The Meb Faber Show - Better Investing

In Episode 135, we welcome Karan Wadhera. We start with Karan giving his backstory that includes a stint at Goldman Sachs and some entrepreneurship. After some time studying the industry, he ultimately got involved in the Cannabis space with Casa Verde. Meb then asks about what Karan sees as a “why now” investment opportunity. Karan talks about the opportunity coming out of the existing black market that is transitioning into a legal market and a range of products that have more to do with other things than just getting high.Next, the conversation shifts to the political landscape, and Karan provides some detail on the gap between the state and federal level, and the federal view of cannabis as a Schedule 1 controlled substance. He discusses how dramatically things are changing, especially in the political space.Meb then asks about the investment landscape for cannabis. Karan talks about how volatile the public market space is, and how when evaluating the theme, Casa Verde saw an opportunity in the ancillary space, companies involved in the industry but not in cultivation, manufacturing, or retail. He then provides detail on the kinds of involvement Casa Verde has in the portfolio companies, as well as some background on portfolio companies leaflink, green bits, trellis, and metric.Karan then talks about some of the areas of the industry that need improvement such as financial services until the industry reaches federal legalization, ag-tech, and biotech. Meb then asks about investor interest in the space. Karan talks about how more traditional institutions are now starting to explore it, and how U.S. investors will be limited on what they can do until there is a federal regime in place. Karan follows up with some resources available to learn more about the industry.This and more, including Karan’s most memorable investment in episode 135. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 134, we welcome Chris Cole. Meb kicks off the show by asking Chris to describe his nontraditional background. Chris studied cinematography in film school at USC, while trading options in his spare time. He eventually made a career switch and began in Merrill Lynch’s analyst program in New York, while trading in his spare time. With his trading, he eventually created $1 Million to start his firm.Next, the conversation transitions to Chris’s work, including his take that “Volatility is the only asset class.” Chris follows by discussing how returns can be deconstructed to represent either “short-vol” or “long-vol” strategies. He mentions that the average institutional portfolio is a 98% short-volatility portfolio that will not perform all that well during a period of regime change.Meb then brings up some recent events that have transpired to lead into a chat about short vs. long volatility, and some dangers when thinking about the strategies. Chris discusses how volatility can be expressed in both tails, for example, the right tail being high volatility and high asset returns, and provides an example that volatility was averaging around 25 in the late 90s when the market was going up 30% per year. He follows with a stat that at-the-money vol moved more in January of this year than it did in the February move most might be familiar with.Chris then provides his thoughts about regime changes, what is possible, and what he sees in the market. He starts with his recent paper, Volatility and the Alchemy of Risk. In that paper, he uses the example of the Ouroboros, or “Tail devourer” as a metaphor for the current short-volatility trade. What he sees as a worry are the explicit short-vol traders, $1.4 Trillion of implicit short-vol strategies that are re-creating a portfolio of short options by financial engineering, and corporations using leverage to buy back shares, suppressing volatility. All together these scenarios represent a snake eating its tail.Meb then asks Chris to talk about market pressures that have resulted in liquidity changes. Chris explains that this is the only bull market in history with less and less volume, and less and less volatility. He mentions that what was scary about February’s volatility was that liquidity vanished. He follows with a discussion of passive vs. active investing, and the role active investors play in the market.Meb then asks about catalysts for stress in the market. He talks about the passive strategy not being understood by investors as something that could lead to de-stabilizing conditions, and that over 50% of the investment grade debt is in the lowest rated tranches, and over $2 Trillion of debt that needs to be rolled in 2019 and 2020. He mentions that what could potentially cause an issue is inflation leading to higher rates, a minor turn of the business cycle given the amount of leverage and gearing on corporate balance sheets, as well as the reliance of stocks and bonds being un-correlated if the markets enter a period where stock and bond correlations are in fact positively correlated. Next, through an example of rental car insurance, Chris gives some background on implementing long-vol strategies by using quantitative analytics to help identify points in time where you are paid to own “insurance” against market declines, in addition to predictive analytics that provide an informational edge to help understand whether or not it might be productive to own protection against market volatility risk.Meb follows with a question on the Japanese Vol Monster. Chris describes the short-vol trade that has been going on in Japan for a long time. He then describes philosophically that volatility is the instrument that makes us face truth.This and more in episode 134. