The Pomp Podcast - #245 Meb Faber - Understanding the Current Market Mayhem

Episode Date: March 19, 2020

Meb Faber is co-founder and the Chief Investment Officer of Cambria Investment Management. In this conversation, Meb and Anthony discuss if these crazy markets are outside the norm historically, why global asset allocation is important, how passive and active strategies stack up, what people need to know about share buybacks and bailouts, and why Meb is so heavily invested in farmland. =============================== Resources from this conversation: Meb’s books and white papers (free downloads) The Last Question by Isaac Asimov =============================== BLOCKFI-----BlockFi allows you to keep your crypto, put it up as collateral, and receive a USD loan funded directly to your bank account. They do loans ranging from $2,000 to $10,000,000, and they're perfect for helping you reach your financial goals of all sizes. Visit BlockFi.com/Pomp to learn more about putting your crypto to work without having to sell it. TAXBIT-----Refund-maximizing, cryptocurrency tax software you can depend on. Visit taxbit.com/invite/pomp and receive 10% off your tax plan today by signing up for a free trial.

What's up, everyone? This is Anthony Pompliano. Most of you know me as Pomp. You're listening to Off The Chain, simply the best podcast in crypto. Let's kick this thing off. Meb Faber is co-founder and chief investment officer of Cambria Investment Management. In this conversation, we discuss why these crazy markets may not be outside the norm historically, why global asset allocation is important, how passive and active strategies stack up, what people need to know about share buybacks and bailouts, and why Meb is so heavily invested in farmland. I really enjoyed this conversation and Meb didn't disappoint. This episode is brought to you by two sponsors, BlockFi and TaxBit. BlockFi is awesome. I'm an

investor and a user. They've got three products today. They'll give you a US dollar loan against your crypto. They'll let you deposit crypto and pay you interest. And they'll also allow you to buy and sell on their crypto exchange. Go check out BlockFi.com slash Pomp. Again, BlockFi.com slash Pomp, and you can learn more. With TaxBit, they help you pay your crypto taxes faster and easier. That's right. They automate crypto tax reporting. You can go to TaxBit.com slash invite slash Pomp. Again, TaxBit.com slash invite slash Pomp, and you'll get 10% off getting your crypto taxes paid this year. All right, now let's get into this episode with Meb. Anthony Pompliano is a partner at Morgan Creek Digital. All opinions expressed by Pomp or his

guests on this podcast are solely their opinions and do not reflect the opinions of Morgan Creek Digital or Morgan Creek Capital Management. You should not treat any opinion expressed by Pomp as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. This podcast is for informational purposes only. Guys, bang, bang. I'm here with Meb. Thanks so much for coming on and joining us. What's up, Pom? Great to be here. You're in good spirits in all the craziness of the markets, which I appreciate. For those that don't know you, maybe let's spend a quick two,

three minutes on your background and kind of what you do day to day today. yeah man um i grew up a little bit colorado and north carolina uh right down the road from the rest of your team and in chapel hill in winston-salem i went to school at virginia was a cavalier um engineering background biology i graduated at really the peak of my favorite bubble, which was the internet bubble. Um, you know, the, the original undergrad plan was to go back to, to complete a PhD. And, um, I had some family members that did that and said, you know, maybe take a few years off, uh, go to grad school later, earn some money first. It's a long slog in the life sciences. And so, um, took a year off to work. So I was always

interested in investing. So I worked as a biotech equity analyst. So kind of the two passions combined in D.C., but they actually allowed me to go to grad school at night at Hopkins and kind of never look back. You know, it kind of the hobby became the career and vice versa and started to gravitate more and more away from biotech and more and more towards quant. If you remember, that was the early 2000s was really the nuclear winter for the Internet. So I had the smart decision to move to San Francisco and had to work there for about a year. And then in Lake Tahoe, said I worked for a commodity trading advisor as a startup there, but mostly ski bum. And then moved to Los Angeles in the early mid 2000s to start Cambria in 2005, I think, and never looked back.

So that's the quick one minute summary. I love it. It's always cool to be able to kind of move between industries just based on your personal interests, which sounds like you were able to do pretty well. All right, let's get to the most important part, which is, it seems like we are living in the craziest of times. It's like every day in a stock market, we're hitting stock circuit breakers. I saw yesterday, we hit seven consecutive sessions of 4% swings in either direction,

which set the new record. The old record was six sessions in a row back in 1929. But this may not be as crazy as we think. So give us some kind of historical context as to how, you know, kind of different is right now versus the past times in the stock market. So like most investors, the best thing you can do as a young person is to lose all your money. And so I did that many times early in my career, discretionary trading. And that's what moved me more and more towards quant, by the way. And so, you know, run an asset management business now.

But the foundation for this was I said, look, I have all the behavioral biases. I'm overconfident. I'll take too much risk that you give me. So I really need to understand and have some expectations to which to set an anchor to ground myself. So to be an investor, you simply have to be a student of history. And so, my favorite investing book, Triumph of the Optimists, you can go back over 100 years, investment returns. Really, you can go back to Amsterdam Stock Exchange in 1600. But really, in the modern era, there's about 200 years. But if you look at today and what's going on, this feels weird to say to a lot of people, particularly younger people, but this is all pretty normal.

And the reason being is that stock market, normal stock market returns are extreme. And let me elaborate on that. We wrote a paper a number of years ago called Where the Black Swans Hide. And it demonstrated that down 5% days are totally normal, as are up 5% days, right? This is the tails of the distribution. They happen about 1% of the time, even down 10% days, totally normal. They happen about 0.1% of the time, and this is in all the countries around the world. And then even bigger down days can happen, of course.

In October 87, we had down 20, and plenty of markets around the world. I think today, some are down 15%, 20% alone. But the funny thing is people don't expect that. So as you came into this year, for example, all the Wall Street strategists, I did this in a tweet, they said, what do you expect stock returns for next year? And they clustered in between minus 3% and 10%. But if you look at the historical yearly returns, it's like 80% of the returns fall out of that range. Yes, that's the average, but normal returns are extreme. Look, last year, we were up 30%, right?

This year, down 30% or wherever we are today. But that's pretty normal. Now, that having been said, you traditionally see volatility cluster, meaning as you've seen in the last month these huge up and down days and we did this study and we showed that most of these big down and up days occur after the market is already declining so you could use something like the 200-day moving average and say um why though just like around two-thirds or 70 of these big up and down days occur when the market's declining well if you you think about it and it makes a lot of sense today it's because people are emotional right

markets are going down they use a different part of their brain when they're making money i think back to last year people probably checking their account balance every day on robin hood they're thinking about buying a new house they're patting themselves on the back for how smart they were and that look at that stock i bought they're bragging in their neighbor they're opening the account statements all that stuff right and and the um very real visceral physical experience of making money, it stimulates a lot of the same parts of the brain as many pharmaceuticals would or drugs would. On the flip side, when you're losing money, it's a very real, visceral, physical experience. It's painful. You don't want to open your account balance. You don't want to talk to

your neighbor. You say, that guy's such an idiot for recommending that security to me. I can't believe I listened to his advice. It's so stupid. And at some point, you start to panic and say, I can't take it anymore. I got to get out. Look, we're only down on the stock market, I don't know. Let's call it today 30%. And had you not studied history, you wouldn't have realized that, look, we had two 50 percenters in the last decade back to 2000. But you go back far enough. You remember the Great Depression? That was over 80. And in plenty of stock markets around the world, you've had worse. And in a couple of stock markets, Russia in 1917 and China in 1949, they said, nope, thank you very much. We're closing it. The government's taking all of

your assets no more private businesses and that's had to do with communism but um you had to know at least what was possible we did a tweet last night where um and this goes along with a another article we did on expectations and we said by the way this is a fact to interpret it as you want but long bonds one of the most universal beliefs in the entire world of investing is that stocks outperform bonds 99 probably percent of people believe that as a fundamental truth but the problem is most people don't believe that stocks can go long periods of underperforming bonds and right now as of today stocks have gone 40 years underperforming bonds um had you studied history you would have known that you would have known there's been periods of 20 years

a couple times in the 19th century you say that's too long ago there's a period of 68 years So the challenge with that is most people think in terms of days, hours, weeks, quarters, and certainly not years. And that mismatch of truly setting expectations and what works in a long period and actually implementing it causes a lot of problems. And as your partner said, I said this on Twitter the other day, Mark Yusko, one of my favorite quotes is, investing is the only business when things go on sale, everyone runs out of the store. And that's the beauty of the quant approach and having a plan. And we can talk more about that. But if you don't and let the emotions work their way in, that's where you start to see fractures and problems happen. Yeah, it's so funny. One of the first things he ever said to me is humans are really good at doing two things.

