RPF0177-Meb_Faber_Interview
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00:00:43.900 | Today on the show, I bring you a much awaited interview
00:00:48.500 | with investment guru extraordinaire Meb Faber.
00:00:52.800 | [MUSIC PLAYING]
00:00:56.400 | [MUSIC PLAYING]
00:00:59.400 | Welcome to the Radical Personal Finance podcast.
00:01:11.200 | My name is Joshua Sheets.
00:01:12.800 | Today is Tuesday, April 7, 2015.
00:01:17.400 | And today, I bring you a show with Meb Faber.
00:01:19.400 | Meb is the author of multiple books.
00:01:21.000 | And he is much acclaimed for being both knowledgeable and expert.
00:01:27.200 | I shouldn't say both.
00:01:28.100 | I shouldn't.
00:01:28.600 | He's acclaimed for being knowledgeable, expert, but most importantly,
00:01:32.800 | clear and direct and honest.
00:01:36.200 | [MUSIC PLAYING]
00:01:39.100 | It's kind of challenging.
00:01:42.400 | And many people feel it's very challenging to find someone
00:01:45.100 | in the investment world who's a straight shooter.
00:01:47.200 | But Meb has a reputation for being a straight shooter.
00:01:50.100 | And I think you're really going to enjoy this interview.
00:01:52.400 | It's pretty hardcore with some respects.
00:01:56.000 | But it's not going to be over your head if you're
00:01:58.100 | new to the topic of investing.
00:01:59.600 | I tried to very much focus our discussion on content
00:02:03.900 | that would be helpful but not overly technical.
00:02:08.200 | If we want to get more overly technical,
00:02:10.400 | I may have to have Meb back in the future,
00:02:12.100 | as you'll hear in today's interview.
00:02:14.100 | But I think you'll enjoy hearing about his own personal philosophy on life,
00:02:18.600 | his own story, and how he came to be in the investment business.
00:02:22.700 | Pay careful attention to some of the lessons
00:02:24.400 | that I teach every day here on Radical Personal Finance,
00:02:27.300 | and see if you pick them up unprompted in his story.
00:02:30.800 | Meb, welcome to the Radical Personal Finance podcast.
00:02:35.600 | I appreciate you making time to be with us today.
00:02:38.100 | Great to be here, and thanks for having me.
00:02:39.900 | I've been looking forward to this chat because you're
00:02:43.000 | one of the most requested guests from the audience.
00:02:45.200 | I've had several people write to me from the audience
00:02:47.600 | and say, "Please, please, please, get Meb Faber on the show."
00:02:50.600 | So you're among friends.
00:02:53.100 | Looking forward to it.
00:02:54.600 | I'd like to kick it off with just a quick intro to yourself.
00:02:58.400 | How on earth did you wind up in the investment business?
00:03:00.600 | What was your path?
00:03:01.600 | Well, somewhat meandering.
00:03:06.600 | Like many, my career started out, my undergrad was biotech and engineering,
00:03:15.100 | and I had taken a year off after undergrad.
00:03:20.600 | When I say year off, I meant not going straight to grad school
00:03:24.100 | for a PhD in biotech, which was the original plan,
00:03:28.100 | but took a year off to work as a biotech equity analyst.
00:03:33.100 | This was at a pretty fun time for markets, meaning a little bubbly.
00:03:37.600 | This was the year 2000, when not only were you having
00:03:42.600 | a stock market bubble, but also a lot of excitement going around
00:03:47.600 | in biotech and sequencing the genome.
00:03:52.100 | So after about a year of that, I said, "Well, this is way too interesting.
00:03:57.100 | I haven't really prepared, ready to go back to grad school yet
00:04:02.100 | and commit to five years of that sort of study.
00:04:07.100 | Let me try this for another year and see how it goes."
00:04:10.600 | I was taking grad classes at night down the road in Hopkins,
00:04:13.600 | so I was in D.C., but I kept gravitating further away from the biotech
00:04:21.100 | and more towards the quant world of investing in finance.
00:04:25.100 | Some of the little decisions you make at the time that seemed very minor
00:04:29.600 | turned out to be larger forks in the road.
00:04:33.600 | Next thing you know, your career becomes a hobby and vice versa.
00:04:38.600 | Were you working as an equity analyst for a mutual fund at the time?
00:04:42.100 | I did. It was both. It was like many shops, a more traditional investment advisor,
00:04:48.100 | but also ran a mutual fund that was focused on the biotech space.
00:04:53.100 | Pretty interesting, because not a lot of the ETFs had been as prevalent as they are today.
00:05:02.600 | In the late '90s, there were only a few.
00:05:05.600 | This move towards finer granularity and all sorts of interesting new products
00:05:11.600 | that the ETF space has spawned didn't really exist yet,
00:05:15.600 | but many of the challenges of having a sector focus or a particular market focus
00:05:23.600 | certainly became apparent to me as the biotech index went down.
00:05:30.600 | I don't remember, 60-70% in the 2000 bear market.
00:05:36.600 | It was fascinating to watch. Painful, of course, for many,
00:05:42.600 | but it was a good intro into the world of managing money,
00:05:49.600 | but also stock picking and all sorts of other lessons learned.
00:05:55.600 | So did you learn? You didn't have a history in investing.
00:05:59.100 | Did you then go from there and learn on the job working for various firms?
00:06:03.100 | Did you pull out of the world, sit down with a stack of books, study, study, study,
00:06:07.100 | and then go back into the professional investment world?
00:06:09.600 | Probably like many, growing up, chatting with my parents and friends
00:06:15.100 | and always had an interest in investing,
00:06:17.100 | and certainly throughout high school and college,
00:06:21.100 | a very strong hobbyist in the sense, reading as much as you could,
00:06:27.100 | getting caught up in the fun of the bubble in the '90s, certainly.
00:06:31.100 | And since that time, a lot of self-taught.
00:06:36.100 | I didn't go to business school.
00:06:38.100 | I did participate in a few of the designations,
00:06:43.100 | but those largely because I thought the books were interesting
00:06:46.100 | and it would be fun to read the source material anyway.
00:06:49.100 | But no traditional business school or MBA sort of background,
00:06:55.100 | pretty much all self-taught, which has its pluses and minuses.
