We Study Billionaires - The Investor’s Podcast Network - TIP 070 : Global Value Investing and Clone Investing w/ Meb Faber (Money Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 70 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Sting Bruterson. All right.

Starting point is 00:00:30 How's everybody doing out there? This is Preston Pish, and I'm your host for The Investors Podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. And we have a guest on the show that a lot of people have been requesting by name on our forum and on Twitter. And they're saying, you've got to get this guy on the show. And it is Mr. Meb Faber. And Meb is the co-founder and chief investment officer of Cambria Investment Management. And Meb's written a couple different books.

Starting point is 00:00:58 And he also manages all the ETFs and separate accounts and private insurance. investment funds out at Cambria. But Meb has written three different books. He's written shareholders yield, the Ivy portfolio, and global value. And I can tell you how I came in contact with Meb. And Meb's been on Barron's, New York Times, New Yorker, all these different, really high profile national news networks or media networks. And I came in contact with Meb the first time, not through like Barron's or anything, but I was actually watching YouTube. And he was giving this speech about value investing and more specifically global value investing. And I'm listening to this speech and I said, this guy gets it.

Starting point is 00:01:37 This guy really understands what he's talking about. And ever since I've been following you kind of closely, Mab, and I've been watching some of your blog articles that you write. And you're a wealth of information. And what I really like is you share that with your community. You put it out there for a lot of people to comment on and you're just sharing your knowledge. And that's the thing that we really appreciate. and we're so excited to bring you on the show. So I just want to personally welcome you,

Starting point is 00:01:59 and I know Stig wants to welcome you as well to the Investors podcast, and we're just thrilled to have you here. Great to be here. It's a pleasure. So, Meb, we watch this video of you giving this speech at Google, and you were talking about value investing. And I was really impressed with this, and I want you to really describe in generic terms,

Starting point is 00:02:17 just so our audience can kind of really understand your approach of international value investing approach. Okay. Well, value investing is nothing new. You know, it's been around for probably hundreds of years, but in the modern terms, you know, at least 100 years, Ben Graham is often seen as the father of security analysis, at least in the U.S., pertaining to stocks. And so he wrote a couple books. Many of your listeners will be familiar with and was also a professor and a mentor of Warren Buffett. But one of the things he used to do is attempt to value stocks and securities. And one of the ways he did it was he looked at earnings and would often average those earnings over longer periods like five to seven years, be able to get a fundamental anchor from which to value a security.

Starting point is 00:03:07 And the benefit of the longer term perspective is that it had investors or the ability to look at the security through both recessions as well as expansions and be able to come up with a fundamental value and hopefully purchase that security at the discount. Well, many people have practiced that investment methodology over the years. It's been very successful, both in academia as well as practitioners. And a very famous, another professor, 80 years later, seven years later, Robert Schiller, a recent Nobel laureate, professor at Yale, published a white paper and then some books basically applying the same logic to the stock market as a whole and said, can we average out a stream of earnings? In his case, he did 10 years, probably just because a nice round number, adjusting for inflation so that you can compare apples to apples and called it the

Starting point is 00:03:59 cyclically adjusted price to earnings ratio, what a lot of people call the Schiller or 10-year PE ratio or the Cape ratio now. And what he found is that, you know, it's not rocket science, valuation works. And when you buy a market as a whole and, you know, look out 10 years, less you pay for something. So the cheaper the Cape ratio, the higher your future returns are. And the more you pay for something, the lower your future returns are. And so the average over time in the U.S. is around 16, 17 when you're, but it's hit a low as close five and a high as high as 45, the late 90s bubble. And just for visual, we're right around probably 24 now after this recent correction. But what we wanted to do is we said, look, this works.

Starting point is 00:04:47 great in the US, why not apply it to all the markets in the world? And so we were the first, to my knowledge, to go out and build this for 45 developed and emerging countries. There's another of other companies that do it, that track it now, such as research affiliates and Star Capital, where you can get free updates of the Cape ratio. But it turns out it works just the same way in foreign markets as it does in the U.S. that you want to buy cheap markets and avoid the expensive. Yeah, and MEP is funny you should mention stock capital because I just pull up some numbers from the side and I'll be sure to link to them in the show notes. And if we rank them just solely based to the Cape ratio, we can see that Russia appears to be the most attractive choice. The Cape ratio is 4.6, which is really, really low. You compared that to the U.S. which is 24 and Denmark being the highest in the world with 40. So I'm just thinking, does that mean like everything else is equal? We can just go in and buy, say, Russia. share, perhaps a few more short Denmark and US, perhaps? Well, it's good and bad news.