One is they always buy what they should have bought, and they always sell what they're about to need, which is kind of the same thing around when the prices go down, everyone runs away. But I think that the book that you mentioned about this optimism, essentially what you're saying here is if you believe that it's not going to go to zero, these dips and drops in the prices are actually opportunities. right and again as long as it doesn't go to zero they end up having high volatility days or over long periods of time you get kind of a continued increase in value across the different stock markets but that's the difference between am i you know being emotional today versus some long period of time actually having a plan being disciplined uh kind of in control of my emotions etc let me get let me give you a good example from the book and so it looks at like 30 40 different stock markets back to 1900 and there's so much information but it gives you a great

base case. So if you look back historically, stocks have done around, let's call it 9% a year. And then after inflation down around five globally. So if you call inflation 4% during that period, bonds historically did around six after inflation two, bills around five after inflation one. So I call it the 5-2-1 rule. So after inflation, your expectations would be that stocks return five, bonds return two, bills perform one. One of the key parts about this study is that it's really important to diversify. Because again, you go back to 1899, we're sipping champagne, we're having this discussion in London or New York or wherever it may be. It wasn't altogether clear that the US was going to dominate the 20th century.

You had a scenario where then in 1900, by the way, the vast majority of the US stock market was railroads okay um but also the u.s was wasn't the largest market cap country uh uk was u.s was only about 15 they ended the decade around half uh the century around half so massive outlier on the upside now they weren't the best performing stock market i think tiny south africa was but there were other ones ignoring the ones that zero um i had essentially zero return austria and others. And if you flip the equation, you look at the bond, same thing. Some bond markets did great. Some went to zero, usually because of hyperinflation, world wars, et cetera. But the beauty of this is, if you take a long view, and we wrote a book about this called

Global Asset Allocation. And we said, look, there's all sorts of investors out there, super famous investors like Dave Swenson from Yale, Rob Renat from Research Affiliates, Warren Buffett, Mohamed Elran, that all at some point have said, here's a recommended asset allocation. And in this book, we said, OK, let's see, as a quant, let's see how these have done in history. And so we took all the main ingredients. So if you're taking all the ingredients off the shelf, you've got global stocks, global bonds, global real assets like real estate and commodities, gold. And we said, let's look and see how these portfolios perform. And we took them back all in 1972. We're going to take this back to the 1920s. We've already done it, but hopefully

update that this year. There's some interesting takeaways. First of all, is that all the portfolios did great, but they were hugely different. Some portfolios said you should have nothing in gold. Others said 25%. Some said 90% in stocks. Some said 25%. There's these massive differences. In reality, it turned out it didn't matter all that much. Let me give you a good example. So, if you go back to 1972, and I said, Pomp, I'm going to give you a crystal ball. I'm going to let you pick the single best performing asset allocation model from this book. And I'm going to let you implement it from 1972 to 2018, 2019, 2020, whatever. How much would someone pay for that? In the billions, probably PIMCO, any of these, Fidelity, Schwab would pay billions

dollars to have this perfect foresight into what works the best and i said however you have to implement this with the average mutual fund fee of today which is 1.25 percent forget going back to 1972 index funds didn't really exist but the average mutual fund then um and you say okay well walking forward if you look at the best performing asset allocation implementing it with perfect foresight but with those fees transforms the best performing asset allocation to almost as bad as the worst rendering the entire asset allocation decision almost meaningless so if you're doing the just basics the what i like to call asset allocation for dummies your specifics don't matter that much as long as you have some global stocks some global bonds and

some global real assets. And I liken this to baking. My mom's from North Carolina. She doesn't ever use cookbooks. She does it by feel. This much butter, this much sugar. If you exclude whole categories of ingredients, it's probably not going to work. So you put all your money in gold, probably not going to work. But in general, if you have the main ingredients, it works out just fine. And so people obsess so much about, gosh, do I have too much in bonds? Do I have too much in stocks? What do I do this with this? And in general, as long as you have the basics covered, it doesn't really matter. As long as you don't implement it very foolishly, and most important, do the really dumb thing, which is make really dumb behavioral mistakes,

and panic at the bottom, sell at the top, over and over. We see so many examples of this. Today, we'll get updates. They do this every week. My favorite example of irrationality is the American Association of Individual Investors. They do a weekly survey, goes back to the 80s. they say, are you bullish, neutral, or bearish on the stock market? And the most bullish reading ever was in December of 1999. The single worst time to be bullish in the history of our lifetimes and the most bearish people were, it was in March of 2009. Again, you cannot make this up. This is not some academic hypothetical. This is the real world. And today, it's probably going to print something really low we'll see uh but historically if you sort based on those those extreme readings

it's usually a really good time so um that sets the case for the expectations of the base case and why is that important because we did this piece recently online a four-part series recently about what's going on in the world it was like time to panic and then it was a three-part series called the get rich portfolio stay rich portfolio how i invest my money and investing in a time of corona and the first part about the get rich portfolio was that if you put money to work i hope there's 20 year olds listening this podcast because this is fantastic opportunity you put money to work right now you get 10 returns just for math's sake 25 years you 10x your money 50 years you 100x your money you do not have to do anything it takes zero effort and we talk so much

about this on the podcast and the blog this is the beauty of capitalism and free markets is you can take a little bit of sweat of your labor, put it into other people's labor and magically transform that into multiples of money in future decades. So the decision by far that thumps everything else is when you decide to start investing, how much, how much you save and how much you invest. And so the basics, again, we can talk more about a lot more timely and tactical implementations and tilts and everything else, but this is something anyone on the planet can do and do it for no cost essentially today and have phenomenal returns, the hard part, of course, is avoiding those emotions which try to lead us astray. Yeah, it goes back to, I think it was

Fidelity or somebody did a study that basically said, out of all of our portfolios, who's got the best performing portfolios? And it's people who lost their password or died, right? It's just kind of once they put it on, they didn't touch it. And some of the basic mistakes I know that you guys have talked a lot about. You mentioned high fees, but also one that I find really fascinating is this home country bias. Maybe talk a little bit about how you guys think about that and why is that so prevalent, especially here in the United States where things have gone pretty well over the last decades and people tend to think US-centric rather than as global as they should so the 2010s were 20 teens were an exceptional decade to own u.s assets go full

rip van winkle in 2009 wake up in 2019 god bless you that's all you had to do for the entire decade and the problem with most investors they're myopic they extrapolate that infinity to to you know as far as you could see going back to what mark said earlier um they destroyed everything else and we we did another poll on twitter i love to source polls on twitter and i said you know by the way people what has been the best performing asset of the last 20 years and i think it was like stock u.s stocks real estate gold something else bonds maybe and everyone said stocks but in reality stocks u.s stocks were the worst because the 2000s were terrible for u.s stocks but that's the way it works one regime regime sets the stage for the next emerging markets dominated the early

2000 uh small cap value everything else just crushed us stocks and then the 20 teens u.s stocks did great and these things play out over the periods of not just years but but decades as well the problem is then people say okay u.s stocks forever and traditionally markets that go up if you look at the pe it's the p that's going up so markets that go up a ton usually get more expensive and what we're seeing right now is that markets that go down a lot uh it's it's you know they're getting cheaper for a reason um and but it's the p it's the price going down but people extrapolate that so the problem is vanguard's done a bunch of studies here we have as many others people for some unknown reason and there's a known reason i can i can understand why but they put the

vast majority of their assets in their own market so u.s investors of their stock portfolio on average put 80 in the u.s now that's not as awful as you think it is because the u.s is around half the world stock market cap but in other countries this happens in every country around the world spain uh italy uk japan australia every single country does it and in some of the countries that are only like three percent of world market cap canada etc it's a really horrible mistake because you're making a massive, massive overweight. People say, look, I feel comfortable. I understand these companies, but it's really a false sense of security. And so we did a post on the blog and summarized it at the end of the year where I took my six favorite research pieces

on global investing last year. One of them was from Bridgewater. And they said, look, U.S. stocks outperforming the global eco weight is an anomaly. In fact, it's only happened a couple of times in the past 12 decades. It happened in the 2010s and it happened in the 90s. Before that, you had to go back to 1920. And there's been a bunch of studies on there that show that diversifying and buying the global market cap, you end up with lower volatility and you eliminate the outlier outcomes. We talked earlier, you eliminate the South Africa being the best but also austria being the worst you get somewhere better than in the middle because you get a diversification benefit and it really makes no sense to just look at one country

and let me elaborate on that for a little bit more on on as to why so that's that's one mistake of just doing it um um and you ask anyone in the world right now who's living in russia greece brazil about putting 80 90 in your own market and they say that was the dumbest thing i've ever done in my life because it's now down 60 70 80 90 percent um it's also compounded but if you look if you go back to the 1970s and there was a neutron bomb that went off in the asset management industry and most people think that it was indexing um which was a massive massive invention you know john bogle vanguard has become very famous for doing it they managed over what, $4 trillion now. Others were doing it Wells Fargo, et cetera, on down. And they came up

with this idea that if you just bought the entire market, you could do it at super low cost because you literally didn't do anything. You just bought stocks according to their size. And the funny part is if you ask people, a lot of investors don't know this, you say, what is like, say, a market cap weighted US stock fund? How is it weighted? And people say, buy stocks. You buy the biggest stocks and that's correct but most people usually think it's by revenue cash flow earnings and that's not true it's actually the only variable is stock price times shares outstanding that's it there's no tether to value whatsoever so if if i know you love aliens if you're an alien and you came down and you said is that a reasonable way to invest does that make any sense you kind of

