The Meb Faber Show - Better Investing

It’s another Q&A episode before everyone gets too busy with the holiday swirl.Per usual, Meb has just come back from more travel, this time to Todos Santos, Mexico. He gives us a quick update before we hop into listener questions. A few you’ll hear tackled are:-         I don’t really understand Trend. In order to maximize return, wouldn’t it make more sense to buy below the simple moving average, then hold or sell when above it? I’m just applying common sense – buy when cheaper than average. What am I missing? -         If you were building an investment strategy for the next 30-40 years, would it more resemble the one found in your QTAA paper, an absolute value strategy (similar to what Porter discussed in that podcast), or your Trinity approach, which is more buy/hold with rebalancing? -         Have you ever considered a strategy that buys put option protection for equity portfolios when valuations are historically high? You could buy long puts or long puts/short calls to offset some of the option premium. -         Are recent bond yield increases causing you to tweak your bond allocations in the Trinity portfolios? -         How does your use of momentum differ from Gary Antonacci’s dual momentum system? -         I’m a banker, and can’t tell you how many times I’ve heard a variation of “Rates are so low at the moment, what a great time to borrow.” What are your thoughts on the long-term debt cycle, and how would you “time” leverage?There’s plenty more, as several of these questions send Meb into deep, labyrinthine rabbit holes – one of which involves his thoughts on how to educate children about investing. He believes most parents today do it entirely wrong. So what’s the right way to raise a world-class investor? Find out in Episode 33. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 32 is like no other we’ve done to date. Local guys, Brew and Brett, run a startup in nearby Manhattan Beach – and it’s disrupting the real estate financing market. It’s not long into the episode before the guys give us the overview of how it works.Peer Street invests in real estate debt. Now, when most people try this, there are too many intermediaries. The effect is the yield is stripped out. Peer Street is fixing this, focusing on short-term, high interest rate loans. The guys’ vision is to enable investing in real estate lending to be as easy as buying a stock through an online broker.After giving us their fascinating professional backgrounds prior to starting Peer Street, Brew and Brett dive into how the process work.There’s always been a shadow, niche market in this space. A real estate investor finds a good property that he/she is able to fix up and sell/rent. But to make the deal happen, the developer has to move quickly, and doesn’t have time to get a traditional loan through a bank. In steps a reputable cash lender, enabling the deal. Brew and Brett are enabling retail investors to take part in these localized real estate deals.Meb asks about the range on yields… how many current deals they have… just general top-down metrics to paint the broad picture.Since the end of Oct 2015, the guys have opened around $200M of loans. The average yield to investors is 8.5% net of fees and expenses. The average loan duration is 10 months. And the average loan-to-value ratio is 65%.The guys then discuss how deals are vetted. There are approval processes, several layers of underwriting, a requirement wherein lenders have to commit their own capital, various data analytics, then stress testing of the loans.Meb asks what would happen to these loans in a real estate Armageddon situation.The Peer Street guys tell us they use as much data as possible to mitigate potential losses. And these are only 10-month loans, so to lose money, the borrower has to stop making payments and the value of the property has to decrease by about 35%. To try to protect against this, they run algorithms and compare the data to previous cycles. Then they consider what was the worst decline in that submarket. This helps them do a manual underwrite of the loan, after which they get an appraisal from an independent 3rd party. There’s far more on how the guys manage risk which you’ll want to hear.Next, the conversation steers toward how an investor would actually take part in the deals. He/she can pick from, typically, 3-15 available deals at a time. Or investors can set up an automated system, establishing parameters from which Peer Street would match them with the right investments. Ten or more loans at a time is recommended for diversification, with the minimum investment being $1,000.There’s way more in this episode, including Brew’s and Brett’s vision for how disruptive this could be, where this type of investment would fit into an asset allocation model, and an “imposter Cambria” that has Meb very angry. Curious why? Find out in Episode 32. Learn more about your ad choices. Visit megaphone.fm/adchoices

Experienced investor, Mark Yusko, emphasizes the importance of asset allocation in managing large pools of capital. He discusses the challenges of accessing great money managers and the need to identify them early. Mark also shares insights on when to part ways with a manager and the significance of continuous learning in finance.

