The Derivative - You still don’t have enough Trend Following or Foreign Equity exposure with Meb Faber

Episode Date: March 2, 2023

Grab your favorite trucker hat/baseball cap, and settle in for this episode where Jeff picks Meb Faber’s brain on everything from skiing to picking an investment advisor because they can get you on at Riviera Country Club.  We’ve got Meb Faber back on the show to nominally talk about trend following – but as often happens with Meb – we get into a bunch from global equity exposure, to market cap weighting, to Japan's dot-com bubble, de-globalization, investing in U.S. stocks, and the value of trend in a low-inflation environment. Meb and Jeff explore Meb’s first exposure to trend following (yes, it has a ski story attached) and discuss the optimal portfolio allocation to trend, and the problem with replicating private equity. They touch on passive investing, how to choose a trend-following fund, and the current state of the market. Plus listeners can gain insights into the ETF and RIA space, and speaking of space – hear about start-up investing in farmland and space — SEND IT. Chapters: 00:00-02:00 = Intro 02:01-12:50 = Skiing in Japan to global market cap weighting & Japan’s real estate bubble 12:51-27:46 = De-Globalization, Why everyone’s overinvested in U.S. stocks, Value/Trend and inflationary environments 27:47-47:30 = First exposure to Trend Following, what’s the optimal portfolio & the problem with a private equity replication strategy 47:31-59:58 = Passive investing, how do you choose a trend following fund & current state of the market 01:00:19-01:06:13 = What’s going on in the ETF & RIA space – where is it headed? 01:06:14-01:12:47 = Start-up investing – Farmland & Space 01:12:48-01:17:49 = Mebs’ Top Ski Spots From the Episode: The Case for Global Investing | Meb Faber asks: Why aren't more investors allocated to trend following?  |  Journey to 100x Guide to Trend Following whitepaper Follow along with Meb on Twitter @MebFaber and check out mebfaber.com, and his podcast The Meb Faber show. Don't forget to subscribe to The Derivative, follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2, 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

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. Hello there. Welcome back. Happy March, I guess. Feels like we just had New Year's Eve. So yeah, I'm definitely losing it.

And speaking of losing it daily, what's the deal with zero DTE options? Half the managers we talk to say it's noise. The other half think it could be a problem. So we're going to do a What the F episode next week with Professor Plum, a.k.a. Mike Green, and Craig Peterson of Tier 1 Alpha, who loves to look into the gamma stats. So we're going to dig into it. Go subscribe or follow or whatever the platform you're on calls it so the episode gets to you as soon as it drops. On to today's episode, where we spent way

too little time talking about skiing, in my opinion. I threw on the Crested Butte hat and everything, but our guest stopped talking powder and started talking the Japanese real estate bubble, like he was on a financial podcast or something. Wait. Yeah, it is that podcast. Anyway, it's none other than Meb Faber, and we're getting deep into the financial powder, talking US bias, value, and why no big investors seem to have enough trend-following exposure. Send it. This episode is brought to you by RCM and its guide to trend following white paper. We talk about why there aren't larger allocations to trend, why people get confused between managed futures and trend, and more in this episode. And the guide to trend is a great compliment with manager performance and more. Go to rcmalts.com to check it out.

And now back to the show. All right. Hello, everybody. We've got Meb Faber of Cambria with us here today. Welcome, Meb. Hello, my friend. Been a while. Been a while. I was debating. I knew you're going to have a hat on, so I was going to either go my master's hat or my Crested Butte hat. But knowing you're a skier, I decided Crested Butte. And I mean, we're both wearing kind of black hoodies because it's cold here in L.A. Like, you know, it's Armageddon. It's been snowing. We we just got back from Mammoth where it was like, I don't even know, 10 feet of snow.

It was so much snow. It was like too much. You couldn't, you didn't know what to do, which is a wonderful problem to have, of course. I was just pulling that up actually on my, on the snow. 123 at Mount Waterman. Where's that? That's more like, that's like closer, closer to, closer to LA. But the.

Yeah. And 104 at Mount Baldy. Have you ever skied Baldy? No, I don't even know if you can ski Baldy, but the, uh, the fun takeaway is that, um, you mammoth will now be open to probably July or whatever. And I'm more of a, I love spring skiing, you know, you can go out in a t-shirt or just like a little shell. So maybe we'll do a macro meetup on the slopes of Mammoth or Tahoe or somewhere where you can ski through the summer. I love it.

By the way, we'll tie this into economics and some investing lessons. I talk a lot about skiing in Japan and they finally reopened for the first time in years post-COVID. They're still very COVID conscious, you know, the most wonderful and polite people in the world and have always been kind of, you know, often mask wearing in general. But a fun fact for the listeners is that Japan has, despite being one twentieth the physical size of the United States, more ski resorts than any other country in the world. And it's like 550 or something. And they have some of the most amazing snow. And this is down from a peak of like 800 ski resorts back during the boom

times of the eighties. And so we've kind of come a long way since then, since the Japanese peak bubble to where we are today, but Japanese stocks are finally cheap. So it's kind of Japanese peak bubble to where we are today. But Japanese stocks are finally cheap. So it's kind of a fun time to be talking about them. And in the Japan stock market, which is second largest in the world, is still like one seventh the size of the US, which is still sort of an astonishing takeaway. And their population, I don't know that off the top of my head. I don't know if you know it off the top of your head, one-tenth of ours or something.

Yeah, quite a bit less. But you could go off into a thousand different directions on that just basic concept. Everyone on the equity long only side is a percentage of the world market cap. My favorite read of the year just came out, which is from Credit Suisse. It's called the Global Investment Returns Yearbook. And it's a spin out of my favorite book, which is called Triumph of the Optimist, but they update it yearly. Listeners, you can go download like the last 12 years on Credit Suisse's website, as long as Credit Suisse is still around. But they look at 120

years of investing returns across stock markets and you get all sorts of fun facts and they drop a lot of kind of haymaker conclusions that are non-consensus views in the investing world. We can come back to some of those, but one of which is they look at market cap weighting, for example, 1900, and the US wasn't the largest market cap then. It was UK. The US was like 14% or something, and it's now 60%, which just goes to show what a massive run. But the US was not the best performing equity market over the period. You know who was? Switzerland. there's like a few Switzerland I think actually has the lowest drawdown if you look at a lot of historical studies it's like never pays just

to invest in one country even if that country is the US it's almost always better to invest in a diversified portfolio Switzerland I think is one of the few that has a lower and by lower I mean still over half but lower equity market drawdown I think it's Australia South Africa was in there but they market drawdown. I think it's Australia.

South Africa was in there, but they're, you know, so tiny that it's, it's hard to, to compare. So I think it was the Aussies, but we'll see. And now you got to tell me how Australia was close to Switzerland. Yeah. Yeah. So it is always a bunch of Aussies skiing up in Japan, by the way, my favorite trip. And when the first time we went to Japan, we were in a tiny little town. And the waitress spoke absolutely perfect English, but she spoke with an Aussie accent. She said, good day. And I was like, what?

