share count goes down, which increases the value for the, uh, current shareholders.
[00:11:30] Meb Faber: That’s a good monger phrase. He says, “Look for the cannibals. You want the ones eating themselves.” No, there’s no more beautiful chart than we come up in the shares outstanding just slowly year over year now. But what’s important about this strategy is you have to have a value filter. And so Berkshire does a great job of this, right?
[00:11:46] They say, “Hey, we’ll buy back stock when it’s below, like 1.3 times.”
[00:11:51] Nick Mazing: Yeah. 1.2, 1.3 is…
[00:11:52] Meb Faber: And CEOs, on average, do a great job. So if you look at the big buybacks where it’s 5% or more shooters shares outstanding per year, they usually trade at a significant discount to fair value. And the ones that are issuing usually trade above fair value.
[00:12:07] Last thing you want is an expensive company buying back shares. Media loves those, right, or expensive company in general. So having that valuation filter is, is I think, really important too.
[00:12:18] Nick Mazing: Yeah. And now you also have factory ETFs. So can you tell us what factors are to begin with, in case our listeners are, are not familiar with those, and how you combine them in in your products like value and momentum?
[00:12:33] Meb Faber: 50, 50 years ago, indexing or passive really meant something. It meant market cap waiting, and that’s it. And it was a amazing invention. Bogle, Wellington, Wells Fargo, all these others. It’s not amazing, though, from the index or the market cap standpoint, it’s for what it allowed, which was you don’t do anything.
[00:12:55] You just bought a portfolio of stocks. They float, you mess around corporate actions on occasion, but that’s it. But what that allowed you to do is not have a staff of 50 analysts or people updating traders ’cause you don’t do anything, so you could offer it for lower cost. For 50 years from now, well, guess what?
[00:13:10] You can launch ETFs for low cost. They’re tax efficient. So the trading gives you a, a structural tax advantage over active mutual funds. I think that estimates say it’s about 70 basis points per year just from the structure and taxable accounts, ignoring the fees. Fees add more. So you can offer strategies that aren’t market-cap-weighted in general.
[00:13:34] Right? And market cap waiting is fine, but to me it’s never been optimal. And the reason being is that market cap waiting can expose you to booms and bubbles. So market cap waiting at its core, there’s no tether to valuation whatsoever, right? Like, what a crazy way to invest. You invest just based on price.
[00:13:54] The price goes up, market cap goes up, you own more. As market cap goes down, you own less. Now that guarantees you own the winners and the losers go to zero. So it’s a good, fine investing strategy, but it’s not ideal because there’s no tethered evaluation. And it becomes particularly problematic when you have bubbles.
[00:14:11] And 1990s late internet bubble in the US, people remember that. And the biggest stocks that become the biggest part of the index are often the most expensive. And there’s gobs of research that show that the last thing you want in an index is the largest companies. Because tho they go on to underperform that sector, that country, that index by about three percentage points for the next decade.
[00:14:35] Meb Faber: And you can show a chart. And one of my favorite charts in all of investing is Ned Davis. They look at, if you just invested in the largest stock in the stock market when of the time is the largest. So Amazon, Apple, IBM, GE, on and on, how does it do versus the S&P? It’s a horrible investing strategy.
[00:14:49] Absolutely atrocious. So, market cap is, is suboptimal in my mind. So a factor to me is really anything that moves you away from that. Now, it could be value, “Hey, I’m gonna do the Dogs of the Dow, 10 stocks that have the highest dividend yield rebalance once a year.” That’s a value strategy. You could do momentum, which we love.
[00:15:10] You know, you mentioned Vamo, which is an odd doc. So, you know, going back to, I don’t, I don’t think there’s a fund in all of the mutual fund in ETF space that’s quite like it. So at its core, it buys a hundred stocks with value and momentum characteristics. So if you’re looking at factors, all right, so we want cheap stocks that also have good momentum.
