You still don’t have enough Trend Following or Foreign Equity exposure with Meb Faber

Grab your favorite trucker hat/baseball cap, and settle in for this episode where Jeff picks Meb Faber’s @MebFaber brain on everything from skiing to picking an investment advisor because they can get you on at Riviera Country Club.  We’ve got Meb Faber back on the show to nominally talk about trend following – but as often happens with Meb – we get into a bunch from global equity exposure, to market cap weighting, to Japan’s dot-com bubble, de-globalization, investing in U.S. stocks, and the value of trend in a low-inflation environment.
Meb and Jeff explore Meb’s first exposure to trend following (yes, it has a ski story attached) and discuss the optimal portfolio allocation to trend, and the problem with replicating private equity. They touch on passive investing, how to choose a trend-following fund, and the current state of the market. Plus listeners can gain insights into the ETF and RIA space, and speaking of space – hear about start-up investing in farmland and space — SEND IT.
Check out the complete Transcript from this week’s podcast below:
You still don’t have enough Trend Following or Foreign Equity exposure with Meb Faber

Jeff Malec  00:07

Welcome to the Derivative by our RCM Alternatives, where we dive into what makes alternative investments go analyze the strategies of unique hedge fund managers and chat with interesting guests from across the investment world. Hello there. Welcome back. Happy March, I guess feels like we just had New Year’s Eve. So yeah, I’m definitely losing it. And speaking of losing it daily, what’s the deal with zero DTE options have the managers we talked to say it’s noise the other half think it could be a problem. So we’re going to do a What the f episode next week with Professor Plum, aka Mike Green, and Craig Peterson of tier one Alpha who loves to look into the gamma stats. So we’re going to dig into it go subscribe or follow or whatever the platform you’re on calls it so the episode gets to you as soon as it drops. On to today’s episode, where we spent way too little time talking about skiing in my opinion. I threw on the Crested Butte hat and everything but our guests stop talking powder and started talking the Japanese real estate bubble like he was on a financial podcast or something. Wait, yeah, it is that pocket. Anyway, it’s none other than MEB Faber and we’re getting deep into the financial pattern talking us bias value, and why no big investors seem to have enough trend following exposure. Send it This episode is brought to you by RCM and its guide to trend following white paper. We’ve talked about why there aren’t larger allocations of trend why people get confused between managed futures and trend and more in this episode, and the Guide to trend is a great complement with managers performance and more. Go to our CMOS slash white papers to check it out. And now back to the Show All right. Hello, everybody. We’ve got med Faber of Cambria with us here today. Welcome ma’am. Hello, my friend Been a while Been a while I was debating. I knew you’re gonna have a hat on so I was going to either go my master’s hat or my Crested Butte hat but knowing your skier I decided Crested Butte and


Meb Faber  02:12

I mean, we’re both wearing kind of black hoodies because it’s cold here in LA like you know, it’s Armageddon. It’s been snowing. We we just got back from Mammoth where it was like I don’t even know 10 feet of snow. It was so much snow. Yeah, it was like too much couldn’t know what to do. Which is a wonderful problem to have. Of course.


Jeff Malec  02:31

I was just pulling that up actually on my on the snow 123 At Mount Waterman. Where’s that?


Meb Faber  02:39

That’s more like that’s like, closer to closer to LA but the


Jeff Malec  02:44

Yeah. And 104 At Mount Baldy. Have you ever escaped Baldy?


Meb Faber  02:47

No, I don’t even know if you can ski Baldy. But the fun takeaway is that you mammoth will now be open to probably July or whatever. And I’m more of us. I love Spring skiing, you know in go out in a T shirt or just like a little shell. So maybe we’ll do a macro meet up on the slopes of mammoth or Tahoe or somewhere where you can ski through the summer. I love it. By the way. Well, we’ll tie this into economics and some some investing lessons. I talk a lot about skiing in Japan and they finally reopened for the first time in years post COVID They’re still very COVID conscious, you know, the most wonderful and polite people in the world and have always been kind of, you know, often mask wearing in general. But a fun fact for the listeners is that Japan has despite being 1/20 the physical size of the United States, more ski resorts than any other country in the world. And it’s like 550 or something and they have some of the most amazing snow and this is down from a peak of like 800 ski resorts back during the boom times the 80s And so we’ve kind of come a long way since then since the Japanese peak bubble to where we are today but Japanese stocks are finally cheap. So it’s kind of a fun time to be talking about them in the Japan stock market which is second largest in the world is still like 1/7 the size of the US which is still it’s sort of an astonishing


Jeff Malec  04:22

takeaway what in their population I don’t know that I’ve taught my I don’t know if you know it off top your head 1/10 of ours


Meb Faber  04:29

Yeah, quite a quite a bit less but the but it’s you know, you could go off into 1000 different directions on that just basic concept. You know, everyone on the equity long only side as a percentage of the world market cap. My favorite read of the year just came out, which is from Credit Suisse. It’s called the Global investment returns yearbook. And it’s a spin out of my favorite book, which is called triumph for the optimist but they update it yearly listeners you can go download like the last 12 years on Credit Suisse. His website, as long as Credit Suisse is still Stick around but, but they look at 120 years of investing in returns across stock markets and you get all sorts of fun facts and they drop a lot of kind of Haymaker conclusions that are non consensus views in the investing world. We can come back to some of those, but one of which is they look at market cap weighting. For example, 1900, you know, in the US wasn’t the largest market cap, then it was UK, US was like 14% or something. And it’s now 60, which just goes to show you know, what a massive run but the US was not the best performing equity market over the period, you know, who was


Jeff Malec  05:38



Meb Faber  05:39

Close? There’s, there’s like a few countries, which Switzerland, I think, actually has the lowest drawdown, if you look at a lot of historical studies, it’s like never pays just to invest in one country, even if that countries do us. It’s almost always better to invest in diversified portfolio. Switzerland, I think, is one of the few that has a lower, and by lower I mean, still over half, but lower equity market drawdown. I think it’s Australia, South Africa was in there, but they’re, you know, so tiny that it’s hard to compare. So I think it was the Aziz, but we’ll see.


Jeff Malec  06:12

Oh, no, you gotta tell me how Australia was close to Switzerland.



Meb Faber  06:17

Yeah, so it is always a bunch of Ozzy skiing up in Japan, by the way, my favorite trip and we’re the first time we went to Japan, we were in a tiny little town. And the waitress spoke absolutely perfect English, but she’s spoken with an Ozzy accent. She said Good day. And I was like, what? A bunch of Aussies that come to this now. Anyway,


Jeff Malec  06:39

that’s definitely on my list. So when did you went for the first time just this after? COVID? Or you’d been before?


Meb Faber  06:44

No, we’ve been many times probably 10 years going on now been probably maybe five, six times. But kind of all over, both on the mainland. And Hokkaido. Yeah, I tattooed a tree pretty hard this year. Our guide broke his femur the night before we arrived. So we were a little bit on our own this year. But it’s a it’s a spectacular place listeners if you if you need some, some beta, some info hit me up and I will pass along some information.


