Weekly Issue
TIM MELVIN: Hey guys, I’ve got a treat for you this week. We’re on with Meb Faber, who we try to get on at least once a year. I’d have him on every week if I thought it wouldn’t clog his schedule up. He’s one of my favorite all-time writers and kind of market thinkers, I guess is the right way to put this. Meb is the co-founder and CEO of Cambria Investment Management. They do a bunch of ETF stuff. I let him talk about that as much as he wants to. Host of the Meb Faber Show on mebfaber.com. I don’t listen to many podcasts. I try to make it a point to get to that one every week. I don’t always make it, but he’s always just got great guests and great topics and tons of information. He’s written several books. I’ve lost track of how many. If I remember the story, you got mad because somebody was reselling your books on Amazon at inflated prices and started giving some of them away for free. Most of them are for free these days. The e-books, you can find them. We actually have a new book coming out next year. I’ll tell you about it later.
MEB FABER: Okay. Yeah. I know that there are four for free on the website right now at MebFaber.com, including two that I really want to talk about today, and that’s Global Value and Global Asset Allocation. He’s written too many white papers to actually count. I mean, it just—you keep, you know, paper after paper studying the market and what works and what doesn’t work.
TIM MELVIN: Meb has been, along with me, one of the very lonely voices over the last several years talking about two of the most unpopular subjects in markets today. That’s global markets and value investing. If there’s anybody left that we haven’t really made angry, we go ahead and talk about trend following a little bit. That just wipes out the room. I wanted to have you on specifically because you just sent out a couple weeks ago your quarterly valuation updates for the global markets. I look forward to these. I’m aware of the information, but having it all there in one place is just kind of cool and a great thing to look at. It’s very controversial because you’ve got stocks that are the most undervalued in countries that are hated. Like, for instance, this year it’s Colombia, and we already know that Colombia managed to climb onto the top of our esteemed president’s list of uh-uh countries. Poland is on there, right on the verge of, you know, the war zone, Turkey. Those countries have been on there for a while. All the countries that are unpopular and nobody wants to go to have the best stocks on that list. You threw out some performance numbers in a tweet not long ago. Can you share those with us?
MEB FABER: Yeah. You know, lost in everyone—you turn on CNBC, read Bloomberg, and, you know, everyone all day long is talking about the U.S. stock market being at an all-time high. That’s well justified. It’s been an amazing run for the past fifteen years. It’s been a ten-bagger. If you’ve been in the queues, it’s been a twenty-bagger. People have made a lot of money. It’s been one of the most exceptional times ever to be invested in U.S. stocks. My favorite chart of the last few years was a rolling ten-year returns of the U.S. stock market. There have only been four times in history it’s done fifteen percent a year for ten years or an extended period. It’s the roaring twenties, nifty fifties, the Internet bubble, and today. There’s a good reason everybody talks about U.S. stocks, but it’s constant. It’s NVIDIA. They’re starting to talk about gold a little bit too given that it’s over four thousand. That’s kind of the main topic. We’re having another good year in U.S. stocks. Underneath the surface, you know, the turbulence of the whitewater and the waves, the foreign markets—which have underperformed for forever, really—have started to turn. You have foreign developed, foreign emerging, outperforming U.S. stocks, but in particular, global deep value. It’s actually the hat I’m wearing currently. You’re not watching this online. This is our GVAL ETF, but the global deep value of the cheapest countries in the world is putting up almost—you know, like you mentioned, these are countries that often people shy away from, but there are a lot of countries in that basket that historically you wouldn’t associate with necessarily being geopolitical risks. The U.K. has been in there. China has been in there, and on and on. It’s a lot of Eastern Europe. I think Poland is one of the best-performing countries this year. I think a lot of people are very under-allocated to foreign, you know, as a percentage of the global market cap. For U.S. investors, it’s a third ex-U.S. U.S. GDP is only a quarter of the world, but the vast majority of everyone I talk to, you know, puts everything in U.S. stocks, which is cool. If that’s your thing, good, go for it. Historically, though, that’s been a suboptimal way to invest, putting all your money into one country.