scratch your head and say why would anyone invest like that you would never buy a business like that you would never buy a lemonade stand with no reference value or a house or a car or anything else why would you do that with stocks now the reason it actually works is because in the stock market um people understand this when it comes to private investments but it happens in the stock market too all of your returns are determined by the outliers so there's about five percent of stocks in the entire stock market that determine your entire return it's holding the amazons the mcdonald's the walmarts the apples of the world that have these multi-baggers up 10 times up 100 times, up 1,000 times that generate all the returns. So by indexing, by owning everything,

you are guaranteed to own the big winners, the power laws of investing. If you look at the distribution, about two-thirds of stocks underperform a broad index. Almost half over their lifetime have a zero rate of return. And around a quarter, probably now a third, are straight up zeros over their lifetime, which is why stock picking is so hard. Just by throwing darts, you're probably not going to get a winner. People are attracted to it just like catnip because they see the outliers and say, oh my God, if I put 10 grand in Berkshire Hathaway in the 60s, I'd have $200 million today. Anyway, that's the base case market cap weighted investing. That's good, but it's pretty suboptimal. The reason being is that there's really free

markets in capitalism. And it makes sense where if you invest in Apple and it gets the size worth a trillion dollar company, you better bet that someone in Korea or in Europe wants to make billions of dollars too. And so you have that creative destruction. You have the competition where other companies come in. And there's been a lot of quant studies on this. Research affiliates have done it. If you look at the largest stock in the stock market, so by market cap weighting, it underperforms the broad market by three percentage points per year for the next decade. This applies to every country. This applies to every sector. And it should make sense. And it does make sense because it's really the price going up with no tether to fundamentals.

So you can create an investing strategy. It doesn't matter what it is. It could be equal weighting. It could be weighting based on value, which we like, momentum, whatever it is. It could be waiting based on whether a CEO wears bow ties or regular ties or no ties. All of those should be market cap waiting by about a percent or two per year. Now, why does this go back to the home country bias discussion and comment? Well, it also applies to the global portfolio. And so we said overweight in the U.S. isn't a big of a deal because the U.S. is 50% versus 80, which is what people in. But the US came into 2020 being one of the most expensive countries in the world, which happens all the time with market cap weighting. So we just demonstrated why it

happens on individual stocks, but it happens to entire markets too. And so if you look back in history, the big granddaddy of them all, we like to use long-term valuations called CAPE ratios, which is a 10-year price to earnings, but you can use anything. You could use dividends, sales cash flow whatever um in the 1980s japan so for reference long-term p ratios are around 18 uh you've seen countries get as low as five the u.s hit 45 in 99 but japan hit almost 100 it was the largest market cap country in the world in the 80s um you're probably too young for this but every magazine article every tv story every book was about the japanese business model it was about how they're outperforming everything in the world. We all had to copy Japan. And it turned out

it's just the biggest bubble we've ever seen. But if you were a market cap weighted investor, you put most of your money in the biggest bubble we've ever seen when it was the most expensive. And so this is something that happens over and over again, happened in the US or happened globally with the US at the end of last year. And so the good news is it's a pretty easy problem to fix. You diversify, you try to wait with a tilt towards value or any other metric. But in general, the problem with putting all your eggs in one basket, particularly a home country bias is you end up saddled to a very specific outcome. And you ask most people around the world and they would say it's usually not a good one. Yeah, it's super interesting

because you're right, this happens in the private market all the time, right? Especially take kind the most extreme example of angel investors in technology companies. What they end up doing is the downside is companies going to zero and a lot of them go to zero. So you actually need incredible power law to come back where you need the thousand X, 10,000 X, whatever those numbers are. And what you're basically saying is whether it's that private investing or it's in the stock market, like the power law and indexing does work. I guess then what comes down to is how do you think about indexing fitting into a broader strategy, given that if you kind of have a pretty simple, I'm going to put money into this index, then is it just let me make as much income

as I can save as much and just continue to kind of feed that strategy and don't kind of try to be too smart and divert from it in times of either extreme euphoria or fear? Or do you kind of think of, hey, build it out and then start to look at maybe alternative investments or something else? It's like, how do you think about the stocks fitting into that rest of that portfolio? All right. There's three parts of this wrapped in. I'm going to try to hit all of them. You touched on private markets briefly.

And I think this is interesting because power laws happen in both private markets and public markets. So VC funds, almost entirely, their performance is dominated. They do 100 investments. It's dominated by two or three investments. If you hit an Uber, you hit a Google, you hit something that does 100x, 1,000x, 10,000x, all the other ones are irrelevant, actually. the same thing happens in public markets if you own an index you're guaranteed to own those

the problem comes if people don't use indexes and they buy a stock let's say you buy a stock today six months from now it doubles it triples you are elated you are so happy and you're probably going to sell it which is natural it feels like the thing you should do i can't believe it i'm so smart i double triple my money well guess what at some point that stock could go up 10x 20 50 100 1000 x it's a little harder with public markets because they tend to be bigger so the market cap you know you're at 100 million range up to a trillion whereas a lot of the private angel stuff you're down sub 100 million a little bit easier to expand the the hack which used to be considered i think a bug but i actually think it's a feature in private markets you can't sell

so you know i've been investing in private companies back to probably 2014 and there's sell them that I guarantee you, I would have sold a thousand times over after they doubled or tripled in the public markets. But because I can't sell, you know, they've now have been up 10x, 50x, 100x. And so we learn so much about investor behavior, how many of us would be able to sit and watch that stock that goes up, say 10x. But then what happens if it goes down 50%? You know, the great case is Amazon. So you know, people, the media loves saying if you just put 10,000 Amazon, it's now worth 20 million today, probably less after today. But the problem is the path to get there, right? Amazon's gone through multiple 50% declines. It had one that was a 90, I think

95% decline. Who could sit through that? Only a psychopath, right? No one can. So indexing allows you to own those and not know it. Private allows you to do it and be stuck in it, okay? So there's kind of a behavioral hack and i think it's a great one in addition there's some some tax benefits to the private now where you can do these qsbs rules where you pay no taxes on investments under 50 million you can put them in an ira now like alto ira and others um we can get in that later if you want um but the thing is again going back to the beginning is the base case investing is actually pretty damn simple we give an example in one of our articles and this is really simple and anyone can do it where you say, look, there's been countless famous people who have been low-income

workers who have just saved the crap out of it. And one was this janitor and he put in $40 a week. And we give the example. So let's say you're 20 bucks. Most of them could come up with 40 bucks a week, put in 40 bucks a week for a decade. And that's it. You only save about 20 grand in total, but you allow that to compound until retirement and you have a million dollars. and it's not hard. You don't do anything. And the problem for most people is they want to look at it. They want to check, they want to sell it. And everyone wants to be a millionaire, right? The problem is almost everyone, this is a quote from my buddy, Morgan Housel. They don't actually want to be a millionaire. They want to spend a million dollars.

They want to buy a house. They want to go on vacation. right um but to be a millionaire take the exact opposite skill set you have to save um you have to invest and you have to not muck around with it i mean a good example right now i mean we gave a speech last year in dublin where i was talking to a bunch of students and i said look much you guys are going to probably be going to spring break right now um god bless you you're probably going to abiza maybe in the u.s it would have been i don't know cancun or daytona or something who knows um let's say it's going to cost you all in two thousand dollars you know or you could take that two thousand dollars and put it in a retirement account an ira and whatever and in 50

years that's going to be worth a couple hundred grand does a 60 70 year old you can you have empathy and sympathize with that person um or uh would you rather just spend the two thousand dollars now um and so it's hard i said look you should probably go to a visa or cancun you build a lifetime of memories and you can look back on when you're 70, but the actual implementation is pretty damn simple. And let's be honest, there's never been a better time in the history of the world to be an investor. Back in the day of my parents and grandparents, you want to buy a stock that's going to cost you a hundred bucks, 2% commission each way. You're going to get just absolutely ripped on it. Today, you can buy a portfolio of stocks, bonds, ETFs for 0.05%.

That's essentially free. If you include short lending on the portfolio, which most ETFs do, and the good guys return it to shareholders like we do, that portfolio is probably not already 0% fee. It's probably a negative percent fee, meaning you're getting paid to own the portfolio. And that's phenomenal. So right now, if you're a young person, you should be ecstatic about being able to set up and have a plan and allocate. And that's the problem, though, for most people is they just don't have a plan. We have over 45,000 investors at Cambria, and we do all these office hours, and the 90% plus don't have a written plan. They don't have something set up to where it's automated, maxing out their 401ks and everything else.