00:07:00.100 | The plus is, of course, that you don't have any sort of preordained belief system.
00:07:06.100 | The minuses are that you go down 10,000 dead-end roads
00:07:11.100 | that probably would have been a lot easier with certain mentors or curriculums.
00:07:18.100 | But it's been a fun ride the whole way.
00:07:22.100 | And now you run Cambria Investments.
00:07:25.100 | Could you share a little bit about what you guys do?
00:07:27.100 | And you're known for being a writer as well.
00:07:29.100 | Could you share just a little bit about what you do and the books that you write?
00:07:32.100 | We started Cambria in 2006, and my partner, Eric Richardson,
00:07:37.100 | comes from somewhat of a legal investment banking VC background,
00:07:42.100 | and so pretty complementary, because my background,
00:07:45.100 | by the time '06 came around, was mostly in research and portfolio management.
00:07:51.100 | And we decided we wanted to start an investment advisor.
00:07:55.100 | Didn't really know exactly what we wanted to be when we grew up years down the line.
00:08:02.100 | Knew that we wanted to start a couple private funds, which we did, private hedge funds.
00:08:08.100 | So we started two of those, but also started managing individual accounts.
00:08:11.100 | The writing very much was somewhat of a fortuitous accident.
00:08:18.100 | I had published my one and only academic paper almost by accident,
00:08:25.100 | and after that, started blogging and writing,
00:08:31.100 | and that initial experiment really became an ongoing affair
00:08:41.100 | where it benefited me vastly more in many ways to share my thoughts and research
00:08:48.100 | with people around the world and have them--
00:08:51.100 | Being a quant can often be a lonely pursuit.
00:08:54.100 | You're not talking to management all day.
00:08:56.100 | You're not out there kicking the tires of companies and talking to suppliers
00:09:00.100 | and all that goes with being a fundamental analyst,
00:09:03.100 | which is what I used to do as a biotech guy,
00:09:06.100 | but being a quant, it's much more singular.
00:09:10.100 | And so the ability to interact via the Internet or Twitter now
00:09:15.100 | or blogging and writing articles and white papers and books
00:09:20.100 | has enabled me to really expand the network of brilliant people
00:09:28.100 | that have criticized and constructively built upon a lot of the work we've published.
00:09:34.100 | So it's been a pretty cool way.
00:09:36.100 | Going back to '06, I'd certainly--
00:09:39.100 | had you told me 5, 10 years later I'd be writing as much as I had,
00:09:44.100 | I would certainly say you're crazy.
00:09:47.100 | As much as we like to think that we plan our path and plan our life out,
00:09:51.100 | sometimes it just more happens that things open up as we go through them, right?
00:09:55.100 | Well, the funny story about the white paper actually is that
00:09:59.100 | I was going through one of these designations called the CMT,
00:10:03.100 | which stands for Certified Market Technician, for those listening,
00:10:07.100 | which is somewhat of the technical analysis equivalent of the CFA.
00:10:12.100 | And three-level program, in level three,
00:10:16.100 | they used to have and have reinstated an option to not take the test
00:10:22.100 | but to write a paper.
00:10:24.100 | And at that time, there's nothing I wanted to do less than take a test,
00:10:29.100 | especially with a lot of material I didn't necessarily believe in,
00:10:32.100 | so I threw in an abstract at the last minute
00:10:35.100 | because they were closing down the essay possibility.
00:10:38.100 | And I said, "What in the world could I possibly write about?
00:10:41.100 | I've never written a finance paper."
00:10:44.100 | So it became this trend-following paper
00:10:48.100 | that we then published in the Journal of Wealth Management,
00:10:51.100 | which, strangely enough, is now the number two most downloaded white paper
00:10:57.100 | on the Social Science Research Network,
00:11:00.100 | which is where all the academic nerds like me publish their research.
00:11:05.100 | So it was kind of this really strange, like you mentioned,
00:11:09.100 | fortuitous event that just because I didn't want to take a test,
00:11:14.100 | it ended up being a very popular white paper
00:11:16.100 | that people really seemed to resonate with people.
00:11:19.100 | Wow. Wow.
00:11:21.100 | The radical personal finance community is not built up of hardcore--
00:11:27.100 | we're not hardcore quants, we're not hardcore investors.
00:11:30.100 | Rather, we're more kind of normal, everyday people
00:11:33.100 | with an above-average interest in personal finance.
00:11:36.100 | And one of my goals with the show is to bridge the gap
00:11:41.100 | between very technical, complex, in-depth investment conversations
00:11:46.100 | and overly simplified, just whitewashed personal finance advice
00:11:53.100 | and kind of fill in that middle ground there.
00:11:55.100 | That's where this question is coming from.
00:11:57.100 | You are making a living and have made a name for yourself
00:12:01.100 | with investment advice, and yet the common perception
00:12:06.100 | in the personal finance world is, well, no one can do that successfully.
00:12:11.100 | How would you discuss what you actually do professionally,
00:12:17.100 | the value that you actually bring,
00:12:19.100 | and how would you defend the money that you earn
00:12:21.100 | and the value that you bring to your investors
00:12:23.100 | in the mainstream world of personal finance,
00:12:27.100 | which believes that there's very little value
00:12:29.100 | that individuals can bring to an investment portfolio?
00:12:33.100 | Boy, that's an open-ended question.
00:12:35.100 | Okay, so background on our firm is that we run now five public ETFs,
00:12:43.100 | so public funds that are pretty broad spectrum.
00:12:47.100 | The goal for us is to disrupt the traditional high-fee investment world.
00:12:54.100 | So a lot of the basic ideas and strategies that exist in mutual funds
00:13:01.100 | and hedge funds, we want to be able to offer for lower cost.
00:13:06.100 | So we have ETFs that range from anywhere from a 0% management fee up to about 0.69,
00:13:12.100 | so half the cost on average of the average mutual fund.
00:13:17.100 | And so when you think about investing, and this is now going back to your question,
00:13:23.100 | it becomes a very personal type of way to think about the world.
00:13:31.100 | And the challenges with this--I actually had a long, meandering,
00:13:36.100 | 45-minute Uber conversation as I was Ubering around,
00:13:41.100 | stuck in traffic in LA yesterday.
00:13:44.100 | But it highly depends on the person.
