The Derivative - Exchanging Intellectual Assets with $TAIL, $SYLD $GVAL ETF-icionado Meb Faber

Episode Date: April 17, 2020

In this episode we chat with an ETF creator, financial book author, and host of the popular Meb Faber Show podcast. We're talking with Meb Faber about Colorado sports teams, trend following, skiing vs surfing, farmland investments, interesting pod guests, how most asset managers are out of business already but don’t know it, how Meb invests his own money, IN-N-OUT orders, and naming ETFs as the last thread of creativity in investing. Meb Faber is a co-founder and the Chief Investment Officer of Cambria Investment Management, where he creates the investment process behind their ETFs and separate accounts. Meb is the host of a popular podcast and has authored numerous white papers and actual hold in your hand 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. Mr. Faber graduated from the University of Virginia with a double major in Engineering Science and Biology. Follow Meb on Twitter and LinkedIn, check out his website & the Cambria Investments website, download his free books, and take a listen to his podcast. And last but not least, don't forget to subscribe to The Derivative, and follow us on Twitter, or LinkedIn, and Facebook, and sign-up for our blog digest. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. There are funds in categories, particularly with ETFs, that you should not expect there to be liquidity there. Now, the interesting part about this last crisis is people were saying, oh no, the bonds, ETFs are trading at big discounts to net asset value. But in reality,

what was happening was the ETFs were actually probably the correct price. Yeah. And the indices and net asset values are stale. Hello and thanks for joining us for another episode of The Derivative. I'm your host Jeff Malek and back with you podcasting from home due to the coronavirus lockdown. We're excited to have with us today a trend following, farmland, farmland-loving, surfing, skiing author, asset manager, and FinTwit must-follow. It's Meb Faber of Cambria Investment Management. Welcome, Meb. Hey, man. Great to be here. Great to have you. So, Meb, you run an ETF shop. You're a popular podcaster, author of a blog, white papers, and books, along with being an industry thought leader, along with the Meb Faber Show, your papers, and books, along with being an industry thought leader, along

with the MedFaber show, your podcast, and somewhere you find time to be the CEO and CIO of Cambria. So you've authored six investment books. Some are offered on your website for free, and are kind of an all-around asset allocation research geek. Hopefully you don't take that the wrong way. So we can't get enough of your work. So thanks for joining us today. Yeah, man. What are we going to talk about today?

Well, first I got to know what that lid is. What is that? Nuggets? Old school nuggets? Yeah, man. I'm going through all my don't shower till 5 p.m. hats during the day. So this is, yeah, I'm a Colorado native. Grew up a little bit in North Carolina. So this is Nuggets, which obviously you're not playing right now, but have a pretty good team. You know, Colorado sports have sort of flip-flopped over the last few years. I grew up Broncos being the only game in town, but for a while the Avalanche were good. Nuggets were always terrible, but they've been pretty decent last few years.

And that's an old school, right? The old school Nuggets was that rainbow jersey that rainbow jersey beautiful beautiful jersey some of the best alex english back i was gonna say alex and it's all um quick story when i i lived out in aspen for a year and a half which we can get into later ski bump but uh i was a bears fan from chicago so a buddy called me he's like hey the bears are playing the broncos and i'm like cool you have tickets he's like no but uh i'm working security and i can get you in on secure so i work the security at the bears broncos games and i just had my arms facing the field the whole time the supervisor would come through every 10 minutes and be like you're

supposed to be looking at the crowd not the game hey, you can fire me as soon as the game's over. Yeah, that's awesome. That's awesome. I have a lot of fond and some not so fond memories of my going to the games in the snow. My parents would just put us on a bus and send my brother and I there. And he's seven years older. So there's definitely some times I came home in tears for him not opening the hot chocolate or just kind of abandoning me. So people sledding down the stairs, a lot of good times and some not so good times, too. Three Super Bowls, man. It was a – you learn a lot about being an investor as a Broncos fan during my formative years. And so what was first, Colorado or Carolina?

Colorado, then Carolina, back and forth for a while, then been out here on the West Coast. Most of my crew is Colorado now. What, split parent situation or what? Yeah, yeah, a little some, and then kind of went back and forth, and then school on the East Coast, then out to San Francisco, then Tahoe for a couple years, and then down to L.A. ever since. And so what do you prefer, surfing or skiing?

You know, man, I'm pretty adaptable. I like them all, depending. I was all revved up to do some serious skiing this year. I went to a really wonderful conference in Jackson Hole, and then that was sort of the finale uh at the end of february all the resorts started getting great snow and shutting down one after another so uh it was um it was a short season but maybe if this all clears up we could head down to south america and catch the catch the summer summer season perhaps

my icon pass i've been looking at that i'm like what's the uh what's the south america resort i and catch the summer season perhaps in August. I got my Icon Pass. I've been looking at that. I'm like, what's the South America resort I can head down and hit? I thought there was going to be a lot more avalanche deaths, right, of people in Colorado just like, I got to get out there, man. I'm going to hike. I don't care what the conditions are. Going backcountry, yeah.

I didn't hear too many of those articles. So, Meb, we've known each other for about 10 years uh or so embarrassingly i think the first time we met was live over a webinar i don't think it was video back then but uh i didn't really know who you were and i was trying to show up a little and i called out your use of a certain man's futures mutual fund and one of your products live with a bunch of wholesalers and investors listening. So if you remember that, I apologize for that. No, I don't mind. I don't mind. It's not water under the brim. Sure. But you're still using quite a bit of trend following, correct? Yeah. You know, you're starting quick on a pretty philosophical bent on what that means to all of us. I think most trend followers have a

probably somewhat similar view of what it means. But, you know, you think kind of really broadly speaking, you could characterize almost most of the money in the world allocated as some form of trend following already. But in the traditional sense, yes, we use probably more trend following as a percentage of our allocations probably than almost any RIA or institution just about in the world that I know of. So we're pretty outlier there. And tell me a little bit about that journey because you were an RA first, correct? Yeah, well, so okay, just a super one-minute backdrop was out of college, engineer, biotech, started out as a biotech quant analyst, started as a biotech fundamental analyst, then gravitated more towards quant analyst. That was the time san francisco and then lake tahoe when in lake tahoe

i was working for a startup cta that didn't go anywhere uh did some of the original we worked with those guys what was the name of that incline yeah right in incline village uh right down the road from miss t's rotisserie some of the best uh rotisserie uh that's still there right now and that's i had a mount rose pass that's, I had a Mount Rose pass. That's a nice secret where it was, um, some of the best shoots in all of the, uh, Sierras, certainly in a local mountain that just opened there and got great snow. Um, but I had a similar situation to you and talking about your Broncos story with a lot of local buddies, one worked in the ski shop, one worked on the mountain and one worked in a hotel. So between all those, we had every possible freebie covered for the locals for a couple years.

But yeah, so I did a lot of trend following research at the time there, much of which laid the foundation for what became some of the beginnings at Cambria, which got started, I moved down here in 05, started the company, 05, started managing my company, started the company in 06, started managing money in 07. And the origins were all trend following. You know, a lot of it came out of, we did separate accounts and private hedge funds. Most of the philosophy was in trend following. So, you know, we wrote our first paper and blog at sort of the same time this would have been published in 07 and then became book and, you know, fast forward all the content we've done since then, but it was pretty accidental at the time. But, but yeah,

the origins were very much with the trend following foundation and fast forward, you know, over a decade, it's, it's morphed a little more into a, a pure public ETF company and we can get into reasons why. But again, the, the main foundations still very much as has trend following as a huge component. But then Beck, so when you first moved to LA, you were having a,

you were in RAA with clients that you were managing bespoke stock portfolios and whatnot? So we started the firm with my partner, Eric, with no clear pathway of what we were going to look like when we grew up. Just like in all the business books, right? And so he'd come from a venture capital, corporate sort of background, VC, corporate law in-house. And so we started it with the idea that we knew we wanted to manage, be an asset manager, somewhat agnostic as to how it got delivered. You know, when you're starting from zero, like full bootstrapped, you know, is a scenario

where we weren't going to try to pretend what it was going to look like. And for us, that meant private funds and separate accounts. At the same time that the company got started, because of this writing, we started to get a lot of attention from various, you know, inbounds all over.