She says, it's the only bunch of Aussies that come to this town. Anyway. That's definitely on my list. So when did you went for the first time? Just this after COVID or you'd been before? No, we've been many times, probably 10 years going on now, been probably maybe five, six times, um, but kind of all over, uh, both on the mainland. Yeah. I tattooed a tree pretty hard this year. Um, our guide broke his femur, uh, the, the, the night before we arrived. So we were a little bit

on our own this year, but it's a spectacular place. Listeners, if you need some beta, some info, hit me up and we'll pass along some information. I need some. I'll join you next time. Wait, so this is interesting to me. So do you think all that was a result of the bubble, of the real estate bubble, and they were developers buying up mountains, building out resorts. Yeah. So the long history listeners, if you look at market cap weighting, right, the thing about market cap weighting, and I asked my friends who are not involved in markets, usually I say, you know,

they say I invest, I put my portfolio and, you know, boring indexes. And I say, okay, well, well, just so you know, like, so like the U.S. stock market. I said, do you know how that's weighted? And they say, yeah, like it's the biggest companies. And I say, okay, biggest, when you say biggest, what do you mean? They're like, well, you know, like earnings and revenue and everything. I said, well, no, no, no, no, no. Market cap weighting, which is the market, is simply the price of the stock times shares outstanding.

There's no tether to fundamentals whatsoever. So it is a trend-falling index, which is one reason it does great. You invest in companies that are going up, and you invest more in those companies. And as the companies or stocks, excuse me, go down, you invest less until they go to zero, right? Your stop loss is essentially when it gets kicked out of the index because of size or zero. And so that works decently over time. Now it has no tether to fundamentals and it's a weird position sizing algorithm, but it works decently over time. The problem with that, and you look at these equity markets, is it gets really overexposed to booms and busts. And so because it has no tether to value,

like a PE multiple or whatever it may be, Japan in the 80s, if you look at long-term PE ratios, they center around somewhere around 18, let's call it. And the US has been as high as 45, the peak of the dot-com bubble, and as low as five. By the way, in this recent cycle, it hit 40. I was kind of cheering for it to surpass, which I never thought I'd see in our lifetime again, the peak of the dot-com bubble, but we got close. We're right around, I think, 30 today, maybe high 20s. Anyway, Japan, which was the largest stock market in the world at the time, hit a peak valuation of almost 100. So that's over twice the size of the US market in the world at the time hit a peak valuation of almost 100. So that's over twice the size of the U.S. bubble in the late 90s.

And there's all sorts. You do research back in the 80s. I mean, it was a very real, every investment book came out was about how Japan, the business models, the companies were taking over the world. And they had a dual real estate and stock market bubble. The real estate was really the big kicker. Anyway, you can look at charts. Wasn't that like the Imperial Palace was worth more than all of California or something? Yeah.

And so, you know, the booms create distortions as do the busts. And so misallocation of capital, yada, yada. I mean, you look at the amount of golf courses, et cetera. But it's a great illustration too. One, you shouldn't market cap weight because traditionally market cap weighting means you invest the most at the kind of worst times. So in the 80s, if you were a buy and hold indexer, Vanguard, John Bogle, you would have put most of your money in the most

expensive bubble in history. And like that just doesn't check the common sense box to me. So late 90s, you know, same thing with the US. The US, we don't have it as the most expensive country in the world. And it's not horrific now, but it's still expensive. You put 60% of your money in that country versus the other odd 45 countries that are quite a bit cheaper. So anyway, it's a suboptimal way to do stock market investing because of these boom periods. Despite that, it also creates a lot of psychological differences in how you invest. And so I did a meetup in, in Tokyo, uh, a few years ago, uh, over some peers and, um, a lot of local investors, some expats, but you know, the culture of investing is different, right? Because you've had a stock market that's gone nowhere for decades. And this isn't some tiny economy. This is the second biggest economy in the world. I think now third, but buy and hold isn't really a concept there where people would say, oh,

I just buy stocks and just let them go, right? Because there's generations of people who've had no or very little return on stocks. Now I think it's changing. Now I think it's a great opportunity, but for many decades. And so right now is an interesting example because you can look at 45 developed emerging market stock markets around the world and look at just how many have gone nowhere for 10, 20, 30 years. I mean, China being a great example, but there's tons of these. Stocks for the long run really means you have to diversify across all stocks. And even then, it can go a long time. So a lot of the US investors, I think, we've hit the inflection point on the US versus foreign performance really in the last couple of years. I think we'll look back and market as to maybe 2021, 2022

is the main inflection point for U.S. versus foreign, which historically has been a coin flip over time. Right. And January was rocking for foreign. What's the counter to that of like, hey, the whole U. u.s right it's not a military industrial complex it's a investment industry industrial complex and their whole being sense of being from the fed to the treasury to the congress everyone is incented to make the stock market go up versus other countries where they might not have that machinations, right? They might not have all that stuff to make the stock market go up.

So could you take the other side of that and say like, the US is better because of all the stuff that we push. And maybe that just creates a bigger bubble that will deflate in a bigger way down the line. But in the short term, you can argue that that's why it exists. Not surprising, but we have a lot to say on this topic. We have an old blog post called The Case for Global Investing that I think does a good job hitting some of the main rebuttals about putting all your money in U.S. stocks. So U.S. is a percentage of the world, 60% U.S., 40% rest of the world.

But the average American puts in well over 80%. And so we call that home country bias. It happens all over the world. Our Japanese friends do it, our Aussie friends do it, on and on. Our UK friends do it. And they put all their money in their own stock market, Chinese, Russians. And the funny thing is you ask everyone else around the world, hey, it was a good idea to put all your money in your own market. And our Greek friends would say, are you crazy? Brazil, Russia, on and on, even UK, Germany. I mean, those markets have really struggled. So there's two parts to it. There's A, some amazing hindsight bias, right? Like we look back, the US was the most successful, not only country, economy, stock market, really over the

20th century. Okay. So we look back and say, okay, amazing. However, so excluding that, say, look, let's say you love USA brand more than anything in the world, rule of law, military, on and on. That's a good reason to put seven times as much in the US as any other country, right? Doesn't mean you should put all of it. And in particular, here's the interesting part. The world has changed in the last 30 years. It's much more globalized. You have companies and stocks that may be domiciled in the US that have no US revenue. You can have companies based in the UK that just happen to be in the U.K., but they get all their revenue from China or the U.S. or whatever, right?

So the borders are becoming increasingly meaningless. And so then people say, ah, that's my reason. I invest all my money in the U.S. because I'm diversified. 40% of my revenue is from abroad. And I say, correct. That is the lowest amount of any developed market of them all. So the other countries have even higher percentages of revenue from abroad. And if you live in a world where the revenue is sort of cross-pollinated, then why would you pick the one spot that has the highest valuations? You wouldn't. If you consider a world of globalization, you would pick

the spots that have the lowest valuations. And so just for, again, reference, US is, let's call it 29, 10-year PE ratio. Foreign developed is in the high teens. Foreign emerging is in the mid-low teens. So there's much more opportunity in certain places around the world. But again, even if you are biased, you would put the most in the U.S., which you do on the market cap weighting, instead of putting it all. That's all. A few things I want. COVID, logistics, just-in-time inventory, all that seems to be

swinging back the other way. Do you think that's even more of an argument for non-US? I think there's a lot of things that people talk about. The valuations are the big one. Obviously, I'm a trend guy, so we could obviously get into that too. The dollar and currencies, the US dollar is, by all the fundamental metrics of purchasing power parity is overvalued. And so then it becomes a question of trend and it looks like it's peaked last year, but who knows? Currencies over time adjust on a real basis. They're fairly stable, but that doesn't mean in a given year they can't move 30%. So I think the tailwinds are all in place. Now, I would have probably said this at various points in the last few years,

just historically speaking, people say, no, no, Meb, the US deserves to have a higher valuation. And I say, okay, well, so how much and how much do you think it was historically? Because right now it's double, you know, foreign emerging and much higher than foreign developed. And they say, well, I don't know. I said, well, you know what the historical premium is? It's zero. If you look at the average valuation for foreign ex-U.S. versus U.S., there's zero. I mean, sorry, it's like 0.5 or one uh on the valuation it's like 22 versus 23 of the last 40 years right but not so there's 45 versus 20. yeah and tying this back in

see this is totally intentional i promise yes if you go back to japan in the 80s right japan was the most expensive country in the world and the US was cheap. And these things just go through cycles. So we say this is the biggest opportunity in 40 years to diversify globally if you're a US investor. I think that was about a year ago, I put out a tweet of all these alternatives folks are blending their either trend following or intraday with just pure passive beta, right? Putting these together, it's a smoother equity curve. Everything looks great. But it was to me, I'm looking through all these products, S&P, S&P, S&P, S&P, right? Totally US focused.