And the actual investing part is simple. It's the implementation. It's the emotions that get into trouble for most people. Hopefully, that was the part of the question I answered. I got a little off topic. No, it was fantastic. So how does the passive investing and kind of that disciplined plan mesh with active strategies and kind of this world of the individual investor who thinks they can pick stocks probably not going to be very good at it, but there are professionals who are pretty good at kind of active management, etc. How do you kind of balance those two things as you think about just portfolio management in general?

okay so the base case what i like to call asset allocation for dummies is it doesn't really matter what you do going back to what i said earlier but the starting point for almost everyone if you don't have a waypoint or a compass is what i call the global market portfolio that means if you went out and bought the entire world of public assets and the things that are missing in public world is is private homes and farmland and some private real estate but but if you were to buy every public asset in the world, what does it look like? You end up with a portfolio that's roughly half stocks and half bonds. And of that, it's roughly half US and half foreign. And that's a great portfolio as a starting point. But most people want to kind of

skew that depending on their own interests and start to tilt away from there. 90% of what I talk about in our research you know our white papers our books is the like final 10 you know we wrote a um if you remember back again probably too young but back uh decades past they had this old uh food pyramid where the government recommended what people should eat the most of and then sparingly all the way to the top and it's funny to look back on because the the base for everyone used to just be carbs it was like bread cereal pasta you know pizzas like totally inverted today on what people think would be good, good advice. And the same thing probably applies to your investing. But in general, you do the big muscle movements first. And are the things at the top

worth doing? I think so. I have a lot of departures from the standard advice. But this goes back to a John Bogle quote where he says, I set up indexing work for him, for example. Are there approaches that are better, sure, but there's infinite worse. And so finding one that works for you is important. It's easy to say, to set your risk tolerance and say, look, I'm fine losing 50%. And we talked about a lot of people used to ask me, hey, Meb, this get rich portfolio, how do you hit 20% returns? How do you get 30% returns? And I said, here's some ways, but frankly, most of you probably can't handle it. Because on paper, you say you can handle down 50, down 80. And then when it hits the fan, you probably can't. And we did a tweet and this

is kind of happening in real time. I said, usually don't see bad behavior until people see minus 20. And then it gets exponentially worse every 10 down from there. So that's the base case, what I call the global market portfolio. And if anyone did that, it's fine. By the way, there's a 2000 year old portfolio called the Talmud portfolio, where it says, let every man invest a third of his wealth in land, a third in business, and a third keep in reserve. So I call that real assets, stocks, bonds. That beats the vast majority of institutions over time. We've done some articles called Why Calper Should Be Managed by a Robot, Why Harvard Should Be Managed by a Robot, How to Clone Ray Dalio's All-Weather Bridgewater. All of these are pretty

hard. This 2,000-year-old portfolio does a pretty good job of replicating what all these do with thousands of people, tons of fees, tons of effort, headache. You just buy this portfolio. Okay. So that's the base case. Now, let's say you want to start tinkering with that. And by the way, my personal portfolio largely mirrors the Talmud portfolio, which is I do it a little bit differently because my background, my family and my dad's side came from a farming background in kansas and nebraska um my old man grew up on a farm straight up no running water all that stuff um so farming is sort of in my blood so a third is in farmland a third is in private businesses because i know that i'm friggin horrible about behaviorally selling things uh so over 150

private companies and then then there's the public assets okay um i think there's some important tilts that make a lot of sense and the two big foundations the pillars to which to build from in my mind are nothing new it's nothing that we've invented um but that goes back 100 years uh so one over 100 years goes back hundreds of years but famously 100 years in the u.s one being value so ben graham you know one of the famous most famous people to talk about that uh and then on the other side is what i would call trend following and momentum which Charles Dow, you know, creator of the Wall Street Journal, but also talked a lot about trend following early 20th century. We talk on valuation first. It's actually pretty easy to

come up with an estimate of how a stock market is going to do the next 10 years. This isn't my equation. It's actually John Bogle's equation. You know, one of the greatest contributors of the well-being and success of investors all over the world, particularly in the US over the last 50 years. He wrote a paper in the 90s, and I call it Vogel's formula. Obviously, he would never say to use it for timing, or forecasting, but he would say just to set expectations. And it's super simple, and it's three variables. You want to know the stock returns the next decade, it's starting dividend yield, then it's dividend growth, and then it's change in valuation. And that's it. Now the dividend growth, you can kind of explode into inflation and real dividend growth, or you

also call it earnings growth but same thing so historically and i'm going to round here going back to 1900 the dividend yield up almost around five percent gone are those days although they they may be soon coming back depending on what the market's happening today uh dividend growth also almost five percent and change evaluation should be a wash over ending 19 2019 uh there was a slight edge to that in the us as the us stock market got more expensive over over over the past 120 years. And so you can plug in parts of that equation and find out where we are. So at the end of last year, dividend yield, let's round up and call it 2%. Let's say you got the same dividend growth as historical. And the nerds out there who are listening, by the way, the

dividend growth is actually a little bit higher than historical because of the way buybacks have sort of changed that equation. But it's a wash mostly because the inflation is low. the big variable comes with a change in valuation and so we ended 2019 at a long-term price earnings ratio of around 32 i think and historical average is around 18 now if you have low inflation you could say it's around maybe 21 so it's high again it's not crazy like the late 90s uh we're 45 but but it's high and so you can plug that into the equation and say look John Bogle said this before he passed, by the way. He said, investors should expect, I think, low single-digit returns in the U.S. stock market for the next decade. Now, his point wasn't sell everything and be done with it, but rather just to lower expectations. Take your medicine and maybe save more or just have real estate. And Vanguard publishes very similar returns. The problem, of course, comes that most investors expect 10% always, every survey.

The Texas just did one where they surveyed investors all around the world in the last year. They expected 11.7 real. So you got to add on inflation. And I think the survey is probably not fair because most investors have a hard time distinguishing between nominal and real. But really, that means like 14%. But even at 11.7, it's crazy because markets have never returned that in history ever.

So the problem you see is this massive dislocation between valuations. So that was the bad news. But you put that in the US and you say, look, every quant shop on the planet, AQR, Research Affiliates, GMO, yada, yada, would say low single-digit returns expectation. Some would say even negative. So a pretty bad opportunity set. Now, the good news is the rest of the world is cheaper. So we'll use end of last year, and then we can update it.

Foreign stocks were trading around average valuations for low inflation. So let's call it 21. Emerging market down around 15. and the cheapest bucket, cheapest quartile was down around 12. Historically, tilting towards value has been a great way to add, let's call it 1% to 4% returns over market cap weighting. The problem is, obviously, it comes in chunks. It doesn't happen every year. As we've seen this year, it certainly can get worse. The beautiful thing about valuation is it's hard. The stuff that's cheap so end of year i mean we're talking russia brazil greece italy singapore i mean norway

just nasty who's who the worst countries of geopolitical of economic news you know the price is because they've already declined 60 80 and on the right side the good stuff that's hitting new highs everything's rosy at least it was a few months ago right the u.s lowest unemployment on record had the first decade in history with no recession the first year in history calendar year where the stock market went up every year in 2017 on and on right everything looks great um but one of the biggest things about using valuation is it's not just about buying the cheap where there's massive career risks nobody wants to own those names because if you do and they go down your clients say what are you talking about we own russia and brazil and greece

nilly you're fired if they do great they're pat on the back what you're supposed to do everyone wants to own the expensive stuff um but using valuation is every bit as much about avoiding the expensive as it is investing in the cheap and going back to our examples of avoiding the u.s when it was the largest market cap country in 1999 avoiding japan when it hit a p ratio of 100 and it's had negative returns the next 30 years um and that's not some backward economy right japan is the still the top three economy in the world so uh doing those two things is hard that's why you make it systematic you put the rules in place you have it so that you tilt towards value i mean look this is warren buffett 101 it's not that hard um and over time

it delivers now the problem and i'm getting a little long-winded i'm sorry um the problem is that most people expect returns to come within a year or two that's how long of a leash they get people. We did a survey on Twitter where they said, how long would you tolerate a manager underperforming before you sold that allocation? And it was like 80 or 90% said under six years and most said under three. There's been survey after survey that shows institutions are just as bad, by the way, where they say they'll give 95% of managers under three years and then they fire them. But the academic literature shows that's the exact opposite of what you should be doing. The three-year time horizon, most institutions, they've shown this over 10,000

hiring and firing decisions, would be better off staying with the manager they fired and not adding the one that they're adding to or including now because they just revert. And if you don't mind, give me a little latitude here. Let me give you a good real-world example. I used to tell clients, they'd ask me, say, Meb, how long should I give this strategy? And you can extend this to asset class, anything you want. How long should I give it? And I used to say 10 years. And now I say 20. A good example is the stocks versus bonds. Currently, everyone knows stocks outperform bonds. It's been 40 years and they have it. Will we expect that going forward? No. With bonds at almost 0% interest rates versus stocks, you would absolutely expect stocks to outperform.