Some from the academic community, because we published this first paper in the Journal of Wealth Management, pre-crisis. I think my first client actually came from editorial I wrote in the newspaper, like an op-ed, which I've never done before since. What was the newspaper? I think it was LA Times. I think I wrote something about pension funds, which humorously 10 years later, I think is finally starting to probably become a big problem here soon. So, but at the same time, started writing the blog and all of that started to create this sort of flywheel of attention. And as you know, for someone who's, you know, doing separate accounts and private funds, it's a lot easier to have a public fund as far as people investing, you know, the private funds, they got to read these, all these documents and sign them

back then it was fax or mail them in. There are 50 pages long, these private placements is just, it was just hard way to start from a group that wasn't coming out of Goldman or coming out of, you know, a pedigree shop or hedge fund, but doing it from scratch. And so we started with investment, separate accounts and private funds with a trend following, pure trend following approach in the beginning. And as we started to write more, we had a couple opportunities to sub advise on some funds, some that didn't get off the ground, some that did, and then eventually said we should be launching our own funds, which we started doing, I think in 2013. And yeah, fast forward, we have 11 now. And let's see, another half a dozen filed and a few more uh probably in the queue so we'll probably

settle in that mid-teens range somewhere you're a lot smarter than us because we're still doing the privates and the reams and reams of paperwork although docuSense made it a bit easier but yeah you still i mean look each each type of structure has its own benefits and drawbacks for sure. You know, the biggest one with the public is that it's just, it's not sticky in or out. You know, people can log into Robin hood or E-Trade or Fidelity or Schwab or whatever, maybe in buy and sell every day. You know, the, whether you have an advisor, so on the separate account side or even private fund, perhaps,

and maybe not, there's a little more friction with trying to sell an investment. You have an advisor to talk to, particularly if you're on the financial planning that may prevent you from doing really dumb stuff, but not always, of course. At the end of the day, it'll probably be more based on just how the funds perform over time. And we can talk about time frame at some point. But yeah, each vehicle tends to have different benefits. The ETF structure, which is what we've gravitated towards, had a lot of benefits for us. And over the years, we've adopted that. But still, I'm fairly agnostic as to structure.

If something better comes out in a year or two, we're open to that too. Let me jump back to a little personal. Maybe we'll weave it back into the beginning. But so I asked you about surfing. Did you surf before you moved to L.A.? Not really. I mean, I've been like a handful of times in the outer banks in North Carolina, maybe Waikiki or something. Nothing particularly too much other

than just playing around. How many times you get out a week? Well, zero now. They closed the beaches. Quarantine was totally fine. It was no sweat until they closed the beaches. Now everyone's going insane. But you know, I'm highly impressionable on who drags me out to do whatever. So if I got a lot of friends that are playing volleyball, I'm happy to kind of morph into that. If they're doing mountain biking, skiing, surfing, I'm easy to convince. So surfing was highly dependent on who's around to drag me out six in the morning. I'm easy to convince. So surfing was highly dependent on who's around to drag me out six in the morning. I'm not a morning person. So it varies quite a bit. And you're the kind of guy who's going to go challenge the locals at their local break?

I'm terrible. You get me on the Costco phone board, the wave storm, I'm happy as a clam. It gets much bigger than shoulder high and I'm watching from the house with a coffee. And what's coronavirus, what's the lockdown like in LA? Where are you in LA? You're in Manhattan. I'm in Manhattan Beach. You know, as it began, I mean, I think probably the same experience for most people. It's gotten, people have become more serious as time has come on.

You know, we're recording this mid-April where hopefully, knock on wood, it seems like we're turning the page a little bit. Things are getting better. But for a while, in the early days, people, yeah, there's a park right across from my house and people, you know, would occupy every inch of it. And then they decided to close it, law of unintended consequences. And so everyone just used it as a track, which concentrated everyone even more in a small area. But I think the beach, you know, look, you got to do what you got to do to get past this. But the beach I think was hard for a lot of people in the parks because it was raining for a couple of weeks, which wasn't a big deal. But now it's beautiful. It's supposed to be 80, I think, tomorrow. So for those that have access to the outdoors, it's a lot easier for those that don't.

I'm scared for Chicago because it's been pretty much the worst weather, March and April, that we've had in a while, which has helped keep people inside. But right as soon as it's a 65-degree sunny in Chicago, I mean, people are going to be out like crazy. I'm about 70%, 80% sure I had it already. So if we get these antibodies tests, I'm certainly volunteering to get back in the action.

But who knows? By the time this publishes, I imagine the world could look very different, whether in 24 hours or two weeks. I hear you. And then I've seen on your Twitter, which you do a great job on Twitter, but you were starting to run some polls on like how many people, what led you down that path? That's pretty interesting. You know, I mean, in the beginning, my understanding was that, you know, in thinking about markets, we wrote a paper called, or blog post, Investing in the Time of Corona. And I wanted to lay out a way of thinking because, you know, a few weeks ago, stock market, other markets were going up, down 5%, 10% a day, oil, you know, the whole point of everything we do is trying to make

a plan before it all hits the fan and spent the last 10 years trying to educate investors and don't even really care what your plan is necessarily, but at least having one. And the analogy we give is whether it's John Elway or Payne Manning more recently, or Drew Locke, you know, coming to the line of scrimmage, they prepare, they see what's going on. They can audible, but there really should be no situation in which case they're like, Oh man, I have no idea what this defense is. I've never seen this before. I'm unprepared.

And so at least having an idea of what the possible scenarios are trabisky trabisky is the one without exactly and so he's like he's like the he's like the investor without a plan just winging it so i smell it we came to this with that you know message for last 10 years and we wrote a bunch of papers to this with that message for the last 10 years, and we wrote a bunch of papers on this, the zero budget portfolio, the investor pyramid, just how to develop and have a plan. And so we laid out in the beginning of this article, I said, look, the struggle with geopolitical and events and markets, the future is uncertain.

That's the way this all works. We don't know what's going to happen. And if you do know the future, you're fooling yourself. And so I said, I could very easily, and this was in early March, lay out a bull and a bear case, for example, for how this plays out. I said, you know, the bull case was that the U.S. health care system, fiscal monetary responses were effective. People self-quarantined. Tests were plentiful. The treatments were developed. Vaccines were constructed and distributed. You know, it was a very mild flu-like sort of experience. It never comes back and the world moves on back to all-time highs in stock markets by summer or the end of the year. On the flip side, you could come up with a scenario, and this was at the time when everything every day was just going up in Italy and elsewhere, was that, you know, the US and other countries, despite their

best intentions, treatments were ineffective, the virus spread uncontrollably, particularly in emerging markets, and hospitals were overwhelmed, there were no treatments, vaccines were years away. And even though perhaps the virus went away in the summer, people had hope, you know, they got back to normal and then it hit again in the fall and it was twice as bad and mutated, yada, yada. Both of those, not out of the question of possibilities, you can say what's more probable anyway. Long-winded answer to your comment was that, you know, in the beginning I said I thought your comment was that, you know, in the beginning I said, I thought my hypothesis

was that as this became more real for people, meaning as they started to know people that got sick and died as perhaps famous celebrities or politicians got sick and died, it would become a lot more real and things could get a lot worse as far as sentiment. But I said, no matter what, you have to be prepared for both. And if you're trying to bet your portfolio, life savings, whatever, on just one outcome, that seems like a pretty, in my opinion, foolish way to go about it. So anyway, we started doing the poll and in the beginning, yes, it makes sense that beginning no one really knew anyone.

Everyone seems to know someone now, but most likely everyone knows someone that are just asymptomatic and haven't been tested. Yeah, we pulled it on March 14th when you first started was 8%, and April 9th was 40% of your Twitter followers who are clicking it. Yeah. Yeah, my wife's aunt and uncle both got it. They've been on a cruise in Egypt. He just got out of the hospital, actually, and he did a four-mile walk today or something.