So my little yellow flag went up. I'm like, hey, this is time. This is a commentary on people being, having that hindsight bias and having that home country bias and just building this the best they think is how, but. And, you know, I think a lot of it has to do with career risk too. I mean, I think people, the trend, the trend followers of which, you know, I count myself, had an obviously historical year last year, phenomenal year, really just one of the few things that did its job, but as you would expect it to do,

you know, and the quants, the big quants have been talking about this for a long time. The opportunity set in traditional 60-40 was atrocious. And sure enough, you have one of the worst years ever for 60-40 last year. And so people revisit and recall, oh yeah, hey, look what diversifies this traditional portfolio. So I think you have the scenario where most people in the US, that's all they do, right? They do the S&P and maybe some bonds scattered in too, which is a shame because as we know, as students of history, people love to buy what they wish they had bought.

And after a few years of foreign outperformance, that blend will no longer be US stocks and trend following. It'll be a global diversified equity allocation and trend following. And it's never been easier to own foreign, right? Like with all the ETFs and sector weightings, is it maybe too easy? Like you get confused, it'd be easier just to buy the MSCI or something? You know, I mean, again, I think you run into the same problem. Look, so going back to indexing, indexing meant something very specific 50 years ago. It meant market cap weighting, and that's it. And the big innovation there, the giant neutron bomb that went off in the 70s, you know, John Bogle, Wells Fargo and others was actually not market cap weighting indexing. That

wasn't the innovation. It's what it allowed, which was lower cost exposure to all these equity markets. Because you don't do anything, right? You just market cap weighting, you just buy a bunch of stocks. Theoretically, you just leave them for forever, ex-corporate actions. And so today in 2023, indexing means something totally different. You could have indexes on really anything. You know, you could have an index of ski resort companies and charge 3% a year if you wanted to.

So alternative weighting methodologies, we have 12 ETFs, you know, our flagship sort of equity ones we call shareholder yield. You know, we weight those differently than market cap weighting. So we have U.S. foreign and emerging and those funds, you know, they're targeting these markets, but they're saying, hey, we don't just want market cap weight. We want stocks that have high cash flows. They're treating their shareholders decently through buybacks and dividends. They're trading at low valuations.

They're not doing it with a ton of debt and sprinkling momentum in. To me, that sounds like a great way to pick companies and stocks. It sounds like a Warren Buffett-esque portfolio. So when you say global, yes, we love global. And on aggregate, the indices top down are more attractive. But here's the interesting part. No one says, the starting point is always S&P, right? But even in the U.S. stock market, the cheap stuff, you know, the value sort of trade versus

the expensive is totally fine. You have companies that are sitting under this, you know, these thousands of, look, the trend follower out there loves breadth, right? So you have thousands of companies. No one says you have to just invest based on the S&P market cap weighted. And so you can find a lot of opportunity. And if you look at the underlying characteristics of those portfolios, it's single digit PE ratios. it's, you know, valuations and the value trade is arguably top decile in history in the US. So 2020, 2021, it was it got into like sort of the single digit best opportunity ever for value investing, even more so than 1999. And a lot of the expensive stuff has come down in the last year or two.

You look around, a lot of stocks are down 60, 80, 90%. But abroad, it's still like top five percentile for a lot of this cheap versus expensive. So it's easy to get the market cap weight, broad indices, S&P, IFA, EEM. But really really to do the extra little work and to get to better constructed portfolios, I think is worth the time. And you can do it now in ETF form for low cost. That's the beauty. And if you're a taxable investor, an efficient tax structure for equities too. Sorry, that was long-winded. No worries. And talk through just real quick how that works when you're running an ETF. Not you, but if I'm running SPY, they're buying more and more and more of that stock as the market cap goes up to keep pace, right? So it's kind of a self-fulfilling prophecy.

Yeah. Market cap weighting, look, I think it was decent innovation and it is the market. You just end up with a portfolio that can have, and most of the time it's okay. Like, you know, markets, as we know, most of the time it's in the fat part of the distribution. But at times when it goes crazy, like 2020, you know, you end up with companies, you're over-weighting that are stratospheric valuations. And other times it's the opposite on the other side, you get into countries and you can look at as far as valuations. I mean, the long history, not even long history, China, great example. China's down near some of the lowest valuations ever been. You go back a decade, 15 years ago,

it was trading the P ratios like 50. So what's the difference? Nothing. It's just what people are willing to pay. And in a world of sustained inflation, this was my least popular tweet, I think of 2022 at the beginning of the year, I said, average valuation for stock markets historically is around P around 18, but in low inflation, modern inflation, you get historically is around PE, around 18. But in low inflation, modern inflation, you get up to around 22, 23. So people are willing to pay more for stocks when inflation is tame. Well, we don't live in that world currently.

A lot of these markets around the world have high inflation. Historically, the multiple is not 18 to 22, 23. When you get into these mid, mid high single digit inflation, it's down around low teens. So multiples like 12, which is 50% from here for US stocks. Now, I'm not a doomer. I'm not saying that that has to happen, but in these high inflationary times, historically speaking, value, the 1970s, 1940s has been an excellent place to hide out. And whether inflation, the expectations is going back down to two, 3%, we'll see. My guess is not that. Isn't that just a relative though? You'll just lose less in value, you're saying?

No. Well, perhaps. You never know what the exact path is going to be. But if you look at the 1970s, the 40s, value did just fine. And the 70s was a tough time to invest, right? Unless you had some real assets, unless you're a trend follower. And by the way, one of our original papers back when I used to be clean shaven and wore a tie, talked about Japan and said, never seen that guy. What could you have done in this world? And trend following, despite the fact the market was overvalued and went nowhere, saved your hide, right? You survived a lot of the carnage after the peak of the bubble. So for the listeners who aren't familiar with Meb and Cambria, by the way, I'm talking a ton

about value on a trend following podcast, but our default allocation for all of our asset allocation portfolios is we do roughly half in buy and hold. So that's a mix of global stocks, global bonds, global real assets. So we already have a higher real asset exposure than most, all with tilts towards value and some momentum. And then half the allocation is in various trend strategies. And that's higher than any RIA-based case allocation of anyone I know in the country. You may know someone more, and I'm excluding specifically trend-following asset management strategies. I'm saying, hey, this is our default allocation for a retail or institutional investor. We call it Trinity. And we also have an ETF that does that.