Starting point is 00:05:49 You know, it's boring to say, but the U.S. is expensive, but it's not a bubble. It's not horrifically expensive. And being a quant, all that it means is the future expected returns are expected to be lower than normal. And, you know, that doesn't make for great TV and probably doesn't make for great podcast either, but it's the reality. And there's a future spectrum of returns. And if you're a value investor or an investor in general, you know that the future is not perfect.

Starting point is 00:06:17 And so despite the fact you have a high valuation, U.S. stocks could easily go up 40% next year. And then that's happened in the past. But it does improve your odds. And it changes the probabilities in the future. So if you buy a market that's expensive, the chances are higher that you're going to have a big fat loss or drawdown going forward. And when the markets are really cheap, you have sort of that margin of safety. There's so many caveats of this, of course, you know, we often talk about it that it's similar to a poker player or blackjack player who's sitting in a table and, you know, may do something

Starting point is 00:06:52 really dumb, like hit on an 18 versus when the dealer has a six, and you pull your hair out and say, why would anyone ever do that? And of course, there's the one idiot that does that at some point and gets a three and gets 21. So it's not impossible for markets to go up when they're expensive. So that's the bad news. The U.S. is expensive. The good news is most of the rest of the world is reasonably priced to cheap.

Starting point is 00:07:15 So the foreign developed index is around, I think, 16. The foreign emerging after the shalacking of the past year is down around 13. And if you look at a bucket of the cheap 25 percent countries, you have a valuation of around nine, which is the lowest that bucket's been since the bottom in 08, touched around that area in 03, and then before that, back to the early 80s. We've said this on the show before, but if people are listening to this and you're hearing the numbers that Meb is throwing out there, so if he would throw out a 10 as far as the Schiller PE, in general terms, the easiest way to figure out what the yield is that we're referencing, you just take one divided by the number that we're saying. So if it's a 10, then that would be about a 10% return. So you can take one divided by 10. It gives you a 10% return. If it's a 15, you'd go one divided by 15, you'd get a 7.5% return. So just as a rule of thumb, just so you guys can equate, these numbers with actual yields as he's throwing out the different markets. MEP, I've heard you talk about this in some of your other interviews, and I think it's really

Starting point is 00:08:16 important for you to highlight this for our audience. But can you talk about the bias that domestic investors have for equities in their own country? So I've been giving a variation of this speech over the past year, a couple years, and if the audience is small enough, I'll pass around a piece of paper and ask one question. I'll say, what percentage of your stock allocation? So we're excluding real estate, bonds, commodities, currencies, everything else, just your stocks. How much do you have in the U.S.?

Starting point is 00:08:48 And almost every time I gave this speech in Phoenix and Tucson last week and I said, I guarantee you the number is going to be very close to 70. And sure enough, in both towns, the number was 69%. And what that's called is home country bias, where if you look at the world market cap portfolios, So this is simply, if you bought every stock in the world measured by its size, you would end up with roughly half in the U.S. And the U.S. is the biggest market. So that should be your starting point.

Starting point is 00:09:19 If you're an agnostic investor, John Bogle, Vanguard indexer, you would say my starting point is half in the U.S. But in the U.S., obviously investors put way more around 70% in the U.S. because it's comfortable. It's what's familiar. But this isn't just a U.S. bias. It happens in Italy. It happens in the U.K. It happens in Australia.

Starting point is 00:09:42 It's even more odious in those countries because their market caps are even smaller, 10, 5, 3%. But so that should be the starting point. And then if you move forward from that, if you're a value investor, you say, look, the biggest problem with market cap weighting is that you overweight high value companies and countries. And so a good example is that, you know, in the 80s, Japan hit the highest cap ratio we've ever seen, almost a value of a hundred.

Starting point is 00:10:10 Biggest bubble in stocks we've ever seen double our internet bubble in the 90s. And at the time, Japan was half a world market cap. So you had a massive drag on performance. And all the research shows that market cap weighting, while it is the market, it simply has no connection to value whatsoever. And so you often put too much in the big markets. And studies show that by investing in the largest company, in the S&P 500, for example, underperforms the S&P by about three percentage points a year.