Jeff Malec  07:14

I need some. Yeah. I’ll join you next time. Wait. So this essentially means so do you think all that was a result of the bubble of the real estate bubble? And they were developers buying up mountains building out resorts? Yeah. So


Meb Faber  07:27

the long history listeners, if you look at market cap weighting, right, the thing about market cap weighting, and I asked my friends who are not involved in markets, usually I say, you know, they say, I invest, I put my portfolio and you know, boring indexes. And I say okay, well, just just so you know, like, so like, the US stock market. I said, Do you know how that how that’s weighted? And they say, yeah, like, it’s the biggest companies and I say, okay, biggest when you say biggest? What do you mean? Like, well, you know, like, Apple earnings and revenue and everything. I said, Well, no, no, no, no, no. Market cap weighting, which is the market is simply the price of the stock 10 shares outstanding, there’s no tether to fundamentals whatsoever. So it is a trend falling index, which is one reason that it does great, you invest in companies that are going up, and you invest more on those companies. And as the company’s stock, excuse me go down, you invest last until they go to zero, right that your stop losses, essentially when it gets kicked out of the index, because the size or zero. And so that works decently over time. Now, it has no tether to fundamentals. And it’s a weird position sizing algorithm, but it works decently over time. The problem with that, and you look at these equity markets, is it gets really overexposed to booms and busts. And so because there’s no tether to value, like a P E multiple, or whatever it may be Japan and the 80s. If you look at long term, P E ratios, you know, they center around somewhere around 18, let’s call it and the US has been as high as 45, the peak of bubble and as low as five. By the way, in this recent cycle, it hit 40 I was kind of cheering for it to surpass, which I never thought I’d see in our lifetime. Again, the peak of bubble, but we got close, right around I think 30 Today, maybe high 20s. Anyway, Japan, which was the largest stock market in the world at the time, hit a peak valuation of almost 100 So that’s over twice the size of the US bubble in the late 90s. Then there’s all sorts of you do research back in the 80s I mean, it was a very real every investment book came out was about how Japan the business models that companies were taking over the world and they had a dual real estate and stock market bubble the real estate was really the big kicker anyway, you can look at charts


Jeff Malec  09:48

inflation that like the Imperial Palace was worth more than all California or something is the


Meb Faber  09:53

Yeah. And so you know you the booms create distortions as do the bus So misallocation of capital yada, yada. I mean, you look at the new amount of golf courses, etc. But it’s a great illustration to one you shouldn’t market cap Wait, because traditionally, market cap weighting means you invest the most, at the kind of worst times. So in the 80s, if you’re buying hold index or Vanguard, John Bogle, you would have put most of your money in the most expensive bubble in history. And like that just doesn’t check the common sense box to me so late 90s, you know, same thing with us, the US, we don’t have it as the most expensive country in the world. And it’s not horrific now, but it’s still expensive. You put 60% of your money in that country versus the other odd 45 countries that are quite a bit cheaper. So anyway, it’s a sub optimal way to do stock market investing because of these boom periods. Despite that, it also creates a lot of psychological differences in how you invest. And so I did a meet up in Tokyo a few years ago, over some peers, and a lot of local investors some expats, but, you know, the culture of investing is different, right? Because you’ve had a stock market that’s gone nowhere for decades. And this isn’t some tiny economy. This is a second, you know, biggest economy in the world. I think now third, but But you know, buy and hold is isn’t really a concept. There were people who say I just, you know, I just buy stocks and just let them go, right? Because it always goes up. There’s generations of people who’ve had no or very little return on stocks. Now, I think it’s changing. Now, I think it’s a great opportunity, but for many decades, and so right now is an interesting example, because you can look at 45 developed emerging market, stock markets around the world, and look at just how many have gone nowhere for 1020 30 years. I mean, China being a great example. But there’s tons of these stocks for the long run really means you have to diversify across all stocks, and even then it can go a long time. So a lot of the US investors, I think we’ve hit the inflection point on the US versus foreign performance. Really, in the last couple years, I think we’ll look back and market as to maybe 2021 2022 is the main inflection point for us versus foreign, which historically has been a coin flip over time.


Jeff Malec  12:34

And January was rockin for for what’s the counter to that of like, hey, the whole us, right? It’s not a military industrial complex. It’s a Investment Industry industrial complex and their whole being sense of being from the Fed to the Treasury to Congress, everyone is incented to make the stock market go up, versus other countries where they might not have that. machinations, right, they might not have all that stuff to make the stock market go up. So could you take the other side of that and say, like, yeah, so it’s better because of all the stuff that we push, and maybe maybe that just creates a bigger bubble that will deflate in a bigger way down the line, but Right, so, you know, argue that that’s why it exists.


Meb Faber  13:23

Not surprising, but we have a lot to say on this topic. We have an old blog post called the case for global investing, that I think does a good job, you know, hitting some of the main rebuttals about putting all your money in US stocks, so the so us as a percentage of the world 60% Us 40% rest of the world, but the average American puts in well over 80% You know, and so, in, we call that home country bias, it happens all over the world, our Japanese friends do it or Ozzy friends do it. On and on. UK friends do it. And they put all their money in their own stock market Chinese Russians. And the funny thing is you ask everyone else around the world, hey, it was a good idea. Put all your money in your own market. And our Greek friends would say are you crazy? You know, Brazil, Russia, on and on even UK, Germany. I mean, those markets have really struggled. It’s just so there’s two parts to it. There’s a some amazing hindsight bias, right? Like we look back the US was the most successful, not only country economy, stock market really over the 20th century, okay, so we look back and say, okay, amazing, however, so excluding that say, look, let’s say you love USA brand more than anything in the world, rule of law, military, on and on. That’s a good reason to put seven times as much in the US as any other country, right? Doesn’t mean you should put all of it and in particular, here’s the interesting part. The world has changed in the last 30 years. It’s much more globalized. You have companies and stocks that may be domiciled in the US They have no us revenue, you can come companies based in the UK, they just happen to be in the UK, but they get all their revenue from China or the US or whatever, right? So the borders are becoming increasingly meaningless. And so then people say, Ah, man, that’s my reason I invest all my money in the US, because I’m diversified. 40% of nationals, my revenue is from abroad. And I say, correct. That is the lowest amount of any foreign of any developed market of them all. So the other countries have even higher percentages of revenue from abroad. And if you’re live in a world where the revenue is sort of cross pollinated, then why would you pick the one spot that has the highest valuations? You wouldn’t if you consider a world of globalization, you would pick the spots that have the lowest valuations. And so just for again, reference us is let’s call it 29, XR P E ratio, foreign developed is in the high teens foreign emerging is in the mid low teens. So there’s much more opportunity in certain places around the world. But again, even if you are biased, you would put the most in the US what you do on the market cap weighting. Instead of putting it all that’s all


Jeff Malec  16:20

a few things at one COVID logistics, just in time inventory. All that seems to be swinging back the other way. Do you think that’s even more of a argument for non US?


Meb Faber  16:32

I think the there’s a lot of things that people talk about the valuations of the big one, obviously, I’m a trend guy. So we could obviously get into that to the dollar and currencies, the US dollar is by all the fundamental metrics of purchasing power, parity is overvalued. And so then it becomes a question a trend and it looks like it’s peaked last year, but who knows currencies over time, adjust on a real basis, they’re fairly stable. But that doesn’t mean in a given year, they can’t move 30%. So I think the tailwinds are all in place. Now. I would have probably, you know, said this at various points in the last few years, just historically speaking, people say no, no MEB, the US deserves to have a higher valuation. And I say, Okay, well, how much just so? So how much? And how much do you think it was historically? Because right now, it’s double, you know, foreign emerging and less in much higher than foreign developed? And they say, Well, I don’t know they because they don’t. I said, Well, you know, what the historical premium is zero. If you look at the average valuation for foreign X, US versus us, there’s zero. I mean, it’s sorry, it’s like, it’s like point five or one on a valuation. It’s like 22 versus 23 of the last 40 years, but not so there’s versus 20. Yeah. And tying this back in, see this is totally intentional, I promise. You go back to Japan in the 80s. Right, Japan was the most expensive country in the world, the US was cheap. And these things just go through goes through cycles. So we say this is the biggest opportunity in 40 years to diversify globally, if you’re a US investor.