00:13:49.100 | And the challenge--so take my mother, for example.
00:13:52.100 | She is completely content and happy and sleeps at night.
00:13:57.100 | Having money and CDs and low-risk investments,
00:14:00.100 | could not care less about being exposed to broader markets,
00:14:05.100 | regardless of the additional return.
00:14:09.100 | And there's other people that like to think they have higher capacity for risk tolerance, etc.
00:14:16.100 | The biggest problem comes when most people haven't studied enough history.
00:14:23.100 | And this isn't just individuals.
00:14:25.100 | This is professionals, professional RIAs.
00:14:28.100 | This is why 2008 was such a big problem for most investors,
00:14:32.100 | professionals as well as retailers, because certain market-style events
00:14:37.100 | like that happened in 2008 hadn't happened in a long time.
00:14:41.100 | And so it had been mostly purged from people's memories.
00:14:44.100 | So the point I'm trying to make here is that people often take an investment approach
00:14:49.100 | and even try to be honest with what they think their pain points and risk tolerances are.
00:14:55.100 | And so as an example, say, "Yeah, I'm okay. I have a long-term time horizon.
00:15:01.100 | I can lose 50% and I'll just rebounce and it'll be okay."
00:15:06.100 | And then what happens is it turns into a bear market and someone loses 50% of their money,
00:15:12.100 | and it's a totally different experience than what they may have thought it would have been like.
00:15:17.100 | And the famous Mike Tyson quote is that, you know,
00:15:22.100 | "Everyone has a plan until they get punched in the face."
00:15:25.100 | And so that correlates pretty highly often with what's going on in the world.
00:15:30.100 | So if you have a generic asset allocation portfolio, that's probably great.
00:15:34.100 | The way you set it up and have, you know, X percent of this and Y percent of this,
00:15:39.100 | and you're a buy and hold investor, you've got to realize that at some point
00:15:43.100 | that's going to have a fair amount of losses.
00:15:46.100 | And the unfortunate reality is that there's only two possible states for your portfolio.
00:15:52.100 | It's all-time highs or in some form of drawdown.
00:15:57.100 | And for most people, you spend the majority of the time in some sort of drawdown from your peak value.
00:16:06.100 | So the emotional side can be very challenging.
00:16:09.100 | And so what we try to do, we try to wrap strategies that--my number one criteria is it's something I want to invest in.
00:16:18.100 | Certainly there's a lot of companies out there.
00:16:20.100 | Vanguard is a perfect example where you can get exposure to markets or portfolios for very cheap.
00:16:28.100 | And we never will offer those.
00:16:30.100 | The only types of strategies and portfolios we offer are areas that we think we can do it a little bit better
00:16:37.100 | or we think it's an area that doesn't exist yet that someone should offer.
00:16:43.100 | And so we have five funds out. We have about three or four more that we'll eventually launch.
00:16:50.100 | Probably never much more than--many more than 10 funds.
00:16:54.100 | And we can--I'm happy to get into the research or ideas on any of the particular strategies
00:16:59.100 | or wherever this conversation is going to go.
00:17:01.100 | But one of the biggest takeaways for investing is that it becomes highly personal.
00:17:07.100 | And the biggest challenge with that is that the personal depends largely on your time frame.
00:17:13.100 | So the investor, average investor in Japan who went through the biggest bubble we've ever seen in the 1980s
00:17:21.100 | in their stock market and for the past 20 years has lost money, last two years excluded,
00:17:28.100 | would have a very different perspective on what it means to be an investor than someone in the U.S.
00:17:35.100 | or someone in Russia right now or Greece or Brazil.
00:17:40.100 | And one of the biggest takeaways for the listeners is to get some historical perspective.
00:17:48.100 | And one of my favorite all-time investing books is Triumph of the Optimist.
00:17:54.100 | And it's expensive. It's about $100, but a fun coffee table book that lets you look back and see,
00:17:59.100 | hey, what has happened in markets for the past 130 years and is just to at least see what's possible.
00:18:09.100 | And it's hard to think about all the potential outcomes, but we would argue fairly necessary
00:18:15.100 | because crazy things can happen in markets.
00:18:19.100 | And one of the better phrases is normal market returns are extreme.
00:18:26.100 | So how does a normal investor balance a sense of long-term optimism
00:18:33.100 | but with a healthy skepticism and desire for self-protection?
00:18:39.100 | There's a couple of good rules of thumb that I like to go by.
00:18:43.100 | And for the investors on the podcast who aren't familiar, there's a difference between what we call nominal returns,
00:18:50.100 | which are if you see that the S&P was, say, up 10% last year, that's what we call nominal.
00:18:57.100 | And then if you subtract out inflation, and let's call that 2% right now, that's a little high.
00:19:03.100 | It's probably closer to 1%. But we'll use an example, 2%.
00:19:06.100 | Your real returns would have been 8%. And those are the returns that really matter, what we call returns you can eat.
00:19:12.100 | You can't really spend inflation dollars.
00:19:16.100 | Ask anyone that's been in Zimbabwe or Argentina where there's been very high inflation because it eats away.
00:19:23.100 | So if you have a 10% return but you have 10% inflation, your return is zero, your real return.
00:19:30.100 | And so it's important to think in those terms.
00:19:32.100 | It's a little challenging because most people don't really think that much about inflation.
00:19:37.100 | And the U.S. has been tame for the past, what, 35 years.
00:19:42.100 | But for the older crowd listening, they remember the '70s when inflation was high single digits, low double digits.
00:19:48.100 | And it's a totally different atmosphere.
00:19:50.100 | So a couple of rule of thumbs.
00:19:52.100 | One is that the historical return on stocks, real returns, and this is net of inflation, around the world has been around 5% per year.
00:20:04.100 | The average return for bonds is a little below.
00:20:09.100 | It's probably 1.5%, but I like to round up and call it 2 just because it makes the rule of thumb easier.
00:20:15.100 | And then for T-bills or short-term bonds, it's less than 1, but we round up to 1.
00:20:20.100 | So we call it 5-2-1 rule.
00:20:22.100 | So that's what you should be able to expect on stocks, bonds, and bills over time and historically.
00:20:31.100 | The biggest problem with that, and the U.S. did better than that since 1900, so I think the U.S. was up above 6% real returns, called 6.5, and then you add in the inflation and then you get to that historical 10% number that most people expect and are familiar with.
