Meb Faber - Quant Savant
Meb Faber joins The Business Brew to discuss his views on investments, geographical diversification, trend following, and much more.
Meb's podcast, The Meb Faber Show, was one of the first financial podcasts Bill listened to. That show has featured many incredible thinkers, different styles of investments, and more recently many private market investment discussions. In addition to his podcast, Meb writes often and highlights his favorite investment writing (see https://www.cambriainvestments.com/investing-insights/). Another fun thing Meb does is post things he disagrees with his peers about. You can find that thread at https://twitter.com/mebfaber/status/1108070025770856448?s=21.
Meb is incredibly smart, nice, and everyone that knows him speaks highly of him. The Business Brew hopes this conversation adds value to your day. We also hope it adds a different element to your thinking. But as importantly, we hope it highlights Meb.
Meb, thank you for the education you've shared. And thank you for joining the show.
This episode is brought to you by Koyfin, one of the fastest-growing platforms for financial data and analytics to research stocks and understand market trends. Check out Koyfin.com to see what a Bloomberg-lite, with tons of high-quality fundamental data and a powerful graph engine looks like.
See https://www.youtube.com/watch?v=fRJKoalFBgs for Bill and Rob's podcast. This is the podcast that will highlight how Koyfin works.
Album art photo taken by Mike Ando.
Thank you to Mathew Passy for the podcast production. You can find Mathew at @MathewPassy on Twitter or at thepodcastconsultant.com
+ Transcript
Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. This episode is brought to you by Koyfin. Koyfin displays financial information simply and elegantly. Koyfin is one of the fastest growing platforms for financial data and analytics to research stocks and understand market trends. I discovered them, thanks to their very passionate users, many of which are my friends. Imagine a Bloomberg-lite with tons of high-quality fundamental data, a powerful graph engine that can show it all clearly, and a user interface that doesn't look it was built in the 1990s. If you're an individual investor, research analyst, portfolio manager, or financial advisor, do yourself a favor and check them out. You won't regret it. Sign up for free at koyfin.com. That's K-O-Y-F-I-N dotcom.
As a side note, Rob, founder of Koyfin is a heck of a guy. I did a podcast with him, which was super fun. I will drop a link to the YouTube video in the show notes, and you can watch Koyfin while you listen to me pontificate about something else as if you don't have enough of me in your life, but you will be able to see what Koyfin actually looks like with a real user driving a platform. I think that you will be impressed with what you see. This episode features the one and only, Meb Faber. Meb is a legend to me. He is one of the true OG's of the financial podcast game. He's done more podcasts than I can even imagine, and I've learned just a ton from The Meb Faber Show. I hope that I do half as good of a job highlighting who Meb is as he does highlighting his guests. This one was a real honor for me. I'm excited to release it, and I'm thankful to Meb for joining the show. As always, none of this is financial advice. All of the information contained in this program is for entertainment purposes only. Please consult your financial advisor before making investment decisions and do your own due diligence. Thrilled to be joined today by Meb Faber, one of the coolest cats in finance and OG of the podcast game. Thank you very much for saying yes to coming on the show, Meb. I appreciate it.
Meb: Great to be here. Happy Monday.
Bill: Happy Monday, indeed. I learned a lot of finance from listening to you. So, to be able to interview you is, it's a treat, man. I appreciate it.
Meb: Well, we'll see if you learn the right things or the wrong things. We'll talk about it.
Bill: Yeah, I'm sure I learned most of the wrong things. Let's see. Quit my job to invest, right? So, I failed the invest in yourself, make an income, just use low fee indexes that would be less than one that I completely botched. I am overallocated US stocks, which I'm pretty sure you would not appreciate, and I have almost zero trend following in my portfolio. So, how would you say my implementation of your lessons is going?
Meb: It's a little more nuanced. I think that the trend following part, for example, there's a lot of as usual with everything. There's a lot of gray areas and it's particularly in 2021, a lot of people, for example, are allocated a trend and don't know it. So, we can go through your portfolio one by one if you want, and we'll just talk about it. Two is-- [crosstalk]
Bill: I'm currently allocated to negative trend, Meb.
Meb: The knife catcher, I like it. Two is that the example about the US despite all my ranting about that topic about being a global investor, it's complicated. We live in a world in 2021, where everything is intertwined. It's like a giant spiderweb and so, we talk a lot about this where borders have become increasingly irrelevant, and so, people love to use the stat about if you invest in the US, it's like 40% of your revenues are for abroad. Therefore, you're diversified is usually the way the argument goes. But it's actually true on the flip side.
In reality, US is last on that list. Most countries have a much higher percentage of their own revenue from outside their own borders, which makes sense. It's global world, but it's even weirder for that there are stocks that are in UK indices that have zero British revenue. There's US stocks that aren't even domiciled here. It's a little more nuanced than that, but that leads to the point of the world's your oyster. There's no reason just to focus on whatever. Well, I'm sure we'll get into that. You've already derailed the conversation.
Bill: I know, I took it way too diving into finance right off the bat. For anyone that doesn't know who you are other than having their head under a rock, do you want to give a little bit of a background on who you are and what you do?
Meb: Sure. Begin where? Where do you want me to start?
Bill: You want to talk about your time as a biotech analyst?
Meb: For the people watching this on YouTube, all five of you, you can see I'm wearing a Broncos hat and basking in the glow of us starting 2-0. I'm sure by the time this comes out, we'll be 3-0. Because I think we're playing the jets. But that harkens back to, I'm Colorado native. I was born in Colorado, spent about half my time growing up in North Carolina. Shoutout to my fellow Carolinians, Winston-Salem.
Bill: Where in North Carolina?
Meb: Winston-Salem represent.
Bill: All right. My dad is in Appalachia.
Meb: Yeah. There are some unbelievable breweries up near Asheville-
Bill: Yeah.
Meb: -and Brevard and thereabouts. Love that part of the world. Miss it. get homesick when I'm back there. Not so much when I'm here in Los Angeles. Went to Virginia-- [crosstalk]
Bill: Did you hang out [crosstalk] mountains when you are over there?
Meb: Oh, yeah. [crosstalk]
Bill: I can see you as a Smoky Mountain fan.
Meb: Yeah, the east is a little too humid for me. I go back and it's a struggle, but I love it. Food, the people, everything is wonderful. It's just so warm and kind. Anyway, college, Virginia, studied engineering as you alluded to biotech, biomedical engineering, started out in aerospace, graduated at the peak of the internet bubble. So, 2000, but also the peak of the biotech bubble, which for those who recall was equally as exciting and vicious in the aftermath. Certainly, a lot of rhymes with today worked, as you mentioned, as a biotech equity analyst while going to grad school at Hopkins, and then that's where the path started diverging my career path and hobby kind of flipped. So, fork in the road kept getting wider.
So, started moving more and more away from biotech, more and more towards finance, in particular quant investing, did a stop in San Francisco and Lake Tahoe. Could qualify a lot as ski bum period, but also as pretty formative time learning about trend following, and then moved to LA, which I thought I would hate probably in the vintage of 2006 to start this company, Cambria, started to manage money in 2007 right before the financial crisis, and then the rest is history. Fast forward till today, we got a dozen funds, little over a billion in management, and coming up with new and weird ideas as we speak.
Bill: I got a couple questions from this. What about today reminds you of, I mean, I think you alluded to it. I don't mean to place the question. But I think you've said this, and you just said it. 1999, 2000, and today have some things that rhyme. I think one of the things that I'm thinking about is E-trade versus Robinhood and whether or not the rise of the retail investor. Do you think that that's a new story, do you think that that's a story that rhymes from the 90s?
Meb: I think it's the story as old as time as long as markets have been around. So, I think there is an increasingly large number of parallels between that period. I actually have my current pin tweet, which I'll leave up for as long until this publishes, is reference to the south and it says, as my southern grandmother would have said, "What in tarnation for the non-southerners out there? It's like, what in the world is going on? I had started a running list of my favorite charts demonstrating the US market and not intentionally saying parallel to that period in time, but saying things are getting super weird and I don't know. There are 20 to 30 charts in there and you can go down the list. So, all right.
The first and most obvious that we talk about is valuations for contacts. If you look at the 10-year P/E ratio, which people love to call the Shiller CAPE ratio, but again, valuation metric does not matter. You can pick any one and the Shiller CAPE ratio is probably one of the most sober of all the valuation metrics. But let's just use this one for discussion purposes and take it back to pre-1900. But even just back to 1900, the average overtime is round 17. Pretty mellow, been as low as five, and it's been as high in December 1999 as 44 and change, okay. Just for context. When inflation is mellow like we have now, sort of that 1% to 4% warm and cozy zone, it's allowed to be a little higher people want to pay higher multiples for that certainty of mellow inflation, and that's true all around the world. The average is around 22. Well, before today, we're at about 38. So, pretty high.
Bill: Yeah. So, we're recording on a day that the market is painting everything red.
Meb: Yeah. Evergrande, or as I like to say it, Ever-grande, which sounds like a Taco Bell all you can eat menu item--
Bill: Is getting extra saucy today.
Meb: I joked on Twitter that I was chatting with a friend who did their Christmas party as a CEO, they rented out of Taco Bell. They were allowed to bring all their own booze and everything else, and I said, "My God, can you--." [crosstalk]
Bill: [crosstalk] I could guess-- really ugly.
Meb: The best idea or the worst idea ever. Yeah, it better be a day off the following day.
Bill: [laughs]
Meb: You don't want to have to be at the office. Anyway, what are we talking about? Stock market valuations. So, valuations are high and climbing, but if you look at the history of markets, we were actually, I think the first to do this, others have certainly done it since. We've built out a database of all the global stock markets. CAPE ratio is back far as you can go. There's about 45ish investable countries in foreign developed and emerging, and they all have similar summaries as the US. So, an average around 17, but throughout time, there's almost always some crisis going on somewhere, and some countries out of favor. Remember, US has been as low as five. In other times you have things where things are booming, and at other periods like the late 90s, everything is moving in the same direction. So, anyway, that's one example.
You start to have a lot of silliness going on. So, sentiment in the late 90s, you got the final capitulation blow off top. The example, I love to give on sentiment. Sentiment is always a little squishy. Maybe it's moved on at some other pockets this year than just US stocks. Crypto could certainly be one area, but we'll stay focused on stocks for a minute. If you look at the number of the sentiment gauges and my favorite was always American Association of Individual Investors, where they ask people, "You bullish or neutral, you're bearish on stocks." That goes back to the 80s. There's others go back to the 50s. In the entire survey, the people were most bullish and the single worst month to be bullish in the entire history of the survey, December 1999. So, people clamoring as things kept going up and up and up to the moon, people kept getting more and more excited. That's exact opposite of what you want.