Starting point is 00:10:42 That's true also in every sector. So if you just exclude or break that market cap link, you could sort stocks based on any other measure, letters of the alphabet, value, where the CEO went to college, and all of those are going to outperform market cap weighting. So as applied to the global landscape, certainly a lot of the countries are much cheaper than the U.S. Awesome. I love that. Fantastic. Let's keep the show going. We actually prepared nine questions and I don't know if we'll

Starting point is 00:11:11 get to all them. We did the first one though, but map the second one. So on the podcast, our investment philosophy is deeply rooted in value investing. That being said, giving the current mild conditions with high valuations, we have discussed if our listener should look more ahead fund managers like Drunken Miller and Soros rather than Warren Buffett. So who do you expect to perform best the next, say, three to five years? Well, if I knew, I would certainly give them all my money. So let me know if you guys find out. But, you know, it's challenging for investors.

Starting point is 00:11:47 Most investors, if you talk to them, they have a investment methodology. So you'll talk to people and they say, I'm a value guy, or I'm a trend guy, or I'm a dividend guy, I'm a Bitcoin guy. Who knows? But one of the challenges to take a step back and say let the data speak for itself and what has historically worked in investing. And there's a lot of approaches that work in investing. Value works, friend following works, momentum works.

Starting point is 00:12:16 And the biggest challenge why Warren Buffett has been so successful is not his system. Because his system's not that complicated. He invests in cheap stocks, high quality, but what's beneficial is he sticks through his system. And so an example we gave on the blog recently, as we said, if you just went and tracked what Buffett was doing through his public stock picks,

Starting point is 00:12:40 updated it once a quarter, when those picks were public, he's outperformed S&P by something like 5% or 6% a year since 2000. This would have been one of the top performing mutual funds in the United States, would have performed 98% of all stock. mutual funds. However, he's underperformed the broad market in, I think, seven of the last nine years, that strategy. So most investors, if that was a mutual fund or your money manager, would have

Starting point is 00:13:10 fired him after year three or four or five. So you see these long cycles where certain types of strategies outperform. So this is a long-winded answer to your question. But where we are in the U.S. right now. You know, last year, year seven, bull market, stock valuations are getting expensive. And the best quadrant to be in when you're in investing in the U.S. is cheap market that's going up. And so when I say a trend, you could use say 200 day moving average or 10 month moving average, but just an exact quant measure of is it going up or down.

Starting point is 00:13:49 And the best quadrant is cheap in going up. and where we've been the past few years is expensive but going up. And that's not a bad place to be. The problem is when that trend flips, which you've seen fourth quarter last year, end of last year, where all of a sudden you go from cheap and going up, cheap and going down.

Starting point is 00:14:09 I'm sorry, expensive and going up to expensive and going down. And expensive and going down is by far the worst place to be. It only happens about 10% of the time, but you really want to move aside. So a lot of the strategy, I mean, it's only, look, we're only three weeks into the year, but it's been a pretty dramatic start where U.S. stocks are expensive and going down. And what's working, you point out a lot of the quant investors, the managed futures type of funds are up, you know, around 6, 7%. And we've said for a long time, as far as hedging U.S. stocks, you know, nothing is perfect.

Starting point is 00:14:44 The best way to actually hedge is not to take risk in the first place. but U.S. government bonds and then managed futures historically have been two of the best. So we love want and macro guys, but we love them always. So throughout every market cycle, we think they have a great, great place as a complement to value strategies. All right. Fantastic answer. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the high.

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Starting point is 00:19:29 And you kind of hit on that on the last answer a little bit. You've written this book called The Ivy Portfolio. And for anybody else out there, we have gotten a lot of questions on our form. a lot of people, and we get these questions just straight from email, people saying, well, why don't I just imitate the picks of Warren Buffett? Can I do that? And the answer is, Meb has written a book about this, and it's called the Ivy portfolio. And what I'm really wanting Meb to do is just kind of provide the basic framework for this book and just kind of tell our audience a little bit about this idea of mimicking and imitating the best investors in the world just by looking at their

