Rank #1: #169 - Jeremy Jacobson - We Ended Up Saving Roughly 70% Of After-Tax Income For About 10 Years
In episode 169, we welcome our guest, Jeremy Jacobson. Jeremy begins with his backstory of being an engineer by trade, and after paying off his school loans and taking a vacation, he decided to apply his engineering framework to approach saving and investing. He walks through the plan that allowed him to retire at the age of 37.
Meb then asks Jeremy to expand on his investment portfolio. Jeremy explains what going through the GFC did to his portfolio, and the realization that it didn’t impact his day-to-day life at all, in relying on income from his portfolio.
Meb asks Jeremy to discuss geographic arbitrage, and what that looks like for he and his family. Jeremy walks through his annual budget, and how that is used as a guide to where they travel and how long they stay there.
Jeremy follows up with some ideas on how he carefully optimizes his taxes living abroad.
As the conversation winds down, Jeremy covers some travel hacks, and what is coming up for he and his family.
All this and more in episode 169, including Jeremy’s most memorable investment.
Rank #2: #104 - Ken Fisher - “If You’re Worried About What Things Are Going to Be Worth Next Week…You’re Going to Make Yourself Way Poorer 20 Years from Now"
In Episode 104, we welcome the legendary, Ken Fisher.
Meb starts with a quick word of congratulations to Ken, as his firm just passed $100B in assets under management. The guys then discuss Ken’s interest in fishing with a bow and arrow, which eventually morphs into a conversation about a millionaire who allegedly hid a million dollars somewhere in the Rockies, leaving clues to treasure-hunters searching for it.
The guys then jump into investing, discussing Ken’s early days in launching Fisher Investments. They touch upon one of Ken’s early claims to fame, championing the price-to-sales ratio. This leads to a conversation about being factor agnostic, which includes some interesting takeaways from Ken on capital pricing.
Soon, Meb brings up Ken’s book, Debunkery, and asks about one of its points: namely, the misbelief by so many investors that bonds are safer than stocks. What follows is a great commentary by Ken about short-term volatility risk versus opportunity cost risk. When you look at longer, rolling time periods, it becomes clear that stocks are far less risky than bonds. And in the long term, stocks are less risky than cash. Ken tells us that in his business, it’s his job to focus his clients on the longer-term.
Next, the conversation takes an interesting turn, touching upon the explosion of tech science, and how it’s affecting our lives, as well as the capital markets. It bleeds into Meb suggesting that older investors tend to become more conservative or pessimistic, and so they tilt away from equities, and whether that’s a behavioral challenge Ken has to address with his clients. Ken gives us his thoughts, concluding with that idea that people need to be relatively comfortable in capital markets with things that are generally uncomfortable.
The conversation then veers into politics and the effects on the market. Ken tell us that when you look at presidents and market history, our system gives presidents much less power to affect markets than most people believe.
Meb jumps to Twitter questions, bringing up one that wonders how to position yourself in the end of a bull market. Ken gives us a fascinating answer which I’m going to make you listen to in order to hear, but it tends to focus on large cap and quality.
There’s way more in this great episode: capital preservation and growth… volatility (a great quote from Ken “volatility is your friend, it’s not your enemy, if you use it correctly”)… the media’s impact on investor perception… the Fed and sovereign balance sheets… the senate bill trying to eliminate the ability of public companies buying back their own stock in the marketplace… housing (and the need to account for the full housing costs when calculating returns)… and of course, Ken’s most memorable trade.
What are the details? Find out in Episode 104.
Rank #3: #1 - Global Asset Allocation - Investing 101
On this first-ever podcast, Meb provides listeners with a bit about himself and answers the question “What in the world am I doing starting a podcast?” (After all, he is a self-professed former “glorified ski bum.”) He then discusses a broad investing framework – a global asset allocation model – that serves as a helpful starting point for the shows to come. Next, Meb discusses the portfolio returns of a handful of the smartest, most respected fund managers in the world today. Which portfolio allocation has performed the best over the last several decades? The answer is going to surprise you. And while we’re asking questions, why did Charlie Munger (Warren Buffett’s business partner) say “the investment-management business in insane?” That answer, and far more, on Episode 1 of The Meb Faber Show.
Rank #4: #168 - Brian Livingston - What’s True Is That We Have To Adapt To Modern Markets
In episode 168 we welcome Brian Livingston. Brian discusses his background and eventual transition into the world of investing out of a need to invest the money he had from the proceeds of selling his email newsletter.
Meb then asks Brian to get into what made sense to him when he started to look at investment opportunities. Brian discusses the benefit tilting portfolios to the momentum factor.
The pair then gets into the psychological difficulty of investing. Brian then goes on to talk about behavioral pain points, the evidence that people tend to liquidate after experiencing 20% downturns, and what people can do to improve the chances of avoiding pain points. He goes on to explain the mechanics of his process and “Muscular Portfolios.”
Next, Meb and Brian get into the issues of investors looking different than the “market.” Brian talks about the disruption it causes households and savers, and what he suggests people do to be successful.
As the conversation winds down, Brian and Meb discuss the context of one of Brian’s recent columns on the investment costs reflected in the bid/ask spread, as well as taxes and investing.
All this and more in episode 168, including thoughts on chasing performance, and Brian’s most memorable investment.