Oh, good. Well, good to hear you recovered. All right. Thanks for joining us. We've got author, manager, and alts expert, Meb Faber here with us today. Let's get into Cambria a little bit. Is it Cambria or Cambria? Cambria. Cambria. So you're CEO and CIO of Cambria Investment Management, which puts you in charge of all these different ETFs and

separate accounts so run us through all the different ETF products I know we don't have six hours but in a quick 30,000 foot view if you can yeah I think it's important to kind of give the the broad philosophy of the type of funds we launch first I mean one is we try to only launch funds that either don't exist, or we think we can do much better, much cheaper. And in a world of 10s of 1000s of funds, that's pretty rare in all the categories. It has to be something that there's hopefully a fair amount of academic or practitioner research. Either we've done it or basing it on other people's as well. It needs to be something that I want to put my own money into. There's so many funds in particular,

mutual fund managers that have no investment in their own funds, which is a crazy situation. Lastly, is it something anyone actually wants? I have some ideas that I think are absolutely amazing, but good chance no one will ever buy them. And so, you know, of the 11 we've launched, they can be either super niche-y and weird. Some are allocation and pretty broad, meant to represent your entire portfolio if you wanted. And then in between, it's everything from equities, long only, to even some inverse tail risk, to some tactical trend following. The two big pillars, no matter what, are value investing and trend following, both of which have been around for over 100 years. It's our little flavor and interpretation on those. And we have

this belief that in 2020, and we've been talking about this for a long time, the investment world is bifurcating into this barbell of essentially free market cap weighted indices and funds. Bank of New York just launched a legit 0% equity market cap cap large cap fund and a bond fund and then on the other side if you're gonna charge whatever you charge 50 100 200 2 and 20 5 and 40 fund it needs to be weird concentrated and different enough that you can charge for it and hopefully, you know, generate alpha or better returns. So we try to exist in this corner of weird and different. And of the funds, you know, it's a pretty diverse lineup. Happy to talk about any of them under that umbrella.

Do you ever feel like you're like the regional hardware store going up against Home Depot or something like Black Rocks and all the rest? In my mind, we've said this for a long time, is that market cap weighting investing is a commodity, you know, and the bad news about a commodity from someone who deals a lot with them is they're replaceable. And so I don't want to play in a game where it's, it's already at zero. You know, the asset management industry has some of the highest margins of any industry in the entire country.

But there's a lot of fat still there, but it's a lot of people who just don't do anything. These closet indexers that still charge a ton and just you get the s&p 500 which is the last thing you want and i think they're dying speakers toll collectors whatever you want 100 and that's you know our parents generation that's the way that it was and and my belief they take them golfing is that it'll get better one funeral at a time. As people get divorced, probably a lot more of those after this quarantine ends. As people die and pass along assets, no one goes back to paying 1.5%, 2% for a tax-inefficient S&P 500 clone fund. That's not the way

the world advances. And so that trend towards market cap weighting zero cost, it's amazing for investors. Fantastic trend for the end investor, horrible for those asset managers that don't know it yet. And so, you know, I'm of the belief a lot of asset managers are already out of business. They just don't know it yet. And so they're slowly just riding the dividends of their assets and earnings until they all just go poof. I hope there's a blockbuster Netflix moment when they all just go out of business. But I think it'll actually be more of a slow progression over decades, honestly. And by asset managers, you mean the RAs or like who are running publicly available funds? I think the most at risk is fund managers that don't do anything,

meaning there's no what we call active share. They don't look any different than the S&P 500, which is free, and they charge 50, 100, 150, 200 basis points. I mean, there's thousands and thousands of those funds. On top of that, I think, and you can extrapolate that to any asset class. I think it also applies to financial planners or RIAs that aren't delivering any value. I think you're worth your weight in gold. You can charge 1% for the next 100 years, probably, if you deliver true value-added services like estate planning, taxes, behavioral coaching, all that stuff. But the basics of buy and hold asset allocation, you just go buy a bunch

of ETFs, charge 1%. That's gone. Like that, that is not a future proof job. You will be out of business. Vanguard right now runs a digital advisor that will give you a portfolio, rebalance it, all that good stuff, caps it at like 0.15 or 0.2 percent um so yeah the whole point of all the whole point of all this is you have to be value add otherwise you're you can't charge for it which is the way it should be yeah and as altruistic as you are you're not in it just to help people out or you got to keep the lights on, right? So it's, Hey, I'm trying to build a product that's good for you that you, you think you need in the portfolio, but right. I'm adding value and they need to get paid for that value. Yeah. I mean, so I'll give you a few examples. You know, we, um, we launched a series of funds

based under this, this banner of shareholder yield, which is this concept of, I mean, there's tens of billions, hundreds of billions of money allocated to traditional high yield dividend strategies. And we come from a very different philosophy that that just makes absolutely no sense. Thinking about cash flows holistically and the ways that companies return cash to shareholders, thinking in terms of dividends and net share buybacks or share issuance, you end up with, in applying a value tilt, you end up with a much better portfolio. You end up with a much better performing set of stocks all the way back to the 1920s versus a high dividend yield approach, which really just gets you in traditionally kind of junkie companies that are expensive,

excuse me, junkie companies that have a slight value tilt, but have a high yield, which by the way, if you're a taxable investor, you actually don't want. So anyway, we launched some of these ideas. And I think it takes time to convince people because certain belief systems, they have a great brand and there's nothing in investing that has a better brand than dividend stocks. And so it's something that takes time for people to change their minds about. But hopefully there's some people weird enough out there that will agree with us and vote alongside us with their investment dollars as well. But that's a good example of an idea that is a massive, massive, massive amount of capital that's completely, in my mind, allocated with a philosophy that has no footing. And this is one of your books, correct?

Sureholder Yield is a book, white paper. Yeah, all these are free on our website. I mean, the concept was that, particularly in the US, starting in the early 1980s, companies started distributing cash flows through buybacks, which this will offend most of the listeners. It's finance 101. You learn this as freshmen in college. Buybacks are the exact same thing as dividends. If you say there's no tax advantage and they're trading at an intrinsic value, well, buybacks are more tax efficient than dividends. And you can buy stocks when they're trading below intrinsic value. So in Buffett, there's no better example of this than Buffett, who's never issued a dividend for Berkshire. Jimmy or Warren?

Warren, back to the 1960s, where he said he must have been in the bathroom when the board decided to issue the dividend. So he understands they're tax inefficient. He doesn't want to pay them. But he's fully on board with buying back stock, has been, and will continue to do so. But he's smart and he does it. He has a quote, says something along the lines of, if a company, if a stock is trading below intrinsic value, there's no better use of cashflow than to buy back stock. So Charlie, his partner, says this all the time where he says, you know, you want to buy the cannibals, companies that are reducing share count,

eating themselves, because it's a much more tax efficient dividend. So if you look at holistically combining dividends and net share buybacks and buying these stocks when they're cheap, and this is the biggest problem with the dividend funds. If you have a dividend strategy that doesn't account for valuation, all you're doing is buying high yielding stocks that are expensive. End up with a bunch of MLPs that go out of business, right? It's bananas. And so on top of all that, that's the theory. That's the fundamental understanding. It makes sense.

And it also applies to foreign developed and foreign emerging. And then you go back and test it. And we've showed this in our research, papers and books some going back all the way 1920s that shows this is a much better portfolio than any way of constructing it based on yield and all this really is at the end of the day what you get to the core any idea you should be able to explain to your you know niece nephew children say what's the core concept you want to be buying companies that are cheap but high quality and have tons of cash flows which is what you're buying here right you're buying companies

have the ability to generate cash flows distribute them but also are cheap and so you need a quantitative metric or don't even need quantitative but that's what we do just shows that these companies are cheap rather than last thing you want is a company buying back stock that's expensive, which CEOs are, you know, they're empire builders. Does that help you with a company like Apple who was forever, didn't pay out dividends, like to identify someone like that, that you could get into a lot sooner? Apple's a perfect example. It's been a long time holding where, you know, they're not going to be owned in either. There's the dividend side. They, and it's, I have to check recently, but it's roughly about the same where they pay

out both dividends and do buybacks. And so, um, and it's important to note that you don't want a company that the reason why I have to use net share issuance, you don't want a company that's just using buybacks to mop up options that are going to ask you what you thought of Ben Hunt's work and all this. So the big challenge, and I love Ben, but the big challenge with I think a lot of the commentary around buybacks is it's a good bad guy. It sounds good. I mean, I said that talking about branding, the worst thing people ever did was calling them stock buybacks. They should just call them tax efficient dividends, which is what they are. And so the thing that people are hitting on that they, everyone knows that something feels a little off is that they're upset about high exec compensation.