[00:15:31] So as one of my buddies, Steven Sugar says, “Stocks that are cheap hated, and hopefully in an uptrend.” You know, the yin and yang of investing. Uh, it’s rare, but it happens. But then the cool thing that fund does, which is different, cool, depending on when, is it’ll hedge up to a hundred percent of the fund dynamically based on top-down levels of US
[00:15:53] stock market value for roughly half of it, and then trend for roughly half of it. So it can be 100 percent long, only 25, 50, 75, a hundred percent hedge or market neutral. And sometimes that’s good. Last couple of years had a nice positive return last year. Sometimes it’s atrocious from launch through like 2020,
[00:16:14] this fund was horrific because value stocks underperformed, small-cap underperformed, value momentum underperformed, hedging anything underperformed. Hedging, particularly with the choice of the S&P underperformed. So it was a stinker, but the tides have shifted. You know, I think you can tie it back to interest rates bottoming, the turn in, uh, whether it’s the election, COVID, et cetera. But really there was a, a regime shift. Interest rates have come up obviously a lot. Inflation has returned. It’s a different market environment. The expensive stuff has already gotten killed, so, you know, we can look around and see the amount of stocks that are down 60, 80, 90%.
[00:16:50] But a lot of the value stuff hasn’t quite really benefited. So this could be the fund is currently, I think the strategy is like 75% hedged. Don’t quote me on it, but maybe a hundred percent. Somewhere, somewhere that 50 to 100 percent. But it updates weekly, so they can change quick.
[00:17:06] Meb Faber: But it’s a cool idea because the strategy to say, “Look, I wanna invest in stocks, I want the good stocks. But also if we go through a long bear market, 20, 40, 60, 80%, like I wanna protect. I wanna survive.” So, nothing quite like it doesn’t mean it’s for everyone, doesn’t mean it’s necessarily for anyone. We like it, but it’s different.
[00:17:25] We’ll, we’ll give it that.
[00:17:26] Nick Mazing: Yeah. And you, you also have some interesting thinking around what is actually passive allocation, right? Because obvi making an investment in, let’s say the S&P 500 index fund, yes, it is passive, but we’re actually actively allocating to US large caps equities. Right? And you have some products that address kind of the entire tradeable asset market. So how, how did you approach that?
[00:17:55] Meb Faber: Yeah. So, we love to say that market cap is the only passive portfolio when so people think of stocks, but then there’s the global passive portfolio. So if you went out and bought all the public assets in the world, what does that look like? It looks like roughly half stocks, half bonds, half US, half foreign.
[00:18:16] And it shifts over time a little bit. But it’s actually been a really great portfolio historically. It’s hard to beat. I think it’s better than 60/40. It’s more diversified. We launched at the time the first ETF with no management fee, so we don’t charge a fee on it, but it’s a fund-to-fund, so it owns underlying ETFs, some of which are ours.
[00:18:34] Meb Faber: So, we will probably break even, maybe make a little bit of money on it, but that wasn’t my goal. My goal was to say, “I want to launch a global market portfolio, but without the drawbacks of a global market portfolio that’s market cap weighted.” So I want this to be tilts, tilts towards value and momentum, and I wanna make sure it includes real assets.
[00:18:53] The two big missing pieces from the global market portfolio, I think, are really single-family housing and farming. It’s hard to allocate to those two asset classes traditionally, for now. So that portfolio is a wonderful buy-and-hold asset allocation for super low cost. There’s some problems with buy and hold,
[00:19:11] I think. The biggest one being is that it’s traditionally fairly tethered to the business cycle to what’s going on in the real world. So if you invest in assets, I mean, look, we just finished 2022, one of the worst years ever for 60/40 traditional US stocks and bonds. The global market portfolio would’ve done better because it has tilt towards value, it has foreign stocks, it has real assets, all of which did better than traditional 60/40.
[00:19:36] Um, but, but still, it’s buying hold. And so it still has this tether to the economy and what’s going on in, in, in the real world. And over long periods, it’s fine, 10, 20, 30, 40, 50 years, it’s a great portfolio. It just can be challenging for some investors, psychologically, mentally, to have it all hit the fan at the same time.
[00:19:59] Meaning what happens when a bear market happens? Stocks down 50, think financial crisis. Well, unemployment, shooting up, recession, banks are failing. Lehman’s going under, you’re losing your job and also your portfolio’s going down. That’s an odd combo. Like I actually, you would kind of want it to be the opposite.
[00:20:16] Like I would want my financial assets to go up when it’s hitting the fan in the real world. But traditional buy and whole portfolios tend not to have that feature, which makes it a little tough for people to really to sustain over time.
[00:20:32] Nick Mazing: And this, this actually inadvertently goes into my next question, or it’s a two-part question. Number one is how do you get all the nice ETF tickers? And since you have tail and fail, and there is a study that I read, I think it’s from 2012, that if your ticker is a real word, the liquidity is better. Right?
[00:20:57] And you have tail and fail, which are tail risk hedging products that you market, I think, specifically in the two RIAs themselves rather than regular investors. So how did those products come about? What’s the thinking there?
