Invest Like the Best with Patrick O'Shaughnessy - Meb Faber - Factors, Dividends, and Angel Investing - [Invest Like the Best, EP.53]

Episode Date: September 7, 2017

My guest this week is Meb Faber, who started a podcast similar to this one right before mine and was a big reason I was open to the idea in the first place. Meb is a quantitative researcher whose firm Cambria has been behind many interesting investment strategies that break the Wall Street mold. We talk investing factors, dividends, angel investing, podcasts and more. This was a fun catch up with a close friend in the industry who has been in a leader in using data to explore the best active strategies in a variety of asset classes. Please enjoy our conversation, which begins with a factor draft.   For comprehensive show notes on this episode go to http://investorfieldguide.com/meb For more episodes go to InvestorFieldGuide.com/podcast. To get involved with Project Frontier, head to InvestorFieldGuide.com/frontier. Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Books Referenced Dr. Tatiana's Sex Advice to All Creation: The Definitive Guide to the Evolutionary Biology of Sex   Links Referenced Update on the Valuation Metric Horserace: 2011-2015 Jason Calacanis on Meb Faber Show Brent BeShore episode of Invest Like the Best Team Ritholtz episode of Invest Like the Best   Show Notes 1:55 – (First question) – Drafting quant factors             4:10 – Update on the Valuation Metric Horserace: 2011-2015 10:25 – Most interesting thing Meb’s learned over the past year                    14:05 – Jason Calacanis on Meb Faber Show             14:49 – Brent BeShore episode of Invest Like the Best 16:10 – What is Meb’s process for investing in private companies 18:35 – What part of the fintech landscape would Meb be most excited about 26:50 – What has been working well on the business front for Meb 30:34 – Looking at investor behavior and changing fee structures 35:54 – What has Meb enjoyed most about doing a podcast             36:26 – Team Ritholtz episode of Invest Like the Best 40:55 – A list of guests that meb would like to have on             41:27 – Dr. Tatiana's Sex Advice to All Creation: The Definitive Guide to the Evolutionary Biology of Sex 43:19 – If Meb couldn’t work in this business, what would he do 45:02 – Same question for Patrick 47:28 – Kindest thing anyone has done for Meb    Learn More For more episodes go to InvestorFieldGuide.com/podcast.  Sign up for the book club, where you’ll get a full investor curriculum and then 3-4 suggestions every month at InvestorFieldGuide.com/bookclub Follow Patrick on twitter at @patrick_oshag

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The views expressed in this podcast do not necessarily represent the views of CFA Institute. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaunacy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect

the opinion of Oshamously Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Oshonosie Asset Management may maintain positions in the securities discussed in this podcast. My guest this week is Meb Faber, who started the podcast similar to this one right before mine and was a big reason I was open to the idea in the first place. Mab is a quantitative researcher whose firm Cambria has been behind many interesting investment

strategies that break the Wall Street mold. We talk about investing factors, dividends, angel investing, podcasts, and more. This was a fun catch-up with a close friend of the industry who has been a leader in using data to explore the best potential active strategies in a variety of different asset classes. Please enjoy our conversation, which begins with a factor draft. Okay, Mab, so now, after a year of doing this together in L.A., unfortunately, we're remote, and this time I get to host, it'll be a conversation, but I'll try to skew it

in your direction, at least a little bit, as you did for me a year ago. And we'll start with a draft for quant factors. So the rules of the game are, we're each going to pick five. The rules of the game, just back and forth, snake draft, not an auction. And a factor would be defined as, say, price to earnings ratio, not value as a category. So it's got to be a specific factor. And the idea is that you can use these five factors in a model however you see fit. Maybe we'll talk a little bit about how we might do that afterwards, but that it's over the next 10 years. So you're trying to earn the most kind of excess return, let's say, in the U.S. all-cap market using five factors.

Since you're the guest, I'll let you pick first. All right. First of all, congratulations on a year, Patrick. Thank you, brother. The podcast. In your honor, I have, it's Friday afternoon here in Los Angeles. So I, the only alcohol-fueled podcast I've ever done was the one you and I did, which kind of ended poorly for me because you had to go give a speech later and I ended up drinking

about six beers. So I just poured myself a margarita. So your listeners, I would encourage to listen all the way through this podcast because this is probably going to get more interesting as we go. But this was a listener sent us in a bottle of tequila. So cheersing to you virtually from L.A. All right. So the rules of this draft, is it U.S. or global? U.S. only say stocks above 200 million or something. Sure. And it rebalances once a year or whatever, but we got to stick to it for 10 years. Yep. And I have to use these in combo or they're, it's going to be like a multi-factor model. That's your discretion. We'll talk about how you want to use it at the end. So think about it first, just like drafting players onto a team and then you can be the coach and deploy them however you see fit.

But you're going to get a roster of five discrete individual factors. I can't even name five factors. This is kind of an interesting mind game because now I also got to pick factors that I would like to pick before you pick them. Exactly. All right. So first, I'll take the factor that was named in West Gray's.

He did a paper called The Horse Race of something of factors. You can link to it in the show notes. I can't remember the name. But the data mine best factor, Enterprise value to EBITDA, or some variation of that. I'll take that as Numero Uno. A traditional value factor,

private equity guys love or Charlie Munger hates. Toby calls it the acquires multiple. It's sort of the winner of all those horse races. We did a, in preparation for this, me and the other research guys at O'Shaughnessy did a mock draft, and that was the first pick in that draft too. So, uh, the clear leader. So again,

largely because it blocks you from taking it in the future, I'll take buyback yield, which is a component of shareholder yield, but kind of takes that one off the table, since I'm assuming you're not going to, Knowing what you think about dividend yield, maybe we could do a short portfolio factor that you might take dividend yield in. So I'll start with buybacks. So theoretically, I could not now say shareholder yield because it encompasses buyback yield. Correct. So you could only do dividends or something with that.