As Meb is back from another series of speaking engagements, Episode 30 starts with a brief recap of his travels. But we hop in quickly, first addressing the election. We’ve had several anxious people write in, requesting commentary on the financial markets now that Trump will be taking over. Meb offers his thoughts, which we can reduce to one word: irrelevant.Next Meb gives us an overview of a white paper he’s soon to begin writing – a rebuttal to detractors of Shiller’s CAPE ratio. He provides some convincing points on why CAPE can be an effective timing tool. You’ll want to hear this if you’re a CAPE fan – even more so if you believe CAPE is flawed.After that, we hop into listener Q&A. A few of the questions you’ll hear Meb tackle are:-         How does CAPE do as a valuation metric for a stock index when the composition of the index is changing or there is significant dilution? -         When it comes to value filters like P/B or P/E, how do you rank metrics which can become negative or distorted when they get too close to zero? -         Besides trend following, what other alternative strategies (e.g. long/short, diversified arb, global macro, market neutral, etc.) do you believe are a worthy addition to a balanced portfolio? -         Please address living through drawdowns versus using trailing stops. Discuss the tradeoff between minimizing drawdowns versus potentially missing huge recoveries. -         What do you think of using CAPE in Frontier markets? And does the 10-month SMA timing model work in these markets? -         How do you practically implement the bond strategy laid out in your paper, “Finding Yield in a 2% World”? -         James O’Shaughnessy’s “What Works on Wall Street” references an investing strategy that posted amazing returns for many years. Seems too good to be true. Any insights? Wouldn’t everyone be using this system if it really was this wonderful? -         Any pointers on how to do your own backtesting?As usual, there’s lots more, including the common investor sentiment of “I’m waiting until the uncertainty dies down before I put more money into the markets,” Meb’s thoughts on cash and inflation, and the benefits of systematic investing. All this and more in Episode 30. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 29, we welcome market veteran, Tom McClellan. Meb starts with some background on Tom – he’s been doing financial writing for 20 years, likely making him one of the longest-running financial writers in the business.The guys then provide an overview of Tom’s proprietary market tool, the McClellan Oscillator. The roots of the Oscillator date back decades ago, when Tom’s father, Sherman, was trying to develop a system by which he could better time corn purchases for their farming business. (It turns out, you can get a better price in March.)In short, Sherman eventually crossed paths with some technical analysts who were exploring breadth statistics in the market (advance/decline line). Sherman applied moving averages to the advance/decline line, and a few tweaks later, we got the McClellan Oscillator.Meb then asks about the best way investors can use the Oscillator, and what the signals are telling us now. Tom gives us a quick tutorial, then suggests that the Oscillator is saying “oversold” (keep in mind this episode was recorded on 11/9). It has been correcting since July, but now that election is over, maybe we’ll see that change.With the election in mind, Meb brings up the sentiment he’s heard from many investors: “I want to wait until the election is over and things are more certain.” Meb finds this amusing, as when are the markets ever certain?This segues into Tom’s election indicator. It had predicted Trump. Tom gives us more details about the mindset behind his indicator. In essence, we see market movements reflected in the poll numbers. In other words, the market is a leading indicator for where the polls will go.As evidence, he references the election when Bush/Gore was too close to call, discussing this through the prism of what the markets were doing at the time. And in this most recent election, the indicator had called for Trump to win though the polls didn’t. Tom says that’s because the poll numbers before the election hadn’t reflected the big decline in the stock market in the week leading up to the election – but that decline did show up as a change in the actual vote.This sets the guys off on a conversation about “sentiment” which is an indicator Tom loves. Then Meb steers the conversation toward interest rates and the Federal Reserve. It turns out, the guys believe you can tell where the Fed should set the Fed Funds Rate by looking at what the yield is on the 2-year note. It’s when that doesn’t happen that we see market issues. Tom gives us an example from Bernanke’s tenure.Meb then points toward another chart from Tom: the S&P verse Federal Tax receipts divided by GDP – in essence, how much the government is collecting in taxes. What’s the relationship here? Well, if you’re against the government taxing too much, you’ll likely agree with the findings.There’s more fascinating conversation about Tom’s various charts. For instance, the common conception is that a slowdown in the economy leads to an increase in crime. Tom says not true. Do you know what is correlated to an increase in crime? Inflation. What inflation does in Year 1 is what crime will do in Year 2.Meb then asks about the biggest mistakes that investors make when creating their own charts. Tom tells us that people want to simplify too much. “Just give me the one chart that will work.” Unfortunately, there is no holy grail. If you’re looking for easy answers, the stock market is not the place to find it. Look for more obscure indicators. If everyone is using the same indicator, there’s no value there.There’s lots more, including a conversation about “value.” Turns out, Tom doesn’t really use value at all. In fact, he says there are only two variables that matter. What are they? Find out in Episode 29. Learn more about your ad choices. Visit megaphone.fm/adchoices