Jeff Malec  18:13

That’s my think it was about a year ago, I put out a tweet of all these alternatives folks are blending. They’re either trend following or intraday with just pure passive Beta Ray. putting these together to smoother equity curve, everything looks great. But it was to me I’m looking through all these products. s&p, s&p, s&p, s&p, right, total US focus. So my little, you know, yellow flag went up and like, Hey, this is this is time this is a commentary on people being having that hindsight bias and having that home country bias and just building this the best they think is how but


Meb Faber  18:52

and, you know, I think a lot of it has to do with career as to I mean, I think people is a trend that the trend followers of which you know, I count myself. Look at, obviously, historical year last year, a phenomenal year, really just one of the few things that did its job, but as you would expect it to do, you know, on the quants, the big clients have been talking about this for a long time, the opportunity set and traditional 6040 was atrocious. And sure enough, you have one of the worst years ever for 6040 last year. And so people revisit and recall Oh, yeah, you know, hey, look, look what diversifies this traditional portfolio. So I think I think you have this scenario where most people in the US, that’s all they do, right? They do the s&p and maybe some bonds scattered into which is a shame because, as we know, as students in history, people, people love to buy what they wish they had bought and you know, after a few years years of foreign outperformance that that blend will no longer be US US stocks and trend following. It’ll be a global diversified equity allocation. And it’s never


Jeff Malec  20:10

been easier to own foreign right, like with all the ETFs. And sector weightings is maybe too easy like you get confused. So it’d be easier just to buy the MSCI or something. You know, I


Meb Faber  20:21

mean, again, I think you run into the same problem look at so going back to indexing indexing meant something very specific 50 years ago, and met market cap weighting. And that’s it. And the big innovation there. The giant neutron bomb that went off in the 70s. You know, John Bogle, Wells Fargo and others, was actually not market cap weighting, indexing that wasn’t innovation, it’s what it allowed, which was lower cost exposure to all these equity markets, because you don’t do anything right, you just mark cap weightings by when stocks, theoretically, you just leave them for forever X corporate actions. And so today in 2023, indexing means something totally different. You can have indexes on really anything. You know, you can have an index of ski resort companies and charge 3% a year if you wanted to. So. So alternative weighting methodologies, where we have 12 ETFs, you know, our flagship sort of equity ones, we call shareholder yield, you know, we weighed those differently the market cap weighting, so we have US foreign and emerging, and those funds, you know, they’re targeting these markets, but they’re saying, Hey, we don’t just want market cap weight. We want stocks that have high cash flows, they’re treating their shareholders decently through buybacks and dividends, they’re trading at low valuations. They’re not doing it with a ton of debt and a sprinkling of momentum. And, you know, to me, that sounds like a great way to pick companies and stocks, you know, it sounds like a warren buffett s portfolio. So when you say global, yes, we love global and on aggregate, you know, the, the indices top down are more attractive. But here’s the interesting part, no one says, The starting point is always s&p, right. But even in the US stock market, the cheap stuff, you know, the value sort of trade versus the expensive, is totally fine. You have companies that are sitting under this, you know, these 1000s of look, the trend follower out there loves breath, right. So you have 1000s of companies, no one says you have to just invest and based on the SMB market cap weighted, and so if you, you can find a lot of opportunity. And if you look at the underlying characteristics of those portfolios, it’s single digit P E ratios, it’s, you know, valuations and the value trade is arguably, top decile in history in the US. So 2020 2021, it was it got into like, sort of the single digit best opportunity ever for value investing, even more so than the 9099. And a lot of the expensive stuff has come down. And last year, too, you know, you look around like stocks are down 6080 90%. But abroad, it’s still like top five percentile for a lot of this Cheevers expensive, so it’s easy to get the market cap away broad indices, s&p ephah em, but really, to do the extra little work and to get to better constructed portfolios, I think is worth the time. And you can do it now in ETF form for low cost, that’s the beauty. And if your taxable investor, you know, inefficient tax structure for equities to sorry, it was long winded,


Jeff Malec  23:41

no worries, and talk through just real quick how that works on it when you’re running an ETF, not you. But if I’m running spy, they’re buying more and more and more of that stock as the market cap goes up to keep pace, right. So it’s kind of a self fulfilling prophecy.


Meb Faber  23:56

Yeah, market cap weighting. Look, I think it’s a, it was decent innovation, and it is the market, you just end up with a portfolio that can have in most of the time, it’s okay, like, you know, markets, as we know, most of the time, it’s in the fat part of the distribution, but at times when it goes crazy, like 2020, you know, you end up with companies, you’re overweighting that are stratospheric valuations. And other times it’s the opposite on the on the other side, you get into countries and you can look at the as far as valuations. I mean, the long history, not even long history, China a great example. China’s down near some of the lowest valuations ever been you go back a decade, 15 years ago, it was trading the P E ratios like 50. So what’s the difference? Nothing. It’s just what people are willing to pay. You know, and in a world of sustained inflation, this was my least popular tweet, I think of 2022. At the beginning of the year, I said you know, Average valuation for stock markets historically is around p around 18. But in low inflation, moderate inflation, you get up to around 20 to 23. So people are willing to pay more for stocks when inflation is tame, well, we don’t live in that world. Currently, a lot of these markets around the world have high inflation, historically, the multiple is not 18 to 2223. When you get into these high, mid high single digit, inflation is down around low teens. So multiples like 12, which is 50%, from here for US stocks. Now I’m not a Doom or I’m not saying that that has to happen. But in these high inflationary times, historically speaking value, the 1970s 1940s has been an excellent place to hide out and whether inflation expectations are just going back down to two or 3%. We’ll see. My guess is not that


Jeff Malec  25:48

but isn’t that just a relative, though, like, you’ll just lose less in value? You’re saying?


Meb Faber  25:55

No, know? Well, perhaps, yeah. You never know what the exact path is going to be. But if you look at the 1970s, the 40s value did just fine. And the 70s was a tough time to invest, right, unless you had some real assets. Unless you’re returning far, you know, and by the way, one of our original papers. Back when I used to be clean shaven and wore a tie, I talked up talked about Japan and said, Look, never seen that guy. What could you have done in this world and trend following despite the fact the market was overvalued and went nowhere it was saved your hide, right? Like you survived a lot of the carnage after the peak of the bubble. So, you know, for the listeners who aren’t familiar with MEB and Cambria, by the way, you know, I’m talking a ton about value on a trend following podcast. But our default allocation for all of our asset allocation portfolios, is we do roughly half and buy and hold. So that’s a mix of global stocks, global bonds, global real assets, so we already have a higher real asset exposure than most all with tilts towards value, and some momentum. And then half the allocation is in various trend strategies. And that’s higher than any ri a base case allocation of anyone I know in the country. You may know someone more, and I excluding, specifically, trend following, you know, asset management strategy. I’m saying, Hey, this is our default allocation for the retail or institutional investor, we call it Trinity. And we also have an ETF that does that. So I’m not just a value guy, I promise. Listen, I’m like, consider me half value, half half trend, which there’s not too many of us around.