But that wasn't the case 40 years. So you've got to wait. But let's use Warren Buffett. Everyone knows Buffett's an amazing investor. Everyone didn't know that in 99. I've got articles saying he's lost his touch. He's old fuddy-duddy. and we wrote a book called invest with the house that you you um actually used to talk to mark a lot about this where you could track hedge funds what they're doing through the 13f filing so you could buy what buffett buys when it's public top 10 holdings equal weighted back to 2000 when the filings became electronic and that outperforms the market by about three percentage points per year that beats 95 of all mutual funds you don't have to do anything you could also buy berkshire the the 13 f's outperformed by a little bit but it's very close um you don't do anything it takes five minutes a year you just hired the best performing performing managers on the planet

and charlie munger too uh and now the new guys but why would never why would anyone never do that it's because they go through ridiculously long periods of wonderful performance buffett is underperformed we're ignoring what's happening this year i have no no idea the last 17 years so of the 20 years he's underperformed and it's like 11 out of 17 calendar years so every institution every retail investor would have given him a three-year leash and then you're fired warren you're fired charlie but i just gave you a prescription to beat 95 about mutual funds zero cost takes no effort but no one would have been able to withstand buffett because of that mismatch we're talking earlier but this applies to active management too so um going in with all

these asset valuations and the struggle with why this is so hard. If you look at the world right now, after it's been imploding the last few months, the good news, stock valuations in the US have come down from 32. I don't know what today is happening, but down to about 22. So we're back to normal valuations for low inflation. That's great news. It's not back to normal full period, which would be another 20% from here. And it's not back to global financial crisis lows, which would be, I hate to say it, another 40% from here-ish. And it's certainly not back to all the way to five where it's been before. But you also have to hold in your head the chance that it could go back to 45, right? Or all-time highs. If we cure this, we find out that

chloroquine works or there's a new vaccine, boom, we can go back to highs. You have to hold both possibilities in your head and most investors can't. Foreign developed is probably down to, I don't know, 15. Foreign emerging is probably straight up at 10. And the cheapest countries, we update this every month, every quarter on the Idea Farm and send it to investors. I'm happy to send it to y'all's list. A lot of countries around the world are going to be P ratios about five and about seven, which are generational buying opportunities. These things, you doesn't have to be this week, this month, this quarter, could be this year, could be next year. the things you could be allocating to where you will get probably 15, 20% returns going forward,

but it's going to be really hard. It's good. You may buy them and they may go down 20% more. I'm going to pause there. I've been blabbering for like 20 minutes. So you're still awake. It's incredible because what you're basically elaborating on and kind of hitting from multiple perspectives is this idea that if you are a short-term investor and you want immediate results, uh one you're likely not to get them and two you're actually going to make really bad decisions right because the if you're looking for that kind of quick feedback loop of hey i bought x it didn't return what i wanted in 12 months let me go change my strategy it's kind of this belief that the average um is the average for a reason right and so if you go through three four or five years of

underperformance well if the average performance is higher than that at some point it reverts back to that right it's kind of the the thing that mark always says around you know people kind of buy what they should have bought because it's at the all-time highs and they think that it's all rosy, but then also they sell what they're about to need. So they sell it after a couple of years of underperformance, and then all of a sudden it goes on the run that they were all expecting three, four, five years before. And so it really comes down to, I think, one, the emotional discipline, but also two, the ability to understand the math behind a lot of the decisions, which you've done a great job articulating, and just trust that the math works. And what I find when

I talk to a lot of investors is it's almost like they know the right answers, but they feel like they have to do something to feel in control. Because if I underperform two, three years in a row, rather than stick with it, if I do something, then now I'm in charge and I can get myself out of this. And that usually is just a really bad strategy. We had a quote that we put out in this piece this past week, again, channeling Bogle. We probably would have disagreed on so many things, But we think he's wonderful where he had a great quote where he said during crisis, you know, most people want to want to do the don't just sit there, do something. But the reality is you'd be better off with don't just do something, stand there, you know, sit, sit there, do nothing. And so for most people, we said the whole point of this is you have to have a plan.

You know, as Peyton Manning, as football goes the line of scrimmage, you know, he has the plan. And you come into this and say, look, this is my plan. Now, your plan can be basic. It could be, look, I'm going to do global market portfolio rebalance once a year. So rebalancing has the effect of you're guaranteed to be adding more to the stuff that's gone down and cheap and trimming the stuff that's gone up and expensive. So it's that constant discipline. There's a topic that we talked about in a podcast with Howard Marks and Robert Knott, where it's this concept of even you could go a step further and over-rebalance or calibrate, meaning you add a little bit more. And maybe,

say if you had 60-40 portfolio, you go back to 60-40. Well, maybe if stock valuations are cheap, you go 65-35. But notice it's never like 90-10. Most investors, they want a super binary all in, all out. But in reality, it's better to just trim a little bit. And you get the blended outcome of all expectations. But yeah, if you have the plan, and one of the beauties of a lot of approaches today is you can automate those suckers you know we've said um we demonstrate for public assets most people you build your portfolio you let it sit let it were in the background it just should never touch it again if it's automated and so we have a digital offering that does this and as well many others um and it makes the adjustments for you so you don't have

to worry about you almost see it as a savings account and it just kind of keeps you your hands out of the cookie jar uh but if anything you know in times like these people start to act act bat shit crazy there's some things and dislocations you could add a little bit but this is on the periphery right these are little tilts you want to be making not wholesale i got to be all in on stocks are all out um because all that matters is this sort of sleep sleep at night portfolio and i love to sleep i really really do i have a young kid who's quarantined now as well we all are probably not sleeping as much but but the portfolio is not bothering me um because you have all the stuff planned ahead of time and uh it takes away a little bit of the uh the

interest in mucking with it yeah i know a lot of people like to talk about the robo advisors and stuff like that to me uh the whole idea of um just taking people's hands off the wheel kind of that savings account you talked about so it's literally just let me automate as much as i can I really remove myself and my bias from the process, I think, will become much more popular over time. Some of that's technology driven, just there's got to be more options. People got to understand how they work, trust them, etc. And then two is I think it's a lot of people just educating folks. Look, the more that you try to do things, especially for an individual that's not doing this professionally or full time, the more you're actually probably screwing it up than

you are helping yourself. So I think we'll see that over time. I want to switch gears a little bit and talk about dividends, share buybacks, and bailouts, which I know you have sworn off talking about buybacks. But maybe we can just start with what's the pro argument or the proponents of the dividends and share buybacks? And then we can get into a little bit of, I think, the timely conversation around airlines, et cetera, have done a bunch of this stuff and now are looking for the government assistance. But I'll just leave you with the broad so you can take whichever direction um first of all i'm gonna lay some foundation and say one of the biggest policy failings of our you could call it government educational system all of us um is we don't teach basic personal

finance forget about investing in school in high school i think it's like 12 of the high schools in the country teach personal finance forget about in college like we're teaching calculus right like i was an engineer i haven't used calculus ever uh forget about differential equations and physics and all these other things um but not equipping people with the very basics and the libertarians out there will be like well yeah but your parents should do it well look a lot of people don't grow up where they have access to uh parents maybe they're single family home maybe they don't have parents at all and the education system is failing and it's not hard and it would benefit people so much we expect 17 year olds to say hey you got to make a decision

about the rest of your life about taking on 50 100 200 500 000 dollars of debt when you're 17 years old i wasn't thinking about that are you crazy um thinking about girls and beer right and so uh it's it's a tragedy and the best thing young people have is time um we talked about early with investing in a long-term time horizon so it's it's really frustrating so when you hear a lot of politicians and gurus and everyone weigh in on this topic, I partially say, look, I get it because they weren't taught this. They should know better. Again, I try to ban this topic because it's an emotional one. It's like talking about religion. It's like talking about cryptocurrencies, right? People end up on these totally irrational. So listeners, come into this, please, with an

open mind um and try to understand and be objective i'm a quant right there's no emotions here i have no heart so i always joke and say it's negative interest rates crypto and uh stock buybacks are the three most religious things in finance all in one all right let's start with the basics and then we'll go from there you're a company doesn't matter if you're public private whatever you let's use public company say you're apple there's only five things you can do with your money. And that's it. The first one, which is what people spend 90% of the time on is the sexy part is you can reinvest in the business. That means you're building new plants, you're doing research into a new computer, you're hiring new people, you're doing new innovation, right?

That's one. Second, you can go do M&A, you can buy other companies, which traditionally is actually value destroying on average um but you can go take over other companies add to your company to extend you have cash so that's one so one reinvestment company two m a three to the extent you have debt you can pay down debt and then the last two are ways you return the cash to shareholders you can pay cash dividend or you can do a stock buyback that's it there's nothing else you can do with your money and the job of a ceo who by the way most of these guys are not dummies they may be egomaniacs but they're not dummies is to pursue any project that has a the highest return okay um and so let's say you're at apple and you have a great idea for a

new teleporter and it's going to be awesome good for you put that money there but if you're a widget factory making widgets and you don't have like any brilliant ideas but you're sloughing off off billions of capital. What are you supposed to do with that? Most people say, well, you could just go hire a bunch of people and do all this R&D. Well, you're just flushing money down the toilet if you don't have ideas that are reasonable. If you get to a certain size, it gets harder and harder. If you're a $100 billion company, if you're a $500 billion company, these are the old kind of bloated companies, you can't do anything with that much money. What have they done historically they go to m&a and also flush it down the toilet they name stadiums flush it down

the toilet so the long history by the way you go back hundreds of years is that the original reason companies had dividends is because um when you were selling securities to the public and institutional investors you had to try to make them a little more like bonds like hey you can buy this company and it'll pay you some sort of like cash return like interest okay and it's returning cash to shareholders and so that was the concept but buybacks this is going to trigger everyone but this is finance 101 this is something you should have learned as a freshman in college is that buybacks are the exact same thing as dividends with only two differences dividends buybacks are more flexible you can do them whenever you want or stop them

they're more tax efficient dividends or have a worse tax treatment because you're forced to take them every year when the company pays you so you have to have money back whether you want it or not and then buybacks can also happen at a distance from intrinsic value for the company and that's it so if the company is trading a stock's trading an intrinsic value and let's say theoretically politicians did this. They never will. They have the same tax treatment. They're literally the exact same thing. And that's full stop. Okay. You cannot argue that fact. That is a one plus one equals two theorem. Okay. So one way to establish if a writer or a guru or someone doesn't understand buybacks is to look at what they just said, take out the word buyback and put in dividend.