[00:21:13] Meb Faber: You know, the tickers, you just gotta ask. I’m often surprised at what’s available, but, you know, as I get older, you know. As, as we’re, uh, hitting the 10-year mark on our ETFs and we have over a hundred thousand investors, you know, I think about what’s, what’s the main issues that people come across. And a lot of it’s behavioral, right?
[00:21:33] It’s messing up your investing program that you established ahead of time. Usually, people don’t really have a written investing plan. You should, listeners, if you don’t and you don’t. ‘Cause we do polls, and it’s like 95% don’t have a written plan. They just kind of wing it. They don’t establish cell criteria when they buy a position which I think is foolish because what happens when it goes wrong and, you know, you become emotional, but also what happens when it goes right? If you buy an investment, it goes up 10 x. Like, are you gonna keep it? You gonna sell it? Because sometimes it’s 10 x is on the path to a 100 x. Anyway, so writing it down helps to keep you on the same way as the diet, as in, as any program would do.
[00:22:12] But one of the challenges with a traditional portfolio that we mentioned is these drawdowns, you know. And people say, “Buy and hold. Just gotta sit through it.” And, and let’s clear up some misconceptions. Even Bogel wasn’t a buy-and-hold investor, right? Like we posted a video on YouTube that shows, you know, he talks about trimming portfolios in the late 90s as stocks went crazy.
[00:22:35] Rebalancing obviously also does, has this feature, but calibrating is what some of our podcast guests called, or over-rebalancing. But there’s another investing strategy as you think about what can help a traditional portfolio. And I’ll come back around to tail and fail in a minute. But, but as you go down the list, like the investing pyramid, it’s like one, uh, invest in a global opportunity set of global stocks, global bonds, global real assets. People already don’t do that. They have massive home country bias. They put all their money in their own country, and that’s it. Okay. They exclude real assets. B obviously implement it with a mine towards low cost and tax efficiency.
[00:23:15] Meb Faber: We like ETFs, but… Three have tilts towards value. We think that’s important to avoid the, the manias. Four is really like a, a concept that almost no one does, which is trend following. And trend following look, goes back a hundred years, Charles Dow has very long history practitioners. Trend following is sort of like the opposite of value investing in my mind or, or buy and hold.
[00:23:41] Sometimes they overlap, but for a lot of times, they don’t. Trend falling, uh, is simply and combined with momentum, they’re kind of cousins, is you wanna be be invested in things that are going up and out of them when they’re going down. Sounds simple. And a lot easier, and than in reality. But trend falling and practice when you buy fund or funds that do trend falling traditionally does similar to buy and hold.
[00:24:03] I think it’ll outperform buy and hold over time, but it’s similar. It traditionally does it with less volatility and drawdowns, but most importantly is that it does well usually when, when it buy and hold is doing terrible, trend falling usually does great. 2022, fantastic example. Almost everything
[00:24:22] stunk. Trend falling, managed futures, another name for a different cousin, did fantastic. Now, 2008, 2009, same thing. And so the problem with trend falling, uh, so people are like, “Why don’t I just put all my money in trend falling?” Well, the problem with trend falling is you can underperform in other periods when the S&P is romping and stomping 20% a year.
[00:24:43] Uh, but you also look different. And humans don’t love being the odd one out in the room when everyone else is winning. You go to a cocktail party, everybody’s talking about their vacation, a new house they’re buying, from their Dogecoin and Tesla, and you’re sitting over in the corner, you know, nursing your Bud Light ’cause you can’t afford a, a more expensive drink. And they struggle. So we came up with a balance. We call it Trinity, and we run momentum funds too. But Trinity is basically half buy and hold and half trend. Now that’s probably more trend than any investment advisor in the country. I don’t know anyone that does more than 50 as a, as a base case.
[00:25:22] But, we think it, um, we’ve been running this for over five years now, Trinity Strategies. And to us, the whole point of this game we’re playing is to finish, right? To reach that funded contentment, as my friend Brian Portnoy says, that’s the whole point, right? And so if you don’t get to the finish line, if your chips get taken away, if you get taken out of the game, everything doesn’t matter. And so having a path, an investing structure, because there’s times when buy and hold will do great, and there’s times when trend won’t really shine, but the, the combination of the two is, I think, greater than the whole. This is long-winded answer. Sorry. So, but, so on the way at a tail risk, you know, it’s like all these other things you would do first, so we mentioned all these steps and trend is, is one of my favorites, my desert island strategy. But even then, there’s periods where either an individual market like US stocks hit a, a 10-year P/E ratio of 40 during this last cycle. I, I thought they might eclipse 1999, but they didn’t, they were close.