Rank #5: #13 - Want Buffett’s Returns? Here’s How to Get Them
Stock picking is hard—really hard. Fortunately, there’s a simple strategy you could begin following today to improve your success. It’s simple to implement, takes just minutes of your time, yet has the potential to vastly improve your investing results. Sadly, if you’re like the average investor, you don’t even know it exists. So what is it? Well, consider the world’s star hedge fund managers – the Buffetts, Klarmans, and Teppers – the guys with average yearly returns in the upper teens and twenties. What if you knew what they were investing in right this second? Logic would suggest if you invested alongside them, you too could post their extraordinary returns. Well, it turns out, the option is available to you thanks to the SEC and Form 13F. This is a form professional fund managers with more than $100m in U.S.-listed assets must fill out. Best of all, it’s available to the public, providing you and me a way to “peek over the shoulder” of some of the world’s most successful investors. Of course, there are some issues with this strategy. For instance, there’s a 45-delay in reporting, there can be inexact holdings, and the biggest one – the fluctuating success of your chosen manager. Bill Ackman’s recent debacle with Valeant certainly comes to mind. No, it’s not easy; a 13F investing strategy takes dedication. Many of the star managers who post amazing long-term returns can actually underperform for years at a time. Would you stay invested alongside them long enough to ride out those barren stretches? Or would fear and second-guessing shake you out? Turns out there are a few ways you can improve your chance of success. Find out what they are in Episode 13.
Rank #6: #2 - Patrick O’Shaughnessy - An Unexpected Drop-in from Patrick O’Shaughnessy
Meb and Patrick cover lots of ground in this fun episode. They discuss stocks not to own right now, Meb’s worst market loss of all time, and Patrick’s career advice in response to listener Q&A. They then get a laugh reading aloud the worst book reviews that each has received on their respective investing books (posted anonymously on Amazon). There’s far more, including discussion on stock buybacks, roboadvisors, value versus growth investing, some microbrew tasting, and even how Meb once cheated his own grandmother.
Rank #7: #39 - Ed Thorp - “If You Bet Too Much, You'll Almost Certainly Be Ruined”
In Episode 39, we welcome the legendary Ed Thorp. Ed is a self-made man after having been a child of The Depression. He’s a professor, a renowned mathematician, a fund manager who’s posted one of the lengthiest and best investment track records in all of finance, a best-selling author (his most recent book is A Man for All Markets), the creator of the first wearable computer, and finally, the individual responsible for “counting cards.”
Meb begins the episode in the same place as does Ed in his new book, the Depression. Meb asks how that experience shaped Ed’s world view. Ed tells us about being very poor, and how it forced him to think for himself, as well as teach himself. In fact, Ed even taught himself how to make his own gunpowder and nitroglycerine.
This dovetails into the various pranks that Ed played as a mischievous youth. Ed tells us the story of dying a public pool blood-red, resulting in a general panic.
It’s not long before we talk about Ed’s first Las Vegas gambling experience. He had heard of a blackjack system developed by some quants, that was supposed to give the player a slight mathematical advantage. So Ed hit the tables with a strategy-card based on that system. At first, his decisions caused other players at the table to ridicule him. But when Ed’s strategy ended up causing him to hit “21” after drawing 7 cards, the players’ opinions instantly changed from ridicule to respect.
This was the basis from which Ed would create his own counting cards system. Meb asks for a summary of how it works. Ed gives us the highlights, which involve a number count that helps a player identify when to bet big or small.
Meb then asks why Ed decided to publish his system in academic journals instead of keeping it hush-hush and making himself a fortune. Ed tells us that he was academically-oriented, and the spirit of science is to share.
The conversation turns toward the behavioral side of gambling (and investing). Once we move from theory to practice, the impact of emotions plays a huge role. There’s a psychic burden on morale when you’re losing. Meb asks how Ed handled this.
Ed tells us that his early days spent gambling in the casinos were a great training ground for later, when he would be “gambling” with tens of millions of dollars in the stock market. He said his strategy was to start small, so he could handle the emotions of losing. As he became more comfortable with his level of risk, he would scale his bets to the next level, grow comfortable, then move up again from there. In essence, don’t bet too much too fast.
This dovetails into the topic of how to manage money using the Kelly Criterion, which is a system for deciding the amount to bet in a favorable situation. Ed explains that if you bet too small, won’t make much money, even if you win. However, “if you bet too much, you’ll almost certainly be ruined.” The Kelly Criterion helps you determine the appropriate middle ground for position sizing using probabilities.
It turns out that Ed was so successful with his methods, that Vegas changed the rules and eventually banned Ed from their casinos. To continue playing, Ed turned to disguises, and tells a fun story about growing a beard and using contact lenses to avoid identification.
Meb tells us about one of his own card-counting experiences, which was foiled by his partner’s excessive Bloody Mary consumption.
Next, we move to Wall Street. Meb brings up Ed’s performance record, which boasts one of the highest risk-adjusted returns of all time – in 230 months of investing, Ed had just 3 down months, and all were 1% or less. Annualized, his performance was over 19%.
Ed achieved this remarkable record by hedging securities that were mispriced – using convertible bond and options from the same company. There was also some index arbitraging. Overall, Ed’s strategy was to hedge away as much risk as possible, then let a diversified portfolio of smaller bets play out.
Meb asks, when you have a system that has an edge, yet its returns begin to erode, how do you know when it’s time to give up the strategy, versus when to invest more (banking on mean reversion of the strategy). Ed tells us that he asks himself, “Did the system work in the past, is it working now, and do I believe it will it in the future?” Also “What is the mechanism that’s driving it?” You need to understand whether the less-than-desired current returns are outside the range of usual fluctuation. If you don’t know this, then you won’t know whether you’re experiencing bad luck (yet within statistical reason) or if something has truly changed and your “bad luck” is actually abnormal and concerning.
Next, Meb asks about Ed’s most memorable trade. You’ll want to hear this one for yourself, but it involves buying warrants for $0.27, and the stock price eventually rising to $180.
There’s plenty more in this fantastic episode, including why Ed told his wife that Warren Buffett would be the richest man in America one day (said back in 1968)… What piece of investing advice Ed would give to the average investor today… Ed’s interest in being cryogenically frozen… And finally, Ed’s thoughts on the source of real life-happiness, and how money fits in.
The show ends with Meb revealing that he has bought Ed and himself two lottery Powerball tickets, and provides Ed the numbers. Will Ed win this bet? The drawing is soon, so we’ll see.