Starting point is 00:20:04 10-Q or just kind of expound upon that idea. Well, the great news, what a great lead in because I just published my fifth book last week on this topic. It's 200 and probably 60 pages deep on this called Invest with the House. But where this theory goes back to is back in college, I was a biotech engineering student and was taking a security analysis class taught by a famous hedge fund manager, manages probably 10 billion now. And it was a security analysis class. And each week there would be a different hedge fund manager or,

Starting point is 00:20:37 guest speaker. And so you would listen to these guys give talks. So like Lee Ainsley of Maverick or a lot of these really famous guys. And you would sit there and listen to say, my God, they know so much more about these stocks than I ever will. They have far more resources, 20 analysts. They pay people to go spy on oil fields. They have people sitting in the parking lot of Walmart counting, shopping car, you know, all of these resources. I said, why wouldn't I just allocate to what they're doing. And many people don't know this, but, you know, investors with over 100 million under management have to publish their holdings once a quarter.

Starting point is 00:21:17 And it's with a 45-day delay. So the holdings as of the end of the year would come out February 15th. There's some caveats to these type of filing, such as, you know, it's only the long picks show up, the shorts don't show up, the futures and derivatives don't show up. And so you want to be able to track the investors who, have a long time horizon or stock pickers. You don't want to track the high frequency guys, the guys who are doing arbitrage,

Starting point is 00:21:45 the guys who are doing macro, none of that works. But Buffett's a great example. So I said, being a quant, I can never get comfortable with the possibility, say, does this strategy work or not?

Starting point is 00:21:56 I have no idea because I can't test it. And so after a few years, I said, all right, I paroled a few interns, and we went and did this by hand and went and got downloaded all of the files online,

Starting point is 00:22:07 This is all free. You can look it up on a number of websites that track these holdings like whale wisdom. And I said, I pulled together all these filings, found a non-biased stock database and said, let's test these and historically how it worked. And so Buffett being the example, we just mentioned where we said, you know, what would it look like to track Buffett? And it turns out it works actually great. And in fact, it works great for many of these managers.

Starting point is 00:22:33 And in some cases, the performance is as good or better. in the managers because you're not paying the high fees. You're not paying them the 2% management fee, the 20% performance fee. And so what we illustrate in this new book and way back in the Ivy portfolio is you can cobble together a list of, you know, five or 10 of your favorite managers and use it in a couple ways. One, as a stock screen for, you know, an idea form of new investments you may be interested in, potential stocks to buy, so screen it down.

Starting point is 00:23:05 or you can simply outsource your entire portfolio to some of your favorite managers and say, let them do the work. You know, these are the Michael Jordans of finance. And so instead of allocating to what my broker says or my next door neighbor, I'm going to let Seth Clarmine pick my portfolio. And I think it's a great way to invest and we've been doing it for a long time. That is awesome. So, Mab, just a quick follow-up question to this idea of tracking these, you know, all-stars

Starting point is 00:23:34 that are investing with just awesome returns. One of the things that we talk about on our show a lot, and my concern with sometimes telling people different picks, is that they will lack the conviction to kind of stay with it if it starts moving against them, especially in the early part of taking that position. So is that something that you talk about in this new book that you said that's just coming out, investing with the house?

Starting point is 00:23:57 And if it's not, I'm just real curious to hear your thoughts on this idea of conviction whenever you're basically following somebody else's move and you might not fully understand why they're taking that position. Well, look, investors are always their own worst enemy, and it's not just retail, it's institutions as well, where the biases we have, they'll go out and chase performance. And, you know, this happens over and over again, and all of the academic research shows that, you know, it costs investors anywhere from one to four percent a year by buying what's done well and selling what's done poorly. So I'm internally bearish on investors as a

Starting point is 00:24:34 group to ever get to ever get it right regardless so i mean fine hold investing whether it's active regardless the strategy you know commodities and emerging markets are a great example right now no one wants those cheap countries we were talking about earlier that you know no one's going to listen to this podcast and say you know what i'm going to go by brazil and russia in eastern europe and you know spain and italy and all these you know throw in a little sprinkle in a little peru in Egypt just to make it interesting because it's hard to do. And so the same problems that face and look, I have all the biases. I'm overconfident. I'll take too much risk if you give it to me. But that's part of the reason I became a Kwan is to make these rules and say, look, I know

Starting point is 00:25:20 given these parameters, I'm going to make a lot of mistakes. And so the same challenges apply whether you're picking stocks or buying hold investor is that, you know, can you put in rules in place And a great example was the Buffett example earlier. You know, could you still track this manager who's underperformed seven of nine years? Despite that fact, he's outperformed the S&P by five or six percent a year in one of the best funds in the country. You know, can you follow Seth Klarman after he had probably a down 30, 20 percent year last year? And it's hard. So I don't know if there's any easy answers to that question.