They're upset about companies that pay huge options to their management and then particularly are highly leveraged and then get in trouble like a lot are this year and come running to the government. All that feels bad. I agree with all of that. The problem is it has nothing to do with buybacks. Compensation is a board issue. If the board ties your compensation to buybacks, which they never should, then you just have the dumbest board on the planet and the board should be cleared house and should be in jail. That's just stupid. But it exists, right? Right. And it's just so dumb. Why would you ever do that? It has nothing to do with buybacks. Now, um, again,

the whole key of a CEO's job is that he needs to divert cash and there's only five ways to manage cash. If you are a company, it doesn't matter what the company does. It's reinvest in the business, which is the sexy part. It's, um, you know, you could buy back stock, pay out dividends, pay down debt, or go acquire another company. That's it. There's nothing else you can do with that money. And it's funny to see how the mood about the public has changed. Everyone's always hated the CEOs, right? The empire builders that do dumb things. But if you go back in history over the past 100, 200 years,

it's actually the case that the government and shareholders often either require or heavily prefer companies to do buybacks because the last thing they wanted is the company to have a bunch of extra cash sitting around. Would they then pay themselves or go name stadiums or buy buildings, right? So it's funny how the mood has changed at the end of the day the best advice if you wanted to fix this in a very simple very simple writing on a napkin it's two ways one is you de-link executive compensation from uh short terms earnings per share and stock price i mean that's silly anyway two is that you just make dividends on par with buybacks tax treatment. Dividends gets taxed twice, buybacks don't. So just say dividends are tax-free, done.

That's it. Now, politicians aren't going to do that. The same reason they're not going to get rid of the lottery because you know they like the tax revenue I hear you the so a few things to unpack that one will get off buybacks and the dividends but just ETFs in general and we touched on the passive ETFs that are tracking the market weighted tracking S&P or whatnot what about these conspiracy theories or fears that that is gonna somehow infect the market during a crash? I think we just proved in March here that it didn't happen, but people are fearing it's going to disconnect from the NAV. There's going to be problems with redemptions. And what do you see

being an ETF creator that would disprove that or give credence to that feeling? Short answer is it's silly and there's nothing there. The longer answer is you got to remember ETFs are just a structure. ETFs are essentially just a mutual fund that happens to have daily liquidity. And it's a more efficient mutual fund for equities in particular because of the creation redemption. And if you go look back to the spiders back to the late 90s, they've never paid essentially capital gains distribution. So it's vastly more tax efficient if you're an equity manager, or if you do, doesn't matter if it's

index or active. The entire active mutual fund universe, if you're allocating to an equity guy there, I would call them up and say, hey, you got to launch an ETF if I'm taxable because it's a much better just structure. And that's just a little bit of a nuance of the tax code. You know, again, if the government was really on top of this or the SEC, SEC would just wave its wand and say, mutual funds should have the same tax treatment as ETFs. It's really not fair. Being an ETF manager, I don't care. I hope they all got a business. But that's just the way that it is. You cannot argue that point.

There's probably for the active equity funds, a 70 basis point tax per year cost on average of the mutual fund structure versus ETFs. Forget about expenses. Okay, ignore all that. So ETFs, there's nothing unique about them. They're just another fund type. And by the way, they're tiny. They're a speck of sand compared to mutual funds, compared to sovereigns, compared to individual investors, everything around the world. Like it's just rounding here. The thing that people do have correct, and this has nothing to do with the ETFs, it could be anything, is that any fund you have that's buying illiquid stuff that thinks it's liquid. So let's say you had a hedge fund that

had daily liquidity that was investing in Brazilian small cap tech names, and it was a $10 billion fund. And all of a sudden you had daily liquidity and someone says i want five billion out well obviously you can't that's just not it doesn't matter if it's a hedge fund mutual fund uh a separate account atf whatever right or distressed debt or things of that nature like there's and so there are there are funds and categories particularly with etfs that you should not expect there to be liquidity there. A lot of the bonds, the bond ones, where you're investing in corporate bonds, but expecting them that they don't trade daily, but you're expecting the fund to. Now, the interesting part about this last crisis is people were saying, oh no, the bonds, ETFs are trading at big discounts to net asset value.

But in reality, what was happening was the ETFs were actually probably the correct price. Yeah, yeah. And the indices and net asset values are stale. So the way you see this is a lot of times is if a fund or a country or something will get halted, let's say Brazil halts their stock market or Greece, but the fund keeps trading. And then you see the fund, the country stock market open back up

and it opens exactly where the ETF is. So it's a price discovery that I think is... And in the futures world, you see that with, if we're locked limit down in whatever market and you can check the option prices and derive what the futures will reopen it. Yeah,'re definitely i just had this debate with someone the other day they're acting as the pure price discovery and if all those investors could access that bond market

right away the prices of those bonds would be the same and in future is a good example like i'm not someone who's just going to tell you ets are the best thing on the planet there's a couple areas like i don't think they matter as much in retirement accounts because there's a huge tax benefit of taxable. So in retirement accounts, they don't matter as much. In bonds, it's kind of a wash. Futures, it's meaningless. Like if you're going to do a managed futures fund, there's no benefit of the ETF. There's probably drawbacks. But particular with equities and turnover in taxable, it's a great vehicle. So back to the fun stuff. I think ETF naming seems like the last bastion of creativity in

the financial space. How do you come up with some of these good names? You have Toke, which is a cannabis one, and Tail, which is Tail Risk. How does that process work of coming up with those fun names? We just sit around over happy hour and try to come up with memorable names. I think it's – You got to check if they're available and apply to the SEC. Yeah, you can reserve tickers if you're an issuer. Typically, they don't want you squatting on a bunch.

You have to have the intent of launching them. So if you have an active prospectus with a fund, you can attach it too. It's much more likely. Sorry, quick story on sitting on things. A guy in our office had bought Bloomberg2020.com for like $4.99 in 2018. And he eventually settled for like $60,000 or something. Good for him.

Yeah. Good for him. Convexity. Yeah, exactly. Yeah. You unfortunately can't do a whole lot of that, squatting and selling the tickers. But, you know, I think, look, the ticker is memorable and helpful. We all know five, 10 years from now, the ability to get exposure and how the fund performs,

you know, is going to be vastly more important than the ticker. You know, we're again, we're trying not to really be involved in the market cap sort of weighted exposure to a lot of these indices where the first fund to launch. Talk about that a little more. You've mentioned that a few times. What's the summary of what you mean by that? So let's go back 50 years, 1970s. And you invest in a stock market index which technically had been around longer back the time of dow jones but really the big innovation came in the 70s wells fargo john vogel vanguard and others said well if you just invest in the whole market meaning you just bought

all the stocks in proportion to their size uh you could do this as a passive index. And everyone thinks that, by the way, the passive index was the big innovation, and it's actually not. It's that a passive index, because you don't do anything. If you go out and buy the 500 biggest stocks in the US, you technically never rebalance that as a market cap way that you do corporate actions if somebody buys someone a business goes out whatever but you're not rebalancing that ever so it takes no effort you know my my dog could do this uh he's a very bright dog but um so the the benefit the huge innovation is because it took no effort and a freshman in high school could do it, you don't have to charge much and you probably shouldn't or couldn't be charging much. So all these funds that were market cap weighted funds that were charging one and a half, 2% or market cap weighted funds in

drag as a 200 basis point hurdle of alpha that you just didn't have to have. So obviously we know what has transpired since. Now the term passive and indexing has lost all meaning over this time, but to the real correct academic term, market cap weighting only means one thing. It's the price of a stock times shares outstanding, and that's it. And so that's a great first innovation because you're guaranteed to own the winners. If we know anything about markets and investing and trend following, by the way, and that's the market cap weighted index is a trend following index. It's just price. As it goes up, you earn more. As you own, as it goes down, you own less. It's like one of the simplest trend following systems in existence. It guarantees you to own the winners. And in the stock market, about 5% of the stocks generate all the gains,

McDonald's, Amazon's, Walmart's of the world. And so, but it's not an ideal index and it's not an ideal strategy. It's a good first start and it's fine. But the problem with market cap weighting and stocks is that it has no tether to value. And so often as price goes up, many of the stocks valuation is simply going up. It's the P and the PE. So market cap weighting historically, if you avoid the largest stock in an index, if you avoid the largest stock in a sector or country, the largest holding underperforms that country's sector index, usually by three percentage points for the next decade and up in certain areas.