Good. I'm going to take market cap, meaning I can slant mine to size. I want small enterprise value to eB.com companies. So why? Fush that out. Why do you want that one? Because that's the theory I just gave you is. is that the combination of giving me a chance to beat you on, is this just cager?

I mean, are we just talking to your return here? All right. I'll take the smaller guys and the bigger guys. So my pushback there is that a lot of this stuff will cluster you small and midcap naturally. So a bold reach with a number two pick. So for my number two pick, I'll do free cash flow to enterprise value. So theoretically, I could have selected basically price to free cash flow. which listeners, despite the fact I love shareholder yield, it's basically the same thing.

So you kind of swooped in and took that because I was thinking about adding another value factor, but I already got value, now I got size. What round is this? I'm going to go with, now I'm taking momentum. So let's just do a simple 12-month mo, total price returns, nothing more than that. All right. So you've got good, you've got good, like fairly low correlation stuff with one another. I'm going to do a quality factor, something that can screen out some really scary stuff.

I'll go with kind of the classic accruals factor. Boring. You guys love accruals. I could not even probably tell you what accruals is if I sat down for a CFA level one. By the way, your favorite sponsor, CFA level one test, I probably would fail accrual section. Okay. So I got value size and moments. You're going classic.

And I'm getting ready to crush you here now. And because you know my opinion, the U.S. stock market's expensive and everything's expensive. So buying a bunch of small cap value stocks probably isn't going to save me. So I'm going 200-day moving average factor if it's above or below. And I think that qualifies as a factor, right? Sure, man. We're making the rules up as we got here. Trend.

Trend. I like it. I'm going to stay fully invested over 10 years because the dispersion on that, that starting earning stuff is too wide for me. So next I'm going to do, I'll do return on invested capital. Last one for you. All right. So I'm going to take, I got one more. I'm going to take 10 year stock cape. And the reason being is that that's going to help me cut down my turnover a little bit hopefully. So that'll pick up the longer trends. It doesn't really improve the performance too much over the other value factors, but because it's such a long-term metric, it will weed out a little bit of the

noise. Hopefully that will reduce my turnover. Love it. These are coming in very true to our underlying DNA. So my last one, even though I know that obviously I should take a momentum factor because it's got negative correlation with all this other stuff, this is just for fun. So I'm going to do something different and stick with my kind of value DNA. And I'm going to go price to sales, which is about as far from free cash flow as I can get. So I'm doubling down on value. Price of sales is interesting. If you look at the market as a whole and a lot of these, like, the median stock measures for stocks in the entire market, price of sales is hitting the highest it's ever been in the database we've seen. And so I wonder if the distribution is that

wide or if it's actually pretty tight. All right. So what were your five? All right. So your team is EB. Or EBIT EV, I can't remember what when you said. Market caps are tilting small, simple momentum, price momentum, a 200 day moving average. So a trend and an individual 10-year stock cape cyclically adjusted. Mine is buyback yield, free cash flow to EV, accruals, return on invested capital, and price to sales. So I'm going like hardcore capital allocation quality cheap, and you're going small, out of favor, trending. How are we going to track this? Are we going to get O'Shaunice?

You're going to set up a couple tracking portfolios? Are we going to find a family office listener to pony up 20 million each for a couple of ETFs? Yeah, what's the best idea? Yeah, let's decide on a portfolio construction methodology. I would say we just go super simple. So we go equal-weighted portfolio. I mean, we could just even just do it for the next year and be fun to check in on. Yeah.

Equal-weighted portfolio, you want to rebalance it or no? Yeah, of course. Okay, quarterly rebalance. Oh, man. You should like that. That plays to your advantage. That's momentum. That'll help me.

That'll help me. as long as it's gross of tax. So yeah, so gross of taxes, pretends a passive ETF. So quarterly rebeow, 50 or 100 stocks, your call. 50, of course. Okay, so 50 stocks, equal weighted quarterly rebeow. And what's the stakes? You want to do a charity thing?

Sure. All right. Name it. So the, the loser. $100. Let's do, we'll figure it out offline and we'll report back. but the loser has to contribute to the winner's charity of choice. Awesome.

Cool. So let's shift gears to what's been going on with you in the last year. You guys have been pretty prolific in new strategy research and just tons of new research. You've had the podcast going. What in the last year since we last talked has been the most interesting thing you've learned or area that you've explored? There's two that kind of popped to mine. One is an area that, you know, and it's funny, and I'm sure you've experienced,

this on the podcast as well as writing is there's oftentimes you'll spend months on a research study or a concept or an idea and put it out and you're so excited about it. It's just crickets. You know, you think it's like earth-moving, earth-shattering research. And then there's other times you'll just write a stupid tweet or article and people fall in love with it. But one of those areas that I was really interested in. I haven't seen much research. And maybe you have. And maybe it's just buried. Someone wrote about it 20 years ago. But is thinking about investing in stock. and avoiding yielding companies, but still getting value. So this concept was, the original idea was,

can I replicate dividend yield without any dividends? And meaning dividend yield is, I cannot count how many hundreds, if not thousands, if not thousands of dividend funds there are out there. But dividend yield is really just kind of a value factor, and it's kind of a crappy value factor. You know, you end up with kind of highly levered companies that have a lot of debt and they're not particularly a great way to express value. So I said,

well, what if you could express value, but if you're going to do value, do value. So I set up a bunch of screens and had some research and had Wes's shop, Alpha Architect, run a bunch of these numbers and said, look, what if we avoided the top quartile of high dividend yield and the top 50% and the top 75%? The theory being that if you're getting these dividend yields, you have to pay for a taxable investor, you're paying taxes on them once a quarter. And, And what the research found was that a value composite, so stuff that O'Shaughnessy has put together over the years, very simple, and it doesn't even matter what you put together, but put together a handful of the value indicators you talk about.