Starting point is 00:25:56 But the biggest is to write down an investment plan. You know, some people call it a policy portfolio. that accounts for any possible scenario and understand enough market history to say, look, I understand that, for example, my buying whole portfolio will go down by 35% at some point, or my stock portfolio will decline in half. I mean, this has happened to Buffett multiple times in his career. And if you can really behave properly when things go poorly, my favorite quote is, investing is the only business when things go on sale,

Starting point is 00:26:28 people run out of the store. And, you know, so I think that applies very broadly. to any strategy, not just stock picking. Yeah, great answer. MEP, recently you written a blog post about the performance of various indexes, and we touched upon this prior here in the NGO, but what did you learn from studying international markets in 2015? And do you think there are any regions that investors should pay special intention to

Starting point is 00:26:53 in 2016? Well, we've been saying for a long time that foreign markets are cheap, but that doesn't mean they can't get cheaper. We expect the cheapest bucket, and we have ETFs that track this, you know, to have double-digit returns in the foreign stock markets, whereas in the U.S., we expect low single-digit returns. But historically, and so we did a book called Global Asset Allocation, they looked at 15 of the most famous guru portfolios. So as recommended by David Swenson or Rob Arnott or Mohammed Al-Aryan and all these famous investors that manage in the trillions, they've all recommended publicly at some point an asset allocation portfolio. So they say you should put this much in gold, this much in stocks, as much in foreign bonds, real estate commodities, whatever. And what you find is that it's actually really surprising, but they almost always recommend some in global stocks.

Starting point is 00:27:51 some in fixed income and some real assets, such as REITs, commodities, and tips. There's vastly different allocations, however. But the stunning takeaway from that book was that you exclude the permanent portfolio, which is a little different because it has a high allocation to cash, all of the asset allocation portfolios in that book were within one percentage point return of each other over 40 years.

Starting point is 00:28:17 So they all grouped in this little range of, let's call it, 5% real returns, so nominal around 10 historically since 1972. Now, they had vastly different returns in any given year. So here's the challenging part is that you went back to 1972 and said, you know what, Crystal Ball, I'm going to be able to predict the best asset allocation portfolio. And that turns out it would have been the Al-Aryan portfolio, which is an endowment style. So it's heavy in growth and heavy inequities. And so that's not surprising because that's done well.

Starting point is 00:28:50 the past 40 years and said, I'm going to layer on the average cost of a mutual fund today, which is 1.25%. That would have taken the portfolio of the best asset allocation in our entire book and made it almost as bad as the worst. And so what investors spend so much time thinking on, and this is the strategic asset allocation crowd, is, you know, our stock's expensive, should I be in bonds, with the Fed raising rates, you know, what about commodities? And it turns out the actual allocation is not that important. What is important is the boring stuff, the basic blocking and tackling of fees, commissions, and taxes. And then on top of that, if you layer on the average fee of financial advisor, which is 1% in the U.S.,

Starting point is 00:29:37 so you're up to 2.25% now, you take the best performing crystal ball allocation and turn into far worse than the worst. And that's a pretty profound takeaway from our studies is that a lot of the boring stuff really has a massive impact. And then we did one more study where we said, you know what, we're going to update the allocation once a decade with the best performing allocation of the past decade. So what worked in the 70s will then use that allocation for the 80s and then vice versa for the 90s. that would have cost you an additional one and a half percent a year by chasing performance. And thus lies the challenge and the fun of our business is that, you know, people in the 70s, you know, gold was incredible in the 70s and allocations, most allocations did awful in the 70s. But what worked then, and probably all the managers that would have been fired, would have done much better in the 80s.

Starting point is 00:30:34 And so the challenge right now, for example, the way we see the world is that what is what is dear often is the worst performing asset class going forward and vice versa. So commodities, emerging markets universally hated right now. You go back to 07, everyone is talking about the bricks. Everyone wanted commodities, these big institutions. Fast forward, you know, eight years and it's the opposite. So, I mean, again, going back to the idea of coming up the strategic portfolio that is not, have a home country bias. I say, A, it doesn't really matter.