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 133, we welcome Todd Harrison. Meb begins the conversation asking Todd about what got him into the cannabis space. Todd discusses his intellectual curiosity of the space, and what he has learned about the history of cannabis, from the 30,000 year relationship we have had with it as humans, to the US weaponizing marijuana.Meb then leads into the topic of governments and states changing their attitudes. Todd talks about it being a confluence of things, but gets into a personal story of how he discovered the efficacious ability of cannabis by working with Dr. Julie Holland after struggling with a decade long treatment of PTSD with a Western medicine protocol.The conversation then turns to the marketplace. Todd relays that there is quite a bit ahead for the consumer space. In hearing what scientists have to say, it has painted a much different picture for the breadth of wellness that is going to be disrupted going forward.Next, Meb and Todd discuss a little background on cannabinoids in general. Todd describes that there are over 200 different cannabinoid strains that exist. CBD and THC are two that have been popularized, but when you drill down, there are far more, including CBN, that aids sleep.The conversation shifts to the broad marketplace for investors. Todd describes the four primary arbitrage opportunities he sees that present opportunity: 1) Time Vs. Policy, 2) Price vs. Institutional Flow, 3) Perception, and 4) Liquidity.Meb follows by asking Todd about the firm’s investment approach. Todd talks about taking the long view. He mentions that the space has had two 50% drawdowns this year, and they count on disciplined position sizing and light use of puts to layer on with the long view but are using the current volatility to their advantage right now.Meb then asks Todd about the leading countries in the global landscape right now. Todd talks about Canada being the most mature, Australia looking compelling, and sees the U.S. as having the best opportunity set.Meb asks how Todd diversifies across industry groups and various verticals. Todd talks about there being about 500 listed stocks right now, and that there are probably 50 to 55 companies that his firm wants to invest in, and probably up to half of them at any given time. He thinks in 10 years’ time the survivors can offer a significant market cap. He and his team are focused on sticking with the companies they think are positioned to win. Meb then asks what Todd’s favorite vertical is if he had to pick one to be invested in for 5 years. Todd mentions it would be biotech, even though it may take longer for those investments to pan out because they still have to go through the traditional biotech process.Todd then gets into his approach for analyzing stocks. Todd discusses the importance of understanding the management teams, and “betting on jockeys as much as the horse,” as well as taking the fundamental perspective by getting a read on the company through a DCF analysis. All this and more, including a few names in Todd’s portfolio, and some suggestions for resources investors can tap for research on the industry in Episode 133.  Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 132 has a radio show format. In this one, we cover numerous Tweets of the Week from Meb as well as listener Q&A.For our Tweets of the Week, a few we cover include: A chart from Longboard about returns. Since 1989, the worst performing 11,513 stocks – which is 80% of all stocks, collectively had a total return of 0%. The best performing 2,942 stocks (20% of all) accounted for all the gains. A tweet about another option selling fund blow-up. A Jason Zweig post about how many investors should question the dogma of “stocks for the long” run since history shows that a portfolio of bonds has outperformed stocks surprisingly often and for long periods. The statistic “According to Goldman, its indicator at 73% marks the highest bear-market reading since the late 1960s and early 1970s, which (with a few exceptions) is consistent with returns of zero over the following 12 months.” We then jump into listener Q&A. Some you’ll hear include: In your book, Global Asset Allocation, you compare the results of well-known asset allocations and find that the returns are quite close. Over a long period of time, would you also expect the results of a momentum / value strategy to be similar? Is the main advantage that it allows for better behavior (lower