As we recorded Episode 28 on Halloween, it starts with Meb referencing his costume from the prior weekend’s festivities. Can you guess what it was? He stayed true to his financial roots, dressing as Sesame Street’s “Count von Count.” (Sorry, no photographs.)But the guys jump in quickly, beginning with the subject of Larry’s 15th and latest book – “factors.” Larry tells us that the term “factor” is confusing. He defines it as a unique source of risk and expected return. So which factors should an investor use to help him populate his portfolio? Larry believes there are 5 rules to help you evaluate factors: 1) Is the factor “persistent” across long periods of times and regimes? 2) Is it “pervasive”? For instance, does it works across industries, regions, capital structures and so on. 3) Is it “robust”? Does it hold up on its own, and not as a result of data mining? 4) Is it “intuitive”? For instance, is there an explanation? 5) Lastly, it has to be “implementable,” and able to survive trading costs.The guys then switch to beta. Larry mentions how valuations have been rising over the last century. He references how CAPE has risen over a long period, and points out how some people believe this signifies a bubble. But Larry thinks this rising valuation is reasonable, and tells us why. Meb adds that investors are willing to pay a higher multiple on stocks in low-interest rate environments such as the one we’re in.Next, Meb directs the conversation toward a sacred cow of investing – dividends. He asks about one particular quote from Larry’s book: “Dividends are not a factor.” Larry pulls no punches, saying, “there is literally no logical reason for anyone to have a preference for dividends…” He believes investors over overpaying for dividend stocks today. He thinks it’s unfortunate the Fed has pushed investors to search for yield, inadvertently taking on far more risk. Dividend stocks are not alternatives to safe income. There’s plenty more on this topic you’ll want to hear.Eventually the conversation drifts back toward market values. Larry tell us that when the PE ratio of the S&P has been around its average of 16, it has about a 7% expected return. So now that the CAPE is roughly 25, and the expected real return is around 4%, some people are shouting “Sell! Huge crash coming!” Larry disagrees and tells us why.But the guys just can’t leave dividends alone. They swing back toward the topic, with Larry telling us the whole concept of investors focusing on dividends literally makes no sense. If you want a dividend, create your own by selling the commensurate number of shares.There’s far more in this episode that you don’t want to miss: the correlation of value and momentum… trading costs… the use of CDs in your fixed income allocation… corporate bonds and an eroding risk premium… the state of the ETF industry 10 years from now… There’s even a warning – if a former Miss America is pitching you a mutual fund, beware… In what weird context does that advice apply? Find out in Episode 28. Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 27 starts with a quick note from Meb. It’s a week of freebies! Why? Meb is celebrating his 10th “blogiversary.” (He’s officially been writing about finance now for a decade.) Be sure to hear what he’s giving away for free.But soon the interview starts, with Meb asking Porter to give some background on himself and his company, as Porter’s story is somewhat different than that of many guests. Porter tells us about being brought into the world of finance by his close friend and fund manager, Steve Sjuggerud.This conversations bleeds into Porter’s thoughts on how a person should spend his 20s, 30s, and 40s as it relates to income and wealth creation. But it’s not long before the guys dive into the investment markets today, and you won’t want to miss Porter’s take. In essence, if you’re a corporate bond investor, watch out. Porter believes this particular credit cycle is going to be worse than anything we’ve ever seen. Why? There’s plenty of blame to go around, but most significantly, the Fed did not allow the market to clear in 2009 and 2010, and it means this time is going to be very, very bad. Porter gives us the details, but it all points toward one takeaway: “There’s going to be a big bill of bad debt to pay.”Meb then asks what the investing implications are for the average investor. This leads to Porter’s concept of “The Big Trade.” In a nutshell, Porter has identified 30 corporate offenders, “The Dirty 30.” Between them, they owe $300 billion in debt. His plan is to monitor these companies on a weekly basis, while keeping an eye out for liquid, long-dated puts on them that he’ll buy opportunistically. He’ll target default-level strike prices, and expect 10x returns – on average. Meb likes the idea, as the strategy would serve as a hedge to a traditional portfolio.Next, the guys get into asset allocation. Porter’s current strategy is “allocate to value,” but for him that means holding a great deal of cash. Meb doesn’t mind, as wealth preservation is always the most important rule. This leads the guys into bearish territory, with Porter believing we’ll see a recession within the next 12 months.This transitions into how to protect a portfolio; in this case, the guys discuss using a stop-loss service. Porter finds it invaluable, as most people grossly underestimate the risk they’re taking with their investments, as well as their capacity to handle that risk. He sums up his general stance by saying if you don’t have a risk management discipline you will not be successful.Next, the guys get into the biggest investing mistakes Porter has seen his subscribers make over the years. There’s a great deal of poor risk mitigation. He says 95% of his own subscribers will not hedge their portfolio. Meb thinks it’s a problem of framing. People buy home insurance and car insurance. If we framed hedging as “portfolio insurance” it would probably work, but people don’t think that way. He sums up by saying, “To be a good investor, you need to be good at losing.” Porter agrees, pointing out how Buffet has seen 50% drawdowns twice in the last 15 years. If there’s a takeaway from this podcast, it’s “learn how to hedge.”There’s far more, including what Porter believes is the secret to his success. What it is? Find out in Episode 27. Learn more about your ad choices. Visit megaphone.fm/adchoices