TIM MELVIN: Okay. That brings me to the next question when it comes to U.S. stocks. Fifteen percent decades are really unusual, as you just pointed out. All the periods that you just named ended badly. The roaring twenties, the fifties, the Internet decade. How’s this one going to end?
MEB FABER: We don’t know. You know, this book I’m writing is called Time Billionaires, and it looks at the history of stock markets back to sixteen hundred. What you find is a long history of booms and busts and periods where, you know, other stock market countries held the crown as biggest in the world. You know, for a couple hundred years, the U.S. wasn’t the largest stock market. There was no U.S., right? It was the Dutch and then the British. Even as recently as fifty years ago, Japan was the biggest stock market in the world. These names change places over time, and it’s not just the countries but also sectors. You know, a hundred years ago, we’d only be talking about railroads or utilities as opposed to tech and financials and everything else today. These stocks tend to have cycles. Sometimes these cycles last what’s essentially a lifetime. You know, fifteen years for many people is an entire career. I was joking with someone this week. The NBA season just started, and they were asking a bunch of the younger players, “Hey, what do you remember about the nineties NBA?” To a T, all of them were like, blank stare. They’re like, “What are you talking about? I wasn’t even alive. You know, I was born in the two thousands.” The reason I bring that up is that all of us extrapolate our own lived existence, not just in our own lives but also in investing. If you’ve only been investing in the last fifteen years, you’ve learned over and over and over again that you should put all your money in the S&P and nothing anywhere else. It doesn’t go down. We wrote a paper on this a couple of years ago called “The Bear Market and Diversification,” where a diversified portfolio—it doesn’t matter if you do sixty-forty, risk parity, endowment, or anything else—would have been the worst period in history in the past hundred years for a diversified portfolio relative to the S&P in terms of magnitude of drawdown and years in a row. The only thing comparable is post-World War II. I think that’s changed in the last year or two. You’ve seen a lot of assets gain momentum, most notably being foreign stocks and gold. Bitcoin is kind of always doing its own thing, but those two in particular have really started to outperform to the point where, you know, it’s starting to make a little noise.
TIM MELVIN: Okay. That brings me to a question. The U.S. market, everybody favors it. Money’s still flowing into it on a regular basis. Nobody I talk to on a regular basis has much money allocated to global markets. A few years ago, I told my wife she was making some changes in her 401(k). I put it into the global markets, and her HR was like, “Really?” Of course, you know, it’s worked out pretty well. Are we in a bubble? Has the U.S. gotten to the point where we need to throw the caution flag on the field because valuations are just too high?
MEB FABER: Yeah, you know, my son’s entire five twenty-nine is in ex-U.S. stocks, but he’s got—he’s only eight, so he has a lot of time to catch up. Who knows, he may not even be going to college in ten years. It might be all AI education. We’ll see—just football games and beers at that point. Who knows. Let me dovetail on the question you asked in the last question, which I didn’t answer. I’m sorry. When looking at the U.S., what is most likely to happen? We’re at a ten-year CAPE ratio of around forty, which has only been exceeded once in history, which was the late nineties. Usually it’s about half of that, somewhere around twenty, low twenties, where the rest of the world is. Most of the rest of the world is bouncing around twenty, though there are some countries in the teens, low teens, even single digits. The U.S. is expensive. On average, when a country closes the year above forty—and this has happened a bunch in the past, think India and China back in two thousand seven, the U.S., a lot of things in the late nineties, Japan in the eighties—future ten-year returns on average after inflation are about zero. Not great, but probably low single digits on a nominal basis. Never once have they been above average in the future ten years. Meaning your batting average, your hit rate is pretty low. Expecting ten or God forbid, like the young ones these days, fifteen percent returns on your U.S. stocks in the next ten years is probably unlikely. That doesn’t mean it can’t happen. For a lot of these markets to go from a PE of forty, it could go to sixty. It could go to eighty. It could go to ninety. The whole idea about capital markets is that you’re paying for the future stream of cash flows. The more it goes up in the short term, you’re sort of mortgaging your future returns, and vice versa. We think the U.S. market cap-weighted has low expected returns, but within the U.S., there’s a lot of opportunity for small and mid-cap, for other sectors, for value, for foreign, for emerging, for value outside the U.S. Basically, anything other than U.S. market cap weight is sort of what we tell people. Even fixed income—you know, bonds yield four percent plus, T-bills for the first time in a long time. People got accustomed to zero percent. All of a sudden you’ve got a competing asset at four percent. I think there are a lot of choices outside the U.S. as long as you have a long enough time horizon.