drawdowns, etc) or would you also expect the performance to differ (net of fees)? Would you rather own a stock with a high free cash flow yield or high dividend yield? I was wondering if you could touch on the process of launching an ETF. What are the startup costs, how much AUM and at what fee would the ETF breakeven? I've heard you (and others) extol the benefits of a diversified global allocation but I rarely (if ever) hear the counter argument: that the US deserves a premium to the rest of the world because it has the largest and deepest capital markets, has comparatively lower regulation and fosters innovation and creative destruction. Do those factors warrant an over-allocation to US equities? How much should the average investor be willing to spend (as a percentage of portfolio value) in order to carry some protection in the form of puts? What beats the 60/40 portfolio over the next 5 and 10 year periods? As usual, there are plenty of rabbit holes. You’ll find them all in Episode 132. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 131, we welcome economist David Rosenberg.We jump right into David’s view of the current economic landscape. David talks about the global economy, especially the US looking classically late cycle, as the economy is running low on skilled workers, and states “If next year is not a recession, it’s going to feel like it.”Meb asks about the indicators he relies on. David discusses that there are 15 equally weighted indicators he’s looking at, 14 are screaming late cycle, and two stand out the most. ??? Two of the most important indicators for the US are the lack of skilled workers, with a lot of growth coming from people with no better than a high school education, and an immigration policy that has decreased the pool of labor.This leads into a discussion about inflationary pressures. While the strong dollar has been deflationary, more and more companies are passing on costs to customers. Services, which dominates the consumer spending pie, is sensitive to labor costs, and the inflation we will see going forward will be from wages.Meb then asks David about his thoughts on how this plays out for investors given the nature of the late cycle. David tells us that historically, the S&P has annualized an average of 17% per year in bull market conditions, however, this time around, it has done so with nearly half the typical economic growth rate to back that up. He suggests investors be defensive, focus on liquidity, have some cash on hand, and emphasize quality. For fixed income investors, be mindful of duration, and if focused on credit, be thoughtful of upcoming refinancing risks.The conversation then turns to sentiment. David draws parallels to the dotcom bubble, with FAANGM making up 17% of the S&P 500 market cap at September highs, which is similar to the late 1990s when there was a concentration of about six stocks making up a large chunk of the S&P 500 market cap.Next, Meb asks about David’s views on corporate bonds. David sees this in two lights. First, corporate balance sheets are the weakest they have ever been. The BBB component, which is a downgrade away from being rated “junk,” has grown from 30% of issuance to 50%. The alternative, more positive view is that companies are anticipating a lack of bond issuance coming up.Meb then asks about the health of the Canadian economy. David explains it is meandering; the oil price has been a drag and has traded at a significant discount to WTI due to a glut of production, and lack of pipeline capacity. In addition, an overinflated housing market that is deflating, and overextended household balance sheets serve as big impediments. Provinces are tending toward a pro-business direction politically, so that could serve to be a positive going forward. As a strategist, he is seeing much of the bad news priced into financial assets as the TSX is trading down to a 13 multiple, in line with emerging markets, and a discount that has been seen only 5% of the time historically.All this and more in Episode 131. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 130, we welcome Eric Falkenstein. The show starts with Meb and Eric discussing ice fishing in Minnesota (where Eric is currently located). But then Meb asks for Eric’s origin story. Eric tells us about being a teacher’s assistant for Hyman Minsky, wanting to be a macro economist, the turn that pushed him toward investing, and a well-timed put option that made him a boatload in the ’87 crash.Next, the conversation turns toward Eric’s interest in low volatility. He tells us about being one of the first people to study low-vol. He was early, and the broader investing community wasn’t ready for the findings. People dismissed the suggestion that high volatility stocks (with high risk) didn’t outperform low vol stocks. Eric tells us that given all this, “low vol” wasn’t enough of a selling point – you had to layer on another factor just to get people to pay attention.Meb asks about the main value proposition of low-vol. It is a smoother ride? Better returns? And why does this factor persist?Eric’s answer