But that makes sense. It's capitalism. By the time these get bigger, they invite competition. They're expensive. They're the old stalwarts where the younger ones had better returns. So you could weight stock indices by any other methodology, equal weight, based on valuation, based on momentum, whatever it is, it doesn't really matter. They should all beat the market cap weighting by about a percent or two per year. I have this debate with some advisors.

They're like, oh, I don't believe in an automated trading system. I invest in the passive index. I'm like, well, you're actually in a training system that reweights and picks these different stocks and kicks them out when they need to be kicked out. It's like, well, I've never thought of it that way, but yeah. Market market cap weighting is one of the oldest trend following systems on the planet and probably manages more the oldest trend following systems on the planet and probably manages more assets and trend following than than uh than almost anything combined so so your whole philosophy was that i want to capture that extra one two percent by not market waiting and yeah

or cape waiting whatever it is and it doesn't really matter i don't even think what you do obviously have preferences we mentioned shareholder yield any of the valuation metrics you know is is a common sense to me idea that uh checks the common sense box of is this reasonable the nice thing about value using value is not just your you're overweighting the cheap stuff which you are but you're also avoiding the really expensive, the valuation metric you mentioned, which is the chiller 10 year CAPE ratio is just a 10 year PE ratio. We track all sorts of 10 year valuation metrics based on price to book, cashflow, sales, all that stuff, even dividends, by the way, work just fine.

You know, but looking at countries, and this is a good example, as you talk about market cap weighting, it gives you an anchor and it gives you an ability to say, is this a reasonable what's going on in the world? So, you know, coming into this year, if you look at the long term valuation metrics of countries, the average P ratio over time, this 10 year CAP CAPE, for countries, it's usually around 17. In many countries, it's been as low as five. In the US, it's been as low as five and as high as 45 in the late 90s, bull market, internet boom and bubble, my favorite. But in other countries, it even went higher. And the problem with that is if you simply avoid those expensive countries and tilt towards the cheaper, you end up with much higher returns over time keyword being over time doesn't guarantee you any given year or even month quarter week and so going into the

year going into this year the US was expensive it was trading around 32 or 33 which would very simple equation by the way for forecasting future stock returns is just dividend yield, starting dividend yield, dividend growth, plus change in valuation over the next 10 years. This is a Bogle equation. It gives you roughly stock returns. And so the U.S., you plug in those metrics at the beginning of this decade,

2% dividend return, give it historical dividend growth, and then the change in valuation, you end up with low single-digit returns. Well, the market this year has gone from a P ratio of around 32, 33. I think it bottomed around 22 in March, April. It's now back up to 26-ish. But again, that's expensive, not terrible. Good news is the rest of the world came into the year trading around 22, hit as low as I think around 15 emerging markets started the year at 15 hit as low as like 12 or 10 and the cheapest stuff started the year at 12 and ended up in like around like seven and so um but the interesting takeaway from all that we're spending this whole podcast talking about stocks and valuations on a trend following podcast, is that if you look at the global market cap, well, the U.S. was over

half at the beginning of this year, and you're putting most of your money in one of the most expensive markets in the world. Again, not a bubble, not crazy, but expensive. And so you're making the same mistake you would make within the u.s if you overweighted by mark cap weighting expensive stocks and the biggest problem with mark cap weighting it has the tendency to overweight bubbles in the 80s when japan had the highest k-percent we've ever seen of almost 100 that was the biggest stock market in the world at the time so you should have put most of your money in japan horrible idea the u.s was really cheap then that's been taking you 30 years to get back to even. Yeah. Yeah. And that's not, again, we often say

this, that's not some backwater economy. That's not, you know, the Philippines. That's still a top three economy in the world who's had zero stock returns for decades. And so, again, tilting away, it's impossible to tell people in the U.S. this over the past decade because the U.S. has had amazing returns. This decade is starting to be a little different. We'll see how it ends up in 10 years. And there's been a big value trap the last 10 years, as you're saying, right? Like if you stuck with value the last 10 years, you're trailing. But that's the way value works.

And you can certainly sympathize with us on the trend following stuff to any active approach or asset class is, you know, we used to tell people when they would ask us how long should they give an investing strategy to play out to know if it works or not. And we say 10 years and now we say 20 and people laugh and they think that's funny. And I say, no, I'm serious. Most institutional investors and most individuals, it's one to three years, which is such a horrible misunderstanding of everything that's involved in markets.

Last month, there is no more ironclad belief in all of markets than stocks outperform bonds. Can you think of any? That's like the number one to me is like stocks for the long run. You own stocks that outperform bonds. Can you think of any? That's like the number one to me is like stocks for the long run. You own stocks that outperform bonds and largely I agree. First quarter of this year, stocks for the last 40 years had no premium over long-term bonds in the US. Think about that. 40 years, that is a lifetime for someone to invest. And still the most ironclad belief wasn't true over that entire period that stocks had any premium over bonds. And so people will email me and say, Meb, I saw your fund did this last week, last month, last quarter, last year. And I'm like, buddy, it can get way worse than this.

And so, yeah, when you're talking about value, that's interesting because that's, you know, for stuff to get cheap, it usually just means that the P went down 40, 60, 80%. It's usually not the earnings. It's usually just the market went down 80%. That's why it's cheap. And on the flip side, the stuff that's expensive is usually markets hitting all-time highs, which the was but by the way we have a new paper coming out we are published as blockbusters where investing in all-time highs is actually very bullish and it's a great investing strategy much to what most people think but the whole takeaway

is that you know I think value is helpful as something to at least give you an anchor to look around the world to say, is what I'm doing reasonable? Is buying Japan at 100 reasonable? Is buying U.S. in late 90s when I was in university engineering classes and the professors were trading stocks? Does that pass the smell test? At least give you pause before you put your whole neck bag in there or whatnot but it seems to me like in trend following in particular like you get paid the return profile is almost based on people not having the patience for it yeah if they don't have in value somewhat the same thing i don't

have the patience for that i'm going to sell. I'm going to go with the momentum stock, which drives it down and gives it that value. You know, we've been saying for a long time, we did a study you can find on the blog that put the U.S. stock market into four quadrants. And we said, if you could put it into cheap and expensive, historically, and uptrend and downtrend, and what did the returns look like in the next month if you just characterize it every month? And not surprisingly, the best performing quadrant was

cheap uptrend. The second best though was expensive uptrend, which is what we've had for a number of years now. And so we used to always tell people, we say, look, when this flips from the best is cheap uptrend, worst is expensive downtrend. And that makes sense. That's the way you would probably think it was. But second best was expensive uptrend. But when it goes from expensive uptrend to expensive downtrend, which is the worst, finally, we got to it. That goes from the yellow to red flashing light, which is what happened depending on your indicator. But it certainly either happened at the end of January, end of February, you know, and you're still there now. And so you would argue that that's not a warm, fuzzy, happy place when

it comes to, and you can apply that to any market of equities as well. And so what these valuation metrics and knowing as you do of this looks expensive me, did that drive, you know, the one ETF tail, which is tail risk and trying to capture things like just happened in March of 2020 here. Was that the impetus for that product? So we wrote another paper a few, a couple of years ago called worried about the market, you know, maybe time for this strategy. And as stocks started getting more and more expensive, you know, we'd talk to advisors and say, look, or investors of any stripe, they would talk to us and their general concerns. And they'd say, I say, look, if you own U.S.