00:20:49.100 | But there was countries, if you were born in Austria, you had a 0% real return in stocks.
00:20:55.100 | So one of the reasons that it's important to be global in your thinking, because if you concentrate in any one country or environment and the U.S. counts, you're exposing yourself to unneeded concentration.
00:21:11.100 | So if you put together a portfolio and you say, "Look, Meb, I want to build the best portfolio to outperform in any market environment," and we actually just published a book on this topic about a month ago called Global Asset Allocation, a survey of the world's 15 best investment allocations or something like that.
00:21:32.100 | Three bucks on Amazon.
00:21:34.100 | If you're listening to this podcast, if you go to freebook.mebfaber.com, I'll send you a free copy.
00:21:42.100 | You've got to promise to read it, though.
00:21:44.100 | And it's short, about 100 pages, but we looked at the most famous asset allocations from the most famous gurus around the world.
00:21:53.100 | When I say guru, I mean that as a compliment.
00:21:55.100 | So people like David Swensen, who ran the Yale Endowment, Mohamed El-Erian, who ran PIMCO and the Harvard Endowment, Rob Arnott runs research affiliates.
00:22:05.100 | And then a lot of other people that would be familiar with Provida Readers, like Dr. Bernstein, Mark Faber, Larry Suedro.
00:22:14.100 | And all these people recommend portfolio allocations.
00:22:17.100 | So they'll say, you need to put X amount in U.S. stocks and X amount in foreign stocks and this much in 10-year bonds and this much in Treasury bonds, inflation bonds, and X percent in real estate and X percent in commodities.
00:22:32.100 | And what we found is that we looked at all these allocations back to the '70s.
00:22:37.100 | And as long as you had some of each of the three main pillars, so we'll call those stocks global, bonds global, and then real assets, and real assets we define as commodities, real estate, and Treasury, inflation, protected securities, people call those TIPS.
00:22:57.100 | As long as you have a little in gold, we'll add gold in the commodity label, as long as you have some of those three main ingredients, the exact percentages don't matter that much.
00:23:08.100 | And almost all the allocations end up in the same place.
00:23:11.100 | Now, some do better in the '70s.
00:23:13.100 | So the ones that had more gold or inflationary-style assets did better.
00:23:19.100 | And then, but typically, the portfolios that did great in that market environment did poor in the disinflationary '80s and growth of the '90s.
00:23:30.100 | So you want a portfolio that balances over time, but the exact percentages don't matter that much.
00:23:35.100 | So there's a huge takeaway in the book.
00:23:38.100 | And we said, all right, what if you could go back to 1972 in a time machine and say, what was the best-performing strategy over the period?
00:23:47.100 | It was Mohamedou Ariane's strategy, a nice allocation that is very endowment-like, meaning it had a higher percentage in global equity-like investments, so stocks, real estate, but it also had exposure to commodities and a little bit in bonds.
00:24:06.100 | So it was the best-performing strategy.
00:24:08.100 | However, if you layered on the average fees of a mutual fund, so 1.25%, it takes it down to near where the worst-performing allocation was.
00:24:24.100 | And in this case, it was the permanent portfolio, which isn't a bad portfolio, but because it has so much in cash, it's naturally less volatile and has lower returns.
00:24:35.100 | But if you add on the average fee of an advisor who invests in mutual funds, you would have transformed the best-performing allocation into worse than the worst.
00:24:47.100 | Wow.
00:24:48.100 | And so that's a pretty stunning takeaway in my mind, that people spend probably 90% of their time investing, thinking about how much should I have in stocks?
00:25:01.100 | Are stocks overvalued?
00:25:03.100 | Are they going to crash?
00:25:04.100 | What about what's going on in Europe?
00:25:07.100 | Are bonds in a bubble?
00:25:10.100 | Oil just went from 100 to 50.
00:25:12.100 | That's what they spend 90% of their time doing, because it's exciting and fun and makes good TV.
00:25:18.100 | But the boring blocking and tackling of, "Look, you want to pay as little as possible for these types of buy-and-hold investments."
00:25:27.100 | And the vast majority of what my company does is actually not buy-and-hold.
00:25:30.100 | Because I said in our first book, the IV portfolio, I said, "If you're going to do buy-and-hold investing, by definition, you're not doing much.
00:25:39.100 | You're buying and holding.
00:25:40.100 | So you should pay as little as possible for that."
00:25:43.100 | So there's plenty of good options out there, vanguards of the world.
00:25:46.100 | We actually just launched the first ever ETF in the US.
00:25:52.100 | It's called Global Asset Allocation, ticker is GAA, that has a permanent 0% management fee.
00:25:59.100 | So it's not totally free, because it owns 29 underlying ETFs that cover all the main asset classes, three of which are Cambria funds.
00:26:09.100 | So the all-in cost, it's the lowest cost asset allocation ETF.
00:26:13.100 | It's at 0.29%.
00:26:16.100 | But that's a good example of us putting our money where our mouth is, saying, "Look, if you're going to do buy-and-hold, you should pay as little as possible on fees."
00:26:25.100 | And its close cousin, of course, is taxes.
00:26:28.100 | So being very mindful of taxes and harvesting losses for a portfolio, as well as trying to put as much of your investments in tax-deferred sort of accounts.
00:26:44.100 | But it's interesting in this particular example, this book, that what you pay and the boring things you do on a daily basis end up influencing your return much more over time than what the asset allocation actually is.
00:27:02.100 | So there's about three or four different directions I could go after that.
00:27:06.100 | Many questions emerged from that.
00:27:08.100 | But I'm going to ask the more pointed and perhaps provocative one first.
00:27:12.100 | If you are building a structure of your personal company that's based upon charging the lowest fees possible, how do you hope to build your own personal wealth to enrich yourself?
00:27:28.100 | That's a great sideways move to this conversation, but interesting enough.
00:27:37.100 | I spend a lot of time thinking about and being a biotech guy.
00:27:45.100 | I used to read a lot of behavioral psychology.
00:27:49.100 | And so behavioral side of investing has always been fascinating to me.
00:27:53.100 | Because if you go down the list, especially for individuals, this also applies to institutions, of the biggest mistakes they make.
