The Meb Faber Show - Better Investing

In Episode 74, we welcome Jeffrey Sherman from DoubleLine. We start with Jeff’s background – it’s a fun recap, including stories of running the scoreboard for The Stockton Ports… being a bank teller… earning graduate degrees… there’s a brief aside into catastrophe bonds which is a good primer if you’re less familiar with them… then back into Jeff’s background with DoubleLine.This dovetails into Meb asking about the type of shop DoubleLine is, as well as its overall investing framework. We learn that DoubleLine will go into whatever market it finds interesting. They’re also a macro shop, which led them to fixed income. After all, Jeff tells us “If you want to know what’s going on in the world macroeconomically, the bond market tells you.”Next, Meb asks how the world looks to Jeff today.Everything is growing, but it’s not the same old growth. The difference is debt. Overall, it has been a positive environment for investing; inflation is low, but the price of assets now reflects this good environment and people are projecting that forward – but it’s not realistic. Many assets are expensive now. Jeff puts a point on the situation by saying “There’s this ‘buy-the-dip’ mentality… Do you play in it or just shake your head?”The guys cover lots of ground here: Prices in the bond market have gotten ridiculous… Policy mistakes from the Fed… How this is “The Jay Cutler bull market” meaning it’s very “ho-hum”... how Europe is growing at the same rate as the U.S., yet they are continuing to do QE, while we’ve hiked rates four times… we’re talking about unwinding bonds while they’re buying – there’s a disconnect. And we don’t truly know what unwinding is going to look like.This leads into a great discussion of bonds and how they respond to a rising rate environment. As Meb notes, most people hear “interest rates are going up” and they think “bond prices must be going down.” But that doesn’t have to be the case. Jeff dives into some great detail here on the math behind bond returns and rising rates. If you’re a bond guy, make sure to catch this part of the episode.A few twists and turns later, Meb brings up a DoubleLine fund that combines U.S. equities in various sectors, paired with a fixed income component. He asks how is it designed, the benefit, and so on.Amongst other details Jeff tells us, we learn that the fund applies a sector rotation strategy based on Professor Shiller’s CAPE ratio. Historically, people have used CAPE to evaluate markets. Jeff wondered why one couldn’t apply it to smaller subsets of the markets – sectors. For instance, utilities and tech have different profiles re: beta and whatnot. So why not take each sector’s CAPE and compare it to its own CAPE history? You then look for the cheapest sectors of the market. And you can avoid buying a value trap by apply momentum (in Jeff’s strategy, they throw away the worst one-year momentum sector).Meb asks which sectors look good from a CAPE perspective now. Jeff tells us he’s looking at technology, consumer discretionary, consumer staples, and health care. He was looking at energy, but he booted it due to its bad momentum. He tells us another high flier is the financial sector. Up 35% or so since the election.Meb asks a Twitter question next – how much does DoubleLine incorporate technicals into their process? Jeff tells us that he uses technical more on trade implementation and things that are hard to value like FX.There’s so much more in this episode: sentiment… Trump, and the D.C. status quo… commodities… the “Four Asset” portfolio… More write-in questions from Twitter… a quick descent into a crypto-rant… the biggest mistakes Jeff is seeing investors make… and of course, his most memorable trade.What were the details? Find out in Episode 74. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 73, we welcome Jeff Porter and Barbara Schelhorn from the financial planning group, Sullivan Bruyette Speros & Blayney.We start with Jeff’s background. He was a contemporary of Meb’s at the University of Virginia. The guys share a laugh recalling running out of class to check stock quotes back in the Dot Com boom.As the conversation turns to investing and financial planning, Meb asks about changes in the industry – with the rise of robo-advisors, indexing, target date portfolios, and so on, how does Jeff, as a financial planner, continue to add value on the investment side?Jeff tells us how the aforementioned products can be great for many investors, but less so for others. For investors who need more handholding, and/or have more complex financial situations, advisors can add significant value.What follows is a great discussion on questions Jeff asks his clients as he seeks to evaluate the right market strategy for them, as well as the right implementation. There are myriad issues: what’s the best asset mix? Do you add hedges? Active or passive? Factor tilts? And so on.Jeff looks to understand what his clients need from a return perspective in order to reach their goals, as well as their ability to handle risk. This includes variables such as when will the client need to take withdrawals. This leads to an