stocks, the first step, if you want to hedge a risk, is just don't take that risk in the first place. If you have 100% of your portfolio in U.S. stocks, maybe own 80. Okay, don't own so much. You can't sleep at night. Second is that you can diversify to other asset classes. So if you own stocks, you could buy bonds, foreign stocks, real estate, commodities, all that other stuff. We're getting there hold on these are just the beta of asset classes and so the problem with those is we look back to the 1980s

and we said what assets historically helped as a hedge and obviously not surprisingly foreign stocks didn't help at all real estate didn't help commodities didn't help. Commodities didn't help, the broad-based energy ones. And then bonds helped, but, you know, if the market's down 10, they may have been flat or up one on average. So they help, but not that much. Gold helps, but only sometimes. And what did I leave out of anything? And then a tail risk strategy. Real estate doesn't help at all.

A tail risk strategy, which historically is that we described was just buying puts on the stock market, pairing it with 10 year government bonds did great by definition, but of course it should, it's literally an insurance vehicle that has a cost most of the time and should do well when, when markets go south. But before we got to that we said you could also do two active strategies one tilt towards value because historically the expensive markets were much more fragile in the future three to five year returns you had a big fat drawdown more likely when markets were expensive than when they're cheap two to use trend following and i said only then if and only, after you do all those steps,

don't take the risk, diversify, add active strategies, only then would you probably add tail risk. But I said, maybe it's a thoughtful time to be adding it now because the U.S. stock market's expensive. It's been a 10-year bull market. A lot of the sentiment was pretty high, super low volatility environment. But more importantly, the point I made to all the people that are involved in asset management, particularly financial advisors, and no one took me up on this. I think

two people said this was an interesting idea. And I did this with a big slug of my own money, as well as my company's balance sheet. We put about a quarter of all of it in tail risk because i said look if you're the average financial advisor you own us stocks in your portfolio you're personally personally you own us stocks everyone does and that swamps the volatility if you own a 60 40 portfolio the volatility of the stocks swamps the bond so really you just own stocks yeah your clients own stocks so if you're a fee-based advisor and you have 100 million and stocks go down 50 well your revenue just went down 50 and likely the same stocks probably probably the same stocks on top of that if you um clients often if they're just stock exposed, behave poorly when it all goes to hell because buy and hold investors, the biggest problem is the bad times correlate with bear markets almost always with recessions, depressions, contractions, high unemployment.

Look what we're seeing right now. Stock market pukes. Unemployment goes through the roof. On top of that, if you don't own your own company and you work for say Morgan Stanley, their revenue is directly exposed to equities and they may have to downsize because their revenue has gone down. You'd probably get fired. So you're like five times leveraged one risk, which is US stock. So my argument was, you should A, think about not owning so much. The average investor in the US owns 80% of their stock allocation is in the US, when even as the global average, it should be 50. And if you do value tilting or GDP weight,

it should be like a quarter. So already they're way overweight. But then on top of that, you have this multiple leverage. And I said, you could either not own as much, diversify, or start to hedge. I said, you can make the argument you shouldn't own any at all. Airlines hedge fuel. Cereal companies hedge wheat. Why wouldn't you hedge? And I, you know, no.

They're crickets. Yeah, I don't think I believed it. But it's good to see that fund do, you know do in real time what it's supposed to be doing. And it's buying puts on the S&P? It buys a ladder of puts from about two to three months on all that way to about 15 to 16 months. In general, it's trying to get you roughly an inverse exposure. Going back to the very beginning of this podcast when we talked about why do we launch funds, you know, this, this tail strategy is a good example. Cause when we looked at a lot of the inverse funds, we scratched our head and say, they're either so expensive,

uh, or there's some extremely complicated. And I just want something that's just simple that I can understand, put my money 90% in government bonds, buy a ladder of puts and just be done with it. And the bonds pay for the put premiums? So historically, except for now. It's funny because I spent an entire summer modeling and building a bunch of option databases and then came to the realization I could actually back out exactly what we were trying to do from all the CBOE indices they published. It's good to see they matched, but in general, it actually had a positive return historically. I don't think that is realistic because that existed in a world of bond yields north of five. You know, in the 80s, 90s 90s 2000s we're at one now so i think

it'll probably be a negative cost of a few percentage points per year um but the interesting part about this strategy if you were to do an optimal allocation if you were to take a bunch of assets put them into an optimizer first of all all, I said this at a conference a few years back. I said, first of all, you'd probably have half in trend following. Everyone always overrides that, if not more. I don't know if you've seen this. There was a Goldman study, I think it was Goldman, study that said how much should we actually have in trend following, and they go through the exercise, and they had to constrain it

because it said you would actually have to put like 80% in trend following. And they're like, that's unrealistic. Yeah. Nobody would do that. Is it? That's unrealistic. Like, what do you mean that's unrealistic? If it said stocks, you would of course put it all on stocks. Anyway. And I've done a paper before, like the amount people put in trend following, you need like a 70% return in order for your 5% to pay out. And they don't, they, okay, I get it. I'm going to put a little crumb in. I'm like, well, you might as well do zero.

You got to move. You really got to move in blocks of honestly, like five, 10% for it to even move the needle. And so the thing about this tail risk fund, as I said, if you put in the optimizer, will it probably kick out an allocation to tail? And I said, it may not, you know, it may say this is a suboptimal strategy. It's an insurance type of strategy where if you put an

optimizer, should I buy a fire insurance on my house? Probably not, you know, it's going to be, but if it does happen, the key to me is that it, did you have something that helps clients or yourself or investors get to the end game, which we all know the most important thing in all investing is just surviving and having a bankroll to play, to continue to play. And then the gravy on that is having the returns above that. And so, you know, to me is in Q1, when everything is just getting destroyed with the exceptions of probably tail risk and, and bonds and trend following, is it nice to at least see something green on your screen? And does that help you? Yeah. And you know, our friends doing the mutiny fund, which is a similar thing but right the the biggest thing there is to help you stay invested but if you can have something that keeps you from panicking at the lows like that's even bigger than any return you get i think just the behavioral

edge it gives you and tying in a couple threads from earlier you know look i i spent a lot of this podcast you know kind of dumping on dividends but But look, if you tell me, Hey, I got some retiree, he buys 10 dividend stocks every year, rebalances, and he sticks to it. God bless him. That's great. If you have your strategy and approach and you cash those dividend checks and it keeps you behaving, that's a great strategy over time. It's not optimal. It's not what I would do, but as long as it keeps you, you know, in the game. And to me, that's kind of what we're talking about here is the behavioral aspect is vastly more important than the exact optimal allocation. Right. You can have the optimal, perfect portfolio. But if you scrap it every six months and switch to the new perfect portfolio you're gonna weigh in the perform a suboptimal portfolio

so Mab so you're talking all that about these people maybe they don't have the optimal portfolio don't put all your eggs in one basket as a manager so you kind of do that personally you wrote a blog piece recently of what i personally invest in uh tell us in a couple minutes what you're thinking of there way more farmland than i would think would yeah you know i have a another opinion which is not widely held by almost anyone that if you're doing buy and hold long only asset allocation your allocation actually doesn't really matter. I've seen your paper on that. You had like 10 different. Yeah, we have a book called Global Asset Allocation that's free to download that it looks at like

dozens of asset allocation strategies. As long as you have the main ingredients, global stocks, some global bonds, some global real assets, you end up in a pretty good place no matter what over time. And they zig and zag, you know, the seventies had different performance than the nineties than the 2000, whatever. Um, but in general, you know, just not mucking it up and not paying way too much. You end up in a, in a happy place. Um, but again, going tying back into it, the problem with buy and hold is, is it all happens at once. And they're all everything, not just in your portfolio,