All this and more in Episode 39.
Rank #8: #115 - Steve Glickman - Opportunity Zones: Ultimately, If You Hold for…10 Years or More…You Don’t Pay Any New Capital Gains – Ever
In Episode 115, we welcome entrepreneur and opportunity zone expert, Steve Glickman.
Meb jumps right in, asking “what is an opportunity zone?”
Steve tells us about this brand-new program that was created this past December. Most people don’t know about it yet. It was the only bipartisan piece of the Investing in Opportunity Act, which was legislation packed into the tax reform bill.
Opportunity zones were designed to combine scaled investment capital with lower-income communities that haven’t seen investment in decades. You can essentially roll-over capital gains into opportunity funds – special investment vehicles that have to deploy their capital in these pre-determined opportunity zones. It could be a real estate play, a business venture play, virtually anything as long as the investment is in the opportunity zone and meets the appointed criteria. And the benefit of doing this? Steve tells us “ultimately, if you hold for…10 years or more in these opportunity zones…you don’t pay any new capital gains – ever.”
Meb hones in on the benefits, clarifying they are: a tax deferral, a step-up in basis, and any gains on the investment are free of capital gains taxes. He then asks where these zones exist now, how one finds them, and how they were created.
Steve tell us the zones exist in every US state and territory, including Puerto Rico – in fact, the entire island of Puerto Rico is now an opportunity zone. Steve goes on to give us more details.
Soon, the conversation turns toward the problem these opportunity zones are trying to solve – the growing inequality in America. As part of this discussion, Steve tells us about his group, EIG. He created it to work on bipartisan problems that had private sector-oriented solutions. He wanted to address the unevenness of economic growth in the US – why are some areas getting all the capital, while others are getting left behind?
Meb points the guys back to opportunity zones and how an investor can take part. He asks what’s the next step after selling all my investments for capital gains. What then?
Steve tells us all the capital has to flow through an opportunity fund. It can be a corporation or partnership, include just one investor or many, can be focused on multiple investments or just one…. Most people have identified a project in which they want to invest, but some groups are now creating funds to raise capital, then will find a deal. Steve provides more details on all this.
There’s way more in this special episode: the two industries that the government won’t allow to be included in opportunity zone investments… The three different tests for how a business qualifies as an opportunity zone investment… What regulatory clarity is currently missing from the IRS… The most common naysayer pushback they’re hearing… The slippery issue of gentrification… And far more.
Opportunity zones have the potential to be a game-changer for many investors. Get all the details in Episode 115.
Rank #9: #69 - Jason Calacanis - “This is a Little, Secret Way... A Dark Art of Becoming Truly Wealthy... Massive Wealth"
In Episode 69, we welcome legendary angel investor, Jason Calacanis.
We start with Jason’s background. From Brooklyn, he worked his way through college, then was in New York at the breaking of the internet. He started his own blogging company, and eventually sold his business for $30M. Later, he landed at Sequoia Capital as part of its “scouts” program, and went on to be an angel investor in a handful of unicorns (a startup company valued at over $1B).
As the conversation turns to angel investing, Meb starts broadly, asking Jason about the basics of angel investing.
Jason defines it as individuals investing in companies before the venture capital guys get involved (before a Series A). He tells us that the more you can analyze a company through data, the lesser chance it’s an angel investment. That’s because to get the huge returns that come through a true angel investment, there has to be some level of risk (in part, related to having less data-driven information about a company’s financials).
So, the challenge is to find that “Goldilocks” period – before revenues are so high that a VC is interested, but after a startup company has launched a product and shown a hint of traction (so many early stage companies end up failing even to launch a product). When you time your investment in this manner, you reduce your downside risk.
Meb makes a parallel to traditional equity investing, where only a handful of stocks make up the majority of overall market gains. He suggests this dynamic is likely even more exaggerated in angel investing.
Jason agrees. That’s why he suggests you want to go slow at the beginning, ramping up as you learn more, building your network, and growing your deal-flow. But when you get it right, it can result in massive wealth. Or as Jason says, “I think that this is a little secret way… a dark art of becoming truly wealthy… massive wealth.”
Meb points the conversation toward a section of Jason’s book which made the point that to get started in angel investing, you need at least one of four things: money, time, expertise, or a great network. He asks Jason to expound. So, Jason provides us some color on these different angel-factors.
This dovetails into how much of your net worth should be allocated toward angel investments. It’s a great conversation diving into the math of various net-worth-percentages, and how a couple of investment-winners can have a profound impact on your overall wealth. Meb tells us about his own early-stage investing experience, and how the contagious optimism is exciting.
Meb asks what are some resources and places to go for more information. Jason points toward doing some syndicate deals. By doing so, you can read the deal memos, and track the investments even if you never actually invest. It’s a great way to learn – Jason uses the analogy of playing fantasy baseball. The guys go on to discuss ways to grow your network through other syndicate investors.
A bit later, Meb asks about pitch meetings when company founders are looking for money. What’s your role as a potential investor in these meetings? Jason likes to ask the question “What are you working on?” He then provides some great reasons why this question is effective. A follow-up question is “Why now?” In essence, what has changed that makes this moment right for your business? For example, for Uber, it was GPS on phones.
Curious what the “why now?” of the moment is? Robotics is one of them. Jason gives us a couple others (but you’ll have to listen to discover what they are).
The conversation drifts into how to exit your angel investment (or invest more). Jason says if you have a breakout success you want to quadruple down. For instance, if a big VC like Sequoia is thinking about investing, you’d definitely want to jam as much money in as possible. The guys then discuss taking some money off the table if your investment goes public, perhaps selling 25% of your position at four different times.
Meb likes this idea, as we discuss the behavioral challenges of investing so often, with so many investors thinking in binary terms – “in or out?” But scaling is such a powerful concept.