So I'm not just a value guy. I promise listeners. I'm like, consider me half value, half trend, which there's not too many of us around. You did this great tweet saying, hey, everyone, there's not a long enough track record, which is when I started. I did a blog post on that. That's how we started talking a little bit about that this year. But before that, you mentioned your first white papers on trend. Before that, when did you first get introduced to trend? Was it I know know you know,

Jerry Parker, was it that far back and those kinds of guys, or was it just an academic paper? What was your first exposure? Yeah, no. So, I mean, I was a biotech guy by studying undergrad and engineer. I worked at a biotech mutual fund, moved out West. I was actually living in Tahoe working for a startup commodity trading advisor and CTA meant nothing to me at that point. It just, it was a group of guys that lived in San Francisco and, um, for tax reasons and the fact that they love to ski wanted to open an office in, uh, you know, Tahoe split California, Nevada. So the Nevada side, right. And so they said, who wants to volunteer to work out of this office? And I was first to raise my hand, right. Where are my ski pants to work some days? Cause market closed at one, but, but they,

but they had worked on their quantitative, you know, old school traders. Incline or what was the name? Yeah. Yeah. Income village as the locals call it. So, you know, I was in my twenties and really cutting my teeth. And one of the ideas we had been working on was, was codifying some of the, you know, the, the turtle rules, just basic stuff. And, and often quite a bit of variance on that too. And so that was kind of my first exposure to some of those concepts. And my first and really only academic paper, we've written lots of white papers, but the experience of going through writing

one was enough for me. But our first one was really based on this trend following concept, but it's saying, how can we make this palatable for the average investor and make it very simple so that people can kind of understand. Because if you say managed futures, people's eyes glaze over. You know, they start to drool a little bit, say, oh, that sounds futures. What does that conjure? Images of leverage, people blowing up, trading houses that are 200 years old, right? Like derivatives, all scary.

So I said, how can we write about this in a way that resonates with the average investor? And, you know, in terms of even just US stocks, buy and hold person. And the takeaway I thought was pretty thoughtful, which was, you know, you can do this in a way that's not pre-packaged, where you have to trade 100 markets long short. Now that's a fantastic way to invest, but also you can apply it to like, I mean, look, Dow theory has been around for a hundred years. That's basic trend following. It's been around since the time of Charles running the Wall Street Journal, you know, so it's nothing new, but to present it in a way, I thought that was just a little simpler.

It didn't take much effort. And so kind of cobbled down that, cobbled together that paper when I moved down here to LA for a year in 2005, you know, whatever that is. I can't even do the math anymore. 17 years later, you know, we, that philosophy is still very much a foundational and kind of how we think about markets, you know, which is the big key, like, what are we all trying to do here, trying to survive. And if you can't get to the finish line, if you get taken out of the game, because it's

too volatile, too risky, you know, and I got i got ratio the other day on twitter because i was talking about you know someone described they say what do you do with your money i say ah i just it's boring i just put it all you know in in the s&p and i said look let's be very clear about something that's not boring you can call it a lot of things you can call it low. You can call it a lot of things. You can call it low cost. You can call it historically has great returns. You can call it a good exposure to US stocks. You cannot call something that has declined over 80%, has close to 20 vol boring, right? And it has gone decades going nowhere, has gone many decades underperforming bonds. If you go back to the 1800s, it's gone 60 years underperforming bonds. If you go back to the 1800s, it's gone 60 years

underperforming bonds. In 2020, the S&P had gone 40 years underperforming bonds, right? Four decades. And that's just in the US. Other countries is worse. So I was like, you can't call it boring. You can call it some things. You cannot call it boring. People got so mad at me. I don't know why, because you have this culture where the S&P has crushed everything for, what is this, 14 years. And so that's all they've known. And they get really irate if you kind of criticize their, you know, the way they go about investing, but you have something that then, you know, could underperform or has a big fat drawdown. And to me, no small part of that is the military industrial complex, air quotes that I call it, that has been pushing that narrative for 40 years of like, yes, this is boring stock exposure. Put all your money into it.

But so it sounds like you're saying you weren't looking at trend following like a lot of our other guests and be like, cool, I'm looking for outlier trades in silver and cotton and palladium and all these kind of unique markets, it was more of like, cool, this makes me avoid having the 80% drawdown in stocks. I can use some basic trend following techniques to get out and then reenter when the trend reemerges the right way. I mean, it started as the former. And I think, I mean, we even built some systems back in the day. I remember I said, what about, could we do this as an option selling trend following where we're selling straddles and strangles, but we're biasing it in the direction of the trend and all that, you know, we did a million different iterations, but when we had time to put together this paper,

I said, I wanted to write something that I thought would be consumable by the broad public in a way that, you know, it was was presented i think a little bit different academic and white papers are the worst let's be very clear you know you read an academic paper the goal for most of the authors is to show you how smart they are and also my number one pet peeve about academic papers is they put all the graphs and tables at the end like like you're reading it why and you have to flip 450 pages it's figure one i can't even, like you're reading it. Why? And you have to flip 450 pages. It's figure one. I can't even understand what you're talking about. I'm like, can you, can we write this in a way that can be presented to the broad and, you know, the, the broad investing public that is consumable in

a way that they can kind of get it. Because again, I've seen so many people, you know, we have over a hundred thousand investors and I talked to so many people in 2010, 14, 16, 18. They say, Meb, I was investing, went through the global financial crisis, seems forever ago. And I said, I got out. I couldn't take it anymore. I lost my job. My portfolio is down by half. I couldn't take it anymore. I sold everything and I haven't got back in. And so you missed all this huge upside for many years of the emotional behavioral problem of buy and hold investing. And we have a buy and hold ETF, by the way. So let me be very clear.

The big caveat of everything I've said so far, our largest fund is a US stock long only fund. We have a buy and hold ETF. They have their place, but you have to be honest about their pros and cons, their pitfalls too. And you're looking at a long only buy and hold. You cannot find me a long only buy and hold allocation that doesn't lose at least a quarter at some point

and more likely 50%, right? Stocks, bonds, real assets, even the most beautiful allocation you can come up with, back-tested, optimized is probably going to lose a third at some point, more likely half. And in some cases it could lose two thirds. Most of the 60, 40s historically, we love our polls on Twitter if you follow our polls, but we always ask people things like, you know, how much have bonds declined on a real basis, T-bills, you know, or how much have stocks declined? And people are always surprised because it's almost always much more than they expect. And so they're just reaching the finish line, I think, for many investors on a buy and hold basis is really

problematic and hard to do. So speaking of those 100,000 investors, it seemed like you were a little bitter of like, hey, guys, no one trusts me on this trend following thing. There's track records going back 40 years. Like what's wrong with you people? So do you get that from outright investors or is it with advisors you talk to? Like who are you hearing that from

and what's their main point of confusion, do you think? Well, look, I think there's a big education gap when it comes to personal finance in general. We talk a lot about this where we say, you know, we don't teach personal finance, even the basics of money in school as money as a language. And we should, you know, forget Latin. I took Latin, like, come on, like, let's teach basics of money. And within that, I mean, look, there's some really basic stuff that I think is super important. You do like the pyramid. It's like, hey, what's the most important thing? It's how much you save and invest in and when you decide to invest in the first place. So you do it when

you're 20 is way better than when you're 40 or 60 or 80. Being the owner, the ownership mentality of owning things, I think is more important as long as you do it in a thoughtful way than actually what you invest in. I mean, we were tweeting yesterday about it. We talked endlessly about the optimal portfolios and what are some good strategies and what's going on with inflation and what to do about gold or all these other things. And I said, we did a poll and said, you know, how much is your cash account or how much, you know, do you, do you earn on your savings and, and other accounts? Most people it's like zero, like, I don't know, or zero to one. And that's just lazy. You can go get four anywhere right now. And so, I mean, I was like that 4% alpha or Delta is way bigger than, you know, probably what, anyway. So going back to this, so talking to investors for the very long time, the older I get, the more I start to think about, all right, what narrative can we...