A value composite destroys dividend yield, which, of course, beats the market cap average by a percent or two a year over time. So there's obviously worse ways to invest in dividend yield, but value beats dividends. And then I said, okay, well, what if we avoided a certain percent of the universe based on dividends. And it turns out you increase your after-tax return by theoretically it could be a ton. Now, it depends on tax rates. And we did a bunch of different simulations. It depends on the dividend yields over time. So they're lower now, so not as big of a deal. But if you avoid, say, the top half of dividend yields, but still invest in value stocks, basically you should never invest in

a high dividend strategy in a taxable account ever, first of all. And then if you're going to do that, you should do value and avoid the highest dividend yielders. Now, dividends for the last 100 years, like they have such a good brand. You know, it's like talking about Coca-Cola. And it's such a good story. And people, this is probably going to be universally hated from your listeners, particularly the older set, who loves getting their checks in the mail. And they equate dividend yields with someone writing them income or some sort of check.

But in reality, if you're agnostic and you're what a lot of are the topics these day of evidence-based investing, actually if you're investing in value stocks and avoiding dividend yields in a taxable account, you can save anywhere between it's like 40 basis points to 400 basis points per year just by avoiding dividend stocks and not paying those taxes. And dividend taxes aren't as much as they used to be, but it's still a drain. So that's one. Number two, we did a podcast with Jason Calcanus. And some of the concepts that you've talked about with a lot of your guests over the past year with Brent and some others, where you talk about private equity. So I've been experimenting doing kind of angel and startup private investments for last four years.

My company has done actually two crowdfunding investment rounds itself. And mainly is trying to learn about the space and understand what's going on. And my portfolio in generally is woefully under-allocated U.S. stocks. So mainly to understand, but there's a couple of the biggest benefits I don't think are talked about that much. and one being something that you guys kind of talked about on the podcast, which is so many people talk about angel investing in private equity and the illiquidity is a negative. But in reality, I think it's a massive, massive positive. And the reason being is that, you know, we all know the behavioral challenges of running publicly marked to market portfolios. I saw a stat the other day

that the average Robin Hood account checks has bounced 10 times a day. God. And so, you know, all that does is creates horrific behavior. But if you buy an investment that you then can't sell for, even if you wanted to for one, five, 10 years, like you just kind of put it away in a lockbox and kind of forget about it. And you're also a lot more thoughtful before you enter that investment. So that's one, on the behavioral side, I think it's interesting. Two, you know, because you're starting in a tiny market cap, you have the potential for the 100, 1,000, 10,000 baggers.

And lastly, there's a major tax benefit that no one talks about that shields your gains. up to like 10 million in some of these companies as long as you've held them for five years. So even if you just match the S&P 500 on investing in these early stage private startup companies, after tax, it's a potential really big. So those are the two things I've been kind of thinking a lot about. The problem with the latter, which I think is a great business opportunity for someone, I would love to see a research boutique sprout up that focuses on these private early stage companies because there's no information.

presumably if you somehow had an edge at selecting and getting into some early stage investments, it would be in the, you know, the fintech space. Is that where you've concentrated bets and explored companies? And kind of what's, I'm really curious about this world too. I think it's one of those things where the only way to learn anything is to actually do it and get some, get some skin in the game, maybe even viewing it as like an education expense, given the high likelihood that these things won't pan out. But what kind of companies have you looked at? What's been the process for finding them? Is there a process or is it just kind of ad hoc? So, surprising or not, I've done basically almost zero deals in fintech asset management. And one of the reasons may

end up being that I'm now just the dumb money writing checks in other areas that I know nothing about and it's going to end up really poorly. But I've done about 25 and the checks ranging from, you know, most of them $1,000 to $10,000. Very rarely does it get more. Some are like $20,000 checks. And some, and it runs the gamut from companies that are $2 million valuation to maybe four or five of these kind of late stage private like Lyft, for example, or hotel tonight, just things that are, you know, maybe the couple hundred million or a few billion valuation, but still private. There's a great stat from TIA Kref that had a survey that showed that people spent more time researching TVs and they do planning for their retirement or, you know,

before they select a mutual fund. So I'm probably that guy now. But I try to be really thoughtful. And I think some of the things that Jason talked about on our podcast, which is, you know, for me, it's a lot easier to see a product that's already launched with traction and growing. So kind of the promise of a bright, shiny idea or concept, like I think that's a lot harder to gauge and probably really high failure rate. And so I was joking on the podcast the other day. My kind of favorite has been these subscription boxes, you know, where you sign up for some box. And it's like the Birch box is the original one, but it's an incredibly sticky business model because people kind of forget about the payments and all of a sudden a subscription.