Not surprisingly, guess when people listeners were most bearish thought stocks were going to do the worst, the best buying opportunity of our lifetimes which was in March of 2009. The exact opposite of what you want. You want to be bullish. So, a lot of these sort of rhymes are happening. We've had, I think, if you go back to the 50s and this is a Leuthold study on sentiment, and you could average sentiment over the course of a year, you have three, or four, or five of the highest sentiment years all the way back to the 1950s. And then if you were to bucket those top 10 highest sentiment and then just blindly look at the following years returns, on average they were zero, going back to the 50s. If you look at the 10 worst years of sentiment, when people wanted to run for the hills, hated stocks, following year's returns were 20%. So, so much of this is just the same thing. It was just prices going up, and people heard and liked that scenario, and then then it's on and on and on. There's another-- I'm happy to get into as many of these the recent expectation surveys keep clicking up.
Bill: Yeah, those are pretty interesting. Didn't you say that they were like 17% is what people are expecting this year?
Meb: Well, it was 15%, but it's not really fair on the survey to ask because they asked for real returns no one knows. The average investor doesn't know the difference between real and nominal. So, yes, it's 17 or 18, if you include inflation. But they met 15 probably. But again, that's 50% higher than historical returns. So, that's already bananas. Then the big difference I think between now and you can go look at this pin tweet. It's just chart after chart after chart. There are three big differences between now and then.
One, back then, I think everyone believed it. It felt like the world is changing. The internet is changing the world, people thought they were geniuses, stocks were going to the moon. I feel like now and part of this is the Wall Street bets discussion is a lot of people know they're doing really stupid things. The words they use to reference them [crosstalk] probably not-- [crosstalk]
Bill: Yeah, like, [crosstalk] shit.
Meb: Yeah, and idiots and there are a lot of other words that are probably not PC. It's like people know that they're doing really dumb things. A big difference then is on alternatives, a lot of global stock markets went crazy back then. That's not the case now. So, most of the rest of the world today is reasonably priced all the way to downright. So, foreign developed as low 20s on average, foreign emerging as mid-teens, and the cheapest bucket is like a P/E of 11. That wasn't the case in late 90s. Most stock markets were expensive.
Late 90s bonds were big alternative. So, that's partially driving what we have today, what people call the TINA, there is no alternative, where back then bonds yielded at 4% or 5%. Now, they're 1% and change. But that's the case with markets always. They always look a little bit different. There are some rhymes that the amount of stocks that are trading at a price to sales above 10 is the highest it's been since the late 90s. So, on and on, anyway, it's got a familiar vibe to it.
Bill: But there are some people that are going to be screaming into their earphones or whatever. They're going to be like, "But Meb, what about index construction, right? Aren't today's companies much better than the past?" Isn't this time different is sort of the question that I feel like is going to come back? It certainly what that I have. Well, I'll just personalize it.
Meb: Which is the one you have?
Bill: Well--
Meb: If you mention like three different things, and I want to talk about all of them.
Bill: Okay, so, index construction, I think the percentage of the S&P that is-- let's say, perceived to be higher quality businesses, and I think demonstrably is, if you believe gross margins, like the businesses are better. So, when those justify higher valuations?
Meb: So, is your expectation that the thousands of stocks around the rest of the world, the CEOs, and all the other countries are for some unknown reason, just worse. Worse capitalists, not as motivated, not as interested, not as particularly keen to rise out of poverty and grow their company, as we say the US is just magically exceptional in that regard or you just think the sampling of companies just happens to be unique?
Bill: I would say that where the US actually is unique. I do fundamentally believe that there are pockets of geographies that create expertise that is very hard to create elsewhere. So, I do think Silicon Valley is a very unique asset that we have and I don't think that that's very easy to replicate. I do believe that software has higher switching costs than a lot of other businesses. So, I guess, that would be what I would say the installed base plus maybe a geographic advantage. It would be what the US could benefit from.
Meb: Yeah, I mean, look. The fun thing about the valuation's discussion is, if you want to have an open mind, I'm not referencing you. But thinking about global investing in general. We have a post on our blog called The Case for Global Investing. We summarized about five pieces from some pretty big institutions that picks apart and pulls into a couple discussions on this topic of valuations. I agree with you, by the way, partially about what's happened over the past decade and why US stocks have performed better.
The interesting part is that is a rarity. So, despite the fact the US went from being a small part of the overall market cap in 1900 to 60% today, US wasn't the biggest at the turn of the millennium. I think, it was UK at 25% which is, what are they now, three, five of the globe? So, even this massive tailwind of going from a small country, developing economy to the world's greatest power at 60% of the global stock market. It's actually pretty rare for, if you look on the decade level for US stocks to have outperformed. So, this past decade, they did it. They crushed everything. 2010, 2020 absolutely murdered most countries.
The prior decade was the opposite. US stocks ended 99 at that 45 valuation. It took a decade to work off. Then you got to go back to the 90s. They beat the average of the world, and then prior to that 1910. So, 80 years where you would have just been better off investing in sort of the broad average per decade. You can talk about mark cap weighted, GDP weighted. If you look at the best performing stocks per year. So, even at size, large caps, 75% are outside the US and that is just a breadth discussion. Just numbers. There's a lot more companies outside the US than inside the US. So, anyway, I'm actually agnostic. Our largest fund is a US stock fund. Our largest long only fund is the US stock fund.
This brings up an interesting topic, because everyone hears me talk about valuations and pulling my hair out saying, stocks are expensive, and just to give you another way point. We did a study and said, "Look, plenty of other countries have had higher valuations in the past." We were talking about China the other day. 2007, China hit a P/E ratio of 60. Everyone, my God, if the listeners remember the period before the financial crisis, all that anyone could talk about emerging markets in China, and India, and the BRICS and India has P/E ratio of 50. It took them 13 years of zero returns in China. Then they have this nice run up, and now they seem to be taken the escalator down. Elevator down, excuse me.
But there's plenty of times other countries have been expensive. The granddaddy of them all, of course, was Japan in the 80s hit a peak of almost 100 P/E ratio, and then no returns for 30 years. Now, why do I bring that up? I did a stat on Twitter, and this triggers everyone. I don't know why, honestly, but-
Bill: I think you've enjoyed being that on Twitter. [laughs]
Meb: -not many people agree with me when we're talking about CAPE ratios, and valuations, and we can get into maybe why, but Rob Arnott from Research Affiliates has a great phrase where he says, "When stock valuations are high and the CAPE ratios is high critics abound." They come out of the woodwork to get angry when you're talking about stocks. So, if you look back in history at all the foreign markets, he said, look at the-- If they ended the year at a P/E ratio above 35, so, where we are now if we close the year? What were the future 10-year returns? The average is zero. The average real returns is zero. Now, it doesn't mean it's always zero and about I think it was a quarter or a third of the cases that the returns were positive. But it's certainly not 6%, 7% that people are historical returns and it's certainly not better than that. So, part of the justification certainly is because bond rates are low, which I can't say we proved, but was a demonstration that that's a false argument.
But here's where I think people go wrong on this discussion is that, people love to think in terms of being right in markets. Old Ned Davis book down near you in Florida, a great book called Being Right or Making Money. I may have murdered the title, but I think that's roughly correct. See, if you can find it on Amazon, or Half.com, or whatever the used bookstore. It was out of print for a while. Everyone wants to use valuations as like, "Is this something that I can prove my priors and be right?" They use the example of, if valuation goes up-- if stocks are expensive. So, say they're 38 today. Let's say they have monstered and they go up to 45, 50 P/E ratio. They say, therefore you are wrong. That's not how it works. That's exactly how valuation works. That's not a bug. That is a feature. That just means all the future returns are pulled to the present.
Stocks, remember, they know their infinite future cash flows. It's not just next year. So, as stocks get more expensive, future returns are likely to get worse. So, people hate that, and they use it as justification of which to be wrong. We have an old piece, which you probably haven't seen and I'll have to update the numbers at the end of the year. But it was called, if you just use the CAPE ratio, you would have missed 1,000% return in stocks, dot-dot-dot, and that's a good thing. The experiment we walked through, we said, what if-- We showed an old article from Seth Klarman in the early 90s talking about stocks being expensive. Seth Klarman, for the listeners, one of the most famous hedge fund managers of all time at Baupost. I said, "Let's just do an experiment." Let's say, you got out of stocks when they were on the expensive side. It wasn't even much. It was like P/E ratio of 25, I think. Let's say you just hung out in bonds, or let's say, you got out when-- It's stocks from 93 to whatever it was 2018, last 2020, we updated this 1,000%. So, CAPE ratio is wrong.
But we don't live in a world of zero alternatives. That's only true if you put your money in some coins under the mattress. My grandfather used to do that. Nobody else I know actually does that. But if you hung out in bonds, particularly the long bond, your return was almost the same. By the way, you didn't have to 50% haymakers you had to sit through. But then even better choices, you don't have to just choose between US stocks and bonds, which is the mistake everyone is making today. They're saying, the only choices are US stocks with a dividend yield of 1.3 or US bonds with a bond yield of 1.3, wherever we are today. But had you hung out in foreign stocks, in particular the cheapest countries, you would have absolutely destroyed the S&P over that period. So, the whole point of this to me is to use a little common sense, and we did a Twitter poll. We asked people say, "Do you own US stocks?" 98 said, yes. Then, we said, "Would you own them if they had a P/E ratio of 50?" So, higher than they've ever been in the US, okay. And half said, yes. I said, "would you continue to own them if they had a P/E ratio of 100, highest they've been versus any country in history ever, and a third said, yes.
So, people were valuation agnostic is the way I take that. So, if you look at you referenced this earlier, market cap weighted indices, the numbers and listeners, you don't have to believe me. Go to Morningstar, type in SPY, and look at the metrics. Astonishing! how high the valuations are across the board on every metric? But again, if you pull up a basket of high quality, we like to use the term, 'shareholder yield,' we have a fund that does this, but you could do any fund and similar-- There's a ton of great companies trading at totally reasonable valuations within the US. So, this discussion of just US stocks is to me a meaningless term. There are areas that are totally fine. It doesn't mean they won't go down 50% if the market cap weighted gets tanked, but there's much better opportunities, and one of the dumbest things to do. Listeners, please, my God.
Bill: [laughs]
Meb: Is buy a basket of really expensive stocks? Because over time, that is a straight up doughnut or a bagel. On average, you buy stocks trading at prices of sales of 10, your average return is zero. There's a lot of those out there right now. All right, that was a long rant. You still awake?
Bill: Yeah, no. I like that rant. So, I got a couple thoughts. I was looking at a Russia ETF for instance. That ETF to me might as well be benchmarked against oil and financial companies, because it's basically energy and financials is almost 40% of the index. So, I guess when you're looking at which cheaper countries to allocate to, I think, just from first principles looking at some sort of look through industry diversification is probably a reasonably decent idea to think about, yeah? Would you agree with that or no?