So yes, there is the optimal portfolio. And yes, I do think that includes both global buy and hold assets, as well as a huge chunk to trend following. And what that number is and how you do it is less important than whether you decide to include it at all. And I think if you were to ask people, you blindfold them, you go to the, maybe not CalPERS, but you go to a more thoughtful organization that has real money, 10, 100, $500 billion. You blindfold them, you present them an Excel sheet with a bunch of return streams. So you got to put together a portfolio. You can't see what these return streams are. How much is it going to end up in trend following? It's probably going to be 25, 50%. There's no scenario with zero. And in some cases, it's probably even more

depending on how it's constructed and what you're trying to attach it to. So yes, there is the question of the optimal portfolio. And I think those two components, what we call Trinity, is to me the optimal portfolio. I would also include some other things that aren't in the global market portfolio, publicly traded. They're harder to invest in, like farmland. We talk a lot about that. Single family housing is a big one. But then the question comes in our world, and this isn't just retail. We love to look down on the retail investors, the little crazy meme stockers trading GameStop and whatever it is today, AMC. But institutions are horrific at this too, is that you have to come up with narratives that feel warm and cozy. And it feels very awkward to be different, right? To be out. I mean, look at private equity. My God, what an amazing business and industry. If you're involved in private equity, you get huge carry on top of that. By the time, if anyone finds out if you're good or not, you're long gone.

I mean, it's 10 years later, 15 years later, 20 years later. So this giant charade of private equity, this kind of wink-wink nod is a perfect intersection of career risk for investors and institutional allocators. Managed futures in this entire trend following industry, I mean, look, you have another year like 2022, and all of a sudden the money will come flooding back in and people will start to allocate a ton of money to it of course right after the fact but you cannot argue to me that to a traditional buying whole portfolio that there is not a better diversifying strategy than trend following like you cannot come up with one I or if you have listeners send it to me I haven't seen one one, but to me, to a traditional portfolio

and you just look back, not just historically, 2008, 2000, 2003, on and on. It's not guaranteed, but 2022. I did a blog post showing, I think it was 20 years. I think it was in 2020.

Like here's 20 years of the managed futures indices. It was like five percent compound annual rate of return 18 percent dry right it looked not great for some but the guy's like oh why would you ever do i'm like you're missing the whole point that's a positive carry a positive carry on a diversifier that's the point that you should be taking away not like oh it only made five percent yeah um and don't quote me on those stats, but it's something along those lines. We'll put it in the show note. So do you think those institutional guys are consciously

saying, I don't want to get invested in this because there's this career risk? Or is it subconsciously, they don't quite understand it? They don't quite feel comfortable with it? That's what I want to dig more into. Why are they not allocated? And i would also argue sorry i'm throwing 10 things at once but i'd argue that they are allocated and so kind of want to ask you again like what do you think in your mind what is like 100 billion 500 billion a trillion in managed futures like what's the number you're like okay people get it it's properly allocated to now or is is that a percentage? I don't know the number, but I do know, I would say like more of the percentages. If you looked at the average institution, how much they have in trend following,

I mean, our managed futures, what, like 2%? Like it's like a totally meaningless number. It's certainly not. Right, I'm talking to people where it's, they're in the market for 10 to 40%. So like the people I'm talking to are the far side of that equation. Right, sure. Like they're the pre-sold, they're coming to you because you're having that conversation

because they are interested. I don't know any of the 240%. So kudos. Maybe some family offices do hiding out in Zug, Switzerland or wherever. But I don't know any. Listeners, hit me up. I'd love to talk to you. Maybe there are.

But on average, if you look at the big institutions, it's a rounding error allocation. I mean, even if you round up in the most optimistic 5%, there's no chance it is. But I would be shocked that on average, institutions are rounding up to that. I'll send you our blog post. If you have just 5%, what return do you think you need in a diversifying year like last year in order for that to move? It's like 180%, right? If you make a few assumptions on your stock and bond returns, you need to make some insane number, which was never going to move. It's like 180%, right? Like if you make a few assumptions on your stock

and bond returns, you need to make some insane number, which was never going to happen. So it kind of leaves everyone disappointed. Like, oh, my 5% didn't do what I thought it was going to do. I'm going to drop it. It's token. I mean, it's like, you know, you see people doing it at the low single digit percentages as a way to pac to pacify sort of their, um, career risk hindsight bias. And they say, Oh, well, look, well, we had some trend following it helped us in 2022. Um, but not really. Right. And so, you know, I, I think, um, I think if you were to say, Hey, you know, at what point, if we're sitting down at Crested Butte or Japan on a chairlift and looking back on this and saying, okay, eventually the community sort of gravitated

to this place of acceptance, you know, what number, what percentage is that, you know, a third, a quarter of an allocation, private equity. I mean, look how much private equity is right now as a percentage, despite the fact the valuations of private equity, which has been the sole driver of private equity performance for decades, have gone from like an enterprise value to EBITDA of six to like 15, right? So the whole point of this private public arbitrage, which has existed for the better part of history, has now gone to the point where many private equity companies are more expensive than the public markets. So the vintages starting in the last five, 10 years are going to be stinky. We have a private equity replication strategy. We

think you can actually do it much better than private equity managers. It's not launched yet because for years I was saying, hey, I don't want to launch this and watch it immediately go down 70%. And here we are. If you look at a lot of the private equity VC replication indices, they're down 50 plus percent from the peak. Now, the public funds themselves aren't. They're not marked because they don't have to. Again, wink, wink, nod. Hey, we only mark these once a year. So we're going to kind of smooth this out anyway. Do you think it's a bug or a feature? Like they're doing that on purpose. The investors know they're doing it. So is everyone just like, hey, this is cool. I think it's both. I think the feature is, will it get people to behave better?

Well, they don't have a choice. I mean, if you look at the recent lockups at the big public interval Blackstone real estate fund, for example, I don't know why any advisor would ever allocate to a fund then gate to forever again. I can see why you might have historically and could have been justified, but looking back on it now, I think that you can't possibly justify that sort of allocation. So the feature, yes, look, people are terrible. One of my Twitter polls is how long will you hold an investment that's underperforming before you sell it? And the vast majority said zero to three years, which as we know anything about investing, you need to hold, whether it's a pure passive beta like US stocks, or it's an active strategy, 5, 10, 20 years, zero to three, forget about it. And so the feature of actually locking up money, that's fine. The bug is what private equity charges for giving you essentially S&P beta, right?

So the problem is not the concept of illiquidity, which is totally fine. The problem is what they charge for it and what they deliver is a total mismatch. But to me, they're always clever by half, right? We're the ones here marking the market and struggling through and they're like, hey, this is easy. Man, here's my advice to the managed futures industry. You guys need to hire the same lobbyists that the private equity industry has that has kept the carried interest hidden away. Hey, let's talk about buybacks. Let's focus on something and keep this giant monster of private equity going. I think there's going to be no asset that disappoints more than private equity over

the next 10 years. But yet all the institutions have just been rushing in over the past 10, 20 years into this asset. And it's crazier as I get older and friends and colleagues I know, and they're the ones lending to the private equity and do insanely well, right? They're not even picking the companies and doing that work. They're just lending the money to the private equity to go do the job. And they're doing insanely well.