And every month you get a delightful box that is whatever. If it's your animal focused, it's, you know, dog treats and dog snacks. If you're health fitness focus and it seems to be a great recurring business, they've done a few of those. That's been the most. But the FinTech, asset management, media side has been the least. if you don't count investments in kind of my own companies. What about when you're thinking about those acquisition costs?

So one of the things that I've been fascinated with in the fintech space, and I know the robo advisors better than the non-robo fintech companies, is just how hard it is to get customers. And those recurring revenue models are great if you can get subscribers. But it seems like that's been the variable that maybe has held some of these places back, just really high acquisition costs. What do you think about fintech companies? Like if you had to deploy some money there, is there anyone or any part of that landscape that you would be most excited about?

As you look at the way the world is evolving, you know, we've been pretty consistent talking about automated space. I love the interview with your dad where he was talking about essentially launching a robo advisor in the 90s. And a lot of the technology has been around for a decade or two. A lot of the features have been around. And really kind of the packaging and the user interface is a little bit. nicer. So the betterments and wealth fronts of the world really kind of pushed that forward. But we've long kind of held the belief that the custodians would dominate. So the vanguard and Schwabs of the world because they have a huge inherent fee advantage by the fact they can use their

own funds would eventually dominate. And that's kind of come to pass. Vanguard is it like approaching a hundred billion in their automated service in Schwab's north of 20 now, I think. And so Vanguard bigger than all the others combined. But that doesn't mean there's not room for a handful of them, of course. And I think everyone will eventually have that technology deployed. Our friend Josh Brown says, it's silly, this kind of robo advisor, nomenclature is that I was around when we implemented email and no one called us email advisors. So everyone's going to have it. And it's already kind of happened at this point. So as far as interesting ideas, I mean, I think there's a lot of early stage asset managers that I would absolutely invest in.

Like Wes's shop, they're doing really cool stuff that no one else is really doing. I would absolutely invest in that company. You know, and some of the tailwinds of certain businesses that are industries growing 20% a year, you know, that's a nice tailwind to have. So there's a handful of spaces in fintech. And then on the flip side, there's a lot of these getting funded that are actually have great revenue that I think are essentially predatory. You know, so a lot of these savings.

and investing apps that millennials are attracted to. And I've mentioned these publicly, like acorns and stash and a lot of these that charge, it's a dollar a month. So it doesn't sound much until you realize the average account balance is 100 bucks. Right. So they're paying 12% of fees. And why in the world would you ever open an account with them when there's alternative like, I don't know, Bank of America or Robin Hood or E-Trade that you could do and it'd be free? So it's, you know, we're definitely still in, I think, silly season on a lot of these fintech companies. and valuations getting funded. But yeah, I haven't really done hardly anything in that space.

I think there's a lot of great ideas and opportunities that no one's doing that I would love to see someone do. But we got to focus on our knitting. So I'd be happy if someone did them, but I'm not doing it. Of the 25 that you've made, or four of the 25 you made, how many do you think you looked at? So how many knows, what's the no to yes ratio that you've had in your, he's at four years? This is probably one of the behavioral problems I have. One of the reasons I'm a quant is I'm in my core kind of an optimist and maybe a little bit gullible.

So I loved, maybe it was one of your podcast or one of your guests was talking about, no, you got to you got to start at no and then move to yes. But I mean, it's been hundreds. And the way that I think about it and the way that my education over the last couple of years has evolved has been, my first concept was I'm going to approach this just like I would approach 13F investing in hedge funds, which listeners, if you're not familiar, is following some of the top hedge fund managers through their filings. And so you can look at what Warren Buffett buys a recorder.

Seth Klarman, you know, Carl Icon, David Tepper, all these guys, you can look at what they're buying and kind of, one, you can just replicate what they do and two, track them. And so the same thing in the angel space where you can follow what these guys are investing and see kind of why and what. And now that they have a lot of the syndicates, despite the high carry, you know, in my kind of first couple years of doing this, I consider that kind of tuition. You know, when we did our crowdfunding rounds, we did. didn't we didn't use any of the platforms because I didn't want our investors to have to pay that

carry. I think it's a huge cost. So we just did it at a normal fundraise, but a considerate kind of tuition. So trying to follow what some of these top investors are doing and why, but also committing to, you know, 10 years of various vintages, because the same thing with private equity cycle, you know, that certainly even in like two years ago, it got really expensive and they've kind of come off since. But your eight bull market, you got to certainly want willing to allocate over a full cycle. Otherwise, I think you can end up just getting heavily allocated in just a few years. What's the most interesting of the 25 that you've come across?

I've only had one exit out of all of them, which was actually the first one I did. It made like 20%, but it was with one of Howard Linsden's syndicates on a company that was helping people do kind of essentially estate planning. And that there's a lot of just ideas that are huge pain in the ass, particularly when you go through and you're like, God, why is the world still like this? How can it be such a huge pain in the ass to do whatever this might be and find a company that's kind of trying to solve it? And you're just like, ah, this makes life a lot easier. That was a pretty cool one. I'd have to marinate on that and think about it. I'd love, there's certain products like Peter Lynch style.

So like some of the late stage private ones and even some of the startup ones where it's a product you just love. So I love hotel tonight. But I'm kind of the perfect use case for that with my travel. I don't think any families of aid are going to be using hotel tonight when they plan their vacation for a week. But to me, it's just such a beautiful interface, so easy and simple. And it's perfect because it curates. So just a couple things nice. It curates hotels into a short list. So you only have a few choices.