Jeff Malec  27:48

You did this great tweet saying, Hey, everyone, there’s no long enough track record, which is when I started, I did a blog post on that. That’s how we started talking a little bit about that this year. But before that, you mentioned your first white papers on trend. Before that, when did you first get introduced to trend? Was it? Yeah, no, you know, Jerry Parker? Was it that far back and those kind of guys or was it just an academic paper? What was your first exposure? No. So


Meb Faber  28:14

I mean, I was a biotech guy by studying undergrad and engineer. I worked at a biotech mutual fund moved out west, I was actually living in Tahoe, working for a startup commodity trading advisor. And CTA meant nothing to me at that point, it just was a group of guys that lived in San Francisco and for tax reasons, and the fact that love to ski wanted to open an office in you know, Tahoe split, California, Nevada, so the Nevada side, right. And so they said who wants to volunteer to work out of this office? And I was first to raise my hand right? Where my ski pants to work some days because market closed at one but but they had worked on their quantitative, you know, old school traders incline or what was the Yeah, yeah, village income village, as the locals call it. So, you know, I was in my 20s, and really cutting my teeth. And one of the ideas we had been working on was codifying some of the, you know, the the turtle rules, just basic stuff, and, and often quite a bit of variance on that too. And so that was kind of my first exposure to some of those concepts. And, you know, my first and really only academic paper, we’ve written lots of white papers, but the experience of going through writing one was enough for me, but our first one was really based on this trend following concept, but it’s saying how can we make this palatable for the average investor and make it very simple so that people can kind of understand because if you say managed futures, people’s eyes glaze over, you know, they start to drool a little bit, say, oh, that sounds futures. What does that conjure images of leverage people blowing up trading houses that are 200 years old, right, like derivatives all scary. So I said How can we write about this in a way that resonates with the average investor and you know, in terms of even just US stocks, buy and hold person. And the takeaway, I thought was pretty thoughtful, which was, you know, you can do this in a way that’s not prepackaged, you have to trade 100 markets long short. Now, that’s a fantastic way to invest. But also you can apply it to like, I mean, look, Dow Theory has been around for 100 years, that’s basic trend following. It’s been around since time, Charles running the Wall Street Journal, you know, so it’s nothing new. But to present it in a way I thought there was just a little simpler, it didn’t take much effort. And so kind of cobbled down that cobbled together that paper when I moved down here to LA for a year, in 2005, you know, whatever that is, I can’t do the math anymore. 17 years later, you know, we that philosophy is still very much a foundational and kind of how we think about markets, you know, which is the big key, like, what are we trying to do here, trying to survive? And if you can’t get to the finish line, if you get taken out of the game, because it’s too volatile, too risky. You know, and I got, I got ratioed the other day on Twitter, because I was talking about, you know, someone described, they say, What do you do with your money? I say, Ah, just, it’s boring. I just put it all, you know, in the s&p. And I said, look, let’s be very clear about something that’s not boring. You can call it a lot of things you can call it low cost, you can call it you know, historically has great returns, you can call it a good exposure to US stocks, you cannot call something that has declined over 80% has close to 20 Vol, boring, right? And it’s gone decades, going nowhere, has gone many decades underperforming bonds, you know, if you go back to the 1800s, it’s gone 60 years underperforming bonds, in 2020, the s&p had gone 40 years, underperforming bonds, right for decades. And that’s just in the US other countries is worse. So I was like you can’t call boring and call it something you cannot call boring people got so mad at me. I don’t know why. Because you have this culture where the s&p is crushed everything for what is this 14 years. And so that’s all they’ve known and they get really irate if you kind of criticize their you know, the way they go about investing but you have something that then you know, could underperform or has a big fat drawdown


Jeff Malec  32:17

and to me quickly no small part of that is the military industrial complex, quote, air quotes that I caught that has been pushing that narrative for 40 years of like, Yes, this is boring stock exposure, get put all your money into it. But so it sounds like you’re saying you took you weren’t looking at trend following like a lot of our other guests and be like, cool, I’m looking for outlier trades and silver, and cotton and palladium and all these kinds of unique markets. It was more of like, cool. This makes me avoid having the 80% drawdown in stocks. I can use some basic trend following techniques to get out and then reenter when the trend reemerge is the right way. Well,


Meb Faber  32:55

I mean, it started as the former and I think we I mean, we even built some systems back in the day, I remember I said, you know, what about could we do this as an option selling trend following where we’re selling straddles and strangles but we’re biasing it in the direction of the trend and all that, you know, we did a million different iterations. But when we had time to put together this paper, and said, I wanted to write something that I thought would be consumable by the broad public in a way that, you know, is presented, I think, a little bit different than academic, academic and white papers of the worst, let’s be very clear, you read an academic paper, the goal for most of the authors is to show you how smart they are. And also my number one pet peeve about academic papers is they put all the graphs and tables at the end like like you’re reading it why and you have to flip it’s figure one I can’t even understand what you’re talking about. I’m like, can you can we write this in a way that can be presented to the broad, you know, the broad investing public that is consumable in a way that they can kind of get it because again, I’ve seen so many people, you know, we have over 100,000 investors and I talked to so many people in 20 1014 1618 They say man, you know, I was investing when through the Global Financial Crisis seems forever ago. And I got to I got out I couldn’t take it anymore. I lost my job. My portfolio is down by half. I couldn’t take any more I sold everything and I haven’t got back in you know, and so you missed all this huge upside for many years of you know, the the emotional behavioral problem of buying hold investing, and we have a buy and hold ETF, by the way so let me be very clear that the big caveat of everything I’ve said so far, our largest fund is a US stock long only fund we have a buy and hold ETF, they have their place but you have to be honest about their pros and cons there are pitfalls to and you know you’re looking at a long only buy and hold you cannot find me in long on the buy and hold allocation that doesn’t lose at least a quarter at some Point and more likely 50%. Yeah, right. Stocks, bonds, real assets, even the most beautiful allocation, you can come up with back tested optimized, is probably going to lose a third at some point more likely half. And in some cases, it could lose two thirds. You know, most of the 6040s Historically, we love our polls on Twitter, if you follow our polls, but we always ask people, things like, you know, how much have bonds declined on a real basis T bills, you know, or how much if stocks decline, and people are always surprised, because it’s almost always much more than they expect. And so the, they’re just reaching the finish line, I think, for many investors on a buy and hold basis is really problematic and hard to do.


Jeff Malec  35:43

So speaking of those 100,000, investors, so seemed like you were a little bitter of like, Hey, guys, no one trusts me on this trend following thing. There’s track records going back 40 years like, what’s what’s wrong with you, people? So do you get that from outright investors? Or is it with advisors, you talk to like, Who are you hearing that from? And what’s their main point of confusion? Do you think? Well, look,


Meb Faber  36:05

I think there’s a big education gap when it comes to personal finance. In general, we talk a lot about this where we say, you know, we don’t teach personal finance, even the basics of money in school as money as the language and we should, you know, forget Latin, I took Latin, like, come on, like, let’s teach basics of money. And in that, I mean, look, there’s some really basic stuff that I think is super important. You do like the pyramid, it’s like, hey, what’s the most important thing, it’s how much you save an investment. And when you decide to invest in the first place. So you do it when you’re 20 is way better than when you’re 40, or 60, or 80. Or being the owner, the ownership mentality of owning things, I think is more important, as long as you do it in a thoughtful way, than actually what you invest in. I mean, we’re tweeting yesterday about I said, like, we talked endlessly about, you know, the optimal portfolios, and what are some good strategies? And what’s going on with inflation, and what to do about gold or all these other things? And I said, we did a poll, we said, you know, how much is your cash account? Or how much do you earn on your savings and other accounts? Most people is like zero, like, I don’t know, or zero to one. And that’s just lazy, you can go get for anywhere right now. And so, I mean, I was like that 4% Alpha, or delta is way bigger than, you know, probably what anyway, so going back to this, so talking to investors for a very long time, the older I get, the more I start to think about all right. What narrative, can we so yes, there’s the optimal portfolio. And yes, I do think that includes both global buying whole assets, as well as a huge chunk to trend fine. And what that number is, and how you do it, is less important than whether you decide to include it at all. And I think if you were to ask people, you blindfold them, you go to the maybe not CalPERS, but you go to a more thoughtful organization that has real money, 10 100 $500 billion, you blindfold them, you present them an Excel sheet with a bunch of return streams. So you got to put together a portfolio, you can’t see what these return streams are, how much is going to end up being and trend following is probably only 25 50%. Right? There’s no scenario with zero, in some cases is probably even more depending on how it’s constructed and what you’re trying to attach it to. So, so yes, there’s the question of the optimal portfolio. And I think, I think those two components, what we call Trinity is, is, to me the optimal portfolio, I would also include some other things that aren’t in the global market portfolio publicly traded, they’re harder to invest in like farmland, we talk a lot about that single family housing is a big one. But then the question comes in our world, and this isn’t just retail, we love to look down on the retail investors a little crazy meme stalkers, trading GameStop, and whatever it is today, AMC. But institutions are horrific at this too, is that you have to come up with narratives that feel warm and cozy. And it feels very awkward, to be different, right to be out there on your own. Doing something different and that very real career risk plays out. I mean, look at private equity. My God. You know what an amazing business and industry if you’re involved in private equity, you get huge carry on top of that, by the time If anyone finds out if you’re good or not, you’re long gone. I mean, it’s 10 years later, 15 years later, 20 years later. And so this giant charade of private equity is kind of wink wink nod of is a perfect intersection of career risk for for investors and institutional allocators, manage futures and this entire entire trend following industry. I mean, look You have another year like 2022 and all of a sudden the money will come flooding back in and people will start to start to allocate a ton of money to it of course, right after the fact but you cannot argue to me the to a traditional buy and hold portfolio that there is not a better diversifying strategy than Shin Fein. Like if you cannot come up with one i are if you have listeners send it to me. I haven’t seen one. But to me to traditional portfolio, and you just look back not just historically 2008 2000 2003 on and on. It’s not guaranteed. But yeah, 2022