There’s so much more in this episode, and if you’ve ever been curious about angel investing, you’re going to learn from the best. The guys discuss how the lack of liquidity can be a blessing in disguise… why the sophomore year of angel investing can be brutal… a great way to tell if your angel investment is doing poorly… a huge ($10M huge) tax benefit of early stage investing… and of course, Jason’s most memorable trade – it turns out, he was the 3rd or 4th investor in Uber.
Want to hear the details? You’ll get them all and more in Episode 69.
Rank #10: #90 - Dan Rasmussen - “The Crown Jewel of the Alternative Universe is Private Equity"
In Episode 90, we welcome Founder and Portfolio Manager of Verdad, Dan Rasmussen.
We start with a brief walk-through of Dan’s background. It involves a Harvard education, a New York Times best-selling book, a stint at Bridgewater, consulting work with Bain, then his own foray into private equity.
Turning to investments, Meb lays the groundwork by saying how many people misunderstand the private equity market in general (often confusing it for venture capital). He asks Dan for an overview, then some specifics on the state of the industry today.
Dan clarifies that when he references “private equity” (PE), he’s talking about the leveraged buyout industry – think “Barbarians at the Gate.” He tells us that PE has been considered the crown jewel of the alternative world, then provides a wonderful recap of its evolution – how this market outperformed for many years (think Mitt Romney in the 80s, when he was buying businesses for 4-6 times EBIT), yet its outsized returns led to endowments flooding the market with capital ($200 - $300 billion per year, which was close to triple the pre-Global Financial Crisis average), driving up valuations. Today, deals are getting done at valuations that are nowhere near as low as in the early days. And so, the outsized returns simply haven’t existed. Yet that hasn’t stopped institutional investors from believing they will. Dan tells us about a study highlighting by just how much institutional managers believe PE will outperform in coming years…yet according to Dan’s research, their number is way off.
Dan then delves into leverage and the value premium, telling us how important this interaction is. He gives us great details on the subject based on a study he was a part of while at Bain Consulting. The takeaway was that roughly 50% of deals done at multiples greater than 10x EBITDA posted 0% returns to investors, net of fees.
Meb asks about the response to this from the private equity powers that be… What is their perspective on adding value improvements, enabling a higher price? Dan gives us his thoughts, but the general take is that doing deals at 10x EBITDA is nuts.
Next, the guys delve into Dan’s strategy at Verdad. In essence, he’s taking the strategy that made PE so successful in the 80s and applying it to public markets. Specifically, he’s looking for microcap stocks, trading at sub-7 EBITDAs, that are 50%-60% levered. With this composition, this mirrors PE deals.
The guys then get neck-deep in all things private equity… control premiums, fees, and illiquidity… the real engine behind PE alpha… sector bets… portfolio weights…
Meb and Dan land on “debt” for a while. Dan tell us how value investors tend to have an aversion to debt. But if you’re buying cheap companies that are cash-flow generating, then having debt and paying it off is a good thing. Debt paydown is a better form of capital allocation than dividends or buybacks because it improves the health of the biz, leading to multiple expansion.
The guys cover so much ground in this episode, it’s hard to capture it all here: They discuss how to balance quantitative rules with a human element… The Japanese market today, and why it’s a great set-up for Dan’s PE strategy… Rules that should work across geography, asset classes, markets, and time… Currency hedging… And far more.
For the moment, we’re still ending shows with “your most memorable trade.” Dan’s involves a Japanese company that had been blemished by a corporate scandal. Did it turn out for or against him? Find out in Episode 90.
Rank #11: #45 - Gary Antonacci - “You Get a Synergy That Happens When You Use (Dual Momentum)"
In Episode 45, we welcome one of the most often-requested guests for our podcast, Gary Antonacci.
After a few minutes on Gary’s background, the guys dive into Gary’s “Dual Momentum” research. To make sure everyone is on the same page, Meb asks for definitions before theory. “Relative momentum” compares one asset to another. “Absolute momentum” compares performance to its own track record over time, also called time-series momentum. Gary uses a 12-month lookback, and compares his results to the S&P and other global markets. In essence, you’re combining these two types of momentum for outperformance.
The guys talk a bit about using just one of the types of momentum versus combining them, but Gary tells us “You get a synergy that happens when you use (Dual Momentum).” The compound annual growth rate applied to the indices is 16.2% dating back to 1971, compared to the S&P’s 10.5%. And the reduction in volatility and drawdown is under 20% compared to 51% for the S&P.
With the basics of Gary’s Dual Momentum out of the way, Meb decides to go down some rabbit holes. He asks about the various extensions on Dual Momentum. It turns out, Gary says you can introduce some additional granularity, but not a lot. Almost nothing really improves the current version of Dual Momentum substantially. (And in case you’re wondering, you can go to Optimalmomentum.com to track Gary’s performance.)
Meb then brings up questions that came in via Twitter. The first: “What sort of evidence would be required to convince Gary that Dual Momentum won’t work in the future?”
Gary tells us that because the evidence for Dual Momentum is so strong, the evidence against it would have to be strong. We would need more than a few years of underperformance, and instead, a full market cycle of underperformance. But more importantly, he’d want to understand why it would underperform – for instance, perhaps everyone decided to become a trend follower, squeezing out the alpha? Gary quickly ads that such a scenario will likely never happen due to our behavioral tendencies as investors.
The next Twitter question: “What are your thoughts on doing something alpha oriented versus just dropping into cash and bonds when you’re in a downtrend?”
Gary says shorting doesn’t work because of an upward bias to stocks. Meb agrees, saying that shorting actually amps up risk and volatility, but doesn’t really add to risk-adjusted returns.
Next, Meb brings up a post Gary wrote about commodities – are they still a good diversifier? The idea is that markets and their participants change over time. Gary thinks passive commodities have changed over time. And while they were a good diversifier to a stock/bond portfolio before, everyone has started doing it, which changed the nature of the market, reducing the benefit.