Starting point is 00:31:10 But B, one of my favorite portfolios that's really hard to beat is very simple. I think we named it on the blog, the Trinity portfolio, because you put a third in global stocks, third in global bonds, and a third in trend following type of strategy. So you could call it managed futures. You could call it any sort of global trend. And that's a really nice portfolio because it performs well in most market environments. So that's a long-winded answer to your question. But we think there's a lot of opportunity in foreign assets because the U.S. has had a pretty,

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Starting point is 00:35:10 This is a paid advertisement. All right. Back to the show. So, Meb, when we look at the international value investing strategy, we see that Japan right now is offering some really good valuations. Their PE ratio is very low relative to a lot of other locations. But with that said, I don't trust the Japanese currency at this point. And I feel like we're upon some interesting times in this coming year, especially as their

Starting point is 00:35:40 QQE seems like they're not going to be really kind of continuing that anymore. I see that making their currency extremely strong and very difficult for their equities. So specifically with Japan, how do you see this playing out with their valuations being so low and they've got all these other currency issues happening? I'm just real curious to hear your opinion on this. Currencies are tough. There's a good quote called currencies aren't difficult. They're just confusing.

Starting point is 00:36:07 And as Americans, you know, we benefit from having the reserve currency. And a lot of Americans don't really think a lot about currencies. You know, they think of them in terms of, hey, the Argentine pastel and Brazilian real went down big last year. That means vacation to South America's cheaper. Or, you know, a currency is. is expensive in Europe and it's going to be more expensive to go skiing. And that's it, really.

Starting point is 00:36:31 They don't really think in terms of investing. But here's the way we think about currency. So this is a broader question than we'll get to Japan. Real currency returns overtime, meaning net of inflation, are fairly stable. The key word being overtime. You know, in any given year, currencies can go up down 20, 30 percent, as we've seen in the past few years, particularly last year, U.S. dollar being very strong against a number of currencies.

Starting point is 00:36:56 But over time, they're fairly stable because they're. adjust for inflation. So when thinking about hedging or not hedging equity markets, I'm actually agnostic, but feel that you have to pick one or the other and stick with it. Either you hedge all your equity exposure or you don't, but you stick with it because over time, it'll be a wash. With foreign government bonds and developed markets a little different because that's a low volatility asset class and currencies add volatility to an asset class that doesn't historically have them. So in that case, we think hedging makes a lot of sense. Furthermore, if you then say, what about trading currencies themselves as an entire asset class,

Starting point is 00:37:33 it turns out you can apply very simple factors that you apply, say, in stock investing, that work great in currencies too. So such factors as value as trend and momentum, as carry is probably the most famous one. And then you can create essentially trading system on currencies as an asset class that correlates to very little. we've had a currency fund filed for a very long time, but have never launched it because it didn't think people were that interested. I think that's changing. I think people have been more and more interested in currencies the past few years. Now getting on to Japan, you know, it's interesting when you look back at the history of valuation of many of these markets,

Starting point is 00:38:14 because if you look at the left side of the chart of cheap countries, and I mean, it almost gives you nausea to think about because it's it's the worst geopolitical environment, the worst economies, Brazil is probably in the worst recession, borderline depression they've ever been in. And you say, my God, why would anyone want to invest in those? And that's part of the reason it works. And a lot of those country stock markets are simply really cheap because they've declined a lot already. So many of those markets, there's something like 10 or 15 markets around the world now that are down over 50%. A lot of lot of those markets are cheap PE because the P's gone down so much. They've gone down 40, 60, 80 percent.

Starting point is 00:38:57 Greece's case, 95 percent. But the name's changed. If you go back to the late 90s, a lot of the Asian countries were the cheap bucket. If you go back to the before that, it was the Scandinavian countries were in their banking crisis. In the early 80s, the U.S. was one of the cheapest markets in the world. So usually what happens is when markets are cheap, there's a lot of reasons why you shouldn't or would never invest there. Russia, great example, a year or two ago, when they were doing very poorly, I mean, they were shooting down commercial planes, they were invading countries, you know, oil going down, all these reasons not to invest in Russia. But as the story slowly fades away, you know, and things go from totally miserable to only slightly less miserable, that's when you can have some of the big returns. In Japan is one of my favorite examples of valuation, because people also talk about, could you use relative or absolute valuation, meaning, should I just say the average overtime for all countries is around 16, 17 and use that? Or should you compare them to their own value history?