And if the sentence doesn't make any sense now or change the message, well, then they don't understand or they're conveying the meaning or they have an emotionally charged agenda. OK. Let's talk about a few more things. By the way, not everything is rosy about buybacks. We'll get into that for the greater experience of history for the past two, three, four hundred years. This goes back to the Dutch East Asia company, Dutch East Asia. I'm going to get the wrong get the name wrong. um um what's the name of the company anyway 1700s there's one of those uh we're trying to see you know there's we we have on our blog post i got so frustrated with this topic we have a blog post it's called faq on buybacks for journalists politicians etc and it links about the top 10 things to do with buybacks i actually saw a great one

uh flow chart last night from from joshua wolf and michael malvison that's that's on twitter you can post to the show links. For the most of history, governments and investors demanded that companies do buybacks because they didn't want CEOs squandering the money, paying themselves huge salaries, doing stupid projects, hoarding it. So they said, your company, you have to pay dividends. You have to do buybacks because we don't want you to do dumb stuff. And it's funny how the dialogue has changed. So let's fast forward to the modern era. Companies have started doing a lot more buybacks since the 1980s, because there's a rule that got passed in the early 80s that made it particularly easy and gave companies safe harbor

from buybacks. So in any given year, buybacks started ticking up. In any given year, starting in like 97, buybacks have outpaced dividends, as they should, because they're more tax efficient. okay um now there's two parts and there's two separations there's the talk about buybacks and dividends from an investor standpoint which we can get to in a minute and then there's buyback and dividends from a public policy etc why do buybacks have a bad name first of all they got terrible branding whoever came up with the name stock buyback should be fired you know such like you talk about like uh how everyone buys life insurance back when it's called death insurance no one would buy it the same guy the the chilean toothfish when he named it chilean sea bass all of

a sudden everyone buy it all right so buybacks is a terrible terrible freight framing for it what it should be called is flexible tax efficient dividends okay um warren buffett understands this right look at berkshire berkshire has never paid a dividend and that's not quite true it paid one in 1960s it was like 10 cents um and berkshire famously warren says he was famously in the the bathroom when they made this decision because he would never have made that decision because dividends force you to take cash back. Buybacks don't. You can choose to or not. The things that I think are probably fair, many people associate buybacks with CEOs and compensation. They say, well, these CEOs,

They have compensation tied to earnings per share. They have options. Therefore, their only goal is to increase earnings per share. Thus, they're doing buybacks, yada, yada. Those are two separate issues. If you have a dipshit board that is tying CEO compensation to earnings per share, they should be fired. Full stop, right?

That has nothing to do with buybacks, okay? How you distribute cash has nothing to do with how you pay your CEO and your company. In the same genre, you have to talk about companies that also issue shares, correct? So there are a lot of tech companies and other companies to reward employees. They issue stock options. All right. So that's share issuance. So you're diluting the shareholder.

And on the right hand, they go and buy back the shares. OK, so it's somewhat of a wash in many cases. I think that's a fair criticism, but it's not a criticism of buybacks. It's a criticism of structure and how boards operate. and that's a policy decision that has nothing to do with buybacks. Another example is people love to take a sample size of one and they'll look at a company that has been buying back a bunch of stock over the past 10 years and then maybe gets into hard times

or the share price goes down and they say, look how stupid that was to buy back stock and now the share price is down. That was so dumb, they wasted so much money. But many of those companies were also issuing dividends And you say the same thing. It's simply a return of cash to shareholders. It's the same exact phenomenon. Now, as a shareholder, you should never want to own an expensive stock. So if you're Warren Buffett, you have a quantitative measure. He says, look, we'll buy back shares of Berkshire when they get below, I think it's 1.3 times book. I think they're right around one now. So he's probably buying a bunch of Berkshire this year, this quarter, this month. Most CEOs don't have that in place. That having been said, if you look at the historical valuations of companies that are issuing shares, companies that are buying back stock, and companies that are buying back a lot of stock,

the ones that are issuing shares traditionally are trading at valuation premiums. The ones that are buying back stock are trading at valuation discounts. And the ones that are backing up the truck and buying a boatload traditionally are trading at valuation big discounts. So on average, they've done a good job. It doesn't mean you can't come up with some company that hasn't. And then the second part is, is the company just poorly managed? People don't talk about, hey, they wasted a bunch of money on that new plant in upstate New York, or hey, they paid out billions in dividends. They shouldn't. They should have been paying down debt. That's a CEO decision. And whether you wanted to lever up the company or not, it's up to you. But on the flip side, a lot of companies in Europe, a lot of companies in Japan have the opposite structure where they have a ton of cash and they're just very bloated, what you call these zombie companies. All of this having been said,

I'm a buyback agnostic. It doesn't sound like it, but I'm a buyback agnostic. A very simple fix to all of this is legislature politicians eliminate the double taxation of dividends okay so you remove the tax of a company paying dividends and all of a sudden buybacks become fairly irrelevant because companies could pay out dividends whenever they wanted not have to get taxed but most people don't want it um this dovetails didn't interrupt me at any time because i can rant for a while um so one question here is um and i think you nailed the issue on the head right so i'm actually in the camp with you of the buyback is just a dividend right in a different format but but it's ultimately driving value for the shareholder especially when it's done really well i think the

only thing i'd add to that is if you look at the dividends versus the buybacks so the numbers i I looked at yesterday, and I think I have these right, is about 52% of free cash flow went to share buybacks. The reason why that's so high, I think, is because executive compensation is tied to it. My guess here is people rail against it so much because the harder thing to do would be to rail against the board of directors and say, hey, you shouldn't make the compensation. You shouldn't tied to share price or earnings per share, et cetera. And so, the incentives are off. Well, the only thing that the quote-unquote public or those that aren't on the board can really rail against when it's an industry-wide thing is, oh, the share buyback is the problem.

And so, what I don't know is, is there another solution than just railing against the share buybacks where you actually go after the compensation structures? Because if you change the incentives, to your point, the share buyback and the dividend is completely the same fit right so um if you go check out all these faqs on my blog post it attacks almost every one of these myths and there's much um more in-depth academic people that have dalmadaran from nyu malvison we mentioned cliff asness on and on and on talk about each in some cases um some of these myths one by one and one of the studies and i may get it precisely wrong is that uh they looked at the EPS and companies doing buybacks and not, and it was no difference, right? The companies that

were tying at the EPS weren't doing more buybacks than the one that weren't. That having been said, it's a stupid metric, right? Warren Buffett, most of these good CEOs, capital allocators, there's a great book called The Outsiders, could write down on a napkin in probably five minutes, a compensation structure that made sense that's not tied to short-term stock price, but rather long-term performance of the company. And that's not that hard. I just think it's a boogeyman, a demonization that people like to latch on to. Like I mentioned, a very simple answer is, look, I don't care. But think about what happened.

So like Elizabeth Warren and others came out and said, we're going to make buybacks illegal. And I say, OK, you know what you just did? You just said CEO has a lot more cash on his hands. What do you think he's going to do with it? He's going to go spend it. He's going to pay himself more. He's going to pay his execs more. he's going to go buy a jet he's going to go acquire other companies and empire build right

like so that's the last thing you want to be doing um so it's it's tough because you know there's a lot of things that people like to to call attention to that just it doesn't hold up in the data and so i kind of barred myself on twitter sometimes i can't help myself but almost every one of those myths you can go down down down the list and say no that's actually not true, or the data says this, the data says that. But again, it goes back to the CEO's only job is to maximize where he's using that cash. And so is it paying down debt? It could be. Is it new projects? Maybe. Is it buybacks or dividend? Like all these things, that's his job. And it's a topic that's emotionally charged right now because we're talking about bailouts,

for example. And let's be clear, if the government steps in, and there's a long case study history of this or the right way to do it, you bail out a company, whether it's an airline, a cruise ship, these stockholders should be zeroed, right? The CEOs, the executives that have executive compensation that's tied to shares, those shares should be worth zero. But that's the way it's always worked. That's bankruptcy, right? Company goes bankrupt, The US could easily say, look, fine, we're going to backstop some of these airlines. That's fine. But your equity is now zero.