00:28:03.100 | Number one, across the board, not even a question, is getting your emotions involved in your investing and messing around and mucking up and doing dumb things that all of us do.
00:28:14.100 | And it's easy because people chase returns.
00:28:19.100 | They buy at tops when it's exciting.
00:28:22.100 | They sell at market bottoms because they can't take it anymore.
00:28:25.100 | And the challenge of truly understanding those biases, and I have most of them, I'm very overconfident.
00:28:34.100 | We all do, right?
00:28:36.100 | Yeah.
00:28:37.100 | Well, I think I'm smarter than everyone in the room.
00:28:41.100 | I'm a better driver.
00:28:45.100 | And then I have other ones that I've learned over time, mostly by making mistakes.
00:28:49.100 | And painfully, I take way too much risk if given the opportunity.
00:28:54.100 | I'll use much, much more aggressive trading that is prudent.
00:29:01.100 | So number one is understanding your behavioral biases.
00:29:05.100 | But a close cousin of that, all of us spend so much time optimizing the how do I make money, how do I control my personal finances.
00:29:15.100 | But very few people spend a lot of time thinking how can I best optimize how I spend money to actually translate into happiness.
00:29:26.100 | And most people, what actually creates happiness for people is usually not how a lot of people spend money.
00:29:38.100 | And there was a pretty good book out on this topic recently.
00:29:41.100 | I want to say it was called Happy Money.
00:29:43.100 | But it goes through all the research and says, look, what actually makes people really happy?
00:29:49.100 | And it's not shocking.
00:29:51.100 | Things like, you know, sharing with other people and donating and being charitable to other people, having time to give yourself personal time and experiences rather than purchases.
00:30:10.100 | You know, so everyone thinks they want that Corvette.
00:30:14.100 | But does that actually make you happy versus, you know, maybe a trip to Hawaii with your family or having the time to go to your son's baseball game?
00:30:24.100 | And so as you think about a lot of those things and I try to apply it to our company as well.
00:30:30.100 | So Cambria is small.
00:30:32.100 | We have four people.
00:30:33.100 | We're going to probably have to double that in the next year.
00:30:36.100 | But we've built the company to be somewhat frugal and prudent and at the same time say, look, we only want to offer strategies we ourselves would invest in.
00:30:49.100 | So I have 100 percent of my investable net worth in our ETFs.
00:30:55.100 | So I think it's very important to eat your own cooking.
00:31:00.100 | A lot of managers don't.
00:31:02.100 | And one of my recommended first questions to for individuals when they hire a money manager or think about investing in a mutual fund is say, what do you do with your own money?
00:31:13.100 | Tell me how you invest your own money, because there's a lot of people out there that will give advice.
00:31:18.100 | But at the same time with their own money, maybe doing something completely different.
00:31:22.100 | And there's actually a lot of research that Morningstar and other shops have done that shows the mutual funds and funds where the managers have more invested in their own fund perform much better over time.
00:31:35.100 | So how do we make money on the so of the five ETFs we manage, we manage almost 500 million dollars.
00:31:41.100 | We have a couple of private funds.
00:31:43.100 | Our company is quite nicely profitable.
00:31:47.100 | But my goal in life is not to there's two types of companies on Wall Street.
00:31:52.100 | There's one type, which is how much can I charge and get away with it?
00:31:56.100 | So maximizing their earnings.
00:31:58.100 | And there is a lot of companies set up like that.
00:32:01.100 | If investors think Wall Street is built for your benefit, you're sorely mistaken.
00:32:06.100 | And every turn, you know, the companies are built to try to extract fees from you.
00:32:15.100 | And then there's the other types of companies which we would like to think we're a part of, which are the sort of vanguards of the world which say, you know what?
00:32:23.100 | How little can I charge and get away with it and still run a business and it be sustainable and successful?
00:32:32.100 | And so, you know, we've built what we think are five really great funds.
00:32:37.100 | The most expensive is 0.69 percent, and that's because it owns what we think are the 10 cheapest countries in the world.
00:32:45.100 | So there are extra costs in owning stocks in like Greece and Russia and Brazil.
00:32:52.100 | And in the zero percent fund, the beauty of that fund is it doesn't cost me much.
00:33:01.100 | So if no one invested in that fund and it was just for my friends and family, I still would have done it because it's not going to cost me much.
00:33:10.100 | But the beauty of that fund, and it only launched in December, is that it could easily get to $10 or $20 billion and it not be remotely difficult to run because it's a buy and hold style strategy.
00:33:24.100 | So it will eventually make money at some point, and there's one even, and this starts to get into the weeds a little bit for your readers,
00:33:32.100 | but a lot of ETFs out there and mutual funds can even go one step further, and Vanguard does that.
00:33:39.100 | And you can actually lend out the securities in the fund and return what's called the short lending revenue to the shareholders of the ETF.
00:33:50.100 | So Vanguard actually has ETFs that have a low fee, but because they return the short lending to the shareholders, the ETF is actually free.
00:34:00.100 | Not only is it free, it's actually paying you a slight amount to own it.
00:34:04.100 | So it'll have essentially a negative expense ratio, which is actually pretty incredible.
00:34:10.100 | It really is.
00:34:11.100 | You know, at this day and age, you go back to the '70s and '80s, many investors remember this, mutual funds with 2% or 3% fees per year plus 5% sales charge plus a 12B1 fee every year,
00:34:28.100 | and you could have funds that would have a cost per year of owning it of 4% percentage points.
00:34:35.100 | If you go back to my old rule of thumb, remember stocks are going to return about 5%, and you have something that's going to charge you 4% a year.
00:34:48.100 | It's a wonderful time to be an investor.
00:34:51.100 | Never has there been a more awesome time, and we talk a lot about this with the robo-advisors that have come out that will do your asset allocation for you and charge you.
00:35:01.100 | Schwab is now nothing.
00:35:02.100 | They'll charge you 0%.
00:35:04.100 | It's a really exciting time to be an investor.
00:35:07.100 | Never has there been an easier way to invest in assets all around the world.
00:35:13.100 | I feel like you ask these really simple-sounding questions, and then I end up just blabbing for like 10 minutes.
00:35:20.100 | So I apologize if I'm a little verbose this morning.