Meb: People love to use the example, when we get into the weeds about US, and foreign, and sectors, and certain areas have higher sector weightings. But you got to remember, things change over time very technical, very profound phrase I just used I know.
Bill: [laughs]
Meb: But a great example is, people say, "Well, tech stocks are this magical unicorn example of why US is better than the rest of the world despite the fact that everything's a tech stock at this point." But look at energy. Energy has traded as high as a third of the S&P weighting in the past. Last year, it got down to 2% or 3% weighting over time. So, it's like a giant swarm of starlings or swarm of bees. It morphs over time. Sometimes, some countries have a much higher weighting and some sector, and sometimes the other, and sometimes you have a country like South Africa that has a company like Naspers that is then a quarter of the index or even higher in some other countries. So, these things and don't even get me started on the sector classifications. Sometimes, you have companies that don't look remotely like what you would consider to be the sector.
So, my whole takeaway from all of this, because people tend to get caught up in the whole US is expensive, don't buy US stocks, which is not my takeaway. My takeaway is, the world is your oyster and to go anywhere looking for the best opportunities. So, for example, historically, buying cheaper companies of higher quality is a much better idea for the last 120 years than buying really expensive shitty companies with high leverage that are going to go out of business. I think everyone would agree with that, Warren Buffett, everyone else. So, having the breadth of looking at these things wherever they may be, you mentioned right now, some of our funds are firing a lot more opportunity in certain areas of the world and sectors than others. But that varies over time and usually, the whole takeaway on how does something get to a cheap P/E, it's because the P/E usually goes down 50%, 80% or 90%. It's usually not the E that's that volatile. So, if you look at the cheapest countries, you mentioned Russia, single digit P/E ratio. Readers will freak out, but the Russian stock market has had equal or better performance in the US stock market the last five years, despite US multiple shooting up to one of the highest in the world, and the Russia being one of the cheapest in the world. So, you have any mean reversion, we call this the biggest valuation spread in 40 years between US and foreign.
The difference was 40 years ago, the US was cheap and foreign was expensive. You have some multiple re-rating and you could have a monster return in some of these countries sector stocks. But again, some of those could be in the US, too. If you go back to 99 and recall the 2000, 2003 period, what happened was market cap weighting got destroyed, small cap value did fine. Dividend stocks did fantastic. Dividends got to be the highest discount on their valuation ever to the broad market in 1999. They had a great run the next seven years.
Bill: Yeah. It's interesting, you know, a couple of things that you're saying have got me thinking. It's hard for me to on one hand study some of the greats who say, "We're holding periods where you would not be comfortable buying an asset." That's something that fundamentally I don't fully understand the logic behind of. I think I do understand behaviorally not trying to make as many decisions. So, if you buy and then you sell, that's two decisions, and you have to buy something else, and you got to pay taxes. I do get that. But to your point earlier about people being valuation agnostic, it feels and this may not be a correct feeling, but it does feel to me as though not only are they agnostic, some are willingly looking past them in favor of this you know, just don't sell it. You can't ever sell a good company.
I don't know. You go from a 3% free cash flow yield to 2% free cash flow yield, and then back to 3% or God forbid 4%, you need a lot of growth to offset that. That's years of compounding that are taken away. I have not got it. If I have a weakness, it's that I'm not very good at holding things that are very rich. So, I understand what you're saying. It'll be interesting to see how it all plays out, because there's always good arguments to justify why valuations are where they are, right?
Meb: I don't know that there's any good arguments. The arguments sound good to me always because here's the reality. If you were to bucket, I can give you two hours' worth of examples here and to bore your readers to death, and you've probably heard a few of these stories already. But if you were to put on a slide and I used to do this left side is cheap countries. You could do the same thing with cheap stocks. It doesn't matter. You could do the same thing with dividend yields. So, by the way, everything I've said today, if you want to test if someone is open minded about this topic, replace every single time I mentioned CAPE ratio and valuations with the phrase dividend yield. So, we did an example where we went in and said, "All right, we're doing cyclically adjusted price the dividend yield." So, 10-year ratio for dividend yield in country, guess what, works exactly the same as CAPE ratio does, by the way. And we can get into the nuances of dividend buybacks if you want. But the takeaway is that, again, you're existing in this part of the galaxy, which is the Venn diagram of the cheap countries, sectors, stocks, whatever, and you're avoiding this galaxy which is the really expensive stuff.
Now, if you look at the really expensive stuff so today, US market cap weighted stocks, for example, they look amazing, because they've been going up for a decade. So, career risk of sitting out and hanging out in all these stocks is nil. The stocks on the left side of the chart are the countries whether it's ready to vomit listeners, it would be Russia, it would be Colombia, it would be Turkey, half of Europe. Meanwhile, you get about a 5% dividend yield on this bucket versus one in the US in an evaluation one-third. So, two-thirds less than the US is currently, but it makes you nauseous going to go by those because they're all takeaways that the average drawdown in that bucket is like 50% probably, if not more, whereas the stuff that's expensive is all time highest. It's funny because a lot of what I'm talking about feels like it contradicts all of my trend following discussions. But my favorite is when there's overlap. You have a cheap country that's or a stock or at sector, whatever, a cheap investment that's also going up. That's like the perfect combination of the two things in one. But the left side of that table is career risk.
So, if you go by, so these people get off this podcast, they've listened this long, and said, "All right, caught my advisor, chat with my husband or wife, I'm going to go on Robinhood instead of E-trade. E-Trade, I think was my first stock I ever bought by the way online. Actually, I bought [crosstalk] on E-Trade.
Bill: I still have some beef with Robinhood.
Meb: I bought E-Trade on E-Trade though, that's just the meta--
Bill: That is pretty meta.
Meb: All right, so, but if you get off this and say, "All right, we're going to buy Russia, we're going to buy Czech Republic, we're going to buy not even any Meb's funds, we're just going to buy the countries." They do okay, they do well, great. They do poorly, you get fired as a financial adviser. Nobody's crazy enough to buy stuff outside of the US. But again, a big takeaway is, it's not always the US on the right side of the chart. In fact, that's rare for US to be the sole or high expensive country. Usually it's just a wash, a mix of what's going on in the world anyway.
Bill: So, you've been around long enough that you have a sense of how real career risk is. I've always perceived it to be a very real thing and one of the comments that was said to me that really stuck out was somebody said, "You don't get fired for underperforming in down years. It's when everything's going up, and you're lagging. That's when clients leave." How real do you think career risk is it driving these kinds of allocation decisions in aggregate?
Meb: It's extremely real. All the academic literature shows that the vast majority of institutions are just as bad as individuals at chasing returns, and on and on and on on plan sponsors. Most people operate on this zero to three-year time horizon, and that's the sort of max investment horizon. Now, they may say they have a long-time horizon, and there's very, very, very few people and institutions in this world. The late David Swensen is probably the goat here that actually walk the walk when they talk about their time horizons, and how you think about managers. I say this and its old hat. So, I apologize if you guys have heard this a lot. But I say, you make an allocation to an asset class or a strategy. Write down the reasons why you made it, but more than likely, that probably needs 10 years before you have any statistical information of that sort of investment being one that isn't just about noise and how it performed. I think it's probably even closer to 20 years, and you ask most scientists and statisticians and everything else, and they would probably agree with me. But people are like, "That's crazy. At almost every investor, that's crazy."
I need in every survey, we love to do polls on Twitter, and everyone is just so sad and depressing, because they just confirmed the beliefs that I have which is people are willing to give an investment a couple of years, and that's exactly, if you look at all the research we've done on big drawdowns and losses, our very first book, IV portfolio. We did a study that was like pretty joking study, not one that I'd put money to, but it just demonstrates about investing in asset classes after they had multiple down years in a row. Fantastic time to invest in something like US stocks or emerging markets if they had two, three year down years in a row. We used to do this with industries, if they had five or six down years in a row, which is rare but it happens, and I think the record was, this happened twice for coal stocks. We used to do an annual article that we haven't done in a few years because nothing's gone down five years in a row at this point. We've been talked about this at the end of the year.
Bill: [crosstalk] cigarette companies and maybe one or two other things.
Meb: It was a lot of energy and like Ag.
Bill: Yeah.
Meb: Of course, what's through the roof this year, but we've done it. Listeners you can Google this. The first ones like you should ask for coal stocks in your stocking. We did one on uranium, which is also going through the roof now. But we did a study on the industries in French pharma. You can download this all free data back to the 1920s, basically looking at when things were down, 60%, 80%, 90% usually a great time. Close your eyes, hold your nose, and buy and hold, but for buy and hold for three, five years, not for a couple months. But again, you're capturing the same thing we're talking about earlier with valuations just because of what's gone down so much. The time horizon I think, you alluded to this earlier when you talked about buy and sell decisions. Nobody, almost nobody establishes their sell criteria when they make an investment. They spend 99% of the time on the buy. I actually think you could come up, it's pretty simple. I was going to write a paper on this and got distracted, but come up the ran to buy entry and you can add on some sell criteria, and come up with a totally fine investing system. It'd be like a trend following exit. So, going back 300 years to Ricardo, like cut your losses, let your winners run. So, the buy decision being-- [crosstalk]
Bill: So, you do like some sort of moving average crossover whatever is the momentum signal for the sell?
Meb: We did a paper during the pandemic that no one read, because it was during the pandemic. But it was also a fun and interesting papers. US stocks were hitting all-time highs, and the name of the paper was is buying stocks all-time high, good idea. No, it's great idea. Listeners, at this point are probably spitting out their coffee and be like, "Meb, what the fuck you just been talking?"
Bill: [laughs] Yeah, that [crosstalk] typed on.
Meb: [crosstalk] on 20 minutes about using valuation. Look, go back 120 plus years. If you look at the two biggest pillars for us at Cambria and myself included, one is value as a tenant common sense anchor for going back to the time of Ben Graham and before, which is funny because everyone applies value in every other element of their life. They'll spend 30 hours searching for a TV, they'll spend hundreds of hours looking for a new house, but you want to go log on to your investment account and just buy a bunch of expensive stocks, they'll spend zero time. So, they understand value just often not with investing in the stock market. So, value is a pillar that's worked thousands and thousands and thousands of research paper and practitioners, Buffett, my favorite example has demonstrated their works over time.
On the flip side is an equally historical idea when this is the concept of trend following and this goes back time at Charles Dow started the Wall Street Journal and other papers used to write about this and same thing. A million practitioner as well as academic papers on the topic, that was our original entry into markets was writing academic papers on trend following. They tend to be sort of yin-yang. They can be diametrically opposed, but they can be on the same side often as well. If you look at investments, sometimes, by the way, if you put the US stock market into four quartiles, is it expensive or cheap, is it in an uptrend or downtrend? Listeners, you can use same sort of things I say. It doesn't matter what valuation use, metric use for stocks, CAPE ratio, enterprise value to EBITDA cash flows, it doesn't matter. Same thing with trend.