interesting conversation about those risky years shortly before and after retirement begins. If luck is against you, and the market is down in those years, it can make a huge difference in your portfolio’s balance and therefore, your retirement lifestyle. Jeff tells the story of how retiring at two different points in time led to two very different outcomes. The conversation drifts toward allocating cash and savings. But one of the problems is that many investors have way too much cash sitting in accounts earning nothing. At a minimum, they could use that cash to pay down various debts or mortgages. Meb makes the point that countless investors are bad at optimizing the cash/debt equation. He says there are simple techniques to easily turn cash earning 0% into cash earning 1% per year.Meb continues to steer the conversation toward traditional financial planning topics: Social Security, retirement benefits, health and liability risks, and so on…Barbara provides some wonderful information on insurance and long-term health care. As an interesting aside, she tells us that most of her male clients don’t want to waste their money on long-term health care, while her female clients find it to be more of a need. Barbara says the reality is somewhere in between.This hardly even begins to scratch the surface of what’s covered in this episode. (It’s our longest to date!) You’ll hear about umbrella insurance policies (and why Meb could use one for some property he owns in Colorado)… The importance of proper titling of your assets and how it can protect you from litigation… Gifting loved ones with stock rather than cash to get around big capital gains… Effective financial strategies using tax bracket trends… SEP IRAs versus 401Ks vs Roth IRAs… When to start taking Social Security… And way more.And of course, you’ll hear Jeff and Barbara’s most memorable investments. While Barbara’s is interesting, Jeff’s involves a huge market loss thanks to a bad tip from a certain college friend (you guessed it – Meb was to blame).What was Meb’s bad investment advice that cost Jeff thousands? Find out in Episode 73. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 72 is a radio show format before we start back with guests this fall. Some of the questions and topics you’ll hear: You've said that bonds can face significant drawdowns. But because of the way bonds work, is it the case that bond ETFs guarantee a positive return over time (assuming held to maturity and no default)?  I have heard that equal weight beats market cap because it sells the expensive stocks and buys the cheaper ones. I also have heard that most of the stock market gains over time are due to a small percentage of companies. So why does selling the winners down to equal weight and buying the lower performing stocks beat just letting winners run? Are markets, in fact, growing more correlated? Last week’s episode about a dividend strategy without the dividend… Why are so many investors against the idea of creating their own synthetic dividend despite its various advantages? Robert Shiller’s new piece in The New York Times about current investor sentiment and its potential implications for this bull market What are best practices for trading low volume ETFs? As usual with the radio show formats, there are plenty of additional rabbit holes including the potential direction of the U.S. dollar, the velocity of money, and the tug of war between inflation and deflation.What is Meb’s take on all this? Find out in Episode 72. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 71 is a solo-Meb show in which he reads a white paper we’ll soon be publishing. The white paper might be a tad controversial as it calls into question an investing strategy that’s so beloved, it borders on sacrosanct.What’s the strategy? Since this is a shorter episode, we won’t reveal it here. Instead, here’s a bit from the paper’s introduction…“…Similarly, if you worship at the altar of this wildly-popular investing strategy, you too may find this paper’s contents equally blasphemous.Yet if you find yourself feeling that way, I would encourage you to keep an open mind, for rejecting what you’ll read today would only shortchange yourself. That’s because I believe the approach I’ll suggest you consider in place of this beloved strategy has the potential to increase your returns significantly. And that’s just the start, because it also carries benefits that could result in even greater improvements for taxable investors.”What are these strategies? Find out in Episode 71. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 70 is a radio show format. We start with a quick catch-up, discussing the recent eclipse and Meb’s upcoming travel, including Iceland, Reno, Orlando, Amsterdam, among others.Before jumping into listener questions, we get Meb’s thoughts on Episode 69, which featured Jason Calacanis (Meb dabbles with some angel investments himself). Meb tells us a bit more about his own angel experiences and his reflections on interviewing Jason.This dovetails into a question about how Meb allocates his own money between private investments, public investments, debt, and so on (with a “capital allocation” comparison to Thorndike’s book, The Outsiders). You’ll hear Meb’s thoughts on his personal asset allocation.This segues into our first set of questions from listeners, focusing on where to put “safe” money right now. Meb gives us his thoughts, leading into a discussion of which asset could be right for listeners wanting to keep some money on the sidelines, yet without inflation taking too big a chunk of it.What follows is an assortment of questions and rabbit holes: If Meb had to short just one market right now what would it be and why… How an individual investor should look at leverage in a portfolio (includes a recap of risk parity)… Who is Meb’s favorite 13F guru… What hedge fund replication strategies Meb finds most interesting… And even a cryptocurrency challenge to listeners from Meb.What is it? Find out in Episode 70. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 68, we welcome Meb’s friend and Newfound Research founder, Cory Hoffstein (or as Meb refers to him, a “fellow nerd”).Per usual, we start with Corey’s background, but then Meb jumps in by asking Corey to describe his general, 10K foot investing framework. Corey tells us that a specific product and/or style doesn’t necessarily define him or Newfound. Rather, he believes in a consistent, well-researched process that takes into account the behavioral challenges that accompany any given investment strategy. This is because the journey is often just as important as the destination.Meb asks where Corey starts when creating a portfolio. Corey tells us it’s about the balance of risk. This is because “risk cannot be destroyed, only transformed.” Therefore, when building a portfolio, there’s no single holy grail. You need to understand the goals and fears of your client, then figure out how to balance various strategies in order to find a robust, flexible portfolio that handles risk appropriately.This dovetails into one of Newfound’s white papers, “Portfolios in Wonderland,” which tackles today’s investing climate. Corey tells us that we’re in a unique environment, whether focusing on equity valuations or interest rates. It used to be that stocks and bonds zigged when the other zagged. But in the 1980s, both became cheap. Today, we have the opposite: high equity values and low yields on fixed income.This leads to a great discussion on bonds, including Corey’s rule of thumb for estimating future bond returns, and his research into the source of bond returns – how much was due to the coupon, versus declining rates and roll yield.The guys agree that with U.S. equities richly valued, and bond yields so low, future returns of the classic 60/40 portfolio don’t look too appetizing. So, what’s the solution?Corey likes the proliferation of asset classes that used to be found almost exclusively in hedge funds. Now, we can use them to diversify our portfolios and reach a solid rate of return. The conversation bounces around a bit here – how 8%-10% returns aren’t likely going forward unless you’re invested exclusively in emerging markets... how if you let a portfolio optimizer do its thing, you’d have almost no U.S. exposure in either equities or bonds... and how, behaviorally, most people couldn’t have 0% allocated to the S&P, so finding a balance between the best portfolio and the most realistic portfolio is needed.There’s way more in this episode, including answers to “Should we be holding more cash?” “Is dividend investing dangerous” and “How do you factor in various global interest rates when looking at a bond allocation?” There’s also how Corey constructs multi-asset portfolios… how value works across asset classes… the biggest concerns Corey is hearing from clients today… an idea Meb has for a “weird ETF”… and of course, Corey’s most memorable trade.What is it? Find out in Episode 68. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 67, we welcome Simon Black, founder of the newsletter, Sovereign Man.We start with Simon’s military background, having been an intelligence officer. He spent lots of time overseas, yet became disillusioned after the promises of WMDs failed to prove accurate. From this, he began challenging the status quo.Underpinning everything was an ethos of personal freedom, which is at the core of what Simon’s newsletter, Sovereign Man, is really about.Meb asks what global red flags and/or issues Simon is seeing now which might be challenging our personal freedoms. Simon tells us “I see a lot of red flags.” Specifically, he’s seeing a global trend toward socialism. People have a sense that the system is rigged. There’s an intuitive understanding that something is wrong, though people aren’t quite certain what it is, so they blame capitalism. But when people gravitate toward socialism (“I want more free stuff”), we run into the challenge of too many people wanting to jump on the cart, without enough people actually pulling the cart.This leads to an interesting conversation about the effects of socialism in Venezuela, where Simon is located. He mentions how there are vast quantities of soil where the Venezuelans could be growing crops, yet there is starvation. He steers the conversation