00:35:24.100 | I've had probably too much coffee.
00:35:27.100 | I try to seek out people who are interesting and knowledgeable, and then I try to tee up questions that are just provocative enough to get you going on something but to let you run wherever you run, and I just sit back and listen.
00:35:39.100 | So you're doing exactly what I hoped you would do.
00:35:42.100 | We have about 10 minutes left, and there are two themes that I would like to explore with you in the time remaining.
00:35:51.100 | The first theme is how to put in place a professional type of investment policy process for an individual, and here's where I'm trying to bridge the gap between personal finance and portfolio management.
00:36:06.100 | A good portfolio manager is always going to have their investment policies planned out in advance before even running the portfolio.
00:36:15.100 | You're going to have it spelled out.
00:36:17.100 | Here's what we do, here's what we're planning to do, and there might be some leeway in that or there might not be.
00:36:23.100 | But as individuals, it's a rare individual investor or it's a rare person who in managing their own money has a clearly defined set of goals, has a clearly defined set of benchmarks of here's what I'm trying to do, and I've thought through all the different strategies.
00:36:39.100 | How would you advise somebody to sit down, look at their own situation, their own financial plan,
00:36:46.100 | and build out a personal investment policy statement and plan for themselves, taking into account the world we live in in 2015, the global fears with currency fluctuations, the fears of government excess, and all of just the things that are on the news every day?
00:37:04.100 | How would you guide someone to sit down and do that for themselves?
00:37:07.100 | First, I'll make some broad advice and then go through a few steps that I think are important.
00:37:14.100 | One, again, I encourage you to read my book. It's free. I'll send you a copy. Free book, mebfavor.com.
00:37:20.100 | Free book, dot mebfavor.com.
00:37:23.100 | Understand that once you build a nice diversified portfolio, you can really go on back to living your life and not worry about a lot of the things that most people spend most of their time worrying about.
00:37:38.100 | However, if you want to go a step further and say, "Look, I really want to learn a lot more about what's possible, the history of investing," you need to become more of a student of history.
00:37:51.100 | Triumph of the Optimist is a good starting point. There's lots of great books out there that can help you understand what's happened in the past and what's possible so that the biggest problem investors have of the list of four things.
00:38:08.100 | One is having unrealistic expectations and not understanding what has happened in the past. That pertains to personal relationships too, where the biggest problem between people comes if someone has an expectation that's not met in whatever way.
00:38:27.100 | One, understand a little history, have reasonable expectations. Two, go out and try to pay as little as possible for the execution of that portfolio and understand what you're investing in.
00:38:42.100 | Three, stay out of your own way. Once you've set it up and say, "Look, I'm going to write down on a piece of paper if and when, for example, this portfolio goes down 25 percent, what is my plan for that? How am I going to react?
00:38:58.100 | Am I going to rebalance into the ones that are down the most? Am I going to liquidate my entire account?" At least go through the mental process of trying to think what that would be like.
00:39:10.100 | Lastly, some of the things we talk about the world right now is that it's actually a pretty tough opportunity set where U.S. stocks, we look at valuations.
00:39:25.100 | Across almost any valuation metric, and valuation is somewhat of a blunt tool, most people like to think about investments as, "Hey, this is a great investment. I'm going to make a ton of money. I'm buying. I'm a bull. I'm long."
00:39:40.100 | Or, "I'm out. I'm going to sit in cash. The market's going to crash. The Fed's an idiot. The government's doing X, Y, Z." It's a very binary decision.
00:39:51.100 | The challenge is we look at long-term PE ratios. We call them the Shiller-Cape ratio. It's just nothing more than looking at 10 years of valuations for a long-term perspective.
00:40:02.100 | Historically, the U.S. has been around 16.5, 17. It's around 28 right now. We don't think that's a bubble. It hit a high of 45 in December 1999, but it's also hit a low of 5 at times in history.
00:40:19.100 | Not rocket science, but the less you pay for something like the stock market, so when you're buying the stock market when it's at single-digit PE ratios, your future returns are much better than when you buy it when it's at high PE ratios like now.
00:40:35.100 | We expect U.S. stocks to return, instead of that historical 8% to 10% nominal, 5% real, we're expecting them to return only about 3% nominal, close to 1% or 0% real.
00:40:54.100 | Now, that's not exciting, and we're not saying they're going to crash. They could just go sideways for a while. But one of the biggest mistakes U.S. investors make, and they actually make it everywhere around the world, is they have what's called a home country bias.
00:41:10.100 | To most U.S. investors listening to this podcast, I guarantee this, I've done it, this speech probably 15 times, where I poll the crowd where I'm giving a talk and I say how much of your stocks, so ignore bonds, real estate, everything else, so just your stocks, how much are in the U.S.?
00:41:27.100 | And the answer is almost always right around 70%. Well, the U.S. as a percentage of global stocks is only half. So at a minimum, if you were a John Bogle diehard Vanguard indexer, you should have half of your stock allocation in foreign stocks, but no one does.
00:41:46.100 | They don't do that because it's uncomfortable. They don't do that for the same reasons. I'm a Broncos fan that I don't cheer for the Patriots. It's what you're used to.
00:41:57.100 | So going back to the opportunity set of what the world looks like, the bad news is U.S. stocks are expensive. The good news is that foreign stocks are actually quite cheap. So their P/E ratio for foreign developed and emerging is right around 15, which is a little below average over time.
00:42:19.100 | But there are actually a lot of countries that are incredibly cheap. So it's no surprise to people to hear this, but it's simply the ones that have gone down the most and that are in the news almost every day.
00:42:34.100 | Most of Europe is very cheap, particularly emerging Europe. So the pigs, Greece, Spain, Italy, Portugal, Hungary, Czech Republic, but also places like Russia and Brazil.
00:42:52.100 | And the challenge, of course, with global investing is you want to make sure you're diversified. So you don't want to just go own one country, even though Greece and Russia are some of the cheapest in the database ever.
00:43:03.100 | This year is a perfect example. If you just bought Russia, you'd be up almost 30% this year to date. Now, granted, it got crushed in 2014, but you'd be up almost the best performing stock market in the world, I think, or close to it this year.
00:43:19.100 | But if you had bought Greece, you'd be down 15%. So having a broad based sort of diversified portfolio across global assets is important.