[00:26:24] 1999 they got to 45. Now, historically, there’s other markets that have been hired. Japan got almost a hundred in 80s, which is astonishing. So it can get crazier, and others have been in the 60s, but we got to 40. We’re back down around 28, 29, I think. But thinking about hedging your risks, I, I don’t think really anyone agrees with me on this.
[00:26:44] We just published Twitter thread and a blog post called “Things I disagree with” that 75 things I believe that 75% or more of my professional peers would disagree with, and we’re up to 20 now. Um, but one of them is that the vast majority of investors are highly leveraged to one single market, which is US stocks.
[00:27:05] And the example we give is, let’s say you’re a stockbroker. They don’t call them stockbrokers anymore. Let’s say you’re a financial advisor. You work for Merrill Lynch. Well, you own stocks in your own portfolio. Even if it’s diversified 60/40, the stock volatility swamps the bond. So really, it’s mostly stocks.
[00:27:22] And as we know, almost no one owns a meaningful amount of foreign. Average investor in the US puts over 80% in US stocks. Huge home country bias. Okay, so that’s one times leveraged. Two, your clients own US stocks and so, uh, your fee-based revenue is very directly levered to that. Three, when it hits the fan,
[00:27:49] so let’s say the market goes down 50, guess what clients do? They panic. They withdraw. They sell. They say, “You’re an idiot. Why’d you put me all on US stocks?” Four, if you don’t own your own company, even if you do, it might go out of business, but three, you may work for Merrill and Merrill’s like, “All right, well, we have to downsize.
[00:28:05] What are we seeing right now in the economy? Super low employment.” But a lot of these tech companies are saying, “Okay, we’re laying off 20% of the workforce.” So four, so the market’s down 50. Your, your net worth, your portfolio just went down 50, your revenue went down 50, you may lose your job, on and on. It was like, why in the world do you wanna lever everything to one economic outcome? Which is most of the time, it’s good, but when it’s bad, it’s, it’s life-changing bad. And so, we thought about this, and we launched a strategy, and a lot of times, we use dozens of other companies ETFs. But sometimes we look around and say, “Huh, there’s nothing out there that we want or would like to use, or we, we would like to do it different.”
[00:28:46] And in this sort of inverse space, a lot of the funds were either really confusing, complicated, or really expensive. And so we said, “Can we build a better product?” We think so. And so we came up with a strategy. We wrote a white paper on it, and we said, “What if you just paired buying a ladder puts, so three months on out to 15 months on the stock market?
[00:29:07] Rebalances once a month, and the collateral sits in bonds, so you get some income more now than you did a year ago.” But, uh, historically, that strategy does a pretty good job of hedging the times when it really hits the fan. Like any insurance, life insurance, house insurance, it’s probably gonna lose money most years.
[00:29:25] But when things go bad, and when they go really bad, it’s usually a good allocation to make. To me, that’s like the, the seasoning on the end of the portfolio. You gotta do all the other things right. But if you think about, “Hey, I really wanna protect going to bed tonight, waking up tomorrow, and stock market being down 20,” which has happened before,
[00:29:45] what could I add that would, that would help?” And I, let me caveat this. I like to say this is not probably a sharp ratio optimization optimal portfolio to add this. In fact, most investors may not need it, and may be a cost, but you wake up on that day, and it wasn’t too long ago when we were watching the futures at night, stocks were going down 8% every day during the pandemic where you pull up your portfolio, and they’re like, “Oh my God, red, red, red, red, red, red, green.”
[00:30:15] Meb Faber: Right? You see something that’s like helping you sustain. I think that’s psychologically worth something. So we own quite a bit of it in our company balance sheet, uh, paired with Trinity as a way to balance, some outcomes. Not for everybody, though. A lot I could say that that’s tagline for all of our funds.
[00:30:32] Weird, concentrated, different. We think they’re great. Not for everybody.
[00:30:36] Nick Mazing: Yeah. It was kind of rounding of the different strategies. And you have couple three oddball ETFs, low AUM, cue tickers like BLDG for real estate and so on. And one thing I absolutely don’t like in the ETF industry is what they do is when you have a low AUM ETF, it gets shut down. And it gets shut down at like the worst time, like KOL.