Jeff Malec  40:36

post showing, I think it was 20 I think it was in 2020. Like, here’s 20 years of the Managed futures indices. It was like 5% compound annual rate of return 18% drawdown right what it look not great for some, but the guy was like, Oh, why would you ever do it? I’m like you’re missing a point that’s a positive carry a positive carry on a diversifier. That’s the point that should be taken away, not like, oh, it only made 5%. Yeah. And don’t quote me on those stats. But it’s something along those lines, we’ll put it in the show notes. But to me the like, so do you think those institutional guys are consciously saying I don’t want to get invested in this? Because there’s this career risk? Or is it? Subconsciously, they don’t quite understand it, they don’t quite feel comfortable with it. Like, that’s what I want to dig more into, like, why are they not allocate? And then I would also argue, sorry, I’m throwing 10 things at once you but I’d argue that they are allocated. And so kind of want to ask you again, like what do you think, in your mind? What is like 100 billion 500 billion a trillion in managed futures? Like, what’s the number you’re like, Okay, people get it, it’s properly allocated to now, or is that I don’t


Meb Faber  41:42

know the number. But I do know, I would say like more than percentages, if you looked at the average institution, how much they have in trend following I mean, are managed futures? What like 2%? Like, it’s like a totally meaningless number. It’s sort of


Jeff Malec  41:59

buy it right. I’m talking to people where it’s there in the market for 10 to 40%. So like, I’m the people I’m talking to are the far side of that equation.


Meb Faber  42:08

Sure. Like they’re the pre sold. You know, they’re, they’re coming to you because you’re having that conversation because they are interested. I don’t know any of that to 40%. So kudos, maybe some family offices do hiding out in Zook Switzerland or wherever. But But I don’t know. Any listeners hit me up. I’d love to talk to you. Maybe there are but but on average, if you look at the big institutions, it’s a rounding error allocation. I mean, even if you round up in the most optimistic 5% There’s no chance it is. But I would be shocked that on average, the institutions are rounding up to that.


Jeff Malec  42:52

And you are blog posts of if you have just 5% What return Do you think you need in a diversifying year like last year in order for that meal? It’s like 180%, right? Like, if you make a few assumptions on your stock and bond returns, you need to make some insane number which was never going to happen. So it kind of leaves everyone disappointed, like, Oh, my 5% didn’t do what I thought it was going to do. I’m going to drop it.


Meb Faber  43:15

It’s token. I mean, it’s like, you know, you see people doing it at the low single digit percentages as a way to pacify sort of their careerist, hindsight bias. And they say, Oh, well, look, well, we had some trend following and helped us and 2022 but not really, right. And so, you know, I think I think we were to say, hey, you know, at what point if we’re sitting down at Crested Butte or Japan on a chairlift and looking back on this, and saying, okay, eventually the community sort of gravitated to this place of acceptance, you know, what number what percentage is that, you know, the third quarter of an allocation, private equity, I mean, look how much private equity is right now, as a percentage, despite the fact the valuations of private equity, which has been the sole driver of private equity performance for decades, have gone from like, enterprise value to EBIT of six to like 15 Right. So the whole point of this private public arbitrage, which has existed, for the better part of history is now gone to the point where many private equity companies are more expensive than the public markets. So the vintage is starting in the last 510 years are going to be stinky. We have a private equity replication strategy, we think you can actually do it much better than private equity managers. It’s not launched yet because for years, I was saying, Hey, I don’t want to I don’t want to launch this and watch it immediately go down. 70%. And here we are. If you look at a lot of the private equity VC replication indices, they’re down 50 plus percent from the peak now that the funds ourselves are that’s the rub. They’re not marks because they don’t have to again, wink wink nod, hey, we only mark these once a year. So we’re going to kind of smooth this out. Anyway,


Jeff Malec  45:08

I think it’s a bug or a feature like they’re doing that on purpose. The investors know they’re doing it. So is everyone just like, hey, this is cool.


Meb Faber  45:15

I think it’s both. I think the feature is, will it get people to behave better? Well, they don’t have a choice. I mean, if you look at the recent lockups at the big public interval, Blackstone Real Estate Fund, for example, yeah. I don’t know why any advisor would ever allocate to a fund than gates you forever again, I can see why you might have historically and could have been justified. But looking back on it now, I think that you can’t possibly justify that sort of allocation. So the feature Yes, look, people are terrible. They they, one of my Twitter Polls is how long we hold investment that’s underperforming, probably sell it. And the vast majority said zero to three years. Which as we know anything about investing, it’s, you know, you need to hold whether to activate a pure passive beta like US stocks, or it’s an active strategy, 510 20 years, zero to three, like forget about it. And so the feature of actually locking up money, that’s fine. The bug is what private equity charges for giving you essentially, s&p beta. Right. So the problem is, is not the the concept of illiquidity, which is totally fine. The problem is what they charge for it, and what they deliver is a total mismatch.


Jeff Malec  46:39

But, to me, they’re always clever by half, right? We’re the we’re the ones here marking the market and struggling through and they’re like, this is the


Meb Faber  46:47

man yours. And here’s my advice to the Managed futures industry, you guys need to hire the same lobbyists that the private equity industry has that has kept the carried interest hidden away, you know, hey, let’s talk about buybacks. Let’s, let’s, you know, let’s, let’s focus on something that’s, you know, and, and keep this giant monster of private equity going, I think, I think there’s gonna be no asset that disappoints more than private equity over the next 10 years. But yet, all the institutions have just been rushing in over the past 1020 years into this asset.


Jeff Malec  47:19

And it’s crazier as I get older, and friends and colleagues I know. And they’re the ones lending to the private equity and do insanely well, right. They’re not even picking the companies and doing that work. They’re just lending the money to the private equity to go do the job. And they’re doing insanely well. So yeah, it works all the way down. So you mentioned a third and trend buying, like, to me on this side of the fence, a lot of train guys were like, hey, whoa, no, thanks. That’ll make it too big and it’ll not work anymore. Got any thoughts on that?


Meb Faber  47:52

Most asset alphas around the world. If you put enough money into it, it’s going to remove the arbitrage. When you think about value, say, Hey, I’m going to invest in Brazilian small cap tech stocks. And, you know, there’s an arbitrage there for information for value, and then you give that person $10 billion, well, it’s probably going to close right? Or, you know, even smaller, more esoteric markets. I’m gonna play


Jeff Malec  48:20

exhibit a Ark, right? Yeah.