00:43:29.100 | And I think one of the bigger ones is tilting it away from the United States. So, again, another long winded answer, but a lot of things that people should do, but particularly have a global focus, set up your policy portfolio,
00:43:47.100 | understand what's possible, and then pay as little, and then go on living your life. Don't worry about it anymore.
00:43:54.100 | How would you invest to build personal wealth for yourself if I put a restriction on you that you were not permitted to invest in any publicly traded securities?
00:44:04.100 | Well, that's interesting. So no stocks, bonds?
00:44:11.100 | No publicly, not on the publicly traded market. You could do private investment in a company, but not if it's publicly traded.
00:44:19.100 | Well, the biggest way that most individuals can build their net worth is honestly to invest in themselves. So there's the little personal finance decisions like the really basic stuff like paying down high fee credit card debt, of course, just basic things like that.
00:44:40.100 | But investing in yourself so that A, you earn more, B, that if you are an entrepreneur, the business you're building could be worth vastly more than any investments you may have.
00:44:54.100 | Outside of my companies, and I'm involved in three, I don't do hardly any private investing. The challenges that I know personally, I don't like the liquidity and having money locked up somewhere on the private side for me personally is a bit challenging.
00:45:19.100 | Now, that doesn't mean I wouldn't start doing more of it or have any expertise, but it's an area that I think people can certainly, and you see more and more of this with the ability for Congress passing all these new rules for investors to be able to invest in crowdfunded startups.
00:45:40.100 | We actually did a crowdfund round for my company last year. But for people to invest in a lot of these startups, it's a wonderful time, but it's certainly buyer beware. And it's like buying a house. Housing in general is not a great investment. It basically keeps up with inflation over time.
00:46:01.100 | But buying that killer deal in a great neighborhood that you know better than anyone else is a great way to make money. Buying a speculative condo in Miami when you've never been to Miami is probably a horrible idea.
00:46:16.100 | So same thing applies to private companies. If you know your brother or your cousin or someone down the street who is building this brilliant business and you want to be involved, that's totally okay. If you're going to go on some of these crowdfunded sites and not have any expertise in that area and just start throwing down $10,000 chunks into a lot of private companies, will that end up with a good outcome? Probably not.
00:46:44.100 | So there's a lot of ways to go in this kind of topic, but taking away the public market certainly makes it a little more challenging.
00:46:54.100 | And I'm thankful that we have such efficient public markets where there are just such easy options as we talked about earlier for the average person.
00:47:14.100 | So one is by diversifying.
00:47:35.100 | Two, we didn't really get into it in this podcast, but my background in much of what I do is tactical and trend following.
00:47:44.100 | So thinking about how to avoid long bear markets, our first book, The Ivy Portfolio, we've written four books now, and the first white paper really touched on this topic more of is there anything you can do to be tactical and try to avoid long bear markets?
00:48:04.100 | And it turns out there are some things.
00:48:06.100 | Does that mean you'll miss any short-term gyrations? Probably not.
00:48:11.100 | But the long-term 40%, 60%, 80% bear markets, which have happened in pretty much every stock market around the world, there's some things you can do there with very, very simple trend following approaches or tactical approaches.
00:48:28.100 | In that same vein, there's a strategy class called Manage Futures that we think is one of the best diversifiers.
00:48:38.100 | I don't run a Manage Futures fund, but there are a number of public options.
00:48:43.100 | Unfortunately, most tend to be kind of expensive.
00:48:47.100 | We may end up having to launch one not really because I want to but because there's not a lot that are as cheap as we'd like them to be.
00:48:56.100 | That is a wonderful asset class strategy to diversify a traditional portfolio and one of the few that are really good there.
00:49:05.100 | So one is diversification.
00:49:07.100 | Two, you can apply some tactical models.
00:49:10.100 | And three, there are some sort of what people call liquid alternatives that can help to diversify a portfolio even further beyond the traditional stocks, bonds, real asset, asset classes.
00:49:25.100 | I wanted to go into that, but we'll have to do another show or something.
00:49:29.100 | Yeah, we'll come back in six months and we'll talk about all the other tactical ideas.
00:49:34.100 | It would be fun because that's kind of the pedal into the nitty gritty and I think it would be fun to go into some of the strategies that could be employed.
00:49:43.100 | This is not as much fun now because it's been a 70-people market and no one remembers what a bear market's like.
00:49:49.100 | So once the big bad bear shows up again, it's probably a little more timely even though now is probably the time to be a little more cautious on things like US stocks.
00:50:01.100 | Last one of the quick ones and I know this is going to make you cringe, but I have to.
00:50:06.100 | Do you see "the big one" coming with all of the global money printing?
00:50:17.100 | It's interesting. Bear markets are normal.
00:50:22.100 | So it is a normal thing to go through bear markets and understand that at one point US stocks lost almost 90% in the US on the depression.
00:50:35.100 | I'll give you a stat that sounds kind of scary.
00:50:40.100 | If you look at the median stock in the S&P 500, so that's just the middle stock, and it's a way bear markets change over time.
00:50:52.100 | So in the late 90s, there was very widespread between the really expensive stuff, Cisco's of the world that were tech high flyers trading at huge valuations.
00:51:03.100 | And then most of the market was actually pretty reasonable in the late 90s. So you invested in dividend stocks.
00:51:08.100 | You didn't even have a bear market in 2000, 2003, but no one wanted dividend stocks then.
00:51:14.100 | 2008 was a different story. Everything went down.
00:51:18.100 | And so there will be, so the stat I was going to give you, the median stock in the S&P 500 is at the highest price to sales ratio it's ever been.
00:51:29.100 | So, and this goes back to, let's call it the early 1960s. So it may have been more expensive before that, but over the past 50, 60 years.
00:51:38.100 | And that's not a great, you never want to hear things like that.
00:51:41.100 | If you look at all the other US stock valuation metrics, Tobin's Q, our CAPE ratio, Buffett's favorite, which is market cap to GDP.
00:51:51.100 | All those are trading at values that you say it's either as expensive as 1929 and 1999 or in the ballpark.
00:52:01.100 | So would a 30% or 50% drop surprise me? No.
00:52:08.100 | However, would the market going up another 40 or 50% surprise me either? No.