[00:31:05] The COVID had got shut down.
[00:31:07] Meb Faber: Man, I, I wanna relaunch it. I tried to email Jan. I said, Jan van Eck. I said, “Can I have the ticker now? Are you done with this? Can I just relaunch the same fund?” I would’ve said, “I would’ve taken it over. Why? Just give it to me.”
[00:31:18] Nick Mazing: Or, or spec, right? Like, like it, it seized existing after launching pretty, pretty quickly. So how do you think about these, uh, these low AUM products is like a laboratory or like, what’s the thinking be there?
[00:31:30] Meb Faber: Well, let me give you some non-consensus perspective. The bigger fund companies close way more fund than the close, way more funds than the small fund companies. And the reason why, and this isn’t everybody, but some of the big fund companies, they say, “Ooh, what’s the hot trend today? Disruption. What’s the hot trend now?
[00:31:51] Managed futures trend.” Whatever. And so they take 20 funds, they throw them against the wall, and if they don’t scale, they close them, and they move on. The mutual fund industry over 10 years, roughly half the funds go away. So this isn’t anything new, right? And so this has been going on forever. Uh, I hate it. And so, we, when we launch a fund, we plan on never closing it.
[00:32:14] That’s the goal, right? We’ve never technically closed a fund, We kind of repurposed one, but we’ve never closed one. And the small size, to me, the way it has to be viewed is as a portion of the overall lineup. So even if something is at 10 million and technically losing money, that’s not how I view it. I don’t care.
[00:32:34] I, I’m, if I launch something, I’m given that sucker minimum 5, 10 years, right? Like I, I, there’s plenty of environments, you launch something, and you’re like, “This isn’t the right time.” You know, it just, one day, the world will see how brilliant this strategy or, or Meb is and, and come around. And we’ve seen that many times with some of our funds.
[00:32:53] Where, I mean, look, value investing, uh, wasn’t in favor for the vast majority of our existence as an ETF company. Our largest fund, our oldest fund, is a value fund and it, the strategy’s killing it right now. So if I shut it down after five years, it would’ve been a huge mistake. So we hopefully will never shut anything down.
[00:33:14] Meb Faber: Usually it’s pretty orderly, but again, I think the general practice, what you want to do is align with a fund company that has a soul, it could be Vanguard, hopefully, it’s Cambria, um, that launches funds they believe in rather than, “Hey, I, what can we launch that people will plow money into the hot dot?” No, I want something that the PM is putting his own money into.
[00:33:39] Like if you go on CNBC and you’re hawking some, you know, strategy, every interviewer should be like, “Okay, how much do you have invested in this fund?” Because the answer for me is like, I put all my public assets into our funds. Like, that’s crazy not to. You gotta have skin in the game, and it’s crazy to me. And it made sense later.
[00:33:55] I said, ’cause a lot of these guys don’t invest in their own fund ’cause they know it’s garbage, and it’s too expensive. So I, I, it makes a little more sense. We hope we don’t ever close any. Now that haven’t been said, we’re gonna probably launch a half dozen, dozen more in the coming years. Some of which are gonna be totally blue ocean, new ideas where there’s nothing out there quite that exists.
[00:34:15] And I will not be that head in the clouds guy that says, No, no, no. You have to, everyone has to accept this idea that’s new and different.” Maybe it’s just actually a terrible idea that Meb came up with, right? Like, like, I’m, I’ll be honest and say, “Okay, look, nobody wants this. I’m at peace with that.” But today, knock on wood, that hasn’t happened yet.
[00:34:37] So, the whole point of this takeaway is like, you want to find the fiduciaries that are either required by law or out of their goodness of their heart acting in your own best interest in a partnership rather than as a product provider.
[00:34:52] Meb Faber: And I think that’s important.
[00:34:54] Nick Mazing: Meb, thank you for joining us.
[00:34:56] Meb Faber: Oh, it’s been a blast. We’ll do it again.
[00:34:58] Nick Mazing: This was Meb Faber, Founder and CEO of Cambria Investment Management, who have all the relevant links in the notes. My name is Nick Mazing. This is Signals by AlphaSense. You can subscribe to us on all the major platforms. Thank you for listening.
[00:35:12] Thank you for joining us. This was another episode of Signals by AlphaSense. Keep in mind that all views presented here are the views of the guests and hosts and do not represent the views of their employers or of AlphaSense. Nothing in this podcast constitutes investing, tax, legal, or medical advice.
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