But the example we'll give is the most often discussed one, 200 day moving average or the monthly equivalent 10 month moving average. So, if prices are above, you're an uptrend if they're below, you're out. You put them into quadrants not surprisingly the best market environment in history to be invested is a cheap uptrend, and the worst is not surprising, an expensive downtrend. But the problem number two is an expensive uptrend, which is where we are now. Stocks are expensive, but they're going up. So, there's times when the two align, there's times when they don't. Market spend-- [crosstalk]
Bill: Do you ever study turtle traders?
Meb: Oh, yeah.
Bill: Because they would buy a breakout highs, right? Wasn't that one of the buy decisions?
Meb: Right. So, all the trend indicators are like cousins. It's like a family reunion. Same thing with value. It's like, "Hey, value is the same gene pool, trend is the same gene pool." The actual indicator doesn't matter in my opinion on either side. We've talked earlier, we demonstrated that using 10-year P/E ratio is basically the same thing as using 10-year price or dividends. It doesn't really matter. Using a 200-day moving average versus using a 12 month look back sort of whether you call it channel breakout. Again, people writing about the 70 years ago with Nicolas Darvas and others, but let me give an example.
So, in the paper, we said, here's a simple test. Here's the dumbest, laziest investing strategy of all time. What if you just buy a market at all-time highs and update it once a month? So, you only own it if it's an all-time high at the end of the month, and then if it declines and I forget it was either 5% or 10% below in all time, let's call it 10% below an all-time high, you exit.
Bill: Okay. So, you just hang up [crosstalk] in this?
Meb: Correct. So, something like gold, you may go, I don't know, 30 years just chilling out in cash. The takeaway for trend by the way is that the way trend usually works on any individual asset class, so, if you say, US stocks, trend following going back to 1900, you get roughly the same return as buy and hold, but it drops the volatility way down, and it cuts the drawdown in half. So, it's much more palatable return stream, because you're not sitting through these really long drawdowns. So, we talk about drawdowns, the 50 percenters are bad, but we're talking about like the 80 percenters plus and the Great Depression. People say, "Well, that was hundred years ago," I say, "Well, go look at every foreign market over the past 20 years and you find them all over the place."
You go ask our friends in Greece, in Japan, and Italy, and on and on and on, would they have rather use trend following? The answer would have been, absolutely. Because you dig those huge holes, and it's not that different than losing all of your money. If you're down 80, you may as well be down hundred for most people. Anyway, but so, you use the trend following methodology, you can do it across asset classes. We've always discussed doing it long, flat, you get out you hang out in bonds. The turtle traders from 50 years ago, Jerry Parker probably being the most famous, he's one of my favorite people on the planet. He guests, hosts on a podcast, and there's no better way to listen to people that have done I don't know probably hundreds of thousands of trades over time in every possible market in the world than some of those turtles. Anyway, so, the breakout strategy very similar to a normal trend indicator like a 200-day moving average.
Now in the paper, we are doing one step further, which is a little more modern, because most people are going to go waiting 30 years for something to hit an all-time high. We just say, let's do a 12-month look back. It creams buy and hold in every asset class. All you do is you buy something if it's at a 12-month high, and if it declines a little bit, you're out. That sounds too easy but here's the problem. It's like the old Buffett says, "Investing is-- what is it? "It's simple, but not easy?"
Bill: Yeah.
Meb: Did I get that, right? Or, "Easy but not simple?" [laughs]
Bill: No. I think simple but not easy.
Meb: Here's the deal trend. I get equal amount of haters for both the valuation side as well as the trend side. People lose their mind about both. Buy and hold great investing strategy, we have one of the cheapest asset allocation ETF on the planet. Okay, so, obviously we like it. We don't do market cap weighting, but it's a totally fine investing strategy. There's a very real Achilles' heel with buy and hold investing, and investing in US stocks in general. That is, when it hits the fan, it's highly correlated. So, meaning, your investments are going down. It's highly correlated with everything else in the world hitting the fan. Think back the last year. Your stocks are getting creamed. Well, guess what? There's also a pandemic, and guess what? The economy's getting smashed, and guess what? Unemployment just shot up 25%, and on and on and on.
Global Financial crisis, stocks getting smashed, same thing. You're in a recession on and on. So, if you think about it from a life perspective, why in the world would you want to put all your eggs in the same basket, so, then when the bad times happen, all your investments go south, too. So, buy and hold over very long periods, it's fantastic. And there's things to do to mitigate that of course, too. But so, it's hard. So, it's hard for people when times are bad and everything's going south to just sit there, which is why you see people like last year and in 2009, and in 2003, on and on and on, capitulate and sell everything, and then never get back again. We have these conversations with people all the time. They say, "Meb, I sold in 2009. I couldn't take it anymore. I never got back in." And that is tragedy. That's really sad.
Bill: And now, [crosstalk] I'd like to talk to you about maybe buying with a long time horizon, right?
Meb: Sure. That's why we say you got to be a student of history, if you're going to do investing of any flavor in buy and hold. Every 60/40 portfolio in the world has declined by two thirds at some point on a real basis. So, you got to know what you're in for. Trend following usually during the long bear markets in bad times does great. 2008, would have had you totally out. Would have got you out of real estate in 2007, you would have sold everything before that. But that's not the problem with trend following. Problem with trend following is, you have a low batting average, it's we're talking like 40% of your trades are profitable. It's like death by thousand cuts. It's like the market goes up and rolls over, slice, market goes up rolls over, slice, or what's happened to US over the past 10 years, was 2015, on and on. The market starts to decline, you get out, and then rips right back up by the dip. That's the new phrase of this decade.
So, a trend following, you look stupid often, but again, going back to the phrase earlier is about being right or making money. So, trend following usually saves your bacon when things get really bad. It's probably not going to miss the 10 percenters, may not even miss the 20 percenter, but very, very likely it'll miss the 50, 70, 90 percenters, and so, the way compounding works as everyone knows is that's what you need to miss. So, put the two together which is what we do, which is what I do with all my money, public assets. Half in buy and hold, half in trend following. So, you're like 20/20 is a perfect example. Q1, I was like, "Oh, dear God, thank the Lord I have trend following strategies because it looks like the world is literally going to be zombie apocalypse." Watching futures every night, markets just feeling like they're going to absolutely implode. Fast forward a Q2 to Q3, thank God, I had some buy and hold because these things just rip right back up.
Bill: Yeah. So, with the trend following-- [crosstalk]
Meb: So, the two, why they sound different are actually, I think very, very complimentary.
Bill: I'm sure that the rules apply differently depending on the strategy and whatever. But you said they're all cousins. So, with trend following, there's the initial time that it goes above the 200-day moving average or whatever you're defining as a trend going up, and then, you have the higher highs, higher lows thing. But in order to catch a trend, do you then also have like to your point earlier about the 12-month look back. If you're at an all-time high, just get in on the trend. Is that kind of-- Because if you miss the beginning of a trend, you want to capture that middle 70% of a trend in that strategy. Is that a fair thing to say now?
Meb: Yeah, but so, let me give you a different perspective, because we used to get this question all the time. They say, "Meb, I'm starting today. I've got a million bucks. What should I do?" 2014, US stocks have had a monster run for the past five years. Is it too late. I feel like entering now, should I wait for it to go below and back above?" We say a lot of things. One, this is what we call the Trinity Concept, which is half in buy and hold and half in trend is, the whole point of that is, I spent all my time as a professional money manager, not on the nuances of the investing strategies. I actually think that's probably not that difficult of the equation. I spent so much time trying to figure out how to get people to behave and understand the narratives, and be educated on not doing the really dumb stuff. Because that's the haymaker. They're just doing the really dumb things. So, the beauty of this approach with a half in buy and hold the whole, and half in trend is you're going halfsies. You're never all in or all out. So, it removes this gambling mentality, which is a lot of people by the way, secretly want when they come to market.
Some will straight up tell you, the Wall Street Bets crowd will tell you that they're here to gamble and speculate, and that's that. Others, there's an old trend follower named Ed Seykota, very pleasantly eccentric fellow, was in the original market wizards. He loves to drop a lot of philosophy, but he has a phrase and a quote and I'll paraphrase, but it's basically like, everyone gets what they want out of markets. Some people want to lose, and they end up getting that expressing that through the markets. But that's not all the case. Most people I think, actually generally want to do well and not gamble. So, the beauty of this approach, but sorry, I'm getting off topic.
Bill: No, it's all good. I'm just thinking about what you're saying and the thing that's ringing out in my head is liquidity, I think creates a lot of stupidity.
Meb: Yeah. But as far as when to enter and as far as the trends, I don't think it matters. Because you never know. So, if you look at one of the biggest appreciations and you guys, were talking about this on a recent podcast, and I forget with who. Everything in financial markets is driven by power laws. So, we just had an earthquake here the other night in LA, four-seven, just a baby, little shaker, and the way that the Richter scale works is that every point up is 10x. So. five-seven is 10 times the four-seven, six-seven is 10 times the five-seven or hundred times the four-seven, and that applies to everything in the investing world, too. So, tying back together, early part of this conversation, you mentioned indexing, which is a phrase that used to mean something 50 years ago, and now, it doesn't mean what it used to mean. But if we talk about market cap weighting in the US, which is if you look at buying an index fund in the US, which historically has been a fantastic investment, and I think it still is a good investment, the weighting methodology is simply price. It's the ultimate trend following index.
Bill: Yeah.
Meb: You own a stock, if as it goes up, you own more. As it goes down, you own less. You eventually get stopped out at zero or it gets kicked out. That's literally a trend following system and it works. Because you own the big winners. Amazon, Apple, all these guys that are up around 1, 2 trillion now and you own less of the losers. Enron eventually gets to be a smaller and smaller piece, and then it's gone. If that applies, everything applies to startup investing, and you guys mentioned this, there's a lot of historical research and there's some of my favorite papers of the past decade have been on this topic, which is a small percentage of stocks determine the outcome and it's a shockingly small percentage, 5%, 10%-ish. The original authors of this study and I could be wrong on this, but I'm pretty sure I'm right. The first time I ever saw it mentioned with some guys at BlackStar, Cole Wilcox, Eric Crittenden, and they wrote about this topic. They called it The Capitalism Distribution. You then saw it repurposed in Academia. JP Morgan said, I've never seen anyone reference them which depending on how you describe it in the academic world would be called plagiarism. In the modern world, it'd just be called a total-- In California, I just call it a total dick move.