but usually what happens in the real world is all at once. So recession, losing your job, all the news flow. I mean, just Q1 is such a great example. All happens at the same time. It's your portfolio. You would theoretically want it to hedge your human capital, but in reality you're just doubling down on it. So my allocation of my public money, public assets, is half in a global asset allocation. So stocks, bonds, real assets with big tilts towards value

and momentum. And so not just in stocks, but we do value in bonds, et cetera. What do you mean by public money? What's that? What do you mean by your public money? Okay. So, so publicly tradable assets and we'll get to the private stuff in a second. And then the other half is in trend following strategies because trend following in my mind is if I had to pick just one strategy I would pick that because it adapts right and but the problem with trend following often depending on how you do it is that you look a lot different and you can go years with underperforming traditional buy and hold assets and you know the the Buffett crew says you know it's not green fear that drives people,

it's envy. And I know I'm not immune to any of the behavioral biases. So, you know, underperforming buy and hold when it's romping and stomping would be hard for me. And so I love trend following too. But trend following's problem isn't usually the bad times, you know, the bear markets, it's looking different when stocks are up 30 in 2019. Yeah. So having the two sort of yin yang for me, we call it Trinity portfolio, I think is perfect for me. It's what I do with all my public assets that I can in the retirement stuff. I just don't have the same choices. So I just throw them into emerging markets, international, whatever's cheapest and just dollar cost average. Taking a step back,

thinking about behavioral and psychological hacks. To me, for most of my life, I've thought private investments, the illiquidity has been a bug. When in reality, I think it's for many people, an actual feature, meaning the fact you can't sell something is probably a good thing. And what did most people, their biggest assets, their house, if they could value that every day and sell it, you know, with the flexibility to move, it'd be a lot different than if you just can't. And that applies to a lot of things. And so for me, that means one being farmland, which granted, there's a lot of history in my family. My dad's side is Kansas, Nebraska. You know, you can trace it back to immigrating there and being on farms for a long time. So there's some emotional attachment, but it's a fantastic diversifying

investment. It doesn't have a whole lot of correlation to anything. And I would actually like to own a lot more farmland, different stripes elsewhere, and would like to do that in the coming years. And then another big chunk is investing in other private businesses. So for me, startup investing, investing in angel companies have done over 100 and probably 20 or 30 in the past five years, six years. And to me, the ability to invest in them, there's huge tax benefits now with qualified small business tax benefits to if you invest in a company below 50 million the first 10 million or 10x gain is tax free so uh but you just put them in a the coffee can portfolio forget about them because you can't sell them in even 10 years even if you wanted to and if you actually look at that so in the ga book we talk about fund um strategy that's 2,000 years old, and it's from the Talmud, where it says,

let every man divide his wealth a third into business, a third into land, and a third to keep in reserve. And I said, my portfolio looks a lot like that. So a third, land being farmland. I'd put real estate and housing if I don't own a house, but other people would. Third in business, all those private companies and a third of cash sort of style investments, which is what I consider my public portfolio, which a lot of people wouldn't, by the way. We wrote an article about if you look at after inflation returns, you actually want to invest most of your cash. Because if you look at drawdown and volatility,

you end up with a much higher return for similar drawdown and volatility. Really long-winded answer. Do you not own your house on purpose? You feel there's better use for the cash? The K ratio on Manhattan Beach real estate is 600. It depends where you direct this question because, you know, to me, the first five best reasons to own a house is not financial. You know, if you look at housing historically, you know, it probably has, in my opinion,

probably close to stock-like returns if you rent it out or if you live there, but you got to pay for the rent. So it's a wash. I don't think a lot of people get that. The actual value of the house itself probably only keeps up with inflation. But if you were to consider leasing it out versus what you pay, it's a wash. Anyway, but I think most of the reasons are not financial. I think the biggest benefit of housing for the vast majority of people is it keeps you spending that money on something else. So the fact you have a mortgage payment every month, it keeps you from going on vacation and buying cars and all the other going out to dinner.

So it's like a forced savings. It's like a 401k match. That having been said, I don't have the same romantic attachment to ownership of a house as my better half does. I see the black mold on the ceiling. I see the termites. I see the, the value Asian in a, in LA. So if you want to buy house sure let's let's go look in portland or denver or kansas or somewhere but put la's bananas seems to be coming down now but um i'm a i'm a happy happy renter we'll see how long that lasts a private equity friend of

mine here in chicago he's got a huge place on Lakeshore, beautiful elevator, everything, rental. He's like, what are you talking about? I could put this money in so many deals and get like 5X, 10X over what I'd get in the... That might be the only other mantra financial than we talked about before of like real estate. You got to own a house versus stocks will outperform bonds. You got to own a house might be the other one. And the funny thing is you and I could probably sit here for 10 more hours and talk about investing until the cows come home, like super sophisticated, deep, and worth doing ideas and concepts. You talk about most individuals.

It is vastly more important simply the equation of how much you save and invest in the first place versus your actual return. And most people, you know, they just don't. They want to spend all the money, which is great and fun, probably should. But, you know, to actually create the compounding and wealth, you need time and savings. It doesn't matter if you're a janitor if you're a doctor it's easily doable for both but you just have to save it in the first place and that's why that's coming back to your post we're all talking about the stay rich phase right of everything we do and finn twit and all the rest is mostly for people have already gotten there there

seems to be a whole nother need in the world for getting people there. Yeah. Cool. We're going to tie it out. Oh, I was going to talk about the podcast real quick. So you mentioned in the beginning the MedFavor show. It's your podcast. You've done 200 plus episodes.

And you were one of the first there. Are you going to sell out like Bill Simmons for a couple, 10 million bucks? Sure. Absolutely. You got a buyer. I'm listening. You know, yeah, go ahead. It's funny because the origin story of it was that we'd considered doing it for years before we actually started, but had wanted to do a high quality video production and eventually polled the audience and said what would you rather have and people and this is remember this is years ago uh said they'd much prefer a podcast and this wasn't the earliest podcast but kind of the second wave and that it was like 80

or 90 said podcasts audio only and that was a big realization to me that oh okay maybe people want to consume this in a different way than I had thought about. But we've come full circle now because video actually works so well. We're all quarantined. And video is so much higher quality and easier to do despite what you see as my guest bedroom if anybody wants to come for a visit. Yeah, mine as well. To me, my biggest thing with the podcast is i can listen to them i listen at one and a half x yeah so i can rifle through them and

video to me a lot of times i'm like i want it to go faster i want i don't want to look at the person sometimes so yeah and it's easier when you're doing something else like trying to watch a video and drive yeah or go to the gym, walk the dog, same thing. Exactly. So who have been some of your favorite guests you've had? And I'll preface that by I like the ones you do. I listen quite a bit. One of your shows, one of my favorites on there.

But the ones where some of the companies you invest in and hearing those stories are great. Yeah. You know, it's funny. We do like about four or five different types. We do the traditional chat with with people we do what we call like a radio show which is like a q a uh we've started to do more entrepreneurial ones uh just because i think it's it's so funny when you look at public market investing versus private because public market it's like all the news flow is always terrible

it's like the world is ending geopolitics just economics just awful like all you want to do is go buy tail risk all day long right the rule in our office since 02 has been no volume on cnbc yeah the data is fine but the rest is just complete pure noise and so but on the flip side like looking at these private startup companies the smartest entrepreneurs in the world tackling like the coolest product problems. All I want to do is invest all my money into all of them. I'm like, that's the best idea. It's amazing.

It's going to change the world. It's like trying to find the balance I think is challenging, but useful. Um, you know, and so we do the entrepreneur ones. We do some where we're reading research. And then I'm leaving one style out. But for me, there's often very little correlation between what I think is a phenomenal episode and what listeners do. Often people, I'm like, you know,

that just wasn't that interesting. And we'll get tons of response from people like, that was so helpful. Thank you. I loved it. We always get haters. Like that's guaranteed. People always hate the episode.