Meb Faber  48:22

And so there is also a sort of reflexive self reinforcing, you know, money flows issue that pushes asset classes to expensive valuations. That is cheap valuations. I don’t know, that the quote, alpha of trend following is that or or it’s just actually a beta of trend following. And to me, the, the concept of it. I don’t know that more money dilutes that exposure. But again, I’m not sure I’m not 100% Certain in that regard. You could certainly design ideas and concepts that would perform just fine in that reality. But people love spinning their wheels on this topic with passive investing too, you know, I mean, how much money going into passive and how has this changed things? I mean,


Jeff Malec  49:21

I used to, we used to run trading systems for high net worth individuals and we had a system called aberration I don’t know if you ever know. Right, it looked at 20 different futures markets. When it signaled a trade in Platinum it was a basic like 80 Moving Average Bollinger band breakout system when it signaled a move in platinum. Platinum would spike one to 5% at the close that day. So someone on the trading floor had the program was running it and knowing that was a thinly traded market would put on a few contract would start to front run the orders that were going to come in from that popular program. So like,


Meb Faber  49:59

stops Stop disclosing a rule. So we actually talked about the exam is actually an important. The biggest drawback that someone called this thing was Robert and I called it the dirty secret of indexing is that the published indexes Mark cap, wait, Russell 2000 is a great example is they get front run by traders like yourself or down in the pits are hedge funds, every time they rebalance. And that’s a very real cost. I mean, think about the s&p when Berkshire came in, right? They announced Bert, hey, Berkshire is coming in Berkshire runs up, then it goes into the index, well, that’s a real costing investor, you don’t really see it. But it is a cost. And for some indices is not that big of a deal. We’re talking 10 basis points, 50 basis points here. Because some of like the buy and hold commodity indices, it can be multiple percentage points per year. And so we often say, because we’ve been an active index shop, I think the name at this point is somewhat meaningless. The best thing you can do at this point, I think, is an in house index, right? So you’re at, quote, actively managed, you have the rules, but you’re not disclosing them to people. And so it’s a lot harder for them to front run. And then of course, you can do lots of things, to spread them out. And then this is for the longer term crew. So you know, if you’re doing a highly active high frequency, different story, but for the longer term investors, I think there’s ways to be really thoughtful about it, where it’s not gonna have any impact.


Jeff Malec  51:25

The end, so are your you practice, what you preach, they’re inside of yours are not disclosed.


Meb Faber  51:32

We give the broad like watercolor instruction manual, right? So like, our shareholder yield ETF, we have like a little funnel, we say, Okay, this is what we do. We’re taking the top quintile of stocks that are distributing dividends and net buybacks, then we run it through a valuation sambal of valuation metrics, like free cash flow, enterprise value to EBIT, then we kick out the top, most over leveraged companies, we run it through another shareholder yield, and finally momentum, sprinkle on the end, but we’re not giving you the exact so you may be in the right.


Jeff Malec  52:08

Go replicate that. Sure.


Meb Faber  52:10

Exactly. And so like, even like our old basic paper, which use for trend following was the 10 month Simple Moving Average, you know, we didn’t show in the paper, it’s been so long, but I said look does doesn’t matter if you use six, month, eight, month, 10, month, 12 month doesn’t matter for us to enter day two and a 50 day, like you’re all getting to the same sort of surface area of how these trading systems perform. It doesn’t matter if you update on the beginning of the month, the middle of the month. I mean, it’ll matter in the short term, but over the long term, we all we often say use try to use an ensemble of different sync signals, you could scale in, you could scale out, there’s a lot of things you can do. But But I really want. And I’ve always said this about trend following too. You know, I really want to capture the beta of this world. And so people will always email me they say mad. Okay. I want to add a trend following my portfolio, what fund what fund? Singular do you recommend? I say, Well, we have one, by the way, it’s it’s a strategy called Global momentum. But I say they say then they’ll say, Okay, I know you can’t recommend funds. So just not just one. But you know, here’s three that I’m considering, you know, what’s the what do you think is the best one? And I say, I’m not going to look at the funds, but hypothetically, why don’t you just buy all three? Or why don’t you just buy them all? The ones that fit the broad criteria? But people hate that advice, right? Because they hate the same thing. They say, Man, I’m in US stocks, should I sell them? Or a my biggest position is Apple, should I sell it? Or should I keep it? I say why are you thinking in this binary terms? Because no matter what happens, you’re gonna look back and have elation. Oh, I was so smart to sell stocks at the peak. Or, you know, total Lee despondent oh my god, I can’t believe I sold apple and it went up 1,000% From here, I’m so stupid. You know, the least satisfying thing is to be like, You know what? I’m going to sell half. Or I’m going to buy these three funds because I’m just going to capture the average people like to gamble secretly, or maybe not so secretly. And so to me, is like, you got to come up with a number of funds or strategies that fit the criteria and diversify across all of them. And you guys do this you track you know, dozens of these trend following managers going back many decades. I was pestering you the other day when we were tweeting about this, and I said, you know, you got some of these track records from like Dun and others that go back for two years. And even for a lot of people, they’re like, ah, that’s not enough.


Jeff Malec  54:35

Like what? Yeah,


Meb Faber  54:36

so you know, so I always the important question to me is not what people are asking, which is, which fund is best, which strategy is best, but as Should I have this in the first place, and if you’re already thinking about adding that traditional portfolio, I think like that decision already, that’s the big muscle movement. It’s not which one it’s like do I include it in the in the first place


Jeff Malec  54:59

and then When we hire that lobbying group, we’ll have them clear this up more, but then that same question happens and people will go, Okay, I’m looking at this managed futures program and this one and this one, like hold on your bucket a there is managed futures, but it’s not trend following it, right. It can be doing discretionary hog trading or option selling or something as weird. And so that trips up a lot of people like Well, that didn’t perform last year. I’m not going to look at that. So just Public Service Announcement beware what’s on the cover with managed futures doesn’t necessarily mean trend. Yeah, we talked about what it is but it’s only doing equities or at all. Sure.


Meb Faber  55:34

So if you were to ask me same AB What’s your desert island strategy? So two questions one, man What strategy thinks is gonna do the best for the next decade? I mean, I think emerging market deep value stocks are in for to me the best compounding opportunity for the next decade just pure compounding ignore volatility ignore drawdowns, we close our eyes, we do this podcast we do this, this hologram live presentation and 2033 you kind of can’t even say it and we look back say man what what you know, I think emerging market stocks, point 2022 2023 2033 simple compound returns, I think emerging market shareholder yield style strategy, but if you’re saying that what is your desert island strategy you have to survive. So drawdowns matter staying in the game matters. What do you do? And to me too, that’s always been trend following and it’s a separate question if you say MEB trend following as your entire portfolio, or trend following as a diversifier to your buy and hold portfolio because trend following as your entire portfolio to me looks damn long flat. Right? It looks different to me than diversifying traditional portfolio which would be more long short. You know, the shorting part is hard. It adds volatility to me, but there’s no better diversifier. If you look back last year, right? I mean, one of the major performance drivers was all the trend followers for short fixed income and bonds. And you have these like terrible stock bond performing year but like what else diversifies me being short rates going from zero to 4%, like amazing, world class trade. But long flat to me, is a low volatility low drawdown. The thing about long short is you have twice as many chances to be wrong, right. So so long flat, our global momentum strategy it looks at roughly so we have three allocation, ETF strategies, one is buy and hold, does nothing buys global stocks, bonds, real assets broadly similar to the global market portfolio with value tilts super low cost. On the opposite end, it’s crazy cousin targets the same assets. So roughly 50, what we consider to be asset classes, sub asset classes, industries sectors, it sorts based on just like a normal intermediate term momentum of various timeframes, but only owns them. So it takes a top what is it top third, but only if they’re above their long term trend, excuse me, quarter only if they’re above their long term trend. So it can be heavily concentrated in stocks, and real estate and commodities and bonds. And so right now, not surprising. Last year, it was heavy risk off, in you know, the rare times when kind of everything is going down away, it was really the last time I think we saw that COVID Very briefly. But over the final quarter of last year into this year, it really started allocating quite a bit to equities, particularly foreign equities, and then a smattering of precious metals, who knows where those those are going to go, you know, obviously nothing and fixed income at this point, but an earlier in the year last year, it had a lot and other commodities as well. So it that exposure is an aggressive version of really our original paper 1517 years ago now. So it combines momentum and trend. And so then in the middle of that is what we call that Trinity where you got half an buy and hold half and trend. And to me from an individual standpoint, as well as an institution. This is why the narrative works so well is you could do COVID as an example but even this past year, I mean 2022 terrible year for traditional buy and hold you say thank God for transforming you know that half of your portfolio 2023 We’re only you know, a month in maybe not so much two months in but you said oh thank god I buy and hold because everything’s ripping right back up, you know, or same as in COVID beginning of COVID Zombie Apocalypse everything going straight down the world’s ending thank God for trend following and then you balance you say oh my God, thank God I buy and hold because these things just rip so that the Yin Yang diversification of those two, you end up a place in the middle Well, that I think is a lot more palatable.