But it's just like this understanding that a small percentage of stocks create the outcome. That's true in trend following too. So, if you talk to these turtle traders from 50 years ago, they'd be like, "All my profits last year were from shorting the pound or long euro dollar, short wheat." My god, did you see what happened to wheat? You have a lot of these little small losses and then there's these enormous winners. And enormous winners can last a long time. The S&P 500 trend has been up for the better part of the last decade. There's been a couple out ends but a trend follower and S&P has done a great job. You survived and you've done well. So, as far as when you get in, when you exit, it's unknowable future of course. But there's an important part to this which is why it works, and we could talk about the statistical reasons why it works. Again, if you go negative side of compounding, the kink usually happens around minus 20.
Bill: Yeah, I like how you describe this. Just like mentally, I like how you describe that. How you say like the-- [crosstalk]
Meb: The worse it gets, when it gets to 50, you need 100% game to get back to even, you have a Japan scenario, US scenario. You lose 75, you need 300% to get back to even. I think, this is almost like an ethics violation. But you see people all the time report, "What if you just missed the 10 best days in the market, your returns terrible?" Therefore, market timing is impossible. Well, that's true. But you should also say what happens if you miss the 10 worst days? Your returns amazing. And guess what? both of those happen when the market is already declining. So, we did an old paper. I can't remember the name of it. I think it was called "What if Sir Isaac Newton was a Trend Follower?" It talked about bubbles. I said, I love bubbles. That's where people make a ton of money, trend followers. You have these exponential moves up and investments. But at some point, you got to get out and the party ends, the punchbowl gets taken away, time to go home, closing time, whatever it is two in the morning.
So, we demonstrate it, we say look, what are the properties and markets when they're in uptrend? And it's copacetic. Mellow times, markets are going up. What are the properties when they're going down? The volatility explodes. There's lower returns too, but really, it's just the volatility is stretched. So why do you have, it's like, three quarters of the worst days occur when the markets below a long-term trend measure. But three quarters, the best days also occur and it's this volatility clustering. But the irony is that if you miss both by being in trend following system and sitting in bonds or cash, you end up with a higher compounded return with lower volatility in drawdowns. So, you want to avoid the craziness in these types of markets. So, what would that be today, I imagined, you're out of China, your long, most everything else, I think you'd be out of gold and miners. Not sure about Ags, base metals and energies up, foreign-US is up. But again, you tie this all into psychology and behavioral, well, why does the volatility explode when things are going south? What's common sense?
You look around last year 2009, people lose their mind. They use a different part of their brain when they're losing money. When things are uncertain and going crazy, and they do and they're making money. They're making money, what are they doing? They're talking about vacation, they're looking at buying things like JPEGs, they're looking at telling their neighbor how smart they are or going on Twitter, bragging about how much money they made. What happens when times are bad? People don't open their statements. They don't go to their neighbor and say, "Man, it was really smart buying this stock that went down 80%. I'm such an idiot." They have this signaling and bragging, but it's literally like a flight response. For those of you who have never lost big money, it's a great experience to have. Hopefully, it's when you don't have much and you're young, we've all had it, and the best traders have plenty of scars and are humble, and I'll end with a there's a great phrase that I attributed to Mark Yusko. I basically attribute all my favorite quotes to him whether he said him or not or Morgan Housel.
Bill: [laughs]
Meb: But he says, "Every investment makes you richer or wiser, but it's never both." So, thinking about the losing money, great education, but you can avoid that usually with a trend following ideas.
Bill: Jason Buck and I have been talking about this concept, a fair amount. And adding convex hedges and trying to figure out, I don't know. I exist in large part in an echo chamber of stock only long only thought, and I think that there's a lot of merit in it. Here's how I'll be precise with my language. I think there's a lot of merit in wanting to own interest in businesses for the long term. Certainly, there has been over my entire life though, being a child of the early 80s, I've also seen rates come down my entire life. And all my heroes have, there's a fair amount of survivorship bias in it, but they've all done it, too. The future is fundamentally uncertain. So, putting all my eggs in a basket, I know the saying put it all in a basket and watch it closely. I just wonder how much survivorship bias is in that statement too, having a little bit of a hedge is a good thing.
Meb: It's a pretty thoughtful self-awareness. I think despite all my pretty strongly held views of many things we talked about today, there's a million investing approaches that are totally fine. If you were to call me up today and say, "Meb, I buy a bunch of commercial real estate. I don't use leverage, Meb. I buy a bunch of dividend stocks, I just dollar cost averaging them. Meb, asset allocation," whatever. If it works for you cool, great. The biggest fracture occurs when people don't understand that investing approach and how it has performed in the past. A great example, we asked people say, "What do you think the biggest drawdown in bonds has been after inflation and most are T-bills, your safe money? What do you do with it? What do you think the biggest drawdown has been?" Most people say, "5%, zero," and the answer is half. Like 50% on your safe money after inflation over time.
Another one is like, "How long do you think stocks have gone?" We're going back to expectations we say. People say, "I invest three-year time horizon." I say, "How long do you think stocks have gone underperforming bonds before?" Most people, it's like, "Five years," and they've gone decades. Last year, they went, I think, it was 40 years. Four-zero. Four decades with almost the exact same return as long bonds did. There's periods, I think 68 plus years, where stocks have underperformed bonds. So, that's a long time. You and I are going to be well over a hundo probably if that happens, this go around. So, we'll look back and-- [crosstalk]
Bill: I hope I make it that long. [laughs] I was just talking to my wife that I might be over half of my life done. That would be sad.
Meb: We'll be doing some hologram, like head in the glass jar discussion, be like, "Man, that was a crazy period. Wasn't, right?" Like that--
Bill: [laughs]
Meb: --That big Mars Civil War that happened and investing and who knows, anyway.
Bill: I've said a couple times, man. The statement that I've said and I wish I was more precise, as I've said, "If I lose to an ETF, I wouldn't be able to look myself in the mirror." What I actually mean by that is, the market cap weighting and the amount of valuation on a number of businesses that I am not smart enough to understand, if I were to make that market cap weighted bet knowing that I don't understand it and knowing all of the valuation statistics that you've pointed out and I lost on that, because it was like, "the smart thing to do," I could never look myself in the mirror. That's why I just [crosstalk] like market cap weight index.
Meb: But you've got to remember, there's two ways to do something about this. Bogle before he passed away-- this is quite a bit of a ramp in stocks ago. He said he expected US stocks to do about 4%, the coming decade because of the valuations. People were just like, "Wait, what?" The takeaway for him wasn't, "Hey, sell all US stocks." He's like, "Just ratchet down your expectations." His formula, which he wrote about in the 90s and we talked a lot about is very simple. It works incredibly well. It's starting dividend yield, earnings growth, change in valuation, and you can go back in history and plug all those numbers in deconstructed, but it's probably going to get you pretty close to a goose egg this next decade. Now, the opportunity is, could look amazing, anything other than market cap, that's what we talk about. In market cap weighting, this is the funny part is, if you think about a totally nonsensical investing strategy with no relation to fundamentals, that's it, right?
Bill: Yeah.
Meb: Historically, market cap weighting is super suboptimal because the largest stocks in an index, market cap weighted, it doesn't matter if it's sectors, if it's countries, if it's the global market cap, underperformed that index that they're in buy about three percentage points per for the next 10 years. So, just avoiding the big stuff, which is big because price went up is one of the basics you can do. That's why equal weighting outperforms over time weighting based on dividends, weighting based on anything else should do about a percent or two. But the takeaways, Bill, you need launch you own ETF.
Bill: No. I'm not getting in the financial management game, man.
Meb: Come on, dude.
Bill: I don’t mind financial entertainment. I have no desire to launch financial products. I'll leave that to people like you and Corey-- [crosstalk]
Meb: We can do it anonymously.
Bill: Okay.
Meb: Let me tell you something funny that, well, funny depending on-- [crosstalk]
Meb: Our cosponsor, the TOKE ETF, that I'll do. Isn't that yours?
Meb: No, we've done a dozen-- Yeah, we've done a dozen funds thus far, and we exist in this little corner of the world where I won't exist, where we're only launching funds that don't exist or we think we could do much better or much cheaper. People say, cheaper is rare these days, but our funds on average are 30% to 40% cheaper. Every single one of them is cheaper in their category average. In some cases, it's the cheapest fund in the category. The one you just referenced, cheapest fund in the category. Second, it's got to be based on academic or practitioner research. Third, I got to want to invest my own money into it. The average mutual fund manager has zero dollars invested in their fund. Lastly, the hardest part for me is always, does anyone else want it? So, we have about a dozen strategies. I'm looking at my whiteboard that are queued up that don't exist, that are pure blue ocean opportunity. But the hard part is, does anyone actually want it? The answer from any of these is, I don't know, we'll find out.
But during the pandemic, we've done a new filing last year. I like teasing the investment space because we all take ourselves very seriously. It's a lot of egos out there, but the reality is, market cap weighting still is pretty hard to beat for a lot of the professional managers. The reason is not because it's market cap weighting. The reason is because it's delivered at no cost. The fees, the big differentiator, the old Bogle quote, "The conflict of interest in this industry is not passive versus active. It's high cost versus low cost." Vanguard actually manages more active funds than they do passive. They even have a fund that charges over 1%, anyway.
Bill: See, I thought that you were going to say is because it's inherently trend following and then if you layer on some of these current valuation multiples, it would favor a trend following momentum strategy.
Meb: Let me finish this thought because--
Bill: My apologies.
Meb: -I'll forget if I don't. We did this filing, and you may not be old enough to remember but the no hairs, gray hairs listening to this will be, Wall Street Journal used to do a dart throwing index contest. Not contest where they would throw darts against wall pick stocks, and then compare it to professional money managers, and often not surprisingly, the randomness of this world going back to that old study, two thirds of stocks underperform the broad index. So, you're at a disadvantage just chucking them against the wall. About half have a zero percent rate return over their lifetime and about a third or a quarter, I can't remember which basically, good to zero. But if you start chucking against the Wall, just the randomness nature, you may get some of those that 10x, 50x and it's delivered at no cost. So, we were going to file and we still plan--
I say, if we get to like $5 billion or $10 billion in assets or launch this and just subsidize it, the ticker could be dart, or monkey, or random, we have all three. But basically, throw a big party each year, charge people I don't know like thousand bucks to come, and throw a dart against the wall, and that stock ends up in the portfolio for the next year, and I'll just subsidize it. It'll be low cost, whatever.
Bill: [laughs]
Meb: Thought it was a little tone deaf as the world was sliding into the-- [crosstalk]
Bill: Yeah. Maybe, it wasn't the best time to do it.
Meb: But the random walk ETF will make its appearance one day and I'm guessing it's going to beat most of these high-fee managers anyway.
Bill: Are you going to take that to the endowments that you manage when you manage them as well?