So, yeah, it works all the way down. So you mentioned a third in trend buying. Like to me on this side of the fence, a lot of trend guys are like, hey, whoa, no thanks. That'll make it too big and it'll not work anymore. Got any thoughts on that? Most asset alphas around the world, if you put enough money into it, it's going to remove the arbitrage. I mean, if you think about value, say, hey, I'm going to invest in Brazilian small cap tech stocks. And there's an arbitrage there for information, for value. And then you give that person $10 billion, well, it's probably going to close, right? Or even smaller, more

esoteric markets. I'm going to buy up. What's that? Exhibit A, ARC, right? Yeah. And so there is also a sort of reflexive self-reinforcing money flows issue that pushes asset classes to expensive valuations as cheap valuations. I don't know that the quote alpha of trend following is that or it's just actually a beta of trend following is that, or it's just actually a beta of trend following. And to me, the concept of it, I don't know that more money elutes that exposure. But again, I'm not sure. I'm not 100% certain in that regard. You could certainly design ideas and concepts that would perform just fine in that reality. But people love spinning their wheels on this topic with passive investing too. I mean, how much money going into passive and how does this change things? I mean... Well, we used to run trading systems for high net worth individuals.

And we had a system called aberration. I don't know if you ever knew it. And it looked at 20 different futures markets when it signaled a trade in platinum. It was a basic like 80 moving average 400 band breakout system when it signaled a move in platinum. Platinum would spike one to five% at the close that day. So someone on the trading floor had the program, was running it, and knowing that was a thinly traded market would put on a few, would start to front run the orders that were going to come in from that popular program. So like to me, I can see- Stop disclosing your rules. So we actually talk about this.

This is actually an important, the biggest drawback that someone called this, I think it was Rob or not, called it the dirty secret of indexing, is that the published indexes, Mark Capway, Russell 2000 is a great example, is they get front run by traders like yourself or down in the pits or hedge funds every time they rebalance. And that's a very real cost. I mean, think about the S&P when Berkshire came in, right? They announced, hey, Berkshire's coming in. Berkshire runs up, then it goes into the index. Well, that's a real cost to the investor. You don't really see it, but it is a cost. And for some indices, it's not that big of a deal. We're talking 10 basis points,

50 basis points a year. For some of the buy and hold commodity indices, it can be multiple percentage points per year. And so we often say, because we've been an active index shop, I think the name at this point is somewhat meaningless. The best thing you can do at this point, I think, is an in-house index, right? So you're at quote, actively managed, you have the rules, but you're not disclosing them to people. And so it's a lot harder for them to front run. And then of course, you can do lots of things to spread them out. I mean, this is for the longer term crew. So, you know, if you're doing a highly active, high frequency, different story. But for the longer term investors, I think there's ways to be really

thoughtful about it where it's not going to have any impact. And so you practice what you preach there inside of yours or not disclosed? We give the broad watercolor instruction manual, right? So like our shareholder yield ETF, we have like a little funnel. We say, okay, this is what we do. We're taking the top quintile of stocks that are distributing dividends and net buybacks. Then we run it through a valuation ensemble of valuation metrics like free cash flow, enterprise value to EBITDA. Then we kick out the top most over leveraged companies. We run it through another shareholder yield and finally momentum sprinkle on the end. But we're not giving you the exact. So you may like be in the right universe. It's hard for someone to go replicate that. Sure, exactly. And so like even like our old basic paper, which used for trend following was the 10

month simple moving average. You know, we even show in the paper, it's been so long, but I said, look, it doesn't even matter if you use six month, eight month, 10 month, 12 months. It doesn't matter if you use 200 day, 250 day. You're all getting to the same sort of surface area of how these trading systems perform. It doesn't matter if you update it on the beginning of the month, the middle of the month. I mean, it'll matter in the short term, but over the long term, we often say, try to use an ensemble of different signals. You could scale in, you could scale out. There's a lot of things you can do. But I really want, and I've always said this about trend following too, I really want to capture the beta of this world. And so people

will always email me. They say, Meb, okay, I want to add trend following my portfolio. What fund, what fund singular do you recommend? I said, well, we have one, by the way, it's, it's a strategy called global momentum. But I say, Oh, they'll say, and then they'll say, okay, I know you can't recommend funds. So just not just one, but you know, here's three that I'm considering, you know, what, what's the, what do you think is the best one? And I say, I'm not going to even look at the funds, but hypothetically, why don't you just buy all three? Or why don't you just buy them all? The ones that fit the broad criteria. But people hate that advice, right? Because they hate the same thing. They say, Meb, I'm in US

stocks. Should I sell them? Or, hey, my biggest position is Apple. Should I sell it or should I keep it? I say, why are you thinking in these binary terms? Because no matter what happens, you're going to look back and have elation. Oh, I was so smart to sell stocks at the peak or totally despondent. Oh my God, I can't believe I sold Apple and it went up a thousand percent from here. I'm so stupid. The least satisfying thing is to be like, you know what? I'm going to sell half or I'm going to buy these three funds because I'm just going to capture the average.

People like to gamble secretly or maybe not so secretly. And so to me, it's like you're going to come up with a number of funds or strategies that fit the criteria and diversify across all of them. And you guys do this. You track dozens of these trend following managers going back many decades. I was pestering you the other day when we were tweeting about this. And I said, you know, you've got some of these track records from like Dunn and others that go back 40 years. And even for a lot of people, they're like, oh, that's not enough. You know, you're like, what? Yeah. So, you know, so I always, the important question to me is not what people are asking, which is which fund is best, which strategy is best, but is should I have this in the first place?

And if you're already thinking about adding that traditional portfolio, I think like that decision already, that's the big muscle movement. It's not which one. It's like, do I include it in the first place? And then when we hire that lobbying group, we'll have them clear this up more. But then that same question happens and people will go, okay, I'm looking at this managed futures program and this one and this one. Like, hold on, your bucket A there is managed futures, but it's not trend following. Right? It could be doing discretionary hog trading or option selling or something as weird. And so that trips up a lot of people like, well, that didn't perform last year. I'm not going

to look at that. So just public service announcement, beware what's on the cover with managed futures doesn't necessarily mean trend. Yeah. Can you talk about what it is, but it's only doing equities or it also has- So if you were to ask me, say, Meb, what's your desert island strategy? So two questions. One, Meb, what strategy do you think is going to do the best for the next decade? I mean, I think emerging market deep value stocks are in for, to me, the best compounding opportunity for the next decade.

Just pure compounding. Ignore volatility, ignore drawdowns. We close our eyes. We do this podcast. We do this hologram live presentation in 2033. God, I can't even say it. And we look back and say, Meb, I think emerging market stocks, point 2022, 2023, 2033, simple compound returns, I think emerging market shareholder yield style strategy. But if you were to say, Meb,

what is your desert island strategy? You have to survive. So drawdowns matter. Staying in the game matters. What do you do? And to me, that's always been trend following. And it's a separate question if you say, Meb, trend following as your entire portfolio or trend following as a diversifier to your buying whole portfolio? Because trend following as your entire portfolio to me, looks different, long, flat, right? It looks different to me than diversifying traditional portfolio, which would be more long, short. You know, the shorting part is hard, it adds volatility to me, but there's no better diversifier. If you look back last year, right? I mean, one of the major performance drivers was all the trend followers are short fixed income and bonds.