Starting point is 00:40:01 And I always say the former, because bubbles and depressions have such lingering influence, you know, Japan had you said, I'm going to invest when it's cheap relative to its own history, you would have bought the entire way down in the 90s and 2000s. And so every year, he said, well, it's cheap relative. This is historical Cape of 50. but that's just because it was a massive bubble. So Japan finally got interesting a few years ago, but no one cared anymore.

Starting point is 00:40:27 And then they had one of the biggest returns ever for their stock market, but of course the currency got hammered as well. I think it's interesting. It's not hitting our filters as one of the cheapest in the world, though a lot of the countries are changing place very quickly with the market volatility and China being another example that's getting close to the cheap bucket,

Starting point is 00:40:48 but not quite there. So we think it's interesting, but not quite hitting it's super cheap yet for us. Interesting. So, Mab, for the audience out there and perhaps also for Preston and I, could you give us some stock tickers if we want to look at, say, ETFs investing in these really cheap countries? First of all, you know, we have a fund that invests in the top quartile of cheapest countries. It's called Global Value GVAL that does it for you. an important point that I forgot to neglect to mention is that if you're doing a deep value strategy,

Starting point is 00:41:22 you only want to rebalance that once a year at the most. You could rebalance it every two years, but you need to give these countries and stocks time to work. If you rebalance it quarterly or monthly, you completely destroy the returns. So you need to give it some breathing room. So we run a fund based on it. It's very concentrated. It's my personal largest holding. But you could also do a lot of things. There's single country funds that trade for almost every foreign developed an emerging country out there, ETF, spy, a lot of the big name ETF providers, and simply a value approach to global investing would probably work great, just as great anyway. So there's a number of ways to skin the cap, but at the very least we tell people to

Starting point is 00:42:01 put at least half into foreign stocks. All right, Mab, so the question I've got in a lot of our audience is really wanting to hear your opinion on this. This is why I'm going to ask it. And they're curious about the U.S. equity market in the coming year. And they're also curious about your opinion on what the Fed might do from this point forward. So we've got the Fed that raised their quarter of a percent federal funds rate there in the middle of December. I'm of the opinion that they're not going to raise rates anymore into 2016 at all. I'm curious to hear your opinion on that or if you think that they might do it once or twice

Starting point is 00:42:36 more. And I'm curious to hear your opinion on what you think is going to happen with the U.S. equity market specifically. Okay. Two-part question. It's easy. The first part on the Fed, I have. no idea. So we can go ahead and like Charlie Munger style. I'll just say I've got nothing on that.

Starting point is 00:42:53 And then the second part, U.S. equities, you know, if you go Google on our blog, I had done an article last summer called 11 bearish charts, one bullish one. And it detailed 11 different factors surrounding the U.S. market, such as mergers and acquisitions nearing an all-time high, the percent of unprofitable IPO companies nearing an all-time high, valuations such as Schiller. And there's another example, the median price to earnings of the stocks and the S&P 500 is it the highest it's ever been since the 1960s. The percent allocation of investors to equities is one of the highest it's ever been, which historically says low single-digit return. So there's all these indicators that say you should be bearish or have very low expectations

Starting point is 00:43:44 for U.S. stocks. However, I said there's one bullish, and it's the actual, it's like the queen of spades Trump card that matters more than all of these combined, and that was the trend. And so I said at some point when the trend turns negative by 200 day, 10 month moving average, whatever it may be, then there will literally be no reason to invest in U.S. stocks. And so that happened this fourth quarter, where it flipped very quickly, it went bearish, then kind of ran back up, and then now you,

Starting point is 00:44:13 and in many, this is the S&P 500, it's already turned bearish and all the small cap, the midcap, it's been bearish for a long time on foreign stocks and commodities. So going into the beginning of the year,

Starting point is 00:44:27 we have an old white paper called a quantitative approach to tax class at allocation I wrote back in 2006, and a simple trend following approach, but any of the trend following approaches would say you're going to be mostly 100% in cash. And so I think the going forward, you know, caution is absolutely warranted in U.S. markets.