Gary also mentions the risk of others front-running you. Meb chimes in, agreeing – you’re going to want to hear this back-and-forth.
There’s tons more in this episode: moving away from market cap weighting when using Dual Momentum… Dual Momentum applied to sector rotation… sports gambling… our tendencies to stray from our investment plans… and Gary’s most memorable trade – hint: it involves an options blow-up.
What are the details? Find out in Episode 45.
Rank #12: #41 - Doug Ramsey - “Valuation Tells Me I Should Be Lighter Than Normal On U.S. Equities and Tilting More Towards Foreign”
In Episode 41, we welcome Doug Ramsey from Leuthold. Meb is especially excited about this, as Leuthold publishes his favorite, monthly research piece, the Green Book.
After getting a recap of Doug’s background, Meb dives in. Given that we’re in the Dow’s second longest bull run in history, Meb asks how Doug sees market valuation right now.
Doug’s response? “Well, that’s a good place to start cause we’ll get the worst news out of the way first...”
As will surprise no one, Doug sees high valuations – believing that trailing earnings-based metrics might actually be underestimating the valuation risk.
This prompts Meb to bring up Leuthold’s “downside risk” tables. In general, they’re showing that we’re about 30% overvalued. Across no measure does it show we’re fairly valued or cheap.
Doug agrees, but tells us about a little experiment he ran, based on the question “what if the S&P were to revert to its all-time high valuation, which was on 3/24/2000?” That would mean our further upside would stretch to about 3,400, and we’re a little under 2,400 today. Doug summarizes by telling us that if this market is destined to melt up, there’s room to run.
Meb agrees, and makes the point that all investors have to consider the alternate perspective. While most people believe that the markets are substantially overvalued, that doesn’t mean we’re standing on the edge of a drawdown. As we all know, markets can keep rising, defying expectations.
The conversation then drifts into the topic of how each bull market has different characteristics. Meb wants to know how Doug would describe the current one. Doug tells us the mania in this bull market has been in safety, low volatility, and dividends. Overall, this cycle has been characterized by fear – play it conservative.
The guys then bounce around across several topics: small cap versus large cap and where these values are now… sentiment, and what a difference a year makes (Doug says it’s the most optimistic sentiment he’s seen in the last 8 years)… even “stock market returns relative to the Presidential political party” (historically, democratic Presidents have started office at a valuation of 15.5, leading to average returns of 48%, while republicans have taken over at a valuation of 19, which has dragged returns down to 25%). The bad news? Trump is starting at very high valuations.
Next, the guys get into the biggest problem with indexing – market cap weighting. Leuthold looked at what happens to equities once they hit 4% of their index. The result? It becomes incredibly hard to perform going forward. It’s just near impossible to stay up in those rarified market cap tiers. So what’s the takeaway? Well, Doug tell us that he’d bet on the 96% of other stocks in the S&P outperforming Apple over next 10 years.
This episode is packed with additional content: foreign stock valuations… value, momentum, and trend… the Coppock Curve (with a takeaway that might surprise you – higher prices are predicted for the next 12-24 months!)… The best sectors and industries to be in now… Why 2016 was the 2nd worst year in the past 89 years for momentum…
Finally, for you listeners who have requested we pin our guests down on more “implementable” advice, Meb directly asks what allocation Doug would recommend for retail investors right now.
What’s his answer? Find out in Episode 41.
Rank #13: #60 - William Bernstein - “The More Comfortable You Are Buying Something, in General, the Worse the Investment It's Going to Be"
In Episode 60, we welcome the great William (Bill) Bernstein.
Bill starts by giving us some background on how he evolved from medicine to finance. In short, faced with his own retirement, he knew he had to learn to invest. So he studied, which shaped own thoughts on the matter, which led to him writing investing books, which resulted in interest from the press and retail investors, which steered him into money management.
After this background info, Meb jumps in, using one of Bill's books "If You Can" as a framework. Meb chose this as it starts with a quote Meb loves: "Would you believe me if I told you that there's an investment strategy that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90 percent of financial professionals in the long run, and make you a millionaire over time?"
The challenge is the "If" in the title. Of course, there are several hurdles to "if" which Meb uses as the backbone of the interview.
Hurdle 1: "People spend too much money." Bill gives us his thoughts on how it's very hard for a large portion of the population to save. We live in a consumerist, debt-ridden culture that makes savings challenging. Meb and Bill discuss debt, the "latte theory," and the stat about how roughly half of the population couldn't get their hands on $500 for an emergency.
Hurdle 2: "You need an adequate understanding of what finance is all about." Bill talks about the Gordon Equation, and how investors need an understanding of what they can realistically expect from stocks and bonds - in essence, you really need to understand the risks.
Meb steers the conversation toward investor expectations - referencing polls on expected returns, which are usually pegged around 10%. Using the Gordon Equation, Bill's forecast comes in well-below this (you'll have to listen to see how low). The takeaway? Savings are all the more important since future returns are likely to be lower.
This leads to a great conversation on valuation and bubbles. You might be surprised at how Bill views equity valuations here in the U.S. in the context of historical valuation levels. Bill tells us to look around: Is everyone talking about making fortunes in stocks? Or quitting good jobs to day trade? We don't see any of these things right now. He's not terribly concerned about valuations.
Hurdle 3: "Learning the basics of financial and market history." Meb asks which market our current one resembles most from the past. Bill tells us it's a bit of a blend of two periods. This leads to a good discussion on how higher returns are more likely to be coming from emerging markets than the U.S.
Hurdle 4: "Overcoming your biggest enemy - the face in the mirror." It's pretty common knowledge we're not wired to be good investors. So Meb asks the simple question why? And are there any hacks for overcoming it? Or must we all learn the hard way?
Unfortunately, Bill thinks we just have to learn the hard way. He tells us "The more comfortable you are buying something, in general, the worse the investment it's going to be."