Jeff Malec  1:00:02

Right? And then everyone rushed into ball and tail protection strategies for 20. And then they didn’t work and 22 because it was the second responder, not the first responder. Always something. Giving us the kind of ETF and RIA landscape as you see it today, what’s the same? What’s changing? I know that could be a whole pot. Yeah,


Meb Faber  1:00:28

to two big different questions. You know, I gave a talk at the beginning of COVID. in Jackson Hole, and it’s in a little conference room looking out over the mountain. And I said, you know, most investors don’t realize this yet. Or they do and they’re just willing to write out their sort of closet index fees like these old school and mutual fund managers that still charge one one and a half 2% for s&p 500 exposure, basically, I said, the world has changed, you can buy a globally diversified portfolio of market cap weight from Vanguard for essentially zero, it’s like three basis points. And in that world, it’s tax efficient. If you’re going to be doing something different, if you’re going to be quote, an active or alpha generator, like you better be pretty weird, concentrated and different. And you’re just not going to survive like that 50 100 150 basis point fee, like you need to do something to justify that. And I said, first of all, that’s the best time ever to be an investor, amazing opportunity set, we have limitless choice, low cost tax efficient vehicles. And I said in Barron’s one point, I said, you know, ETFs are going to take over the mutual fund industry. And everyone laughed. And I said, you know, for all the reasons, lower costs, tax efficient, yada, yada. What I didn’t foresee was that mutual funds were going to start to convert, you know, so DFA did this with like 40 billion of assets. But these, this really is applying to equities, specifically to equities. Because it’s a, we estimate about a 70 basis point. Structural tax advantage of being in the ETF wrapper versus mutual fund, if you’re in 401k, doesn’t matter, if it’s in your IRA doesn’t matter if it’s bonds, it doesn’t really matter. Managed futures doesn’t really matter. For equities, it really, really matters. But that’s the biggest chunk, right, the active space. And so you’re seeing a lot of these conversions. So if you’d said, Matt, what’s, what’s going on the ETF space? Well, you know, as far as that specifically, look, we have 12 funds, we’re probably gonna launch about another half dozen dozen in the next year or two. You say, Why in the world? How is there’s 1010s of 1000s of funds out there? How are you guys? Possibly, you know, why does the world need any more funds, my God, man, but we keep seeing opportunities that are open sort of blue ocean opportunities where there’s either a strategy doesn’t exist, or we think we can do it much better, much cheaper, subjective, of course, but we like to think we can. So it’s, we still think there’s a lot of opportunity. All right, space, you know, I think it’s evolved the way we’ve kind of talked about over the last 510 years, I mean, the, the automated solutions, we think are incredible. They’re sort of a commodity, which is why Vanguard has been, you know, by far the biggest player there, a lot of the digital offerings we think are fantastic. I mean, we’ve used Betterment as a partner, you know, they have some very key, we’re going back to our cash management solution earlier, you know, they just can sweep you into a 4% plus cash account. You know, and to me, that’s, that’s, you want a fiduciary, if you’re if you’re an investor, you want a fiduciary partner. And so, you know, I think financial advice will still exist, I think, you know, the ones that charge a half or a percent, you know, need to justify it not with asset management, but rather with, you know, wills, trusts, insurance, behavioral coaching, all the other value added activities a financial advisor should be doing in the first place, oh, skiing, golf, Hey, man, look, if you didn’t get on Riviera, or like Country Club or wherever, like that’s a non trivial benefit. And I say that totally seriously. Anyway, I think it’s all the AI technology will become a huge tool, the same way email was Zoom is right, it’s going to augment the capabilities of advisors, they’re not going away. I think there will be fee compression, particularly for the ones that don’t do anything. Right. But that applies. The it’d be there’s like a chart you can do of s&p 500. You know, it s&p 500 funds, where you can buy it for like three basis points, but there’s ones out there that track the s&p that charge 1020 5070 100 And my favorite example is because it iShares who has ephah ETF and they have an exact clone of it, and I forget the symbol Then one charges like triple the cost. And notice they’re not like closing the one that’s triple the costs. They’re just quietly saying, Okay, well, this money is stranded in its exact same index.


Jeff Malec  1:05:12

And that is that people have died or lazy or No, I


Meb Faber  1:05:17

think like it’s like, you know, Buffett says like, don’t ask a barber, if you need a haircut, like people have incentives that are tied to revenue, there’s nothing harder than to say, I’m gonna chop off an arm and say, you know, we’re gonna get rid of this, because it’s the right thing to do. And so when


Jeff Malec  1:05:33

I’m talking to investors still having their money there, they’re just asleep.


Meb Faber  1:05:36

I think it’s, it’s money tends to get stuck. You know, how many listeners? Do you have a bank of America and is yielding three basis points, right? You’re just too lazy to move it. That’s why and so people, they buy funds and funds. There’s a great stat. It’s like the average financial advisor that’s been in business for 20 plus years on something like 200 mutual funds across their client book, like how can you possibly have research 200 mutual funds, but what happens is they get sold them, they buy them, they forget about them. And for the anytime an advisor is talking to a client and wants to buy or sell something that creates a friction fracture point, right? Wait, why are we selling this? Oh, it’s because it’s an s&p 500 fund that charges 75 basis points. Why didn’t you sell this five years ago? Why don’t we sell the 97 when spy came out? So you mean, I’ve been telling I’ve been paying 60 Extra basis points when I didn’t need to? Are you going to refund me that right? So that’s just quiet, just leave it there. But unfortunately, that’s you know, that’s you want you want you want good fiduciary partners. That’s the big takeaway.


Jeff Malec  1:06:43

All right, three quick things on farmland or space that you can tell me that? I don’t know.