Meb: We have an endowment fund file too. What Bill's referencing, I spend a lot of time poking the traditional, high-fee complex investing world where most of the academic literature shows that a lot of these big money institutions would be better off just buying a bunch of ETFs, doing asset allocation, just being done with it. You can replicate the hedge fund space, you can replicate the private equity space, there's a ton of research that shows this. But these giant institutions, so we've written articles called should CalPERS be managed by robot, should Harvard be managed by robot, how to replicate Bridgewater's all-weather fund? The takeaway is actually, it's incredibly simple to replicate all of them. But none of them do it. So, I've offered on Twitter and elsewhere, I say, "Look, if you guys want, I'm more than happy to manage your endowment for free."
We actually launched, let's see how many years ago is it now, seven years ago, this Christmas, the world's first no-fee ETF. So, it's fund to fund. So, all in, it's like 30 something basis points. It's been a big success on the performance side, a bad success on the asset raising side.
Bill: It's one of those no one wants to type things?
Meb: Well, it's all in one. It's like an all-in-one fund. It's assets, so it gives you a global allocation. So, the global market portfolio, if you just went out and bought it, so, if we convince Bill, he needs to be a little more global in nature and get out of Florida, you'd go by the world. All the public assets in the world, it's roughly half stocks, half bonds, half US, half foreign. That's market cap weighted. It's missing a couple key asset classes that are just hard to invest in publicly like farmland, like single family housing. But in general, it's an amazing portfolio and it's really hard to beat. It beats the vast majority of institutions over time, because it's got everything. So, we implement it with tilts towards value and momentum, so, this buy and hold Asset Allocation Fund has it all and it rebalances for you, and I think we'll beat most institutions over time.
Now, there's an added benefit that a lot of people don't understand, and this gets into this concept of short lending as became popularized by the broker that you and I have such a massive disdain for where the vast majority of public funds, if they do short lending like ours, we return it all to the investors. So, a fund like this, which is in 30ish basis points total cost all in, does like, I think, it was something like 20 some basis points of short lending revenue. So, you're down to a net of 10 basis points-ish on total cost and investor. Now, there's some funds like the cannabis strategy mentioned earlier that does like 300 basis points of short lending revenues. So, the takeaway is that, most of the good guys do this in return at all, I think there's an opportunity and the brokerage world to deliver some solutions there as well as long as the long-term period coffee can portfolio you're talking about. But yeah, I think so far, none of the endowments have taken me up on it. We got some institutions that own the fund, but no one is yet. I said, all I have to do show up at the yearly review will rebalance, have some brews and call today. Bad news is, we'll fire everyone and get rid of all the hedge funds in private equity. But the good news is, it'll be a lot simpler.
Bill: Yeah, you're not going to make many friends at that pitch. You might make some friends, if you can get through to the end user, but you're dealing against a lot of incentives with this one, Meb.
Meb: Well, I mean, look, if you look back, we did this post years ago. You look at the asset allocation industry in which way it's moving. Every year, it's this just alligator jaw getting bigger and bigger of all these legacy garbage products that are super expensive, riddled with conflicts of interest just been sold to people, and as people die, as they get divorced and pass on, they don't go back to buying that 2% S&P 500 index fund. Like that just doesn't happen. So, they eventually get sunset and the world's hopefully moving. I think, it's no better time to be an investor than today, but there's still like a trillion allocated to these do nothing buy and hold funds. My anger is not towards the people that are concentrated in doing super weird things. You at least can hopefully distinguish yourself, but for a lot of the people that are by definition do nothing.
Bill: Yeah. It's the closet indexers, and then charging big fees, and you're not really doing anything except for extracting value from the system. We share disdain from that or for that. So, how did you get so into private or not private equity, venture capital? Has the podcast helped with deal flow or was that-- I'm sure it's a number of things. But that's a big part of what you enjoy doing now, right?
Meb: The beauty is, you know of being a podcast host is, you get to indulge all of your curiosities. We're doing a series right now on the podcast about startup investing in Africa for example, and we talk a lot about subjects like farmland, like space. I come from a family of aerospace people. So, the beauty is, you can just ring someone up and say, "Hey, you want to talk for an hour?" 10 years ago, if you just email a Nobel laureate, he'd be like, "Hey, you want to rap for a little bit?"
Bill: Yeah, they're like, "No way, man."
Meb: Pound sand, no.
Bill: Yeah.
Bill: So, anyway, it's been a lot of fun. But the startup investing which started I think in 2014, and most of our followers, we've dragged along the adventure, the goal that I had stated in the beginning was that, so, I'm a quant. I put all my public assets into our strategies, I own the vast majority of my money in one fund. Not a lot of people do that. But it's a diversified fund to fund, So, it's everything in one. I think, actually most people probably should spend, unless it's their hobby and they care about it, almost no time on their public investing portfolio. Just set it forget it, put it on automation, save and invest.
Bill: Thanks for ruining my listening base. I appreciate it. [laughs]
Meb: Well, no. [crosstalk] Unless you're interested in different scenario, but the vast majority of individuals, we did a post called 'what's the best way to increase the yield on your portfolio?' to spend no time on it. This magical, what should you be spending time on the average person is getting a better job, asking for a raise, doing things that you would rather be doing like golf or play with your children or whatever, going out to dinner, avoiding your children, depending on who you're talking to. But I have endless curiosity. The biggest problem with public markets as a constant stream, and depending if you listen to me in the beginning, I hope the takeaway was not pessimism but rather optimism that the world's ending, and it's like a constant just negativity. Then part of that's just the news cycle in general flicking on, you know what, like, it's just negativity. If you try to pull out, what are we trying to do here as investors, you want to invest in amazing businesses that are changing the world, that are sloughing off a ton of cash, they're finding that product market fit, and they're turning into a rocket ship. You want to be invested for a long time and hold them forever.
The opportunity in my mind, so, I got the public markets covered in my mind with our quant funds and what we do. But on the private side, I'd never had that much experience. So, I want to get educated. So, I'm going to start to dip my toe into angel investing, and this was circa 2014, and we just did a long article about this called 'Journey to 100x' that summarizes it for listeners, and I said I want to learn. So, my goals upfront are to learn, learn all the good interesting people to follow in this world, start to make some investments, become educated. If I break even, great. If I lose money, that's okay. I'll see it as tuition. If I beat the S&P, gravy. Fast forward, what is that, seven years now, have invested in over 300 startups, and that made-- [crosstalk]
Bill: Wow, [crosstalk] you are up to 300.
Meb: That made sound like a lot and detractors would say, "Well, you're just doing spray and pray," but what I've come to appreciate it, this is a change for me, and this is a muscle that I continually have to work against, and this is one of my favorite phrases we use in this piece that I have been incorporated in other aspects of our investing world is, it's not a unique insight, but it's the critical insight, which is, if you look at the distribution going back to what we were talking about with stock returns, and the same thing applies to startups but on steroids, and all these venture capital funds, and all these startup funds, we're talking at the seed stage. Investing in companies about a $10 million market cap, $5 million even. Some I think the lowest idea was like $2 million. All your returns come from the handful of investments that did 100x.
Bill: Yeah, [crosstalk].
Meb: Maybe 1,000x. The Ubers of the world. If you talk about investing and this actually goes back to the CAPE ratio discussion earlier and you talk about, what does it mean to be right? Because there's so much randomness in our world, and you ask any good speculator or gambler, and he say, so, you buy stocks at price ratio of 10 or CAPE ratio of 38, and CAPE ratio goes to 50, and you say, "Well, Meb, you're an idiot, you were wrong. Stocks went up because of valuation." I said, "Well, if you went down to the poker table or the blackjack table, you made a really stupid move, but it worked out for you, were you right?" Well, no, it was the wrong move. You just got lucky in the randomness of it. So, anyway, looking at startup investing, you have to place enough bets to give you the chance of hitting those big investments.
People that do it with only like 10 investments, even 20 odds are not in your favor. So, it's been an amazing experience. Every day sees these killer companies that are doing-- It's beneficial because it also applies to your life. I've incorporated so many of these into our business world and into my professional, but a big benefit. Again, this is a feature, not a bug is you can't sell them.
Bill: Yeah.
Meb: So, if you look at one of my favorite investing books, what's it called? It's 100 baggers, but it's a derivation 101 in the stock market. If you look at the public companies that 100x, Berkshire, Monster, on and on, it takes them like a decade or more to 100x. Some of these 20 years. I like compounding.
Bill: [crosstalk] by the way real quick but 100 to one seasoned really well. I read that, and I was like, "Man, this was written a long time ago, and it still sounds very, very good." 100 baggers was great, too. Chris did a great job. But I agree with you. The illiquidity forces really good behavior and gives the runway that these companies need to prove themselves, right?
Meb: Yeah, in some of them pivot after you invest. It's always fun to watch just what happens. Some of course, it's like trend following. So, the weird part is, if you look at this through the Venn diagram of startup investors and traditional managed futures trend followers, there's very little overlap. If you were to build the perfect, long vol portfolio, it's a lot of similarity between those two investments. The methodology is almost identical.
Bill: Can you explain why? Why would that be the perfect long vol?
Meb: It's lots of little losses, and then eventually, you have just the Monster gains.
Bill: Okay.
Meb: Now, the trend following portfolio, the managed futures theoretically, what's the big risk to the startup portfolio or the VC? It's long bear market, bad times in the economy. The exits dry up, there's not 200 SPACs, puking them out, there's not Tiger Global pouring giant funnel of dollars down everyone's throats to the rounds A through Q, it's the lean times. But the managed futures theoretically during the lean times, it's going to be short everything. So, it's a natural balance between the two, where managed futures usually do fantastic during bad times. Anyway, so, I used to always say, you could probably find a blog post from over a decade ago on my blog about, I said, "Why does the average venture capital fund or investor not hedge their investments with trend following?" Because the assumption every CalPERS makes is that their private equity and venture capital portfolios will generate top quartile alpha.
Now, despite the fact that most of the persistence has gone away between the top managers, and despite the fact that the valuations in late stage private equity are the highest they've ever been now, their assumption is they can pick the top quartile. Because the average private equity and VC is just S&P, okay. And then there's a lot more downside, and there's a bunch of institutions have done research. It was a Rockefeller put out one, that was just like-- We've been terrible at this. We've been doing this for 30 years, and we're awful. So, I'm always surprised that they don't do some sort of trend following methodology on private equity or venture capital. But there's one more really important aspect of the startup investing that could be getting nuked by the recent tax legislation, which is the--
Bill: I was just going to ask you about this because I wanted to touch on this.