TIM MELVIN: Okay. The cheapest markets in the world—I’ve got the list in front of me. I’m just going to bounce these out here so folks kind of know what we’re talking about. Where did it go? There it is. All right. Actually, I don’t have it. I know Colombia is number one, the absolute bottom. I believe Poland is still on there. Hang on a second because I absolutely lost my page here. I apologize for that. There it is. Okay, here we go. Colombia is at the bottom, Brazil at the bottom. Also, remember, Brazil is massively out of favor with the United States right now. Thailand, a country that people talk about a lot, but I don’t think most folks can find it on a map. Turkey, always controversial. Poland and Chile are the bottom countries. I know how you keep score of this, and I know how you’re measuring value, but can you detail that for folks—exactly how you’re determining the overall valuation level of the country?
MEB FABER: We say it’s important. We think valuation is a blunt tool. We actually track—we write the Idea Farm, which is a website that shares research. It’s free. Once a quarter, we’ll put out this ranking of about forty-five countries, and we rank them across, I think, four different ten-year valuation metrics. We use earnings, we use dividends. By the way, the S&P dividend is one point one seven. It’s also knocking on the all-time low of about one point one, super low. We do price to book, we do cash flow, and we average them because these countries, you know, any one metric may be slightly biased. In general, if you’re someone like the U.S. that’s trading at a forty PE, the other ones should agree or at least rhyme. Ditto, if something’s trading at an eight PE, they should rhyme. We take an average of all these countries, and the names switch over time. The U.S. on the PE ratio has been as low as five before. It’s not like it’s always at forty. It goes up and down over time. On average, the ranking—the U.S. is actually, we’ve been doing this for over a decade—I don’t think we’ve ever seen it as the most expensive country, and it entered this year as the most expensive. For a while Denmark and India were up there, but the U.S. has sort of bubbled up to be the winner, not in a good way. I think the key thing, though, on this idea is that you’ve got to remember some of these countries are smaller. If you’re investing in the Czech Republic or something, you’re not going to have thousands of securities like you do in the U.S. You may have ten, twenty, thirty. Also, you know, you want to buy a basket of these. You don’t want to come off this podcast and say, “I heard Tim and Meb and they said I’ve got to put all my money in Colombia.” No, that’s not what we said. You know, you want to buy a basket of these countries because, you know, usually the way they get into the low PE is the P goes down fifty, eighty percent or something. That gets you to cheap, and often it’s justified, but it usually goes too far. People extrapolate just like they do on the right side of the chart, and on the left side it becomes career risk. If you buy something that has done very poorly, people look at you like you’re crazy. On average, though, value has been a great strategy.
TIM MELVIN: Let’s touch on that for a second because career risk is something that I’ve heard you talk about. I’ve heard Wes Gray talk about it, and I haven’t heard anybody else talk about it, but having been a broker, I can tell you it is one of the biggest risks on Wall Street. Let’s talk about career risk and what it is and how it affects individual investors.