And you have these like terrible stock bond performing year. But like what else diversifies being short rates going from zero to four percent, like amazing world class trade. But long flat to me is a low volatility, low drawdown. The thing about long short is you have twice as many chances to be wrong. So it's a long flat. Our global momentum strategy, it looks at roughly, so we have three allocation ETF strategies. One is buy and hold, does nothing, buys global stocks, bonds, real assets, broadly similar to the global market portfolio with value tilts, super low cost. On the opposite end, it's crazy cousin, targets the same assets. So roughly 50, what we consider to be asset classes, sub-asset classes,

industries, sectors. It sorts based on just like a normal intermediate term momentum of various timeframes, but only owns them. So it takes a top, what is it? Top third, but only if they're above their long-term trend, excuse me, quarter only if they're above their long-term trend. So it can be heavily concentrated in stocks, in real estate and commodities and bonds. And so right now, not surprising, last year, it was heavy risk off in the rare times when kind of everything is going down. 08 was really the last time I think we saw that COVID very briefly. But over the final quarter of last year into this year, it really

started allocating quite a bit to equities, particularly foreign equities. And then a smattering of precious metals, who knows where those are going to go. Obviously, nothing in fixed income at this point. And earlier in the year, last year, it had a lot in other commodities as well. So that exposure is an aggressive version of really our original paper, 15, 17 years ago now. So it combines momentum and trend. And so then in the middle of that is what we call that trinity, where you've got half and buy and hold, half and trend. And to me, from an individual standpoint, as well as an institution, this is why the narrative works so well is, and you could do COVID as an example, but even this past year, I mean, 2022, terrible year for

traditional buy and hold. You say, thank God for trend following, you know, that half of your portfolio, 2023, we're only, you know, a month in, maybe not so much two months in, but you said, oh, thank God I buy and hold because everything's ripping right back up, you know, or same as in COVID beginning of COVID zombie apocalypse, everything going straight down the world's ending. Thank God for trend following. And then you balance, you say, Oh my God, well, thank God I buy a whole. Cause these things just ripped. So the yin yang diversification of those two, you end up a place in the middle that I think is a lot more palatable. Right. And then everyone rushed into ball and tail protection strategies in 22, and then they didn't work in 22

because it was the second responder, not the first responder. Always something. Give us the kind of ETF and RIA landscape as you see it today. What's the same? What's changing? I know that could be a whole pot.

Yeah, two big different questions. I gave a talk at the beginning of COVID in Jackson Hole. And it's in a little conference room looking out over the mountain. And I said, most investors don't realize this yet, or they do. And they're just willing to ride out their sort of closet index fees, like these old school mutual fund managers that still charge one, one and a half, 2% for S and P 500 exposure. Basically.

I said that the world has changed. You can buy a globally diversified portfolio of market cap weight from Vanguard for essentially zero. It's like three basis points. And in that world, it's tax efficient. If you're going to be doing something different, if you're going to be, quote, an active or alpha generator, you better be pretty weird, concentrated, and different, or you're just not going to survive like that 50,

a hundred, 150 basis point fee. Like you need to do something to justify that. And I said, first of all, that's the best time ever to be an investor. Amazing opportunity set. We have limitless choice, low cost, tax efficient vehicles. And I said in Barron's at one point, I said, ETFs are going to take over the mutual fund industry. And everyone laughed. And I said, for all the reasons, lower cost, tax efficient, yada, yada. What I didn't foresee was that mutual funds were going to start to convert. So DFA did this with like 40 billion of assets. But this really is applying to equities, specifically to equities, because we estimate about a 70 basis point structural tax advantage of being in the ETF wrapper versus mutual fund. If you're in 401k, it doesn't matter. If it's in your IRA, it doesn't matter. If it's bonds, it doesn't really matter.

Managed futures doesn't really matter. For equities, it really, really matters. But that's the biggest chunk, right? The active space. And so you're seeing a lot of these conversions. So if you'd said, Meb, what's going on in the ETF space? Well, as far as us specifically, look, we have 12 funds. We're probably going to launch about another half dozen, dozen in the next year or two. You say why in the world how is there's 10 tens of thousands of funds out there how are you guys possibly you know why does the world need any more funds my god man um but we keep seeing opportunities that are open sort of blue ocean opportunities where there's either a strategy doesn't exist or we think we can do it much

better or much cheaper um subjective of course but we we like to think we can do it much better or much cheaper. Subjective, of course, but we like to think we can. So we still think there's a lot of opportunity. RIA space, I think it's evolved the way we've kind of talked about over the last five, 10 years. I mean, the automated solutions we think are incredible. They're sort of a commodity, which is why Vanguard has been by far the biggest player there. A lot of the digital offerings we think are fantastic. I mean, we've used Betterment as a partner. You know, they have some very key, going back to our cash management solution earlier, you know, they can sweep you into a 4% plus cash account. You know, and to me, that's, you want a fiduciary. If you're an investor, you want a fiduciary partner. And so, you know, and to me, that's, that's, you want a fiduciary. If you're, if you're an investor, you want a fiduciary partner. And so, you know, I think financial advice will still exist. I think, you know, the ones that charge a half or a percent, you know, need to justify it, not with asset management, but rather with, you know, wills, trust, insurance, behavioral coaching, all the other value added activities a financial advisor should be doing in the first place.

Golf, skiing. behavioral coaching, all the other value added activities, a financial advisor should be doing the first place. Golf. Hey man, look, if you can get on Riviera or LA country club or wherever, like that's a non-trivial benefit. And I say that totally seriously. Anyway, I think it's all the AI technology will become a huge tool the same way email was, Zoom is, right? It's going to augment the capabilities of advisors. They're not going away. I think there will be fee compression, particularly for the ones that don't do anything, right?

But that applies, there's like a chart you can do of S&P 500 funds where you can buy it for like three basis points, but there's ones out there that track the S&P that charge 10, 20, 50, 70, 100. And my favorite example is that iShares who has IFA ETF and they have an exact clone of it. And I forget the symbol and one charges like triple the cost and notice they're not like closing the one that's triple the cost. They're just quietly saying, okay, well, this money is stranded. And it's the exact same index. And is that people have died or lazy? No, I think it's like Buffett says, don't ask a barber if you need a haircut.

People have incentives that are tied to revenue. And there's nothing harder than to say, I'm going to chop off an arm and say, you know, we're going to get rid of this because it's the right thing to do. And so I'm talking to the investors still having their money there. They're just asleep. Yeah. I think it's, it's money tends to get stuck. You know, how many listeners do you have a bank of America account that's yielding three basis points? Like you're just too lazy to get stuck. How many listeners do you have a Bank of America account that's yielding three basis points? You're just too lazy to move it. That's why. And so people, they buy funds. There's a great stat. It's like the average financial advisor that's been in business for 20 plus years owns something like 200 mutual funds across their client book. How can you possibly

have researched 200 mutual funds? But what happens is they get sold them, they buy them, they forget about them. And for the, anytime an advisor is talking to a client and wants to buy or sell something that creates a friction fracture point, right? Wait, why are we selling this? Oh, it's because it's an S&P 500 fund that charges 75 basis points. Why didn't you sell this five years ago? Why didn't you sell this in 97 when Spy came out? So you mean I've been paying 60 extra basis points when I didn't need to? Are you going to refund me that? Right. So it's just quiet. Just leave it there. But unfortunately, you want good fiduciary partners. That's a big takeaway. All right. Three quick things on farmland or space that you can tell me that I don't know. You know, so we did a, we've done a couple of podcast series where, you know, it's, it's Meb's