And then it gives you the best prices. What's not to like about that? Now, I would also have said that about a company I didn't invest in, but would have loved to, which was BP, which was a company that made selling your car a lot easier. And I actually sold a car on it. And I was like, oh, my God, this is so much better. why would anyone not do this? And then, of course, they got, I think, went bankrupt or got acquired. So I would have lost all my money on that despite loving the product. So who knows? I'm just happy if I get US stock like returns for the next decade in this.

So your two big things, dividends and VC are pretty far apart on the spectrum, which is a cool year of exploration. On the business front, what has been most interesting? Like what? So, you know, we're both part of relatively small asset management firms. I'm really interested in how others in the business are perceiving the environment, the direction, the headwinds, the tailwinds. So what, what has pleasantly surprised to you? What has been working well on the business front? I mean, we've been at this for a decade, and it's kind of funny to think about because try not to get too, I mean, you can sympathize with this, running a public asset manager. You know, you try not to get too excited when the flows are rushing in and to despondent when the flows are rushing out.

Because a lot of times you know that it's not an investor's best interest to be doing whatever they're doing. And so we've had years where it's just been a constant, just dribble out. And then years like this year where we've essentially doubled or tripled our assets that you try not to get too excited about because you know the bad times will come. But we try to be thoughtful about the fun lineup. And so the criteria that we use is, one, one, it has to be something that I want to put my own money into. And so, as you know, I put 100% my investable public net worth into our funds and strategies.

We think skin in the game is really important. I know you guys are big proponents of that. But the stat that I think it's like 60 or 70% of the average mutual fund manager has less than 100,000 or zero invested in their fund is astonishing to me. And why anyone would invest in those people, you know, when they don't is just beyond. me. So two, it has to be something that, you know, there's research and we think it works and that isn't out there already. So if Vanguard is running some sort of bond fund for five basis points, like, they're better. Like, why would I ever launch a competitor to that? And you see all these

fund companies just launching Me Too funds out the wazoo. And I just scratched my head and it doesn't make any sense. Yep. And so it has to be something that either doesn't exist or we think we can do better or cheaper. And the cheaper is rare, but we've had a couple that that have been in that category. The hardest part for me is launching something that people actually, knowing that people want. So just because I want it, I think it's awesome. So my value tax efficient idea, like we'll probably launch those in funds. I'm pretty sure those are going to be the most hated funds ever. Like maybe a family office or institution will, you know, get it and put in some big chunks.

But I can't think of a less popular fund than going out on CNBC and say, we're going to invest and we're going to avoid dividend stocks. I mean, my God, people will probably just run for it. for the hills. So I think you see a lot of fund managers kind of chasing the topic de jure. I mean, we just saw this week that a fund company is launching a GOP focused, make America great again fun. But then again, there's dozens, if not hundreds of funds. And I say, that is the stupidest idea I have ever heard of in my life. And it'll raise a hundred million or a billion or something. And I just say, you know, all right, who am I to say? You know, how about it?

So we try to be thoughtful about it, but we've certainly launched funds. I mean, we currently have the only ETF without a management feed in wrapper all in. It's 25 basis points, but it's been one of our less popular funds for whatever reason. I think over time, the next 10 years, if you said, MEP, this has outperformed all your other funds. I wouldn't be surprised. But, you know, it's, who knows. But a lot of this is cyclical, too. You've always been one of the people at the forefront of, I guess I'll call it like a super transparent marketing movement in asset management where I think decades ago it used to be about, you know, I've got the inside edge that no one else has got and, you know, hire me as your broker because I know more than the next guy. And that there's been a huge transition to, as you mentioned earlier, evidence based investing. It's sort of now like who can one up each other on white papers and transparency and putting out content, et cetera. Talk a bit about that as a strategy.

for the business. So there's kind of sales and marketing in asset management. It seems like the pendulum has swung in the marketing direction. Do you get that same sense? Well, part of that is because we've been bootstrapping the company and don't have any salespeople. So by definition, we don't do any sales because we don't have any. You know, and the marketing for us has been, we know what we're good at. And the content creation, I mean, if you look back in the history of asset managers in general, I mean, people have done it in many different ways. Edelman did it with radio. Fisher did it with magazines.

You know, now some other shops are better at doing blogs. You look at the Riddholz crew. They're kind of a Twitter. But, I mean, look at the thousands of wirehouse and independent RAs that have done it the old school style, you know, just networking, friends and family, golf course. So whatever the kind of marketing sort of sales, you know, that fits you, so many people say you have to do content marketing. And I often say, look, you know, most people,

they may not have anything to say, you know, their message may not be relevant to doing Snapchat videos. Like, why would some RIA be doing that? Because they're not going to get any clients from that or probably none that they want. So, you know, it's been a very pleasant accident for us. If I said, I was an institution, I was a pension plan or something, and I came to you, and I said, I will lock my money up with a hefty early withdrawal penalty for seven years. What fee do you want to charge me on that same product? What would you charge them? I think it's reasonable to give a discount in that situation.