Meb: If you look at our writings, and most of our books are free to download online. Our Global Asset Allocation book talks a lot about this. Again, going back to not unique insight, but critical were like the number one determine of your asset allocation portfolio isn't the asset allocation. I think that's actually somewhat irrelevant and I don't know a single person on the planet that agrees with me on this, but it's a strongly held belief. As long as you have some of the main ingredients, stocks, bonds, real assets, but what you pay in fees and taxes. Boring as hell, but we could actually demonstrate that that's likely true. Happy to get into it if you want but the point is, taxes fees determines so much in our world, and taxes very likely going up for most investors. There is a tax provision that got past during Obama called QSBS that, if you invested in a startup, so less than 15 million in size, held it for five years, the first 10 million in gains is tax free or 10x investment whichever is greater. So, if you can build a portfolio that even matches the S&P on a post-tax basis-- [crosstalk]
Bill: Yeah, but [crosstalk] tax free. It's going to help you out. Taxes are [crosstalk] man. I got too much turnover in my portfolio.
Meb: You just needs some more losers. The problem is, you got too many gains.
Bill: I don't know. That's not the takeaway that I'm trying to have, but I like it.
Meb: Yeah. Get some of these stinkers out there. It's kind of checks all these amazing boxes where it's-- You buy it, you just put it away. You can't do anything with it even if you want it to. So, you get liquidity when it goes public, it gets bought or goes out of business and that's it. But to me, that's like the way a lot of investing should be. On top of that, you're not paying any taxes which is astonishing. It's like a 1031 exchange for real estate, except you don't even have to pay any.
Now, I think this has been one of the most innovative tax policies for the innovation we've seen in the past decade in the US. I think a lot of this has pushed a ton of money into startups. So, you see this absolute just explosion of incredible companies, part of that market environment, and you may not be able to attribute it all to QSBS, but I think it certainly helped on the investing side at the early stage. It's fun to look into, it's one that politicians are going to be politicians. So, we'll see if it survives. I hope so.
Bill: How involved with, I mean, you're in 300 private investments, how often are you talking to the founders and stuff? Is it fairly passive for you or do you get more active in certain ones? I got to think there's something-- [crosstalk]
Meb: It's passive. If it's fits in my circle of competence, which is pretty limited, I'll certainly, happy to chat with him. I love talking with him on the podcast. We've probably had a couple dozen of the founders on the podcast. Some of which have gone on just been absolute rocket ship unicorns. There's been a few that just, I mean, my God are probably worth one, five plus billion dollars now that with seed investments at $10 million bucks.
Bill: That's cool, man.
Meb: Yeah. So, it's fun to-- It's exciting. At the end of the day, you're investing in these amazing startups, and there's literally nothing harder in the world of being an entrepreneur. Oh, my God, it is exhausting, it's the worst [laughs] experience that anybody can do to start a business and being a portfolio manager is pretty darn similar. It's a 24/7 thing you live with. But it’s amazing-- [crosstalk]
Bill: So, you figured, "I will just marry both of those," huh?
Meb: Well, no. If you were to ask me 10 years ago, I used to think all the ideas I had, all the startup concepts like I have to do these like on my own. I have to start this company. Why doesn't someone do this? I got to do this. Then, now I realize, well, it's way more fun to [laughs] watch other people do it. Way less work, people that are way more motivated that I am and probably more capable in some of these scenarios to do some pretty killer stuff. But going back to what we're talking about earlier when I'm saying, the biggest challenge I have here is the muscle of seeing a good investing opportunity that you look at the numbers say, "Oh, man, this is a high conviction double or even a 5, 10x."
In the stock market that is a dream come true. You're like, "Oh, my God, I can see there's no way this doesn't double in the next year." Then realize, if you're doing the approach we're talking about, even if it does double, it's going to have minimal impact on your actual outcome.
Bill: Why is that?
Meb: So, really looking for the ones that have to go or--
Bill: Oh, because you will need thousand-- [crosstalk]
Meb: [crosstalk] to go a hundred times. Rocket ship out. It still would help and a lot of people, look, this is a personal preference. A lot of people exist sort of that series A, B, C, where they're de-risk the companies are trading at $100 million, $300 million, $500 million. They're growing, everything looks good. I like to operate at the post formation. They have a little bit of traction, probably a million bucks in revenue. They're growing and it's a cool ass idea. But that's personal. Other people like to exist even before that pre-seed, which I think is really hard. I don't like that. Then, later stage is a lot easier for others. Anyway, it's a great experience that you've been-- I tell people all the time, I say just go sign up. You don't have to invest and just read the deals I've reviewed. It's like 5000 deals now, and you start to pick up some pretty interesting takeaways. Even if you don't invest in any, I think it's a useful experience.
Bill: Do you think that seed sort of resonates with you just given the fact that you started your own thing? Do you think there's something in you that identifies with that?
Meb: Maybe. I think part of it is, it's the right number as far as scale. If you're at like $10 million bucks, which by the way in the last year is slowly drifting up to $20 million, I've seen a few $50, $80, $100 million seeds recently, which feels a little bananas. Part of it is just the arithmetic is it easier to go from $10 million to $100 million billion than it is from a billion to $100 billion?
Bill: Yeah.
Meb: I think so, but I don't know, that's certainly the case. I despite being a trend follower, and being willing to have lots of losses, a little losses, I still don't like the feeling of investing in just like pipe dreams that are pre-product or prelaunch. That's hard for me. So, that's the pre-seed area. That doesn't mean that haven't done some that are later stage, earlier stages. It's the vast majority of those 300 are sort of right around seed.
Bill: Yeah, well, you've got to get to know the market and know what you're looking for. So, I would think that staying in an area that resonates with you makes a lot of sense. I've wondered, I talked about it a lot, but one of the guys from the Motley Fool, David Gardner, I almost think he has brought a similar type feeling to the public markets, and how he looks for investments that are already public and what you alluded to earlier about now the series D, E, F, whatever, the valuations are so large. I wonder how much juice is going to be left for some of the public markets on some of these deals.
Meb: I was joking on Twitter, I said, "What comes after series Z?" I was like, "There's got to be a company that's-- is it Accel or goes series AA, series Z1, like it--"
Bill: [laughs]
Meb: It just breaks the model, but you see these rounds. The funny part is, so many of these companies get seduced by this Silicon Valley world, and their goal is to raise the next round. Whereas the ideal investment, if you look at like MailChimp recently sold, for what $12 billion to might single these favorite company in the entire world, which is into it. They never raised capitals. As an investor, the best thing you want is invest in a company. They never raise money. Again, they rocket ship. They're capital efficient, they get everything from product market fit and growth. Whereas so many founders today, I feel like their goal is to just go raise more money, which is plentiful right now. That's for certain, but the dilution-- and the media always gets this wrong about reporting returns, but the dilution is very real and it applies to public markets too, which is issuance.
Bill: I was talking with somebody that was talking about some of the pushback he was getting from some investors, and the pushback was, you're making too much money. I thought, that's an interesting comment of where we are right now, where the argument is not make money for yourself. It's like throw off product as fast as you possibly can to prove out that you're growing, and that will warrant a higher valuation. I think there's probably some merit in the comment, but I also don't think that you see those kinds of comments in say, 2010, 2009-- It's interesting man, because Toby and I, we chop it up every week, and I am hesitant to say like, "Oh boy, this is the late cycle and it's time to really be careful," but on the other hand, if NFT's, and crypto, and these valuations were indicative of a top, when we're all looking back at it, people are going to say, "Boy, it was obvious." Speculation is in plain sight. Maybe that's the best way to say it.
Meb: If you go down the list, and this goes back to the beginning conversation with the charts and the thread, it's really hard to read this list and come to the conclusion that things aren't totally bananas. So, with expectations, with sentiment, if you look at the allocation of US stocks as percentage, the portfolio is the highest it's ever been, if you look at our friends, the short sellers, they're basically extinct, the average company has the lowest short interest ever. If you look at small traders, what are they trading, they're trading options and garbage meme stocks, and on and on, and on and on. So, I'm sure you've heard me say this, but my favorite, my chart of the year for 2021 is from Robeco, which is goes to the French pharma folks which looked at the value factor cheap versus expensive. Historically, works great, but the worst year I had ever had was 1999. Not surprisingly, that was the final just blow off capitulation of that market.
But the best year ever had in 120 years was in 2000, post-peak. Until 2020, 2020 was worse for the value factor, then 1999, and so far, 2021 is playing along with 2000 playbooks. So, values doing great this year. It's kind of the summers seems to have taken a summer vacation, but the expensive stuff hasn't come down. So, it's not that the spread is really narrowing on the expensive side, it's just the cheap had a great begin to the year. So, we'll see if that continues. You know that sort of a 01, 02, 03 or if it's just a momentary blip in this march higher, but we'll see.
Bill: Yeah.
Meb: I like the idea of the characteristics. A lot of these companies that are killer companies that just happened to be way cheaper than what you find at the top of the market cap heap.
Bill: It's been interesting to watch. I was talking with our mutual friend about what he's seeing in his portfolio, and he and I have similar thoughts. If we are in an idea that is like a second-tier player in the market, has a little bit of leverage, and any hair at it at all, it's just all been puked together. We were talking about a number of names. You can chart them-- They're just trading together. Then actually, you can throw the pod stocks on top of that. It's almost as if it's like one huge risk off move, which has been interesting to watch, even pre-today. But this has been in large part because I was over allocated relative to what my history has been. But this has been the biggest drawdown in my career coming into, and then includes last March. But that's I had more beta exposure. But whatever I did-- The companies that I own haven't changed, just the people's appetite on the stock has. At least, I hope.
Meb: That's my favorite book that really describes the last year, we've mentioned is Kurt Vonnegut's, Galapagos which, A, has the benefit of being about a global pandemic but, B, the financial markets go crazy. I have the quote on my blog, but he ends it. He's like, "Why did all these things happen? Why did all these markets crash and this, that, and the other?" He's like, "The land was still as moist and nurturing the people is all the same with exception of all the changes people's opinion." It's so funny to see the narrative change of what people are really excited about, and really depressed about, and you go through these cycles, and it feels like, it just keeps happening over and over. You traveled to some of these countries we mentioned. The personal example for me was Colombia, where it was trading at a P/E ratio, I went down to give a talk on Bogota, I was like 40 or something, and now I think, low teens, and everyone was just fat, and happy, and rich, and oil money was coming out of their ears when that market was just cranking, and then the challenge is the catalyst is always obvious in retrospect,
It's never obvious to me at the time. I don't know what turns this. If it happens this year, it happens in 2025. So, part of this whole fun thing that we do every day is, you have to have an appreciation for histories and to know what's possible. So, you see these gyrations in China and say, "Well, look, I at least know in the 1940s, they totally shut down their capital market and went to zero." So, is it possible it is likely probably not, and also you have to be a little bit of a comedian and have a sense of humor and humility to where you understand that things are going to be weirder and different in the future? We've had five of those in the past five years that have never happened before in the US stock market. So, it's always going to surprise [laughs] one way or the other.
Bill: Yeah, 2017 was bizarre, man. Just like that march up every single day, it was like, "Oh, everything in the portfolio is green."