back to challenges here in the U.S., which leads toward the need for what Simon calls a “Plan B.” In essence, this is a plan intended to protect yourself and your assets from the various risks we face today on many levels – financial, personal, governmental…Part of an effective Plan B ties to diversification. Simon mentions how if all of your assets are in the same banking system, then you’re not diversified. So, Simon suggests at least some money should be kept in banks outside of the U.S. – after all, there are many global banks that are better capitalized than those here in the U.S. He offers Hong Kong as an example.The conversation drifts toward an example of personal diversification – getting a second passport. Simon thinks this is the ultimate option, providing tons of opportunities and benefits – all upside with no downside, for minimal cost.Next up is Simon’s suggestion to legally reduce your tax burden. He tells us “reducing your taxes…that’s the easiest return on investment you’ll ever make.” Simon tell us a favorite tax-reduction technique upon Meb’s request.Next up, the guys discuss having cash outside the U.S. banking system. The conversation references why this is important – just look at what happened in Cyprus and Greece a few years ago. This leads into a discussion of cryptocurrencies. Simon tells us how so many people putting money into crytos today now have no idea what they’re doing – do they even understand Bitcoin and Ethereum? Who has actually read the original white paper on Bitcoin?There’s way more in this episode: where Simon is looking now for safe, margin-of-safety-style investments around the globe… how private equity can help your portfolio… Simon’s entrepreneurial advice… what Simon’s readers are most concerned about today… and of course, Simon’s most memorable trade – it involved day-trading Compaq (and losing everything).How’d it happen? Find out in Episode 67. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 66 is a radio show. We start with Meb referencing the just-published book, The Best Investment Writing, which he edited. It’s a great collection of essays from some of the smartest minds in investing. Check it out.Next, we jump into market commentary, using Meb’s recent “office hours” as our vehicle for discussion. What that means is Meb had some extra time over the last few weeks, so he opened his calendar to his followers, scheduling loads of 30-minute phone calls with various individual investors and RIAs looking to pick Meb’s brain on a variety of subjects. Meb tells us the topics which came up the most often, as well as his thoughts. There’s talk of U.S. equity valuation (and at what level Meb would start selling even before a crash), angel investing, portfolio allocation weightings, and far more.We end with several listener questions. The first involves how Meb views market breadth in light of the growth in index investing; the second solicits Meb’s thoughts on the dangers of ETF investments if the market heads south; the third is at what valuation level the buyback component of a shareholder yield strategy ends up being a headwind.What valuation level did Meb indicate? Find out in Episode 66. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 65, we welcome CTA and commodities expert, Emil van Essen.Meb starts with a fun bit of trivia – if you mesh his and Emil’s name, coming up with “Emil Faber,” can you guess in which movie that name appears?It turns out it’s from the classic comedy, Animal House. “Emil Faber” was the founder of the movie’s “Faber College” and under his statue was his quote, “Knowledge is good.”After Emil gives us a bit about his background, the guys jump into the deep end. Emil trades managed futures, and while most people think “trend following” when they hear “managed futures,” there are other styles. Emil tells us about a style he uses often, spread trading.Emil looks at the term structure in commodities futures contracts. There’s a price for every month going out in time. You can trade the differences between those months (calendar spreads). He also trades relative value and roll arb. Emil likes these strategies because there’s tons of alpha available.Meb pauses to explain a bit for any listeners who are less familiar with all this. He explains exposure to the futures markets, using oil as an example. This leads into a discussion about the growth of commodities markets. Back in the 2000s, commodities went from being just a product to an investment vehicle. So the powers that be created indices and various commodities products to meet this demand. Investments in commodities exploded, driving up prices. This dovetails into what Meb calls “one of the dirty secrets of indexing,” which is how many indices can be front-run. Meb tells us how, for some 1.0 commodities indices, the slippage was in the order of 3-4% per year.Meb then asks Emil to describe what he looks at when establishing a position. Is it fundamental? Technical? Emil tell us it’s very important that you use both, because “you have to understand the fundamentals because things change.”Next is a great conversation about front-running trend followers. This