The Tracking Error Problem

The party always ends — and Meb Faber, one of the most data-driven voices in global investing, says the evidence is now undeniable that the decade-long US equity dominance is giving way to something very different.

SUMMARY

On this episode of Raise Your Average, hosts Pierre Daillie and Mike Philbrick sit down with Meb Faber — co-founder and CIO of Cambria Investment Management, prolific researcher, and host of The Meb Faber Show — for a wide-ranging conversation about what investors and financial advisors must rethink as the rules of the game quietly change beneath their feet.

With US equity concentration at historic extremes, inflation proving stickier than expected, and geopolitical disorder accelerating structural shifts already underway, Meb makes the case that the era of a US-heavy 60/40 portfolio solving everything is in the rearview mirror. He challenges the deeply ingrained recency bias that has left most North American investors dangerously underweight in international equities and real assets — and explains what the data actually says about where opportunity is emerging.

The conversation moves from big-picture regime change into highly practical territory: how to build a portfolio that survives behaviorally, not just mathematically; how to think about concentrated, low-basis positions and the tax traps hiding inside the gains of the last 15 years; and why "tax alpha" may be the most overlooked and underutilized edge in wealth management today. Meb also shares how he's deploying AI in his own practice — including a custom-trained GPT built on his entire body of work — and what advisors should be borrowing from that playbook right now.

⏱️ CHAPTERS

00:00 — Welcome & banter: tacos, spicy food, and market chaos 08:00 — Meb joins; framing the moment: Venezuela to tariffs to Iran 13:00 — A regime change? Dissecting the end of the 40-year bull run 15:00 — The bull market in diversification: foreign markets doing 30%+ while the S&P stalls 17:00 — What advisors are underweight: ex-US equities and real assets 20:00 — How to explain a generational shift to clients without jargon 24:00 — Global diversification: the evidence from 15 famous portfolios 27:00 — The 20% annual spread problem and why tracking error breaks investors 30:00 — Portfolio vulnerabilities in the cap-weighted US-dominant model 31:00 — Opportunities: global value, small cap, fixed income niches, real assets 35:00 — The "fat" portfolio: three ingredients every investor needs 40:00 — Utilities, dividends, and the tortoise-vs-hare reversal 44:00 — Behavioral investing: why systematic strategies exist 48:00 — The concentrated position trap: identity, emotion, and the sell decision 51:00 — Systematic rebalancing: lessons from Cambria's early days 53:00 — "The easy money's been made" — market phrases Meb despises 55:00 — Deep value and what it takes to be a missionary, not a mercenary 58:00 — The best active managers and why they always close the door at the top 1:00:00 — When the penthouse becomes the outhouse 1:04:00 — The Groucho Marx rule: would you buy what you already own? 1:10:00 — Drawdown, pain tolerance, and the real test of a portfolio 1:17:00 — Concentrated low-basis positions: the tax trap hiding in plain sight 1:19:00 — 100 years of stock data: what the best-performing stocks actually returned 1:22:00 — Tax strategies: 351 exchanges, direct indexing, QSBS, and box spreads 1:27:00 — AI in practice: Meb's custom ChatGPT and how advisors should use AI now 1:30:00 — Behavioral AI: what happens when the bot knows you better than you do 1:32:00 — Closing thoughts: raising your average in a noisier, more complex world</p>

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