Meb: Set a record for most up months in a row. If you recall back to election night, I remember Trump, the futures tanking, the famous Carl Icahn moment, but I think it was like 16 months in a row. I would have to search, but I think it set the record for consecutive and it was the first year in history where the stock market went up every single calendar month.
Bill: Yeah, that's wild. You want to do a couple things you believe that most people don't, and then I'll let you out of here?
Meb: I don't know how short that's going to be. We can spend a lot of time on that.
Bill: How about the Fed is doing a good job?
Meb: Oh, boy.
Bill: [laughs]
Meb: Look, if you look at the spectrum of topics, I have opinions out. There are some that I'm extremely opinionated on that people should use valuation in general. I don't care how you do it, but I'm extremely opinionated on. I think it's more important to pay attention to fees and taxes, then broadly speaking what you invest in the macro level. On the flip side, there's stuff where I'm like, "You know what, I don't have a strong opinion," and one of which probably gets you on TV more than anything, and it sounds great is like the universal hatred of the Fed. I had said this, too. I was right out of college. I remember, I was longboard skateboarding in San Francisco with a chief economist at a big investment bank and which is something you do in San Francisco.
Bill: I like that.
Meb: This is the most San Francisco thing. Like here, it would be like you go surfing with someone and we were chatting markets, and I said, "You know what I don't understand? Why doesn't the Fed just automate interest rates?" Meaning, they just tie it to a certain level. He's like, "It's totally reasonable question." I think it's not other than expectations, no reason not to automate it. You could come up with the models that would create an expectation of it. So, I don't have a strong opinion. I think the levels of interest rates probably too low. Yeah, I think so. But I don't know that. It's hard to play out what would have happened otherwise. We only get one shot at moving through this in real time, and the US seems to be surviving and doing okay. But I also have no problem with the creative destruction of the bad times. To me, that's part of it. Part of capitalism and the beauty of competition is firms fail and ideas fail, and that's why we get the ones that bubble up and become Apple, and Amazon, and everything else.
Bear markets, to me, are a normal, healthy part of the wash cycle. If you get rid of those, to me, that's troublesome. Now, it doesn't mean everything they've done I agree with and we've written a lot of articles on policy. One recently called How to Narrow the Wealth and Income gap. But in general, I don't have the universal hatred. I think that everyone else does, and the part for me that I always struggle with for people is that are so angry about the Fed distorting markets. I often say, well, they're telling you what they're going to do, you can't take advantage of that as investor. That's on you. [laughs] It's like you understand what they're up to. Anyway, I should have just said pass on that one.
Bill: No, I like it. I like it. Look, I don't know. I defended the government last March. So, I got plenty of hate over that. I was called some sort of crony capitalist or whatever.
Meb: The problem with the government, the hard part I have and everyone can be on the side of hating the government is that, there's no continuity. That's the frustrating part to me. Everything is needlessly complex let's talk about into it, which I hate per the tax system. There's no reason that it should be that endlessly complex. We were chatting with Richard Taylor on the podcast, and he's like, "Most of the countries in the world, you can have a scenario where for 90% of the individuals, they just mail you a postcard say, "here's how much we think you owe. If you agree, check the box. We don't, you can file your taxes."' That eliminates 90% of people filing their own taxes with the thousands of pages of rules and regulations. I did my taxes and I do them every year. But do I know that I did them 100% correct? No. I don't even understand half of the topics and questions. I'm a professional in this world. End of rant.
Bill: [laughs]
Meb: There's a lot of very obvious policy solutions that everyone on the planet seems to agree with that could be implemented by our government that isn't because of various levels of lobbyists, and interested parties, and established incumbents, which is really frustrating. I'm not going to be running for civil office, but it is a depressing part of the entire process. I'll leave it at that.
Bill: Well, I guess the specific thing that I defended was, I thought in March for the government, and the Fed, and I understand buying junk bonds makes people upset, and I don't even disagree with that necessarily. But the idea of not having a deflationary bust in the middle of a pandemic was something that I understood trying to stave off and the idea that a bunch of people that are elected and depend on society continuing to run without massive hiccups that are potentially unavoidable, trying to avoid those massive hiccups. I understand where they were coming from and I don't know that I could have done any better. So, I don't know. People didn't like that. But whatever. 13F replication is a better approach to investing in most long-term hedge funds than the hedge funds themselves. What do you think of that?
Meb: So, we wrote a book on this topic called Invest with the House and the original idea we had a long time ago, referencing me being a quant, in the origin story of me being a quant as I have all the behavioral biases, and I'd probably be the world's most worst discretionary investor. I'm overconfident, I take on too much risk, on and on and on. But the biggest one is, I'm too optimistic. So, every CEO presentation at any value conference that I've ever been to, I'm like, "That's the best idea I've ever heard. Every single one."
Bill: [laughs]
Meb: So, I don't have the skeptic bone. But back in the day, I used to say, "Well, why don't I just buy what Buffett buys?" That seems so obvious to me. So, we went through and built a database that would let you replicate, and test all the hedge fund managers, it's called form 13F. It gets published 45 days after the quarter end. They are disclosures once they were public. So, meaning, what would it look like if you bought Buffett's stock picks and I actually added an extra week, say, a week after they become disclosed to the public. The takeaway was for the long-term stock pickers like Buffett, it works fantastic. You end up with the ability to replicate the portfolio for zero cost, which is a big one, because hedge funds charge two and 20 on average. You can tax manage them, you can do whatever you want, and we learned a ton during that experience. So, you can see some of the names we did in this book. Baupost, Appaloosa, which was the best performer on and on and on. There's obviously lots of things wrong with a 13F that you can't count on that you need to not follow certain companies. So, it drives me crazy when journalists will write about Bridgewater and what they're up to.
Well, they're a macro fund and they have hedging derivatives positions which just don't show up. So, it's not an accurate representation. The high-speed traders, it doesn't matter. We actually had some pretty amazing insights in the early days. One of our common friends we chatted about earlier when I asked my friends back then I said, "List to me your 10 favorite hedge funds that you would invest in with your own money." One of them, most of these funds, we'd caught clone wonderfully and in many cases, they would beat the underlying fund, because whether it was timing, whether it was position sizing, but usually the two and 20 maverick on and on and on. But there was a couple that just the return stream didn't look like the hedge funds returns, and the biggest one was Galleon, who just had an absolutely atrocious return stream, and it turned out as because their insider trading and didn't have anything to do their stock picks. So, they were just trading around earnings announcements, subsequently went to jail.
SAC was another one. So, no comment on whether that was just because they were super-fast traders or they're doing some other stuff. But I'm surprised, there's a lot of people that have taken that torch, and written papers, and I know plenty of institutions that do it in house, and don't tell anyone about it. To me, it's a totally-- We did an old article like, would you rather invest in Berkshire Buffett? And we actually filed a fund a while back to launch an ETF, and we humorously called it the Omaha ETF and ticker OMHA. And the SEC says, "You can't call it this." I said, "Why not?" They said, "Well, because everyone's going to think you're investing in companies in Omaha." I said, "No, they're not. No one thinks that."
Bill: [laughs]
Meb: At the time, there used to be a national ETF that invested in companies in like Tennessee or something. So, maybe that was a reason being. Then, I just told him, I said, "No, this is a reference to Peyton Manning and [crosstalk]
Bill: [laughs]
Meb: They were just like, "Stop wasting our time, Meb." But it's a fun book. It's one of my favorite books. Again, free online. So, check it out. The beauty of that topic, if you look at Buffett, it was also, we had an article called 'How to beat 98% of all mutual funds,' and the simple Buffett 13F clone over the past 20 years creams the vast majority of mutual funds, but he underperform like, it's some obscene amount of-- It's like 15 in the last 17 years or something. So, this is massive life altering outperformance from 2000 to 2003. The 2007 really where value had that moment. But the example is like how many people if you had blinded this return stream would have already sold or fired this person? Everyone would have-- there's no person that would have hired him post-crisis that would still allocate, but in reality, that's the time horizon you need. You need 10, 20 years for these guys to show up.
Bill: Yeah. Well, this is the old God would get fired thing, right?
Meb: Yeah.
Bill: All right, here's a pre-mortem, and then, I'll let you get out of here. If the US outperforms international, why would it happen do you think over the next five to 10 years?
Meb: I think, there's only two choices. Because if you look at the equation, dividend yield, earnings growth, change in multiple. Dividend yield set, starting valuations set, there's only two things that can happen. Either the valuation multiple goes up, which is possible, but it's lofty or the earnings have to be an absolute moonshot growth. Now, if you deconstruct that earnings growth equation, you can tease it out to real earnings growth and inflation, so, theoretically, you could have monster inflation in which case, the nominal returns would be great, but the real returns would stink. So, depending on what you're talking about, so that's one. People just go full bananas on-- Look, it's happened before. Again, we're talking about all the countries that have hit 40/60 on the CAPE ratio. It's happened in plenty places. They tend to be smaller than the US. So, that's one or two scenarios.
The third would be that foreign somehow just absolutely implodes and I'm trying to think of that, I mean, there's plenty of scenarios and what could happen for that to occur. But I think it's pretty unlikely. Not only do I think it's unlikely, that's what I do with my own money that the biggest trigger on Twitter is when I talk about how I put 401k assets in my kids 529 into foreign stocks, and people lose their mind. Say, but look, if I had to place one bet for the next decade, and close my eyes, and just look at absolute return potential, to me, it's emerging markets value, which is trading at just obscene to me cheap levels. We have a fund that does that, of course. If you randomly screen the 3000 ETFs out there on value measures that usually shows up as like number one.
But if I had to like desert island, any environment, retain my purchasing power, I would do a momentum in trends strategy, so that it exits to cash and bonds if the world goes through some sort of collapse. But the tying back together, the discussion, the big risks, which we didn't really talk about, equities are priced for perfection when inflation is 1% to 3%. When inflation starts to tick above 3%, above 4%, the multiple people are willing to pay historically and every country around the world goes down. So, that 22 goes to 17. You tick above 6%, and again, who knows this is transitory, it's permanent. We're talking low teens. I think, it's going to be a bet I would not make.
Bill: Fair enough. Well, thank you very much. I've enjoyed talking to you. I hope I didn't let you down. That's--
Meb: Well, you didn't get a talking.
Bill: [crosstalk]
Meb: I diarrhea-discussed, blathered the whole time. So, I was really looking forward to hour 3 just being a normal conversation instead of a monolog.
Bill: I can keep going, man. I don't need to turn it off. I want to be [crosstalk] on you time.
Meb: You get me caught up on certain topics and I can't help myself.
Bill: Well, if you ever want me to verbally diary, I'm happy to do it again.
Meb: When are you coming to LA?
Bill: I should be there in October.
Meb: Oh, nice.
Bill: I'll be in Manhattan Beach, man. I'll look you up. Let's grab some beers.
Meb: Well, as you know, that's where I live. So, if you don't, I'll be extremely offended.