interest and whether anyone else likes it or not, but who doesn't love space? I mean, come on. I also have a five-year-old. I come from aeronautics background. My brother and my father are both aerospace engineers. So it's always been close to home, but I do a lot of startup investing. And so for me, this is a lot of fun. I think, you know, going back to talking about true alpha listeners, we got another hour, but go Google, Google QSBS and talk about tax incentives as you're investing in angel investor in companies that have less than a 50 million market cap. It's arguably in my mind, this is Obama era legislation. I think the most impactful tax legislation that has been incentivizing entrepreneurs and people funding entrepreneurs

this country has ever seen. And what it does is if you invest in a company that's sub 50 market cap, so essentially a startup, you know, your gains are tax free and it's capped at like 10 million or 10 times the investment, whichever is greater. So incredible opportunities. So I've invested in over 350 companies at this point over the past decade in the startup world and partially for, and you can find some more information if you Google journey to a hundred X article we wrote on it, listeners. And, but one of the reasons I did it, I said, look, my goal is to, if I break even, great. I'm going to consider this tuition. If I match the S&P gravy, because I'll be doing it tax-free,

and anything above that, amazing. But the real reason I'm doing it is for education. And I've reviewed over 10,000 pitch decks at this point. But you pick up companies and ideas that not only you can apply to your own life, your own company, but also start to get some signals you may not see in traditional media or elsewhere. And it's so much fun because what's better than talking to a passionate entrepreneur? It's the best thing in the world, a new idea. But one of the things we started picking up on, I'll have to look it up if it was three, five years ago, whatever it was, we said, there's an inflection point because when you think of space, you think of Boeing, Lockheed, these giant companies, right? But there started to become

an inflection point and SpaceX is obviously one that really comes to mind, but where you don't need 10 billion of capital to really start to develop the next generation of satellites, electronics, whatever. So the startups were actually starting to really innovate here. And so we did a whole series of startup space investing, and there's been some pretty incredible successes there. And I think there will continue to be the second series we did was on Africa, which again, is a very similar situation for different reasons. But like, if you look at Africa ETFs, there's like one and it's like all South Africa, right? So this signal, which is there's a ton of innovation and success happening at the private startup level, that's going to flow through to the public markets over the next decade

eventually. So those are two areas I think are super interesting. Farmland is like the opposite end. It's like the most boring, but ideal asset class in that it doesn't really correlate to anything. If you've got a blueberry farm in Oregon, a wheat farm in Kansas, a timber farm on the East Coast, very different dynamics of what's going on. And to a traditional portfolio, it's a wonderful asset class. It's hard to allocate to. There's some online platforms that have started sprouting up like AcreTrader. There's private funds that we've done, I don't know, 10, 20, 30 podcasts on the topic. Again, it's informed by my personal experience.

I come from a farming family and y'all's part of the world is probably much more, you know, involved in that exposure as others. But to me, as a, again, like trend following as a true diversifier, those, those are like my one, two, two traditional portfolio. Not making any more of it is the basic premise. That's right. The, and then I want you to ask one of these space guys once, like, oh, we're going to mine these asteroids. They have all these minerals that we need. I'm like, okay, but it's worth it when the price of gold is $2,000. But now if you bring 10 times the amount of gold on Earth back to Earth, guess what the price of gold is going to do? So a lot of that math doesn't quite work out for me when i start thinking about that but well there's a lot of it a lot of the um innovation is um is i think is a lot closer than we think if you look at um one of the companies we did was axiom which is building commercials space station to replace uh the international space station first it's going to kind of attach and then do its own

um that company it's not like 2040 like this is going to be happening in the next five years. And so it's like a really cool development where I think a lot of the SpaceX innovation with the launches accelerating and the size, it's going to happen, I think, a lot quicker than people expect. What about getting us to light speed? I think it's some big big huge magnetic accelerator out there like between us and the moon you just yeah the old uh the old jody foster movie there was there's one company and one of the problems i mean like one of my biggest misses is i i turned down i mean

past um boom supersonic which is like version two of the concord you know so to me i struggle with the really hard capital intensive ones and there's and of course they're hugely successful and they're building all these planes for everyone but another one is a company that says hey we're going to try to instead of um you know the traditional rocket launch we're going to um have a setup where it's just going to spin the rockets really fast and fling them out, you know, and they like did the math on like what it's going to cost and how it's going to work. And I'm blanking on the name of the company. And I was like, that's crazy. You know, how's that going? And I didn't invest, but like the same thing is like, that's crazy.

Who's going to get into a car driven by a random person and drive you someplace? Like, who would invest in that? Who would go stay in someone's house? They're just going to rent you out a bedroom in their house, like, for a night? Like, Airbnb, Uber. Like, two of the biggest successes. Who's going to sit in a car that drives itself? Yeah, exactly. All right.

Last bit. I need your Mount Rushmore top four ski mountains, ski resorts. So this is complicated, you know, because because part of the amount Rushmore like Bill Simmons. Right. So you don't have to pick just one would be even harder. Part of it in my head is like if you include the town. So if you include the town and the community, like I love the traditional Colorado Crested Butte Telluride Steamboat. To me, you're like they're hard to get to. So you don't get as many people. Authentic Western town like the main street, like the just the old school saloonish kind of bar

right yeah you know i grew up going to winter park i got a lot of scars sutures on my body from winter park that's always a soft spot japan to me is unlike anything else um you know you get the cultural exposure as well as just um the consistency and the trouble as you know, you get the cultural exposure as well as just the consistency. And the trouble, as you know, like you're trying to plan a ski trip. I just drove back eight and a half hours from Mammoth last night. Snow, mother nature is fickle. And so like, hey, let's go to Europe this year. Well, it's a bunch of grass and dirt. And so then you're you it's hard. But Japan more than anywhere, the consistency of the snow is really unlike anywhere else. So that to me still is, that's probably number one.

And you, Icon or Epic, I think used to be sponsored by Icon Pass, right? This is another benefit of being a international macro investor. The yen, some of the highest levels it's ever been. And so the cost for Americans is much lower than it has been over the past decade i am icon uh they actually used to sponsor our podcast um and uh but but so did mountain collective so we're we're uh fans of all the passes but um you know in japan i was laughing because we were going up to some of these tiny resorts and um you know lift tickets for like 50 bucks and i was like some of these places in the u.s now are well north of your valley or something yeah like it's just

it's uh i don't know i was we were in sun valley over president's day weekend there's actually some pushback against the passes there of like we did epic was way too crowded we tried this i mean some of those lines from veil you see those pictures where it's just like a thousand people are like, that's literally my nightmare. Like, Oh my God, I look so terrible. I would rather just sit in the hot tub and drink hot chocolate. Underwater Mount Rushmore. But do you think those passes are good for the industry or indifferent? Help some kind of hedge, right. And get income when there is no snow.

I don't know. I don't know i don't know yeah i i think it's um i think it's a mixed bag but um i you know i i think it's probably better than the alternative yeah awesome we'll let you go leave it there we can we'll do another whole podcast on whether climate change is going to ruin a bunch of these beautiful mountains but well my friend it's just going to change it we'll just be skiing and uh you know i don't know where yeah thanks so much for having me all right man it's been fun we'll uh talk to you soon all right skiing space farmland and trend that was fun thanks to med faber thanks to our sponsor rcm and their trend white paper and thanks to jeff burger our producer behind the scenes,

making up for me for getting used to fancy microphones. That's it for the pod this week. We'll see you next week with Mike Green. Peace. You've been listening to The Derivative. Links from this episode will be in the episode description of this channel. Follow us on Twitter at RCM Alts and visit our website to read our blog

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