Bill goes on to discuss the challenge of overconfidence and the Dunning-Kruger effect (there's an inverse correlation between competence and belief one has in their competence). Meb asks if there's one behavioral bias that's the most destructive. Bill answers with overestimating your own risk tolerance. You can model your portfolio dropping 30% and think you can handle it, but in when it's happening in real time, it feels 100% worse than how you anticipated it would.
Hurdle 5: "Recognize the monsters that populate the financial industry." Basically, watch out for all the financial leeches who exist to separate you from your money. Bill tells us a great story about being on hold with a big brokerage, and the "financial porn" to which he was subjected as he waited.
There's way more in this episode: Bill's thoughts on robos... What Bill thinks about any strategy that moves away from market cap weighting (Bill thinks "smart beta" is basically "smart marketing")... How buying a home really may not be a great investment after all... Cryptocurrencies... and even Meb's "secret weapon" of investing.
All this and more in Episode 60.
Rank #14: #44 - Invest with the House
Last week’s solo “Mebisode” was met with lots of positive feedback, so we’re going to do one more in this format before we return to interviewing guests. Therefore, in Episode 44, Meb walks us through his book, “Invest with the House, Hacking the Top Hedge Funds.”
Picking stocks is hard—and competitive. The most talented investors in the world play this game, and if you try to compete against them, it’s like playing against the house in a casino. Luck can be your friend for a while, but eventually the house wins. But what if you could lay down your bets with the house instead of against it?
In the stock market, the most successful large investors—particularly hedge fund managers—represent the house. These managers like to refer to their top investments as their “best ideas.” In today’s podcast, you will learn how to farm the best ideas of the world’s top hedge fund managers. Meb tells us who they are, how to track their funds and stock picks, and how to use that information to help guide your own portfolio. In essence, you will learn how to play more like the house in a casino and less like the sucker relying on dumb luck.
So how do you do it? Find out in Episode 44.
Rank #15: #124 - Howard Marks - It's Not What You Buy, It's What You Pay for It That Determines Whether Something is a Good Investment
In Episode 124, we welcome legendary investor, Howard Marks. Meb begins with a quote from Howard’s new book, Mastering the Market Cycle, and asks him to expound. Howard gives us his top-line take on market cycles, ending with the idea that if you understand them, you can profit from them.
Meb follows up by asking about Howard’s framework for evaluating where we are in the cycle. Rather than look at every input as individual, Howard looks at overall patterns. What is the collective mood? Or is it depressed, sad, and people don’t want to buy? Or is it buoyant? Second, are investors optimistic and thrilled with their portfolios and eager to add more, therein increasing risk? Or are investors regretful and hesitant, burned by recent experience? Then there are quantitative aspects – valuations, yield spreads, cap rates, multiples, and so on. All of these variables help give Howard a feel for whether assets are high- or low-priced.
Next, Meb asks Howard to use Oaktree’s actions during the Financial Crisis as a real-world example of how an investor could act upon cycles. Howard tells us there are two parts to what happened during the Crisis – what Oaktree did during the run-up to the meltdown, and then what it did during the event itself. In short, Oaktree was cautious during the lead-up. They raised their standards for investments. Why? Howard notes that they didn’t know ahead of time how bad things would be. Rather, they were hesitant because they looked at the securities being issued, and it seemed that every day, something was coming out that didn’t deserve to be issued. This was a tip-off.
Then the event happened, culminating in Lehman bankruptcy, and that’s when Oaktree became very aggressive, buying half a billion dollars each week for 15 weeks. Howard tells us that, yes, our job as investors is to be skeptical, but sometimes that skepticism needs to be applied to our own fears. In other words, skepticism also might appear like “no, that scenario is too bad to actually be true.”
Meb notes that the challenge is investors want precision, picking the exact top and bottom. But this isn’t really how it works. Meb asks if there a time when Howard felt he misinterpreted a point in the market cycle.
Before answering Meb’s questions, Howard agrees that trying to find the bottom or top is a huge mistake. He notes that trying to find the perfect day upon which to buy or sell is impossible. In terms of potentially misreading the cycle, Howard tells us that Oaktree has been perhaps too conservative over the last few years, so they haven’t realized all the gains of the market. That said, he stands by his decision telling us, “anybody who buys or holds because of the belief that something that’s fully valued will become overvalued…is embarking on a dangerous course.”
Meb asks how Howard sees the world today.
Howard tells us we’re in the 8th inning of this bull market. Assets are highly priced relative to history. People are bullish. Risk aversion is low. He notes it’s a time for caution – but – we have no idea how many innings there will be in this game.
What follows is a great conversation about bull markets, what ends bull markets, and how to implement market cycles into an investment approach. The guys touch on investor exuberance… whether markets need to be exuberant for a bull market to end… bullish action despite bullish temperament… the need to “calibrate” your portfolio… and the average investor’s ability to live with pain.
There’s so much more in this episode: How Howard’s market approach has evolved over the years… how “it’s not what you buy, it’s what you pay for it that determines whether something is a good investment or bad investment”… Howard’s thoughts on contrarian investing… and, of course, his most memorable trade. This one yielded him 23x.
What are the details? Find out in Episode 124.
Rank #16: #73 - Jeff Porter & Barbara Schelhorn - Why Financial Planning? Because Investing Alone Won't Get You There
In Episode 73, we welcome Jeff Porter and Barbara Schelhorn from the financial planning group, Sullivan Bruyette Speros & Blayney.
We start with Jeff’s background. He was a contemporary of Meb’s at the University of Virginia. The guys share a laugh recalling running out of class to check stock quotes back in the Dot Com boom.
As the conversation turns to investing and financial planning, Meb asks about changes in the industry – with the rise of robo-advisors, indexing, target date portfolios, and so on, how does Jeff, as a financial planner, continue to add value on the investment side?
Jeff tells us how the aforementioned products can be great for many investors, but less so for others. For investors who need more handholding, and/or have more complex financial situations, advisors can add significant value.