MEB FABER: Well, Wes and I are both a little crazy. I’m not sure that’s the best sample size for your listeners. We both got a screw loose. Yeah, I mean, look, much of our world and industry, you’ve got to trace it back to incentives. Why are people saying or selling what they’re doing? Are they investing in their own funds? Are they putting their money where their mouth is? Kind of where these incentives lie. I think also, it becomes problematic with career horizons and all these shifting forces on kind of how people are willing to go about what they do. Are they willing to shift? Are they willing to say “I was wrong” and shift to something else, and on and on. I think career risk is something that a lot of people—if you look at this entire industry of active mutual funds being essentially closet index funds. What do I mean by that? Like, hey, it’s the best time ever to be an investor. You can buy a portfolio from Vanguard of ETFs for about three basis points, zero point zero three percent. If you’re going to pay one and a half percent for some mutual fund or something, you better be getting something super weird, concentrated, different in this search for alpha exposure. The problem is many of these over the years, they may have started out like that when they were young and enterprising and useful and motivated. As the assets bubbled up to fifty billion, one hundred billion, five hundred billion, they just become toll collectors, fee collectors. You end up with something that looks like the S&P, but you’re charging one or one and a half percent. I don’t think, you know, in twenty twenty-five, you need that. I think it’s much more thoughtful to get cheap beta where you can. If you want something to look a little different, go for it. Much of the industry is legacy sort of conflicts like that that are best avoided.
TIM MELVIN: I’m glad you brought up the fund size thing because I’m always—I’m very fond of saying that true deep value works. It’s always worked. It’s never really stopped working. It just doesn’t scale really. We’ve seen it in countless better-known value investors who I’m not going to name, but they came up through the eighties and nineties shooting the lights out. As they crossed that billion and five billion mark, performance came right back to the index.
MEB FABER: The thing with value—and you can really say what you were talking about for any strategy—you’ve got to be really careful on flows and size. If you’re a manager that’s investing in Brazilian small cap tech stocks, chances are you can’t deploy fifty billion dollars. You know, we wrote a recent piece called “When to Sell,” helping investors walk through. A lot of people put a ton of effort and blood and sweat into buying an asset or a strategy or a fund. You ask them, “Well, what’s your plan for selling it?” They give you a blank look. You know, often it’s like, “I’m just going to see how it goes. I’m going to wing it.” They don’t establish the criteria ahead of time. That becomes problematic because we all love to chase returns on both the good and the bad. Some things like a good reason to sell is what you just mentioned—asset class or strategy bloat. You know, if you started out like Buffett talks about this all the time where he’s like, “Look, if I was managing a hundred million, I could do a lot more stuff than managing a zillion.” The opportunity set just shrinks and what you can do. There are funds out there, and we’ve called out a few over the past couple of years. This is somewhat of an Achilles heel of index funds that have been managed without regard to implementation and size. We’ve seen some out there that will just quote “follow their index,” and then they’ll buy ten or twenty percent of the float of a small cap stock. If you’ve ever invested in stocks, you know that buying twenty percent of the company is going to move the price of the stock. Sure. The question is just how much. That becomes a big drain on returns too. Being mindful of the art of actual implementation is hugely important. It’s kind of the boring blocking and tackling of our world. It’s much more sexy to talk about the investing side and what’s gold going to do and the Fed and stocks, but really the basics of implementation on fees and taxes can often be equally if not more important.
TIM MELVIN: Yeah, I think people miss that, particularly on the fees, the taxes side of this. You know, when you’re trying to be really exciting and trading in and out of a whole bunch of stuff all the time, the winner is the tax man most of the time, the broker and the tax man. The broker’s bite has gotten a little smaller. The tax guy’s really has not.
MEB FABER: Yeah.
TIM MELVIN: Your other book is Global Asset Allocation. I can tell you—I’ve been doing this a long time, which basically means two things: I’m old and I’ve learned a lot, because you don’t get to be old in this business unless you’ve learned a lot. One of the things that I’ve noticed is most people pay almost zero attention to asset allocation. They don’t think about it at all. Most brokerages and investment advisors might pay lip service to it, but nobody’s really doing what they should be doing with this. You do a lot with this. Can you kind of address the idea of asset allocation and the best way to go about it?