Meb Faber  1:06:48

You know, so we did a we’ve done a couple podcast series where you know, it’s MIBs interest. And whether anyone else likes it or not, but who doesn’t love space? I mean, come on. Five Year Old. Yeah. So I come from aeronautics background, my brother and my father, both aerospace engineers. So it’s always been close to home. But I do a lot of startup investing. And so for me, this is a lot of fun. I think, you know, going back to talking about true alpha listeners we got we need another hour, but go google google Q SBS and talk about tax incentives, as you’re investing in Angel investor in companies that have less than a 50 million market cap. It’s arguably, in my mind. And this is Obama era legislation, I think the most impactful tax legislation that has been incentivizing entrepreneurs and people funding entrepreneurs, this country’s ever seen what it does, if you invest in a company that’s sub 50, market cap, so essentially a startup, you know, your gains are tax free, and it’s capped at like 10 million, or 10 times the investment, whichever is greater. So incredible opportunity. So I’ve invested in over 350 companies at this point, over the past decade, and in the startup world, and partially for and you can find some more information, if you Google Journey to 100x article we wrote on it listeners. And but one of the reasons I did and I said, Look, my goal is to, if I break even great, I’m gonna consider this tuition, if I match the s&p gravy, because I’ll be doing it tax free. And anything above that amazing, but the real reason I’m doing is is for education, and to I’ve reviewed over 10,000 pitch decks at this point. But you pick up companies and ideas that not only you can apply to your own life, your own company, but also start to get some signals you may not see in traditional media or elsewhere. And it’s so much fun, because what’s better than talking to you about passionate entrepreneur, like it’s the best thing in the world, a new idea. But one of the things we started picking up on after look it up, it was three, five years ago, whatever it was, we said, there’s an inflection point, because when you think of space, you think of Boeing, Lockheed these giant companies, right. But they’re starting to become an inflection point in space X is obviously one that really comes to mind, but where you don’t need 10 billion of capital to really start to develop the next generation of satellites, electronics, whatever. So the startups were actually starting to really innovate here. And we still we did a whole series of startup space investing. And there’s been some pretty incredible successes there. And I think there will continue to be the second series we did was on Africa, which again, is very similar situation for different reasons. But like, if you look at Africa, ETFs there’s like one, and it’s like all South Africa, right. So this signal, which is there’s a ton of innovation and success happening at the private startup level that’s going to flow through to the public markets over the next decade eventually. So those are two areas I think are are super interesting. Farmland is like the opposite. And it’s like the most boring, but ideal asset class and that it doesn’t really correlate to anything. You know, if you got a blueberry farm in Oregon, a wheat farm in Kansas, a timber farm on the East Coast, very different dynamics, what’s going on and to a traditional portfolio. It’s a wonderful asset class. It’s hard to allocate to. There’s some online platforms that have started sprouting up like acre trader, there’s private funds, we’ve done I don’t know, 1020 30 podcasts on the topic. Again, it’s informed by my personal experience, I come from a farming family and yalls part of the world is probably much more, you know, involved in that exposure as others, but to me as a, again, like trend following as a true diversifier those those like my one two traditional portfolio,


Jeff Malec  1:10:56

making any more of it is the basic premise, right? The hum. And then I want you to ask one of these space guys, once they’re like, Oh, we’re gonna mind these asteroids, they have all these minerals that we need. I’m like, okay, but it’s worth it when the price of gold is $2,000. But now, if you bring 10 times the amount of gold on Earth, back to Earth, guess what the price of gold is going to do? So a lot of that math doesn’t quite work out for me when I started thinking about that. But


Meb Faber  1:11:24

well, there’s a lot of it a lot of the innovation is, is I think, is a lot closer than we think if you look at one of the companies we did was axiom, which is building commercials Space Station to replace the International Space Station first, it’s going to kind of attach and then do its own that company. It’s not like 2040 like this is going to be happening in the next five years. And so it’s like a really cool development where I think a lot of the SpaceX innovation with a launch is accelerating in the size, it’s going to happen, I think a lot quicker than people expect.


Jeff Malec  1:12:01

What about getting us to lightspeed? I think it’s some big huge magnetic accelerator out there, like between us in the Muny. Just


Meb Faber  1:12:10

yeah. The old, the old Jodie Foster movie, there was there’s one company and one of the problems I mean, like one of my biggest misses is I, I turned down in past boom, supersonic, which is like version two of the Concorde. You know, to me, I struggle with a really hard capital intensive ones. And there’s, of course, they’re hugely successful, and they’re building all these planes for everyone. But another one is a company that says, hey, we’re gonna try to instead of, you know, the traditional rocket launch, we’re gonna have a setup where it’s just going to spin the rockets really fast and fling them out, you know, to and they like, did the math on like, what it’s going to cost and how it’s going to work. And I’m blanking on the name of the company, and I was like, that’s crazy. You know, how’s that going? And I didn’t invest but like, same thing. It’s like that’s crazy. Who’s gonna get into a car driven by a random person and drive you someplace? Like who would invest in that? who’d go stay in someone’s house? They’re just gonna rent you out a bedroom and their house like for a night like Airbnb Uber like to the biggest success


Jeff Malec  1:13:13

who’s gonna sit in a car that drives itself? Yeah, exactly. Alright, last bit, I need your Mount Rushmore top for ski mountains ski resorts so


Meb Faber  1:13:34

this is complicated


Jeff Malec  1:13:37

because because Park gave you a Mount Rushmore like Bill Simmons right so you don’t have one would be even harder.


Meb Faber  1:13:42

Part of it in my head is like if you include the town so yeah, if you include the town and the community like I love the traditional Colorado Crested Butte Telluride steamboat to me are like they’re hard to get to see you don’t get as many people authentic western town like the main street like the just an old school saloon bar right. You know, I grew up going to Winter Park, I got a lot of scars, sutures on my body from Winter Park. That’s always a soft spot. Japan to me is unlike anything else. You get the cultural exposure as well as just the consistency when the end The trouble is, you know, like you’re trying to plan a ski trip. I just drove back eight and a half hours from Mammoth last night. Snow Mother Nature is fickle. And so like hey, let’s go to Europe this year. Well it’s a bunch of grass and dirt and so then you’re you It’s hard but Japan more than anywhere the consistency of the snow is really unlike anywhere else. So that to me still is that’s probably number one.


Jeff Malec  1:14:50

And you icon or epic I think used to be sponsored by icon paths, right? This is


Meb Faber  1:14:54

this is another benefit of being a international macro investor, the yen some of the highest levels. Ever been and so the cost for Americans is much lower than it has been over the past decade. I am icon. They actually used to sponsor our podcast. And but so did mountain collective so we’re fans of all the passes. But you know, in Japan I was laughing because we’re going up some of these tiny resorts and you know lift tickets for like 50 bucks. And I was like some of these places in the US now or Well, or the valleys like 40 or something. Yeah, like it’s just it’s


Jeff Malec  1:15:32

I was we were in Sun Valley over Presidents Day weekend. There’s actually some pushback against the passes there of like, epic was way too crowded. We tried to


Meb Faber  1:15:41

I mean, some of those lines from Vail you see those pictures where it’s just like 1000 People like that’s literally my nightmare, like, oh my God looks so terrible. I really want to sit in the hot tub and drink hot chocolate


Jeff Malec  1:15:52

underwater Mount Rushmore. But do you think those passes are good for the industry or are indifferent? Help some kind of hedge right and get income when there is?


Meb Faber  1:16:03

No I don’t know. I don’t know. Yeah, I think it’s, I think it’s a mixed bag. But I you know, I think it’s probably better than the alternative.


Jeff Malec  1:16:13

Yeah. Awesome. Well, let you go. Leave it there we can we’ll do another whole podcast on whether climate change is gonna ruin a bunch of these beautiful mountains. But


Meb Faber  1:16:21

well, my friend, it’s just gonna change it will just be skiing and you know, they’re where they excel. And thanks so much for having me.


Jeff Malec  1:16:29

All right, man. It’s been fun. We’ll talk to you soon. All right, skiing space, farmland and trend. That was fun. Thanks for Meb Faber. Thanks to our sponsor, RCM and their trend white paper and thanks to Jeff Burger, our producer behind the scenes making up for me for getting used to fancy microphones. That’s it for the pod this week. We’ll see you next week with Mike Green Peace.


This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.

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