Starting point is 00:44:50 You know, we're much more positive on foreign. But if the U.S. is in, as a bare market, which many foreign markets are already in, it will very likely drag down foreign as well. So we urge caution in the U.S. Perfect. The last question, Mav. What investment book has had one of the biggest impact on your way of thinking? Good question.

Starting point is 00:45:13 So I read a lot. I have a reading problem. So there's many, many books that I have ingest on a weekly basis. My favorite is called Triumph of the Optimists. And it is one of the most important things we think for investors is to understand market history. So to understand what has happened, be able to look back and say, look, the U.S. stock market has declined by 80%. there are markets that have completely closed down like Russia and China or, you know, was U.S. the unique market of the past 115 years?

Starting point is 00:45:47 So Triumph the Oppanus is written by a few British professors. You may want to rent it from the library because it's, I think, a $100 book, but this beautiful coffee table book that looks at, I think, 20 markets, stocks, bonds, bills back to 1900. And there's a few wonderful takeaways, one of which is that what I like to call the 521 rule. And this is roughly what stocks, bonds, and bills have returned for the past 115 years in global markets on average, real returns, so net inflation. Global stocks, around 5%. The U.S., I think, was 6.5, one of the top markets in the world, maybe only one or two better. I think South Africa was the best. But there were countries like Austria that basically

Starting point is 00:46:30 returned nothing over the entire period. And then bonds returned about a percent and a half, though I'm rounding up to two because it's easier to remember. And then bills basically kept even with an inflation round half percent, but I round up to one again to make it easy. So 5-21. But it gives a lot of wonderful examples. And on top of that, you can go Google. Credit Suisse puts out a yearly update called the Global Investment Returns Yearbook.

Starting point is 00:46:56 And they've put out about 10 of these and they're free. And so you may end up on my blog because I posted downloads to these every year. It's one of my favorite. it's like Christmas Eve waiting out for their public education because they tackle different concepts each year. They've tackled tape ratios. They've tackled, you know, what if you sort of global markets on trailing GDP and FX returns, what does best. And they talk about dividends and momentum and trend, a wonderful education for free on all those updates. So that's probably my favorite book to take look at and tackles currencies as well. Thank you so much for coming on our show.

Starting point is 00:47:34 This information you're sharing with our audience is just total abundance. We can't thank you enough. This was just fantastic. And I know you're going to have a lot of people from our audience coming over to your sites and wanting to read more about you after hearing this interview. So if you could give them a handoff to your different sites and some of the things that you have out there so they can learn more about you and maybe some of your books, please share that with our audience right now if you could.

Starting point is 00:47:57 Sure. You guys can always find me at mebfabber.com as my blog. There's over 1,500 articles. and if you've made it all the way through this podcast and go to freebook.mebfavor.com, I'll even send you a copy of a free book. You got a promise to read it, though. And, you know, post a lot of studies on Twitter as well at MedFaber. And there's a handful of white papers on the SSRN network and, of course, any of the five books.

Starting point is 00:48:27 So plenty of reading to keep you busy. All right. So, Mab, thank you so much for coming on. the show. We just really appreciate your time. Thank you. Pleasure. All right. So that's all we got for you guys this week. And if you guys go over to Meb's website, I guarantee you you're going to really learn a lot. All the stuff that he was talking about, we're going to have that in our show notes. So if you guys need or you're not hearing it on the show, or you don't have the opportunity to write it down because you're driving in your car,

Starting point is 00:48:52 just go to our show notes after you're done on The Investorspodcast.com and you guys can pull up all that information and all the links. Also, please sign up on our email list. We try to read a book every other episode, and we send out a free executive summary of all the books that we read. We don't do any spam or marketing. So go ahead and sign up on that, and you can get those. And if you have a question, you want to get it played on our show. We haven't played a question a little bit, but we're getting ready to do our next episode, and we're going to play a bunch of questions from our audience.

Starting point is 00:49:18 You can get those questions played if you go to Ask theInvesters.com and you record your questions there. And for anybody that gets their question played on our show, we'll send you a free signed autograph copy of our book, the Warren Buffett Accounting Book. So that's all we have for you guys, and we'll see you guys next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.com. Submit your questions or request a guest appearance to the Investors podcast

Starting point is 00:49:47 by going to www. www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP network and must have written approval before commercial application.

We Study Billionaires - The Investor’s Podcast Network - TIP 070 : Global Value Investing and Clone Investing w/ Meb Faber (Money Podcast)

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