I mean, I don't know. Take it down to 50. So this is one of those things that I've been thinking a lot about because your comment really resonated earlier about the liquidity being viewed as something you need to be compensated for when in fact it may actually be the other way around that by being less liquid, or having fewer opportunities to go and dig up the roots of your tree, you'll actually do better. So it helps your returns, not hurts them, even though you don't have access. And one of the things that we've observed in the institutional and really across the asset management

spectrum is this kind of standard principal agent problem, hiring, firing mistakes, that it's all performance chasing good or bad. So you get hired after a good three-year run and you get fired after a bad three-year run. And I've just been trying to ask around to see what incentive structure could change. that for the better. Something where like every year of additional lockup, you know, you discount another five basis points or 10 basis points or something like that down to a minimum. And obviously, we have different shops. And I think, you know, you're without a sales force, you know, it's a different cost structure, et cetera. And the churn is a little different with ETFs. But I think

that's an interesting issue. I wish more. I've got the solution for you. Let's hear it. First of all, I mean, here's a great example. I always give everyone when they think about performance. I say, look, if you go buy Warren Buffett's stocks through 13F every quarter back to 2000, he's outperform the market by 5 or 6 percent per year. So that beats, maybe it's down to 5 or 4 now, but let's call it 5. That beats 99% of all mutual funds. And it's even higher if you go back in the 90s, 80s, 70s, 60s because he had smaller asset base and he beat by 10% a year.

How many people raise your hand would you invest in that guy like everyone? And you pay no fees. You just buy them. there's low turnover once a quarter, he crushes it. Well, he's underperform eight of the last 10 years, that strategy. And a lot of that's just because values struggle in this period. And it destroyed it from 2008. So the long cycles, if you were blinded people to who was running this and showed this performance track record, that person would be out of business six years ago. So forget eight out of ten, you know, two out of three, three out of four gone. Like you're not in business anymore. Eight out of

10, Sianara. But, you know, one of his biggest part of his alpha, we say is not his investment approach, which is actually pretty simple. Value quality, hold it forever, is that he sticks to the strategy and doesn't waver. So here's my idea. And you're going to like the first part. We'll call it the Forever Fund. And so I spend a ton of time thinking about behavioral issues. And the biggest problem with ETF's daily liquidity. What almost everyone talks about is, again, as a benefit, you can interday trade ETFs. Horrible. Like, that's not a benefit. That's a huge drawback. I wish ETS just traded once at the end of the day. All right. So we're going to start a mutual fund. It's going to be called the Forever Fund. And it's global asset allocation, whatever.

Maybe we'll do a whole series. We'll do a U.S. equity, multifactor, foreign multifactor. We'll do a combo half cape size value moat trend and half half your portfolio. You got to come up with names for those, by the way. Sure. All right. So the Forever Fund. So maybe a series. But the first one, asset allocation, low cost, whatever, reasonable, reasonably price. There is a 10-year lockup, and there is a declining redemption fee structure. So if you redeem in year one, you're going to pay 10% penalty, maybe five. 10 may, you may get sued, 5% redemption penalty, okay? And it declines each year, five, four, three, two, one, whatever. Or maybe it's 50 basis points a year. So there's a penalty for being an idiot. However,

that sales charge or their back end load, whatever you want to call it, doesn't go to the fund company, it goes to the investors in the fund. So maybe once a quarter or once a year, you get a good behavior bonus from not being an idiot in holding your money long term in this fund. And so you get kind of this dual behavior where you not only get negative feedback from, you know, you're getting punished, but you're also getting rewarded for good behavior. Anyway, I think it's a cool idea. idea. So when you're ready to seat it, let's do it. People that stick get bonuses. It's, you know, probably get sued out the wazoo. I actually emailed Jason Dwig. I was like, have you seen this? You're kind of, you've been around the block for a few decades. And he's like,

you know, a fund did something broadly similar. They didn't give the rewards, but they did some penalty base. He's like, they definitely got sued at one point. But I like the idea. If you could write the contract to, you know, innoculate yourself against lawsuits, that's a super interesting. idea because even if it's not that big, you're going to get really interesting behavior on all sides. And the key point, which, you know, was a great idea by you, is to pay the other people, not the fund manager. So the fund manager's incentive is that they just have long-term capital lockup, which is what every fund manager wants. And they can charge a very reasonable fee. You know, if you got 10-year locked-up capital, you can charge a very reasonable fee. You can plan your

business much better. I love it. So on the podcast, what have you enjoyed the most about it? You've been doing it a little bit longer than me. If you look forward to the next year, do you think you'll be able to keep up this pace? Has it been challenging to, I think you've done one a week like this one. Give me some general impressions and what you think you might do or change in the second year. There's a couple thoughts. Because we're based in Manhattan Beach, Los Angeles, you know, most of the people that we're chatting with are not in-house. It's a lot more fun to do it in person, but, you know, most of ours end up being remote. And the biggest takeaway is a lot of fun. You know, kind of like you mentioned with the Riddholz crew, it's like going to a bar with your buddies,

flipping the on switch recording and, you know, letting people listen in. And that's a lot of fun. And the ability to connect with people and meet people that actually you haven't met before, maybe you know, digitally or, you know, online has been a lot of fun. And like you mentioned, learning a lot. So there's areas, yours tends to be a little more wide ranging than mine does, but talking with people that are doing crazy, interesting things and kind of bucket list. people that, you know, I'd love to talk to that never had the chance to ask them these couple questions. Like, how much fun is that? Like, that's such a, that's such a fun idea. The biggest problem I have, and I've been moaning about this for about a year or two,

is that I go for a walk with my dog once or twice a day, hour-ish or go for runs. And I often listen to podcasts. That's kind of when I listen to them. Airports, commutes, you know, dog walks. and I currently have like 200 in my queue. And I would say about half are okay, you know, a quarter are just life changing, amazing, wonderful, great podcasts. You know, and another quarter are 20 minutes of the hour is amazing, but the other 40 is just a snoozer. And the biggest problem I'm having is for other podcasts in general is being able

to curate them. And I wish, and I've been, I've emailed every single podcast platform and said, well, you guys please add the feature of rating the podcast so people can rate an individual podcast after they listen to it so that at least you can get some sort of curated output. Because I would love to sort mine by at least, you know, again, going back to the idea of curation with rotten tomatoes or the quant cookbook, if everyone's rating this one at two versus everyone rating one at 95, like, good chance the 95 is better. And nothing makes me angrier than listening to a podcast for an hour and it being terrible a whole way.