What follows is a great discussion on questions Jeff asks his clients as he seeks to evaluate the right market strategy for them, as well as the right implementation. There are myriad issues: what’s the best asset mix? Do you add hedges? Active or passive? Factor tilts? And so on.
Jeff looks to understand what his clients need from a return perspective in order to reach their goals, as well as their ability to handle risk. This includes variables such as when will the client need to take withdrawals. This leads to an interesting conversation about those risky years shortly before and after retirement begins. If luck is against you, and the market is down in those years, it can make a huge difference in your portfolio’s balance and therefore, your retirement lifestyle. Jeff tells the story of how retiring at two different points in time led to two very different outcomes.
Another question Jeff asks clients is what percentage, or dollar value, could they accept as a temporary loss in a bear market?” He tells us another story about a husband/wife client who realized they had very different answers to this question.
Meb asks what’s the average answer to “how much can you stomach being down?”. Apparently, most clients say they can handle about 15-20% declines.
Meb then brings up how portfolio creation and management is just one part of a person’s entire financial picture; therefore, as Jeff and Barbara think about risk and a client’s holistic financial view, where do they begin?
Barbara answers this one. She tells us one of the most important things she does is help clients organize their financial lives. She accomplishes this by asking three questions: Who? What? And how much?
She goes on to give us great details on what really goes into these questions. In essence, she’s helping clients gain far greater control over their financial lives. You’ll hear Meb sound a bit overwhelmed in response, noting how simply the organizational side of getting someone’s financial life in order can be massive – and that he could personally use the help.
The conversation drifts toward allocating cash and savings. But one of the problems is that many investors have way too much cash sitting in accounts earning nothing. At a minimum, they could use that cash to pay down various debts or mortgages. Meb makes the point that countless investors are bad at optimizing the cash/debt equation. He says there are simple techniques to easily turn cash earning 0% into cash earning 1% per year.
Meb continues to steer the conversation toward traditional financial planning topics: Social Security, retirement benefits, health and liability risks, and so on…
Barbara provides some wonderful information on insurance and long-term health care. As an interesting aside, she tells us that most of her male clients don’t want to waste their money on long-term health care, while her female clients find it to be more of a need. Barbara says the reality is somewhere in between.
This hardly even begins to scratch the surface of what’s covered in this episode. (It’s our longest to date!) You’ll hear about umbrella insurance policies (and why Meb could use one for some property he owns in Colorado)… The importance of proper titling of your assets and how it can protect you from litigation… Gifting loved ones with stock rather than cash to get around big capital gains… Effective financial strategies using tax bracket trends… SEP IRAs versus 401Ks vs Roth IRAs… When to start taking Social Security… And way more.
And of course, you’ll hear Jeff and Barbara’s most memorable investments. While Barbara’s is interesting, Jeff’s involves a huge market loss thanks to a bad tip from a certain college friend (you guessed it – Meb was to blame).
What was Meb’s bad investment advice that cost Jeff thousands? Find out in Episode 73.
Rank #17: # 6 - Three Concepts That Investors Get Wrong
Do you know which three concepts most investors – retail and professional alike – get wrong? One is asset allocation; two is a bit different – it’s actually a lack of awareness of a type of investment that actually pays you to own it (confused?); third is a misconception about dividends and dividend stocks. Diving in, when it comes to asset allocation, different institutions and money managers often suggest significantly different asset allocations. So which allocation is the most effective? Turns out that’s the wrong question. There’s a far more important issue lurking here. Meb will tell you what it is. Next, we move on to a discussion few investors know about. It involves a way to be paid to own a fund. Interested? Finally, Meb risks alienating more than a handful of listeners by presenting an unorthodox perspective on dividend investing. But if you’re a dividend investor, you need to hear what he’s saying. Turns out there’s a tweak on a traditional dividend strategy that produced significantly better results when back-tested. Learn what this tweak is, and far more, on Episode 6 of The Meb Faber Show.
Rank #18: #119 - Tom Dorsey - Fundamentals Answer the First Question 'What Should I Buy?' The Technical Side Answers the Question "When?'
In Episode 119, we welcome entrepreneur and technical analyst expert, Tom Dorsey.
Meb begins by asking about a book which Tom claims had a tremendous influence on his entire life. From this, Tom tells us the story of being a young broker, eventually introduced to a book called The Three Point Reversal Method of Point & Figure Stock Market Trading by A.W. Cohen. After reading just the first paragraph, the clouds on Wall Street parted and he saw clearly. In the end, it’s the irrefutable laws of supply and demand that cause prices to change.
Meb asks for more details, so Tom tells us how Point & Figure charting was created in the early 1900s. You’re watching the up and down movements of an asset – those movements represented by Xs and Os. You’re looking for patterns in these up and down movements.
Meb asks how one goes from charting these Xs and Os into building an actual strategy. Tom gives us an example using just two stocks, Coke and Pepsi. He walks us through how we would analyze the price movements relative to one another to determine which one might be the best investment at that moment. It’s a discussion of relative strength investing.
Meb asks if this approach means an investor can totally ignore fundamentals and value. Tom tells us that fundamentals answer the first question – what should I buy? But relative strength answers the question, when should I buy? You can be a value investor, but you may not want to be the typical value investor who buys a value play, sits back, and waits for a long time before other people see that he’s right. Tom would rather get the stocks that are ready to move now. So, he tells us to take the fundamentals and work from there.
Next, the guys get into a discussion that bounces around a bit: smart indexing… the beginnings of ETFs at the Philadelphia Stock Exchange (Tom was in the middle of it from basically the beginning)… and how 92% of active managers never outperform the S&P. But this last point dovetails into a broader conversation of whether “the S&P” can beat “the S&P”. The topic touches on the difference between cap and equal weighting, as well as myriad other indexes that might exist within the broader S&P universe. One of the takeaways is that index investing can be harder than you might think. He suggests looking at all the indexes, then using relative strength to narrow it down.