But the ones that people really like, I particularly like the ones where it's someone who's maybe not that well known. You know, obviously if you get Buffett on your podcast, it'll probably be a great podcast, a lot of listeners. But to me, I like trying to give the opportunity to find some uncovered gems, you know, whether it's new fund managers,

people doing great research. I love the old school guys who maybe the younger generation doesn't know. And we just did one with salem abraham oh cool along those lines he's still kicking it there in canada texas was great yeah and and he's see he's got the farming background too right yeah yeah ranching whatever the combo is yeah he's got a apple farm pecan grows wow something else peaches and plums or something um so yeah we were definitely in that like seventh wave of the podcast mainly because we couldn't get it through our compliance yeah um so we have the big long disclaimer at the beginning but we got a

new compliance person last year and finally am i looking am i looking at the new compliance officer no no no at least the uh oh yeah as the host i stamp it yeah great so let's uh finish up we asked all our guests some of their favorites kind of rapid fire here um so i'll just run through them favorite carolina barbecue spot if you have one or where you do you know i mean my uh my hometown in carolina was winston salem was actually supposed to be in the south uh for a wedding this past month in charleston sadly they decided to do it, you know, kind of closed

doors, family only. There was a spot in Winston called, well, I'm going to give you two. One was, I think it's called Little Richard's, but also there was a chicken wing place called Ronnie's that is just absolutely just lights out. All they would serve mainly was wings. They had pizza too. You could order off many, but everyone just ate wings. And I used to have friends come visit. Like, what do you mean you eat wings for dinner? This is before Wingstop and everything else. You know, growing up, they're like, that's an appetizer.

You don't eat that for dinner. These are like super hot or just. You know, there's another Winston-based hot sauce called Texas Pete. And if you've ever had it, that was the foundation. If you haven't, it's, I think, the best hot sauce called Texas Pete and if you've ever had it that was the foundation if you haven't it's it's I think the best hot sauce out there it's a very distinct taste so try to grab some online but totally different sort of hot sauce but that was the foundation for the wings. Favorite surfing spot out there or anywhere? I go right in front of my house

so like we're pretty close to the beach. Uh, the, the, there's a power law here where the further, you know, every block up is like 10 times less likely to go surfing for me, or, or miles away is like zero chance of, you gotta load the bar, but I'm surfing. Uh, but, uh, but just right out front again front, again, it's a very average beach break. But I'm happy to get out there and just embarrass myself. All right. Well, I grew up in Florida, so I can work my way around the board a little bit. Too many sharks there.

Too many sharks. We come here and we have great whites, but they leave you alone. Yeah, we used to get a little rubbed on and get out of the water for 10 minutes like as a 12 year old then you'd be like all right probably clear let's get back in yeah those like drones or plane footage where like goes over a beach and there's all these people and it's just like a shark highway going by yeah scary yeah the uh favorite investing book um this is one I've kind of been saying for a long time. It's called Triumph of the Optimists. It's expensive. So listeners, you can try to get it in the library or there's a free download every year that Credit Suisse puts out called the Global Investing

Returns Yearbook. Then there's about a decade of the updates for free, all worth reading. And it gives you a history of stock markets, bonds, bills for the past 120 plus years. And the big takeaway in my mind of everything we talked about today was that history, you know, at least having an understanding of what's happened in the past is very useful to at least understand how crazy markets have been you know it is crazy they've been this year if you study history at least you have some grounding of what can happen because it's usually way crazier than people think what's already happened uh yeah that can never happen again yeah you know um we always tell people normal market returns are extreme. And this low vol period of the past handful of years is actually pretty atypical. So that Credit Suisse thing is different than Triumph and Optimist? And then the authors, we've had Professor Demson on the podcast.

He's one of three authors. They do a yearly update, partner with Credit Suisse, that's free. And so they do a different topic each year. So one year it'll be like ESG investing or emerging markets, or one year they did momentum. And you get, I mean the book is a beautiful coffee table book anyway. Um, so you should all get it, but, but the, uh,

but the updates are all worth reading too. Uh, favorite In-N-Out burger order. Uh, you know, it's funny. One of my first In-N-Out experiences was so, so uh embarrassing where it's if you've ever been to an in and out and you're listening or you've never been to one it's just picture every single day is a line around the block still and there was a couple near my office and uh i had ordered they have an off menu and just a very menu is like hamburger like hamburger, cheeseburger, fries, that's it. There's like 20 different ways you can order them if you know the secret menu,

and I didn't. And so I heard someone mention they had a veggie burger, and so I thought I would try their veggie burger. I was living in San Francisco and in that mood at the time, as one would do in San Francisco and in that mood at the time as one would do in San Francisco. And, uh, and you couldn't go back because the line was like 30 minutes and it came out and it was just a hamburger without the patty. So there was no veggie burger patty. It was just a, essentially,

fun with lettuce, tomato and ketchup. and i was so sad uh but other you know i i i'm an easy cheeseburger guy i don't need to go animal style double double i just like i love their fries that's a big area of contention for a lot of people a lot of people don't like them i love their fries uh favorite denver bronco of all time you know, Elway would be the default. Certainly had a life-size poster of him growing up in my room. There used to be a charity event thing where you could get a picture taken with the Broncos and it'd be a lottery. So you just invariably end up with like the linemen or like the four-string running back. But as a child, you didn't care. So I have some really great photos growing up. It was always a huge Carl Mecklenburg fan, you know,

a hall of fame linebacker that was kind of underside. I think it was like a 12th round draft pick. So I'm like, yeah, he just, he just got nominated or he just got accepted hall of fame. He was awesome. But yeah there's uh three amigos all those very defining like i said earlier like the you know going through the real visceral pain of loss and hope and expectation and loss again was a very nice preparation grounding for financial markets and getting humbled as well i i have a lot of, uh, common, um, uh, sympathy and pain with all of our, all our bills, uh, compatriots too. Oh, that's been tough. Uh,

and lastly ask all our guests favorite star Wars characters. You know what's, um, what quarantine has done for me. So all the nerds on here can appreciate, uh, underrated is that, uh, the cartoon series, star rebels yeah great actually um great series uh ahsoka you're gonna go yeah so she just got cast i think it's rosario dawson we'll see if she does a good job the mandalorian um favorite character the uh um besides rebels the other Favorite character? The, besides Rebels, the other animated one's really good too.

I'm drawing a blank. Clone Wars? Clone Wars, yeah. The, you know, I thought the Rogue One was really well done. Fun story is when I was living in San Francisco, one of my buddies is an actor and they had,

his like publicist or somebody's like hey the premiere of the very first one do you want like MTV is going did you want to go with MTV to go to the premiere and he said I can't Meb do you want to go with a couple friends we have like three tickets or whatever and so got to see it at skywalker ranch oh wow which was you know george lucas's place they like separated us from all the stars uh samuel jackson and everyone else but um but and then it was a huge letdown you know i mean yes but uh it was so exciting to be there that it didn't really matter they had like there was a pit for the symphony to play right in front of i mean they weren't playing live but to compose the score um anyway that was another defining certainly of the childhood i still have my mom i don't my mom still has the darth vader carrying case with all oh yeah i had that one and the C3PO case. Oh, I know. I never had that one.

But, yeah. It's out there somewhere. I have to go dig them up. So my favorite character, I don't know. I'm stumped on that one right now. We'll give you Ahsoka for now. Yeah, she's great. She's great. All right, man. Well, thanks so much.

It's been fun. Let everyone know where they can find all the good blogs and podcasts and everything you've been talking about. Yeah, not too many mebs out there. So blog is mebfavor.com. everyone know where they can find all the good blogs and podcasts and everything you've been talking about? Yeah. Not too many mebs out there. So blog is mepfavor.com. Twitter, mepfavor.

My day job, Cambria Investments or Cambria Funds. And then the podcast too. All right. Thanks so much. We'll talk to you soon. Best of luck. I could have done this many more hours.

I know. I know. I could have gone deep into some stuff. I know. I know. I could have gone deep into some stuff. But, uh. Do it again. For sure. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel.

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