touches on CAPM, high beta, low beta, risk, various premiums, high flying stocks, and alpha discovery. This bleeds into a conversation about factoring timing relative to valuations. Eric tells us he tried factor timing, but didn’t find it to be too helpful out of sample.The conversation bounces around a bit, with the guys touching on Meb’s paper, “A Quantitative Approach to Asset Allocation,” bonds and how the US is flirting with the top bucket of bond yields, whether low vol translates to global markets and different asset classes, and Eric’s take on risk parity.After that, the guys turn to crypto. Despite the current pullback, Eric believes “in the long run, it’s going to work.” He believes that crypto will eventually replace Dollars as people will want an alternative to fiat currency, something not susceptible to manipulation by politicians. He tells us that he sees a tipping point coming.There’s plenty more in this episode – Eric’s books, pithy quotes and maxims, how people often think about the specific investment they want, but not the “plumbing” such as the bid/ask spread of that investment, the volume, and so on… And as always, Eric’s most memorable trade.Get all the details in Episode 130. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 129 is a solo-Meb show. Meb has been out on the road, giving speeches. In this “Mebisode,” you’ll hear Meb’s most recent talk. It covers forward-looking return expectations, an offer to book some time to chat with Meb one-on-one, best and worst starting points for new investment dollars, improving upon the global market portfolio, what corners of the market to look at now, and far more.If October’s market turbulence left you feeling some jitters, this episode will help you reorient your market views looking forward. All this and more in Episode 129. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 128, we welcome pension fund expert, Claude Lamoureux. We start with Claude’s background, which took him from Met Life to running the Ontario Teachers Pension Plan.When Claude took over the pension, the fund was invested in just Canadian debt, and the size of the pension obligation was underestimated. Claude decided to use derivatives to diversify the portfolio. He expanded into the S&P, recruited an investment department, and within three years, had successfully reallocated the fund into the broad asset classes they wanted.Meb asks how investing is different for a pension allocator versus an individual investor managing his own portfolio. Claude tells us that in the pension world, people don’t want to take responsibility. He wanted to do the opposite. He wanted to create a culture where people become entrepreneurial.This dovetails into a conversation about valuations. Claude is a big believer in having a realistic valuation of liabilities and potential returns. He mentions that today, many U.S. pensions are expecting around 7% returns, which he finds unrealistic. Claude says people should earn the money before they spend it.The conversation eventually turns toward Claude’s general market approach. Claude had a somewhat traditional policy portfolio, yet used lots of derivatives to diversify into stocks and non-Canadian bonds. He mentions how when you have a large deficit, you must go heavily into equities. He also liked private equity and real estate. And there was a great deal of leverage.The conversation turns toward problems in the U.S. pension system. Claude gives us his take on the issue. In short, many pension liabilities here in the States aren’t measured properly. He also mentions interest rate assumptions and the fees of outside managers. Finally, Claude points toward politicians and how they don’t want to face the facts.There’s plenty more in this pension-themed episode: the importance of being a student of the market history…the Canadian Coalition for Good Governance…the sage advice of “when you have to make a decision, always make the one that will let you sleep better, not the one that will let you eat better”…and of course, Claude’s most memorable trade.All this and more in Episode 128. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 127 has a radio show format. In this one, we cover numerous Tweets of the Week from Meb as well as listener Q&A.We start with Meb telling us about his recent back-and-forth over Twitter with Elon Musk, discussing short-selling. Meb uses this as an example to give us more information on shorting in general, as well as short-lending.We then answer a question we’ve received (in various forms) for years – “why is the S&P (or whatever) outperforming your strategy?” For anyone looking longingly at S&P returns for the last many years, you might want to listen to this one.Next up, we tackle some of Meb’s Tweets of the week. There’s a discussion about mixed valuation signals – on one hand, there’s the Russell 3000, with the number of companies trading for more than 10-times revenue now approaching levels from back in 2000. On the other hand, there’s a tweet claiming that “if history is any guide, with 90% confidence rate of positive