Then it goes to bondholders, et cetera. The crony capitalism comes in where they say, no, we're going to protect the shareholders. That's the whole point of being an equity shareholder. You accept that risk, right? Stocks go to zero all the time. Like we mentioned earlier, the distribution is like a third of them go to zero. And so people like Mark Cuban, love him, God bless him. But he's like, we bail out some of these companies.

they should never be allowed to buy back stock again i'm like that just it doesn't make any sense they should not be allowed to pay dividends what do they do with the cash and by the way if you're going to be a fat bloated company those dividends and buybacks guess what happens with them they get recycled back into the young emerging growth companies that are employing and hiring lots of people versus these big fat bloated ones so anyway it's um look man it's a topic that just i think is is emotional um and it's something that people want to latch on to but I just, I don't think there's any, uh, there, there are little things you could change on the edges, but for the most part, um, and by the way, we haven't mentioned this on the investment side,

the number one thing you want to be attracted to is companies that are high quality trading at cheap valuations. And Buffett says this, um, the best thing a company can do with its cast, if it's trading below intrinsic value, and I'm a quant, so you come up quant value metrics is buy back their own shares because you're buying back something for 80, 60 cents that's trading for a dollar. So you can take this all the way back to the 1920s. We call it shareholder yield, but it's combining dividends and net buybacks. So net of issuance, combining the two together and figuring out dividends are the most nonsensical investing strategy on the planet. They're tax efficient, inefficient, and it's kind of a crappy way to do value investing.

it's not a real value tilt they tend to be leveraged companies kind of junky you do the shareholder yield you add a value filter it's stumped almost all dividend uh investing approaches all the way back to the 20s and in most decades so there's from the allocator standpoint as well as the um but what you want at the end of the day is a good business ceo is thoughtful who's thinking about all the ways to to um maximize return and do so in a way by the way the problem we're seeing this year is anti-fragile right where a short-term disruption is not going to zero the company because those things happen. Yeah, I think that we actually see eye to eye on a lot of this

in terms of the share buyback isn't the quote-unquote evil thing, right? To me, it's the bailouts and really the structure of how the bailouts happen. And the other piece of it too is you specifically said, look, the risk you take as the equity holder is that it can go to zero, right? You can get zeroed out there. And again, I think that there's a balance between, hey, we had a really great business. There was this Black Swan event and we didn't do anything wrong, but this occurred versus I think when people look at stuff and say, hey, you had 80%

of your free cash flow you spent over the last five years doing the share buybacks. Well, if you had held that, you could weather this. Then I think the question really comes down to what's the right answer? Unfortunately, regardless of how much people want to debate, I don't think there is a right answer. That's why there's the debate, right? It's because many different people have different perspectives of it, but I think you articulated kind of what that trade-off there is. You know, I would love for politicians to make dividends tax-free. They won't because it generates revenue for the government. In the same way, look, by the way, there's nothing more predatory that every state has and the government has than lottery system that generates tons of

revenue. But if you were to ask a lawmaker, by the way, you're preying on uneducated, poor people, why are you doing this and there's plenty of other systems in the world that have savings based lotteries that actually help people save but they're addicted to the revenue right so it's the same thing with dividends versus buybacks like a simple solution overnight just make dividends tax-free yeah i love it um some of the questions that we got online uh as we're preparing for this a lot of people want to know what's up with the heavy allocation of farmland you talked about it a little bit earlier maybe go into a little bit more detail just when you talk about farmland And kind of how do you think about good investments there versus bad investments and also through market cycles, just holding the same allocation of the farmland?

Or does that change over time? Farmland's tough. You know, it's an asset class. It's one of the few that's not well represented in the global market portfolio because the vast majority of it worldwide historically has been in individuals or massive institutions like Nuveen or Cref that own just these enormous farms. There's not a whole lot of middle ground, and it's been hard for most investors to allocate to. So today, if you wanted to go get a farmland allocation, you've got to either go buy a farm and then manage it, which is a nightmare, by the way. um thankfully we have a lot of friends and family um in the area that can help out um two is you could invest in a private fund that does it we've had a few of those on the podcast that talk about

it there's some platforms that are coming out that make it a little easier uh if i was a young entrepreneur not doing what i do now in the etf business um you know we would probably go and launch a public REIT there's only like one or two that do it that would give access to it uh so it's hard um it's a great diversifying investment like a lot of investments are just non-correlated if you got a blueberry farm in oregon or a wheat farm in kansas or an almond farm in california or like those things don't traditionally correlate directly to uh what's going on the rest of markets which is what you want and then you have of course the um the private benefit which is i put a picture on twitter the other day me walking through a wheat farm and says look

i'm trying to value this today it hasn't traded in forever like i have no idea i couldn't sell it if i wanted to so like for a lot of people um for me it's farmland i don't own a house but for a lot of people their biggest illiquid investment is their house right they probably maybe with zillow can come up with a little more today um valuations but they can't sell it tonight it's not something they would if they wanted to it's a lifelong investment um but it's a big part of people's wealth. And so one of the reasons people across the country in the world that become so rich and wealthy with real estate investing is because it's money they would have spent otherwise, you know, you're putting money into real estate, like it's, it's getting

invested same way with stocks or else. So partly, but if it's personal for me, you know, I mean, it's a, it's a connection to my family and my history. Would I be investing in it? Had I not that had not that probably not, I mean, I would be attracted to it. There's a lot of asset classes i'm attracted to that i think are interesting but certainly wouldn't be such a large allocation plus you can go out shoot guns and hide out the world and uh you know um drive around on atvs and horses and everything else you're talking to a guy who also grew up in north carolina so those are all fond memories for me as well what uh what are your thoughts on uh the stimulus and kind of a lot of the monetary uh policy that's coming out right now in response to uh you know kind of market

conditions at the moment um there's areas and i'm very opinionated on other things that fall somewhat in the middle uh i think this is hard um it's hard because there's so much uncertainty you know um we outlined this we did a piece called investing in the time of corona where we said look here's a bull case and we said um governments around the world respond everyone's doing testing self-quarantine works there's treatments develop hey maybe the malaria medication works the vaccine comes along coronavirus is never um seen again essentially or it's reduced markets hit all-time highs by year end right um then you have the bear case which is uh governments respond but it's too late the virus is everywhere it goes exponential

um you know people are despondent uh treatments don't work a vaccine is two years away the summer comes around has some relief and then the virus comes back in the fall and it happens again and markets go down another 50 like you have to be able to hold those two ideas in your head at the same time maybe not as equally plausible but as possible and we talk about this a lot with valuations and we used to say with valuations last year we do speeches we say this is the stock market is trading at 32 what's most likely most likely is it drifts back down mean to a round average, in which case you'll get 4% or 1% a year. Could it go back up to 45? Sure. And you have to plan for that scenario. We'd say, how does it get there? How does it get to 100p

ratio? Maybe Elon Musk invents free energy. It could also go back down to 5, which has happened before p ratio, in which case stocks decline 80%. What would cause that? Who knows? Could be something we're experiencing. So you have to hold both thoughts in your head and prepare for both outcomes, what's most likely to happen something in the middle. So playing blackjack, you know, most likely events are statistical, the outliers always happen, you know, there's the idiot at the end of the table that, you know, hits a 19 and gets a two, they say, See, I told you so or something like that. But unlikely, so you prepare for both to be somewhat anti fragile. And the way that I do it, and we didn't really touch on it is the hardest part of the public market stuff

is staying the course so buy and hold investing works great you have a over 100 years of working great the problem with buy and hold investing is that um this is stocks bonds real assets is that all the bad stuff happens at the same time so you have a bear market you have a recession people losing their jobs their account balances go down it's all happening at once so the hardest part with buy and hold is usually during the bear market, people sell on the way down or to the point where they just can't take it anymore. But traditionally, if you hold an ad over time, it's a great investing strategy. The flip side, which we didn't really talk about, which is half of my investment portfolio, which is larger than any institution in the world that

I've ever talked to, is in trend following strategies. And that can mean a lot of different things. But the very basic is you're investing in a market that is going up, you're out when it's going down. You could use something like a 200-day moving average. We have a paper coming out that investing in markets at all-time highs is actually a great idea, or like say percent of all-time highs. The problem with trend following, so you can apply that to an entire portfolio. We wrote an old paper back in 2006 in the Journal of Wealth Management that successfully navigated the global financial crisis. And I didn't think I'd ever see anything like that again in my lifetime. And sure enough, that portfolio, which was so basic, it looked at 200-day or 10-month

moving average on updates once a month on stocks, foreign stocks, bonds, REITs, commodities, and it exits each of those when it's in a downtrend. Going into March, it would have been 100% cash and bonds. So who knows how this is going to play out. But the thing with trend falling is that it's also hard to follow. It's hard to follow because it goes through long periods of underperformance. The entire 20 teens, anything other than buy and hold US stocks struggled. And there's old, I can't remember if Warren said it or Charlie said it, but they talk about the emotions of fear and greed is not what drives markets, but the biggest thing being envy. And so the problem with trend following is that if you're underperforming

and chopping along when all your neighbors are making hay in stock markets, you're not going to stick with it. But the beauty of this approach is what we call the Trinity portfolio, which is what I do with all my public assets, put it into one fund. And, and by the way, listeners, I think this is really important. Because a lot of people don't know this, the vast majority of mutual fund managers, depending on the category, it's like 50 to 90% have nothing invested in their own fund $0. And if you go up to even 100 grand, it's even less, I put all my money into our own funds, we have 11 but half is in my hold and half is in trend following and why does that work for me because in a year like 2019 i am so happy to have a big chunk of my money and buy and hold as markets