And I'm not a person that can click it off after 10 minutes. Like I have too much fomo. I'm like, all right, this has to be good. At some point, he may have some investment gem at minute 58. And if I miss it, I, you know, will be so sad. So, but the problem is, like, we've thought about starting that as an entire business. And I would pay someone, I don't know, 50 grand to be able to curate each week. Say, here to the top five investment podcast.

out of these 30 because every hour that you listen to one, and we were talking about this probably on Twitter, you know, whatever you value your time at, if five of them are a waste, you've just wasted five hours that could have been better used listening to these other ones. So the problem is, I don't know if that's a business. Ideally, one of the platforms should implement it. And I don't have any good ideas there. I'm, I'm, that's the kind of the three ideas you're talking about working on the summer. That's the third that I'm kind of stuck on. And so we talked about hiring a bunch people and we put out a kind of feeler and we got a couple hundred people and said, yeah, I'd love to do it. And the problem is I'd love to hire like five people to do it and pay them all

a decent wage to do it. But how do you get to those five from 200? Or is it better to crowdsource all 200, but then the money you would have used to pay five now gets diluted across 200. And how are they, and if they do it just out of their own goodwill, are they going to be incentivized or, you know, so it's a problem that I don't have an answer to. Maybe you have some good input or maybe your listeners do, but I'm kind of stuck. Yeah, it still feels like such a nascent platform that has, to me, it's the most interesting way to consume information now, thus getting into it a little bit. But the tools available for discovery are just, they're terrible.

I mean, it's basically the top 20 shows get all sorts of placement, but it's the same 20 shows all the time. There's no episode by episode. It just seems like such a simple technology solution. I don't know how that hasn't happened yet. But my guess is that I, I too have talked to a ton of people in the world. And I also know some people who are building sort of next generation type iterations of this. But it seems like enough attention is on it that in the next year we'll have an Apple's changing the way they report data to hosts that will have some better ways of finding them.

Fingers crossed. I'm open to ideas, but it's a huge source of frustration. And I still love it. Like, I mean, there's of the 30 investment podcasts and there's more good ones that pop up every day. You know, of the 30 that are worth listening to, I really struggle with it. So anyway, keep me updated. I don't have a solution. If you could choose, because who knows, someone out there might be able to make this happen,

if you could choose a couple people that you would love to have on that you haven't thus far in the next year, who would they be? Who are you most interested to talk to? Here's my number one is that one of, you know, my background's biotech. And one of my favorite books that I gift to or at least used to, was a behavioral or actually, it's an evolutionary psychology book and ignore the title. The title is a little off-putting, but it's not what it's about. It's called Dr. Tatiana's Sex Advice to All Creation.

And it's about how crazy these behavior of like a dozen or two dozen chapters of these various species of animals and insects around the world behave. And, you know, it's funny because you can see so many commonalities in human behavior. And you kind of say, man, I know people that do kind of like what this bug does. And it's really funny. And you just realize a lot of the genetic underpinnings of kind of what we do. You know, why are people striving to make money? You know, why do they go buy that expensive sports car?

You know, and it's kind of a nice reflection. But the author's names Olivia Judson, she's, I think, a British professor. And I think we're going to get her on. I was pretty excited to talk to her and say, she's got a new book coming out. But that's kind of the, you know, the benefit of having a podcast. You can say, hey, look, you know, we'd love to have you on and talk and shoot the shit about whatever. And whereas before, if I just called her and said, hey, can we just talk for 30 minutes?

She'd be like, no, you stalker. Like, what does this have anything to do with asset management? Leave me alone. But kind of like you, I also like the weirder. You know, it doesn't necessarily have to be the CEO or head of an organization. You know, could be a guy three rungs down or people that just are doing, like, there was a guy I was talking the other day that pitched me on. He's like, I have a investment fund that invests in trailer parks, you know, and it's a huge cash-loving

business. And I said, that's the weirdest, like, cool, cool idea. You know, I never would think of that. It's a great excuse to explore complete, I think about these as blind spots. And when we do what we do, which is get a bunch of data, figure out what works, you get cemented into those ideas. And that's great because they should work in the future. But you definitely lose track of a lot of the esoterica.

and this has been a great excuse to get back into some of that stuff. Venture capital is another good example. So last two questions for you because we're running along here. So the first one is somebody asked if you got fired, which I guess you'd have to fire yourself, or somehow you were no longer allowed to work in this business. What would you do? I think first I would take a little bit of time and time off, reflect.

There's a lot of areas that are just so fascinating that I would love to be a part of. So, you know, again, going back to my background was in biotech and, you know, studied genetics. And this, I graduated in 2000. So the late 90s certainly a very just also like the Internet, you know, a huge bubble in the stocks, but transformative technology. You know, same way railroads, TVs, plastics, whatever was for the past 100 years. And you're starting to see a lot of that come to fruition 17 years later. You know, I think the FDA just approved a gene therapy. therapy like a day or two ago.