is something that Emil does. He knows that if there’s a big move, the trend followers are likely all on the same side of the position, so when it comes time to roll the front month, and Emil generally knows when that will happen, Emil takes advantage of the price movement. Meb and Emil then discuss the easiest way to implement this strategy.A bit later, the guys discuss what themes/positions Emil is interested in right now. He tells us how there has recently been a shortage in gasoline, so gas has been running up against crude oil. It’s at high levels now, and Emil thinks it’ll come down. Emil also tells us that he’s looking at grains, the energy markets, and certain metals including platinum and palladium.This leads into a discussion on oil. Meb asks Emil’s take on the industry.Emil gives us some great background on what drove oil up so high, and why it crashed. Then he discusses the technological revolution in oil drilling, the result of which is that the cost of finding and developing oil has collapsed. There are some great details in here which oil investors won’t want to miss, but Emil wraps up this part of the conversation by saying “the days of $80 oil – that’s a long way away.”Meb then asks what areas of commodities Emil likes right now. Emil tells us his thoughts on at what level crude is buy. And he mentions a certain metal which he considers a “no brainer.” You’ll have to listen for the details.There’s way more in this episode: how Emil views gold in light of new cryptocurrencies… A Twitter poll Meb conducted that reveals just how stubborn some investors can be when it comes to selling out of overvalued equities… Where Emil has seen the most investors make the biggest mistakes over his 25+ year career… The dangerous false belief that “we’ve seen this before” in the markets, and how computerized investing is taking us into uncharted waters… And finally, Emil’s most memorable trade (which was a loser that will get your blood racing).What are the details? Find out in Episode 65. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 64, we welcome David Varadi from Blue Sky Asset Management.David tells us a bit about himself before he and Meb jump into investing. Meb starts by referencing a quote from Blue Sky’s website:“Unlike endowments, investors do not have an infinite time horizon. For this reason, we believe that a traditional strategic asset allocation approach based on modern portfolio theory is suboptimal. It makes more sense to adapt to changes in the economic environment. We favor a dynamic approach to asset allocation using market information to guide our investment decisions. Most importantly, we believe that a systematic, quantitative approach is necessary to avoid emotions and biases in decision-making.”Meb’s a fan of all the ideas in that quote, so he asks David to expound and discuss his general market framework.David tells us how it’s easy to be a buy-and-hold investor when market is going up; much harder so when the market is falling – especially when nearing retirement. Significant drawdowns can be devastating. So David tells us that “managing risk is absolutely critical.” Investors need to be able to adjust their strategies to handle a wide variety of market scenarios – bear markets, varying interest rate scenarios, and inflation. And “if you have a dynamic asset allocation, you have the ability to be more in tune with the market regime that is currently going on.”Meb asks David to dig deeper – what are the rules and frameworks in place that make his models dynamic?For David, much goes back to fundamentals, trend, momentum, and volatility. David starts with a strategic allocation that reflects longer-term assumptions. But what’s interesting is how David uses volatility in concert with trend/momentum, helping him know when to be in the market versus cash. Most people think time-series momentum is a binary decision, but David brings probabilities into the discussion.Meb then asks about the challenges a retail investor faces when trying to implement the strategies David has been discussing.A big challenge is tracking error. The more dynamic you are (moving away from buy-and-hold indexing), the more potential tracking error. Another issue is how often you trade. David tells us that the investor has to ask himself what is most important – does the investor want to reduce the drawdown in a 2008 scenario, and if so, is he willing to take the tracking error associated with that?Meb echoes this tradeoff between buy-and-hold versus active. It’s very hard to look “different” than the market and/or your neighbors when you’re underperforming.Next, Meb brings up another Blue Sky whitepaper, this one about retirees and risk. David hits the high points, discussing the challenges of volatility in retirement.There’s plenty more in this episode, including the new areas David is researching… David’s most memorable trade (one involves put options, the other Bitcoin)… And David’s one piece of investing advice to listeners, involving three mental “buckets” for your asset allocation.What are they? Find out in Episode 64. Learn more about your ad choices. Visit megaphone.fm/adchoices