MEB FABER: The concept of asset allocation is really survival. You know, we’re about to hit a twin-year track record at Cambria next year, which is kind of crazy to look back upon. We say the best compliment you can give someone in the investing world is “you survived.” It’s not that you generated alpha. It’s just you’re still here. Because as we all know, the investing graveyard is a big one, but also just in life in general. This applies to relationships, jobs, everything else. Diversification is the same concept. You can’t find an asset out there that’s safe. We wrote an old paper called “What’s the Safest Asset?” I think a lot of people would assume that would be T-bills, and that would be right on a nominal basis. On an after-inflation basis, many people would be surprised to learn that if you put all your money in T-bills, you lost half your money at some point on an after-inflation basis. Actually, the safest portfolio—and this is counterintuitive to many—is a diversified global portfolio. There are kind of three main buckets in my mind. The first is stocks. I mean this globally. The second is bonds or fixed income. The third is real assets—things like precious metals, miners, commodity equities, TIPS, REITs. All of those play somewhat different roles. Sometimes they zig and zag together, and sometimes they don’t. Over time, the benefits of diversification are very real. The biggest challenge for most U.S. investors: they put all their assets in U.S. investments. Everything is U.S. stocks and bonds. Because of the volatility of U.S. stocks, that means basically they’re all U.S. stocks. They very often have very little ex-U.S. equities and also very little real assets. There are certain groups and pockets—you know, if you’re Australian or Canadian or Chinese or Indian, or certain bugs in the U.S., you’ll have maybe some exposure to those real assets. Often people are very under-allocated until after the fact. You know, diversification gives you a smoother ride. It’s the volatility and drawdowns, particularly with U.S. equities, that take many people out of the game. I mean, how many times and how many people do you know? I know a lot that, you know, got hammered in the GFC, sold everything, said, “I can’t take it anymore.” Then they missed the entire recovery. You know, I think a lot of people, if you tell them at the end of their life, you know, say, “Hey, are you bummed out? You got eight percent instead of nine.” They’d be like, “No, like, what are you even talking about?” If you said, “Hey, how do you feel that you got zero instead of nine because you weren’t able to complete the race?” I think that’s a much bigger risk.
TIM MELVIN: You use the numbers there of eight, nine percent. I want to touch on that because many people in financial media today don’t talk about realistic rates of return. We’ve got people walking around out there that, with the market at this level and the CAPE over forty, are walking around talking about, “I think I’m going to make fifteen, twenty percent a year for the next decade.” How realistic is that?
MEB FABER: Well, apparently you’re not hanging out on Instagram enough because over there they say not just, you know, ten, fifteen—you’re going to make thirty, forty, fifty percent a year. We’ve identified a lot of that. That even beats Twitter. I mean, wow. Yeah, that’s big. We’ve identified a lot of frauds over the years, and we try to call out particularly bad behavior. I made the mistake of bookmarking a particularly offensive handful set of marketing. You know, it’s usually like private real estate, private credit, you know, some sort of options. Here, “Come invest in my trailer park, come invest in my movie, come invest in my”—just... But they seduce people with the prospect of high returns. Investors, if they just sat back and compounded over time and focused on the things that are important—saving, investing in the first place, starting early, not mucking it up, paying low fees and taxes—it’s magical, right? In fifty years, you’ve 100x’d your money. They get seduced by the prospect of getting rich quick, in which case they usually lose all their money. All my Instagram ads are these shady deals. I have a Twitter thread that has about fifty of them. I gave up because there are so many. Usually, a nice bear market will clean these people out or the regulators or both.