00:52:15.100 | Because the only thing that's the difference between the valuation is what people are willing to pay.
00:52:22.100 | And people are willing to pay a little bit more when inflation is tame in this 1 to 4% safe zone of inflation.
00:52:30.100 | When inflation starts to tick up above 4%, which we don't have right now, but who knows with what's going on with global central banks, if inflation does start to tick up.
00:52:41.100 | That's when it really starts to affect what people are wanting to pay for stocks because the future is more uncertain.
00:52:48.100 | Inflation eats away at earnings. And so that's when I think you could really start to see some challenges.
00:52:55.100 | But predicting when the next bear market will occur is much more challenging.
00:53:01.100 | But my, you know, on the red light sort of spectrum for traffic signal, you know, the valuations are already a yellow signal.
00:53:10.100 | And if and when the market goes below a long-term trend measure like the 200-day moving average or like a 10-month simple moving average, that in my mind would be the red flashing light.
00:53:23.100 | And I would say at that point, there's probably no reason whatsoever to own US stocks.
00:53:28.100 | So will we have another bear market? Absolutely. When will that occur? I have no idea.
00:53:34.100 | Welcome to the world of the markets, right?
00:53:36.100 | Well, this has been funny. I wanted to get into – I had planned – if we had more time, I wanted to get into the 10 best days myth that you wrote about in one of your monthly publications a few years ago.
00:53:46.100 | But we'll have another chance.
00:53:48.100 | Meb, this has been awesome. Your website is MebFaber.com. The free book is freebook.mebfaber.com.
00:53:53.100 | And you're on Twitter. Is it @MebFaber?
00:53:56.100 | Yep.
00:53:57.100 | And is that the best place that you'd like people to follow you to keep in touch with your work?
00:54:01.100 | Sure.
00:54:02.100 | I thank you so much for making the time to come on the show today. I really appreciate it.
00:54:07.100 | It's been great. Let's do it again sometime.
00:54:10.100 | Interesting to see the industry from an insider, eh?
00:54:13.100 | That's one of the things that I was really hoping to do when I started the show was to bring you – I'm going to be doing much more of it in days to come – bring you lots of, in some ways, inside access to people that are involved in the industry.
00:54:26.100 | Now, fortunately for you, I can kind of filter a little bit. That's probably why you might get a little bit of a distorted view of the financial industry because I'm filtering ahead of inviting them on the show and trying to filter out the good from the bad and invite the good on the show.
00:54:42.100 | And Meb certainly fits that bill.
00:54:43.100 | Make sure to take advantage of his free book deal. Again, it was freebook.mebfaber.com.
00:54:48.100 | Also, make sure to check out his blog. He has a lot of his writing there. And follow him on Twitter. He's very active on Twitter, especially for those of you.
00:54:55.100 | Especially for those of you who are interested in more of the technical science of investing. I think you're really going to enjoy some of his content, some of his ideas.
00:55:04.100 | Notice also just the personal finance approach that he had. Did you notice how he set his life up to be a life that he wants to live and it's not all about the money?
00:55:14.100 | Money matters.
00:55:16.100 | But it matters to a certain extent.
00:55:20.100 | And sometimes other things matter far more than money.
00:55:24.100 | Pay attention to your own life and make sure that you're putting the things in place that you need to have in place that will take you beyond money.
00:55:35.100 | Thank you to all of you who are supporting the show on Patreon.
00:55:39.100 | We are up to, let's see, as of today, we are up to 128 patrons listed there on Patreon and up to $1,351.50 per month.
00:55:48.100 | If that 128 number includes you, thank you from the bottom of my heart.
00:55:54.100 | If it doesn't include you, would you consider it including you?
00:55:57.100 | As little as a buck a month makes a big difference.
00:55:59.100 | If every member of this audience contributed to the show at $2 a month, we would be at the $6,000 a month level that we need to keep advertising off of the show.
00:56:07.100 | And I would love to do that for you guys, but it's up to you.
00:56:10.100 | It's kind of your voting mechanism.
00:56:12.100 | I'm okay with either way.
00:56:14.100 | My strong preference is to keep the show ad-free.
00:56:17.100 | But in order to do that, we need to get the number up to about $6,000 a month by June 1.
00:56:22.100 | So vote accordingly.
00:56:24.100 | And by the way, it's not all about me.
00:56:26.100 | I also have a bunch of goodies there for you that I think you'll enjoy.
00:56:29.100 | Those questions were from today, from Ed.
00:56:31.100 | We're from supporters of the show.
00:56:32.100 | That's one of many benefits.
00:56:33.100 | So see you all tomorrow.
00:56:35.100 | Thanks for listening.
00:56:36.100 | Bye-bye.
00:56:37.100 | Thank you for listening to today's show.
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00:57:05.100 | Details are at RadicalPersonalFinance.com/patron.
00:57:09.100 | If you'd like to contact me personally, my email address is Joshua@RadicalPersonalFinance.com
00:57:15.100 | or connect with the show on Twitter @RadicalPF and at Facebook.com/RadicalPersonalFinance.
00:57:21.100 | This show is intended to provide entertainment, education, and financial enlightenment,
00:57:28.100 | but your situation is unique and I cannot deliver any actionable advice without knowing anything about you.
00:57:34.100 | Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy,
00:57:41.100 | and consult them because they are the ones who can understand your specific needs,
00:57:46.100 | your specific goals, and provide specific answers to your questions.
00:57:51.100 | I've done my absolute best to be clear and accurate in today's show, but I'm one person and I make mistakes.
00:57:58.100 | If you spot a mistake in something I've said, please come by the show page and comment so we can all learn together.
00:58:04.100 | Until tomorrow, thanks for being here.
00:58:07.100 | Toyota's Black Friday deals are too good for just one day.
00:58:11.100 | So right now, every day is Black Friday at your Toyota dealer.
00:58:15.100 | Hurry in and get a low APR or a great lease on our most popular models like the powerful Camry,
00:58:21.100 | sporty RAV4, tough Tacoma, rugged Tundra, and even the RAV4 Prime with its astonishing range.
00:58:28.100 | But don't wait. Black Friday every day and Cyber Monday.
00:58:32.100 | We make it easy.
00:58:33.100 | Toyota. Let's go places.
00:58:36.100 | you