Meb asks what the world looks like to Tom today. What areas are showing the most strength? Tom tells us the strength has been in small caps for a few years now. Value has been hurt, which points toward the problem with value – the asset can be down and out, but still not move north as you want it to.
There’s plenty more: the various ways to implement a relative strength strategy… Tom’s affinity for selling covered calls… the benefits of automated investing… how Tom’s team is beginning to apply their strategies to crypto… and an upcoming investing forum Tom will be a part of consisting of five market veterans with a collective two-hundred years of market experience.
And of course, we have Tom’s most memorable trade. This one involves 10 shares of a certain biotech stock that raced higher and made a huge difference for one of Tom’s friends in need.
Get all the details in Episode 119.
Rank #19: #136 - Steve Romick - Value Investing Is, To Us, Simply Investing With A Margin Of Safety, Believing That You've Made An Investment Where It's Hard To Lose Money Over Time
In episode 136, we welcome Steve Romick. The conversation begins with Steve explaining that he hated losing more than he enjoyed winning, and while there wasn’t one event that led him to value investing, he considers his aversion to loss a contributor to being drawn to the value-oriented investment approach.
Meb then transitions the conversation by asking Steve to characterize the investment strategy of FPA’s Crescent Fund. Steve talks about the value investing framework as investing with a margin of safety and how it has morphed over the years from being about the balance sheet to now, through technological innovation, the corporate lifecycle has been as short of it has ever been with the most of the density of innovation happening in the past 50 years.
Next, the discussion turns to investment framework. Steve describes this team of 11, and how the job of his team is to understand the business and industry first on both a quantitative and qualitative basis. He describes the go-anywhere mandate as a potential recipe for disaster as there are more places to lose money. Steve then discusses looking at equities and debt for the portfolio. In the equity space, they’re looking at two categories, the high quality growing businesses considered “compounders,” and more traditional value investments, where there’s potential for 3 times upside to downside. Meb then asks Steve about Naspers, and Steve follow’s up with commentary about one of the biggest losers the portfolio’s ever had, but reiterates that his biggest concern is permanent loss of capital, and as the holding is still in the portfolio, he’d be surprised if they didn’t make money on it long-term.
Meb asks Steve about credit. Steve talks about high yield and distressed debt as an asset class being periodically attractive and one doesn’t need to be there all the time. He explains that the gross yield of roughly 6.5% looks interesting on the surface, but once you consider the history of defaults and recovery, the yield drops significantly to 4.4%, right above the investment grade yield, and it isn’t so attractive. Steve talks about how the fund allows the freedom to seek asset classes that offer value, and that for the first time, they now own a municipal bond. Steve then discusses the small allocation they have to farmland.
Meb follows with a question about holding cash. Steve expands by talking about going through the research process, and when there aren’t enough opportunities that meet their parameters, cash results as a byproduct.
The discussion then gets into Steve’s background at FPA, and what it was like going through the late 1990s. Steve talks about trailing the market going into the late 90s as valuations appeared unsupportable, but fast forward a few years and he and the team were validated. They allocated to high yield, small cap, and value, and made money in 2000, 2001 and 2002 when the market was down.
Meb then asks how Steve views the rest of the world. Steve responds that while it is more expensive generally here in the U.S., it is important to remember that international exposure can be had by owning U.S. stocks with revenue exposure overseas, and that like-for-like companies are trading at similar valuations outside of the U.S.
Next, Meb and Steve discuss the importance of managers investing alongside their clients. Steve feels it is important that investor’s energy should be aligned with the client’s interests and holdings.
All this and more, including Steve’s thought on the catalysts that could end the current bull market in episode 136.
Rank #20: #118 - Radio Show - Record-Setting US Valuations... Emerging Market Opportunities... VC Bad Behavior… and Listener Q&A
Episode 118 has a radio show format. In this one, we cover numerous Tweets of the Week from Meb, as well as some write-in questions.
We start by discussing articles Meb posted in his Tweets of the Week. These include a piece by Jason Zweig about how your broker might be making 10-times more money off your cash balance than you could make on it. Then there’s discussion of valuations – a chart by Leuthold shows how one measure of US market valuation has matched its 2000 level, and another has doubled it. At the same time, Longboard released a chart referencing a Goldman market outlook that claims “in 99% of the time at current valuation levels, equity returns have been single digit or negative”. We talk about US valuations and when “selling” might trump buy-and-hold.
Then we jump to foreign valuations. GMO believes emerging markets are the biggest opportunity relative to other assets in the past 20+ years. Meb clarifies what this really means. Then there’s discussion of home country geographic sector bias, whether the VC market is in a bubble (Meb tells us about some bad behavior he’s beginning to see in the space), and how the American savings rate is pretty grim.
We then get into listener Q&A. Some that you’ll hear Meb address include:
- Are momentum funds just camouflaging another factor? For instance, if Value became the “in” factor, wouldn’t Momentum pick it up, so Momentum would then just look like a Value fund?
- Assuming the U.S. economy does not enter a recession in the near future, the Shiller PE’s 10-year earnings average will soon consist of all economic boom and no bust as the depressed earnings of 2008 and 2009 roll out of its calculation. How useful is a CAPE that only includes a period of profit expansion?
- Regarding your global value strategy, have you ever tested the strategy using relative CAPE ratios versus absolute to determine country allocations in order to avoid countries with structurally low CAPE ratios?
- I've never heard of a 401k plan offering ETF options. Is there a reason logistically, legally, etc. that prevents 401k plans from offering ETF options?
- How do I structure my portfolio for a 4% yield, after tax?
- I like your shareholder yield strategy, but if I get capital returned through buybacks and share appreciation, how do I get monthly income without selling shares and triggering taxes? I just don't see how I can implement a monthly income plan with this strategy.
All this and more in Episode 118.