romp you know up in the world in 2020 i'm happy to have um a trend following allocation that markets and depending on the fund you use we some of our some of other people's either go to cash and bonds, or they'll straight up short some of these asset classes. And if you look at managed futures, most of those are having a pretty good year. Many of those are up. And so the combination of the two, it's like a yin-yang. Thank God we have trend following in 2020, because if it does get worse, if we do have this bear case, hopefully I'm protected. But if markets rip back up, we find some treatments and the bull case happens, and thank God I have the buy and hold side. And this lets me behave um bogle used to say he put half in cash and half in bonds he said because um half

the time he spent worried he had too much in stocks and the other time he spent he had worried too he had too much in bonds or too little vice versa it's the same thing so that works for me it may not work for a lot of people um the one other thing that so so as far as your question i answered as an investor. But as a policy question, it's really tough, man. You know, I think a lot of hopefully this is a short term thing. I read last night at the Imperial College report and do not read that if you want to go to sleep or or not have huge anxiety and depression for the next six months. We just don't know. And so, look, I think that is the government's responsibility and the private sector hopefully can help as much and try to find treatments but

it's to backstop those in need when you have something that's totally out of control it's not to backstop the fucking cruise line excuse me but it's to backstop um individuals that are you know in the restaurant industry the service industries the people the health care workers that still have to go to work um god bless them you know you and i are lucky enough to be able to do this sort of job remote, um, how they do that. I don't, you know, whether it's universal basic income, whether it's incentives, um, I'll leave that to the, to the lawmakers. I don't know the best answer, but, um, there's probably a sensible, basic idea that, that works. Yeah. I, um, I wrote this today about, uh, the unemployment levels and I went back and I looked

at like Great Depression and kind of really tried to understand the unemployment levels there. And one of the data points that just blew me away was in 1929, right before it started in kind of August 29, unemployment was at 3.1%, right? So very similar to where we are today. And it kind of ramped up over from 29 to 33, up to that 25% number that everyone always kind of, you know, highlights and yells and screams about. But in the second and third year, it was like 8 point something percent, and then 15%. And so those are still very big numbers, right? But they're not 25%. And I started doing some back of the envelope math, just seeing the unemployment kind of multiples that we're seeing. So Ohio, Minnesota, New Jersey, etc, all reporting,

you know, in some cases, seven to 10x increases on unemployment claims over the last couple of days, you know, beginning of this week. And who knows if that's sustainable? Who knows if that's not just kind of one time thing or whatever. But when you start to look at this, you're like, look, you know, sitting around a 3.5% unemployment rate, anything above that can bring some pain. And I'm right there with you. I think that like, you've got to figure out how do you help these people, especially when you're asking restaurants to shut down, you're asking bars to shut down, et cetera. You know, it's just, I hope that we don't kind of lose sight of the small business owner, right. Who's not sitting on tons of cash. They're not worried about stock buybacks.

They're worried about how do I get to next month and continue to make money for my family or their staff. I've got multiple friends that own restaurants or kind of hospitality type stuff. And they're literally like, look, I have to fire half, you know, half to all of my staff in order just to continue to not have to go into bankruptcy because my cash flow or revenue went from, you know, a lot to zero because I literally am shutting down. And it's just a really kind of crazy time. So I don't think we've ever really seen something like this before. Yeah, I agree, man. It's tough. So, all right.

Listen, I appreciate you taking the time to do this. Before I let you go, I've got to answer. Aliens, you already told us your favorite book. but uh believer or non-believer you know i i was i was a biotech uh genetic guy um by trade and um there's there's a great quote um by douglas adams who uh the famous author and i'm going to massacre the quote so i'm sorry but it's something along the lines of you know um can appreciate the garden for being beautiful without having to believe that fairies live underneath and he's of course probably talking about atheism but you know there's so much wonder and amazing

things in our world um you know what and thinking about the natural world and and look at things that come out of the ocean during tsunamis and exploration and so much wonderment um even as as terrible it is like the fact that there's these tiny viruses that can cause such a massive disruption to our entire planet world um you know that do do i uh believe that aliens possible absolutely um i think it's one of two camps they're either uh super smart and leaving us alone or they're probably just telling if out there but like many things it wouldn't surprise me either way. Um, I, I don't think, uh, you know, my, my little bitty brain is really able to comprehend that there's an old Asimov short story, and I'm not going to be able to remember

the name. I'll send it to you. We can put it in the show notes, uh, that, that kind of touches on this, um, perfectly. And, uh, I'll, I'll leave it to the readers cause I don't want to spoil it, but uh it's a great book so yeah i i imagine my bet would be there are uh but uh um if i live in la so they probably live amongst us already if you walk up to to various parts of la it may be here already so you brought up the ocean uh i usually ask people uh would you rather go to space or to the depths of the ocean which one is kind of more intriguing to you um you know i come from a family aerospace guys my dad was an old school uh martin marietta lockheed um you know when he passed away i very fondly remember um going through a lot of his files that were somehow stamped confidential

that he seemed to keep but shouldn't have uh my brother works on rockets at north europe i had started out as an aerospace engineer um before i realized that actually entailed a lot of classes and statics and dynamics and a lot, a lot more math than I wanted. Um, so I, you know, if you were to ask the 10 year old me, I would have said I wanted to be a astronaut and, and learn the aerospace engineering was not the same thing as being an astronaut, by the way. Um, so for me, it'd be, it would be space for sure. So I give it, I probably give it a, if I was a betting man odds that, uh, it happens in our lifetime where we get to go up there, but, um, we'll see. I love the ocean too. We live right at the ocean here in Los Angeles and Manhattan beach. So I

spend a lot of time uh floating around and trying to not kill myself surfing i love it where um where can people go read the blog and then also find you on twitter so um my day job is ceo and cio of camry investments which um website's camry investment camryinvestments.com or camry of funds we manage 11 etfs uh which we didn't even talk about today which is good um all quant based all sorts of strategies stocks bonds global assets allocation tail risk everything in between you can find over 2 000 blog posts at mebfavor.com watch me pick fights on twitter uh at meb favor and of course the podcast which you'll have to come on and join us uh one of these days too uh as the meb favor show and by the way all of our books are free to

download because i have a still have a running um fight with amazon so if you go to our website So you can download all of our books and white paper for free. What are you going to tell me real quick? What's the fight with Amazon? You know, you already hit like my main funny bone, which is the buyback topic. This is probably number two. Um, Amazon, look, love the company, use it every day, transform the world. Um, but the problem is they built kind of a crappy marketplace to where for many years, many, many, many years, uh,

people could just upload whatever products they want. And so I had one many times where people would email me and say, Hey, I'm trying to buy your Ivy portfolio book. Why is it 90 bucks? And I said, it's not 90 bucks. What are you talking about? It's 10 or two or whatever they are. And, uh, and I'd say, send me the link. And then I'd go to the link and it'd be kind of a wonky page where, you know, the normal book has whatever hundreds reviews. This one may have three. Then I looked down at the publisher and the publisher was some dude's name and it was published in 1960 or something. And what Amazon enabled was people to fraudulently upload more than one entry for a book. So mine would maybe have 10 or 20. So if you Google the Ivy portfolio

of Meb Faber or Go Boss Allocation, the first one would be me. They would get the right one. But if you maybe Google Faber Ivy or something, you would get maybe the first listing would be one that's 90 bucks so it was an arbitrage where intelligent people and wherever they may be would list fraudulent versions of the book now you'd still get the book but instead of paying 10 you'd pay 90 and so um that's a really terrible way to destroy trust now amazon didn't care because they got paid uh and the seller didn't care because they got paid but it hurts both the author as well as the buyer um so i emailed jeff one day bezos and let them know and we did a post on twitter where i was like by the way authors i'll send a bottle of wine to the person who has the

most fraudulent books and someone had like 60. i think jim o'shaughnessy has been a guest i think on your podcast had like 20. um and eventually they cleaned it up and so you you don't find that as much anymore there's also fake products on there don't get me started um and there's also So money laundering, where if you steal a credit card and go buy something that may be listed in the far corner, that's like 500 bucks. That's a way of laundering money. And so I had a buddy who sold one day like $20,000 worth of his books. And he's a quantner. I'm like, nobody's buying your books. What's going on? It's like, I don't know. Somebody just bought 20 grand worth. But you find these situations going on. Anyway, hopefully they've cleaned it all up.

I think there'll probably be a multi-billion dollar settlement at some point. But the good news for investors is all my books are free now. So I had enough and I just threw them online and said, I don't want to pick the fight anymore. I love it. Free books. Go get them. All right, man. Listen, thanks so much. I appreciate it. We'll get this out soon and I hope people enjoy it. Paul, be safe. All your listeners, please be safe and best of luck investing in this tough time. Hey everyone, Pop here. If you liked this episode of Off The Chain and want to help us take crypto to the top of the Apple, Spotify, and other podcast charts, please do us a favor and rate, review, and subscribe. To review, simply go to the Off The Chain homepage, scroll

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