And, you know, whether that means it's probably not on the science side. I was always kind of terrible at the lab. I'd spill viruses everywhere and, you know, kind of a little too, not enough attention in detail, but being involved in that world in some aspect, I think would be a natural extension, you know, but I think one of the things that also my old man made clear to me when I was younger was also the differentiation between a hobby and a career. He's like, you know, there's a lot of things that you can do in your spare time and love and not pollute it with having to try to make it a career, whether that's golf or fishing or baseball card collecting or whatever it may be. So there's a lot of things I would love doing, but I don't know that necessarily it's like a full-time gig.

So it would probably be something in the in the biotech genetics world. Cool. What about you? You know, it's so hard and such a hard question because I would just do the exact same thing just in a different sphere. So if I wasn't allowed to touch investing, you know, it would be the same research mentality of just like gathering data and trying to come up with conclusions, which is the process itself that I love more than anything. I think maybe my second really big passion is just the outdoors, generally speaking.

So I think if it had to be a career and therefore a business, something kind of almost like your cookbook idea that was more oriented towards the best places to go and things to do, not necessarily a travel book, but something in that world that required like a ton of travel, tons of being outside and somehow sharing that experience in a formal, in a formal community way, like trips with people or just informational. I think that would be fun because if I think about the way my days are structured, I always want to make sure there's some big research component and some big outdoor component. So I think it would have to be something in that world.

The outdoor one's tough. And, you know, I think a lot about this, but it's the same thing as, you know, whether it's Yelp going back to the hotel tonight, curating it down to just a few choices. Like, I'm getting ready to go to Iceland for the first time. And it's like an infinite menu of ideas. It's fishing and hiking and restaurants and coffee and meeting people and all that sort of stuff. By the way, Icelandic visitors, if you're listening, email me. We'll grab a beer or coffee. But it's kind of overwhelming. And, you know, I don't know that anyone's tackled it in a way that's kind of satisfying. I'll give you one of my favorite, by the way, trips that I've ever done. It was going mountain biking from

tell you ride to Moab. And it's called the San Juan Hut system. And it takes like five days. And each night, you get to sleep in a hut and they stack it with food and drink and everything you need. So all you got to really carry is your clothes. And what just amazing trip. Wow. That's one of my favorites to do. How crowded is it? There's like zero people. I mean, you, you come across maybe like five. So it's a little single track, some fire roads, like five percent is on pavement or something. But, and you can do it the other way too. But it's, I mean, you got to be like a moderate mountain biker. And I probably crash probably 30 times. But it's more aerobic fitness and just, you know, getting in shape than to do it. But of the trips I've done, like, I love adventure and

travel. That's up there with one of my favorites. Awesome. So you know my closing question for everyone, which is the kindest thing that anyone's done for you. I'm going to answer this trying to be a little surprised by it. I actually talked about this in my last one, and it kind of came to me as we were talking about something else. And I said, I'm going to give you two, one personal and one career. Career was when I was in my mid-20s and had written this first paper, I sent it off to like a dozen people.

And all names you would know, kind of famous investors. You know, half never responded. Another three were like, dude, I don't have time for you. you, why are you sending me this? Or market timing is impossible. I got like three really nasty responses and we're not going to name names, but if you search my blog, you'd probably find them. But like really just cruel mean being like this research is worthless. You're an idiot from some very just, you know, respected names. Anyway, but Rob or Not, you know, who manages at this point like $200 billion was like, hey Matt, well, you know, this is a great piece. It's like a C plus paper.

Like the idea is sound, but you need to write it in the format that we'll get it into financial anisternal or something like that. And, you know, it was very like harsh criticism, but it was very thoughtful. And the fact that he took the time to answer. So I've tried to answer every single email that people have sent me over, you know, the past 10 years. And they may be short and very two sentences and spellings and grammatical errors. But I try to respond to all of them. Because to me, that meant the world at the time. Now, oddly enough, the kind of thing that of those guys that they probably did to me was the guy that sent a really horrific email because that, you know, incentivized me to kind of F you and try to write a great paper and,

you know, build a good business. On the personal side, and this is the one that came up in the last podcast with Jason, I said, you know, growing up, my parents, middle class family, I mean, my dad grew up on a farm, no running water type of set up in Colorado. And so growing up, like a normal middle, middle class family. And they said, however, Mab, look, anything that you want to read, like, we're not going to go buy you these, the new Nintendo robot. We're going to, but anything you ever want to, any book or anything you ever want to read will pay for. And so then I just took that and ran with it. And I think the next week, subscribed to about 30 different comic book subscriptions.

So, and so they started showing up in droves, like, a week later. Like, I know. And then my poor mom, but they were kind of like, hey, like, that's well played, Mab, you know, like you can read these and that's fine. And so like I learned how to read, you know, growing up reading Marvel and D.C. and everything. And so my mom at this point, bless her soul, she's even like kept them.

And there's probably, I don't mean, it's got to be five, 10,000 comics somewhere in her basement sitting somewhere that are probably not worth that much because it was later, I guess that was 80s, 80s and 90s comics. But to me, that was something that, you know, it meant a lot, had the right intentions. Awesome. Great place, Dan, my friend. Thank you for doing this. This has been a fun conversation.

We'll have to make it an annual event. Absolutely. Thanks, Patrick. Hey, everyone. Patrick here again. To find more episodes of Invest like the best, go to investorfieldguide.com forward slash podcast. If you're a book lover, you can also sign up for my book club at investorfieldguide.com

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