If you’re ready to dive straight into the deep end, Episode 26 is for you. The guys waste no time, starting off with complicated topic of currencies. Jeremy takes issue with the currency-stance belonging to some former, unnamed Meb Faber Show guests. Specifically, he challenges the idea that currency hedging is expensive. Not true, he says. It’s only “selectively” expensive. You can actually get paid to hedge certain currencies. He gives us more details, leading to his overall takeaway: You should be hedged a lot more than you are. Meb then asks about any rules that might be applied when using a dynamic currency-hedging strategy. Jeremy gives us his thoughts, telling us when we want to be hedged versus when we don’t, as well as two good signals to use – interest rate differentials and momentum. Where are we overall today? Well, Jeremy says that there is no country so cheap that his shop would take their hedge ratio to zero. Eventually, Meb switches the topic to factor investing. Jeremy gives us his take, noting that minimum vol is where things are most expensive. The guys then discuss factor investing as it pertains to the bond space – in essence, moving away from market cap weightings. Why is that important for bond investing? Well, do you want to give the most weight to the countries issuing the most debt? Unlikely, but that’s how market cap weighting works with bonds. Next, Meb steers the conversation toward liquid alts, specifically managed futures. That’s followed by a great discussion on corporate buybacks. Gotta watch out for that dilution from new share issuance. Interestingly, it turns out that buybacks are largely a U.S. phenomenon. Jeremy agrees, but points out some spots around the globe where that might be changing. As we near the end of the show, Meb asks about the opportunities Jeremy sees going forward. His response in a nutshell? “People are underinvested overseas.” There’s plenty more, including an asset class that is coming up on being down a whopping six years in a row, as well as how Meb hacked a VPN service that enabled him to watch the last Super Bowl from a tiny village in Japan. How’d he do it? Find out in Episode 26. Learn more about your ad choices. Visit megaphone.fm/adchoices

We have some great guests lined up in the coming weeks, so we figured we’d squeeze in another Q&A episode. This week, Meb is back from traveling yet again, this time to The Caymans. The show starts with Meb giving us highlights from the trip, as well as one low-light (waking up one morning to find a welt on his head, and hoping it isn’t Zika). This transitions into a topic recently covered in one of Meb’s blog posts; of all the animals that people find most terrifying, lions and sharks are near the top of the list. But statistically, lions and sharks are responsible for only a tiny amount of human deaths per year. You know what kills 725,000 humans per year – yet few fear (until recently)? Mosquitos. Similarly, many investors are terrified about the outcome of the U.S. Presidential election. But this election isn’t likely to “kill” a portfolio. On the other hand, you know what is? The mosquito known as “fees.” Eventually, the conversation gravitates toward listener questions. A few you’ll hear Meb tackle are:-         What are some of the best ways and resources to learn about markets and investing? -         (Dovetails into…) Why don’t we hear Meb discuss single-stock fundamental analysis more often? -         What does the typical day look like for Meb and other successful investment professionals? Habits? Amount of reading? How much sleep? And so on… -         How does an investor tell the difference between an investment strategy that’s simply “out of favor” (and therefore, underperforming) versus a strategy that has truly lost its effectiveness (and underperforming)? -         One of the variables in Bogle’s formula for estimating returns is dividend yield. Why wouldn’t you substitute shareholder yield instead? -         What are the pros/cons of protecting the downside by buying puts versus using trend following? -         Assuming an investor is a huge risk taker and can handle it, should he put all his money in the asset class with the highest expected return – for instance, be “all in” Russia?As usual, there’s lots more, including Meb’s upcoming travel schedule. He’s going to be in Orange County, New York, Richmond, and D.C., so drop him a line if you’ll be in the areas. All this and far more in Episode 25. Learn more about your ad choices. Visit megaphone.fm/adchoices

Exploring historical investment bubbles, the podcast delves into famous bubbles like the South Sea Company and Dutch tulip mania. Strategies for capturing bubble upside while protecting from fallout are discussed, with a focus on trend following using the 10-month simple moving average. The episode highlights the importance of risk management and surviving market bubbles through historical examples.