correlation, this market is going to deliver between 3 to 4% per annum for the next 10 years.” Additional tweets support both sides so Meb tries to resolve it for us.Then there’s a tweet about the challenges of sticking with your strategy during bad years. It references how the little voice of doubt in your head is all it takes “to turn the hardest resolve into the emotional putty that has destroyed generations of investors.”There are several other tweet topics – how Research Affiliates views the probability of 5% real returns at just 1.5%... how one forecast for private equity is calling for just 1.5% returns while a different private equity manager is trumpeting the asset class’s superior performance… and how marketing is nearly as important as performance and fees when it comes to attracting investor assets.We then jump into listener Q&A. Some you’ll hear include: You often say that over the long term, asset allocation doesn't matter much. However, isn't it important to note that because the nature of compounding, a small difference in CAGR over time can amount to a large dollar amount difference in your savings? What are your thoughts on using leverage with momentum? Do you have any recommendations for someone looking to diversify their trend following sleeve by applying a few different rules? For example, I've been doing 1/3 50-DMA, 1/3 200-DMA, and 1/3 crossover. You speak frequently about the benefit of taking a lump sum and investing now versus later. With current equity valuations (at least US) so frothy, is that still true? I’m wondering about how to take losses and how to determine when it’s appropriate to take one and when it is not. Do you, as a quant, have set rules in place? All this and more in Episode 127. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 126, we welcome entrepreneur, author, and investor, Karen Finerman.The episode starts with an interesting connection – Karen and Meb’s wife both attended the same high school in Los Angeles, and apparently, it’s the only high school in the U.S. with a working oil rig on campus. From here, Karen gives us a brief walk-through of her history after graduating Wharton, heading to Wall Street, where she eventually launched her own hedge fund.Meb asks about the framework she used in the hedge fund as she launched. Karen tells us they were fundamentally focused. Coming out of the savings and loan crisis, there were many smaller banks that had been unfairly stigmatized. Many were absurdly cheap with great balance sheets. Karen was able to take advantage, and developed an expertise in the space. She notes it was interesting how badly the market could mis-price an entire sector. She continues by telling us her strategy was mostly long focused. Her shorts were generally idiosyncratic, intended to hedge the portfolio. Beyond that, tax efficiency was a big focus.Next, Meb and Karen dig into her methodology for evaluating specific investments. Karen gives us the details, mentioning fundamentals, growth at a reasonable price, users that tend to be inelastic on price, and various other details, culminating with a specific example of a company she likes.Meb asks what Karen is seeing now. She tells us she’s a little spooked by the tariff situation. Perhaps a big exogenous risk. She then changes gears, going into details about a specific company she likes – Alphabet – noting what she finds attractive (and where she feels they could improve). But overall, she’s very impressed.The conversation gravitates toward “selling”. After all, buying is generally the easier part – it’s when to get rid of an investment that can be tough. Karen tells us that if an investment hits their target return, they’ll lighten their position. These leads into a conversation about investment theses and how that plays into selling.The years 1999 and 2000 come up, with Karen telling us she feels her group did the right thing then, avoiding getting sucked into the bubble. The new metrics at that time (stocks trading at a multiple of eyeballs) just didn’t make sense to her. She notes there are some similarities today, as there are certain companies that are losing lots of money despite posting growth numbers.This dovetails into a discussion of Tesla. It turns out Meb and Elon Musk shared a few words about short-selling on Twitter on the morning we recorded this podcast. Surprising no one, Elon is not a fan of shorts. Listen in for the details.There’s way more in this great episode: the ETF-ization of investing… Karen’s book… How to address the great investing education problem… and of course, Karen’s most memorable trade – actually, she shares two, a good one and a bad one. On the good side, there was an undervalued convenience chain in which Karen got involved at the right time and enjoyed a nice payday when Diamond Shamrock showed up at the buyer’s table. The bad trade relates to when United Airlines was supposed to go private. Karen didn’t factor in the possibility that the deal would collapse. Just how bad was the damage?Find out in Episode 126. Learn more about your ad choices. Visit megaphone.fm/adchoices