TIM MELVIN: Okay, yeah. That’s one of the things that I’ve seen. I saw this as a broker. I’ve seen it because I work in, obviously, financial media. You’re competing against people that will say anything. They’re promising these just magnificent returns and how you’re going to get rich by next Tuesday. Frankly, it drives me insane. All right, you use the CAPE ratio a lot. This is controversial. I know because I use the CAPE ratio. It might have been you that said at one time—and if it wasn’t, take credit for it because it’s a great statement—the CAPE ratio is not a precise timing mechanism by any stretch. Basically, it doesn’t tell you when you’re going to get thrown out of a window by the market. It tells you what floor you’re on.
MEB FABER: That is great. I hope I said that. That’s wonderful. Whoever said it, that’s a fantastic line. I’ll use it all the time. I’ll take it.
TIM MELVIN: Okay. You do use it, as do I, to kind of measure valuations and spot under- and over-identified pockets of the market. What is it and why does it work and why should people pay attention?
MEB FABER: Yeah. I mean, I’ll back up real quick. I mean, valuation in general—if you think about it, it’s everything when it comes to markets. If you say, “Oh, I’m not going to use value,” what’s the alternative, right? Like, you’re just going to buy investments with your hard-earned money with no regard to fundamentals. That’s crazy. Because people end up, you know, buying—on average, one of the worst strategies in history is buying really expensive stocks. If you consistently buy stocks at ten, twenty, fifty, a hundred times revenue, right, you’re going to lose all your money eventually. The thing is, every once in a while they’ll rip up. You know, this little face-ripper, everyone gets hot and bothered, and then they just go back down. Thinking about valuation, particularly on the aggregate like the entire market. I mean, most people when they invest in something like the S&P 500 assume that valuation is already considered. If you talk to the average individual and say, “Hey, you know, you’re indexing. Great. How does that do it? Buys the biggest companies. Biggest by what?” They’re usually, “Well, I don’t know, like earnings, revenue, sales, profits, people.” You’re like, “No, no, no, it’s just price of the stock times shares outstanding.” That’s it. Price goes up, you own more. Price goes down, you own less. That’s literally the world’s simplest trend-following algorithm. It eventually gets kicked out when it goes down too much or goes to zero. Historically, market cap indexing is trend at its most basic. I think when most people think of valuation, the CAPE ratio is very useful to at least give you some perspective. Bogle, Vanguard used to talk about this on how to come up with expected stock returns. They still publish—Vanguard still publishes their capital market expectations. They also think U.S. stocks, particularly on the growth side, are going to disappoint. I think the CAPE ratio in general—we have two parts to my brain. Well, one half at Cambria is the value side, and the other half is trend. If you go back in history, you know, the best quadrant to be in is in a cheap uptrend. The second best is an expensive uptrend. That’s right. Stocks are expensive on average, and they’re going up. The worst quadrant is an expensive downtrend. We’re right kind of like yellow flashing light, and really until this rolls over, you know, it’s kind of an okay situation. That’s when things get a little dark and scarier. It just goes to show, like, there’s nothing inherently about a certain valuation level that means stocks have to crash or even go down. It just means that, on average, I think they’re more fragile. I think your description is great. You’re on a higher floor. Everything we know about markets—future five-year drawdown possibility is much higher from a much higher level. Things can always get crazier. Elon Musk finds free energy on the moon. I don’t know. We get all hot and bothered about some new quantum computing or AI development. I’m here for it. On average, though, that gets incorporated in the price. It gets incorporated in the expectations, and it gets discounted.
TIM MELVIN: Yeah. The other thing—when I talk about valuation of the overall market, I refer to it doesn’t tell you much about tomorrow. It doesn’t tell me at all what the market’s going to do. It says nothing about tomorrow. It says a lot about ten years from now.
MEB FABER: I track a lot of forward return barometers. There’s the aggregate allocation to equities. There’s the Value Line index projected return. There’s the excess CAPE yield. There’s market cap to GDP. All of them right now are saying the same thing, which is kind of unusual. They’re all saying—and even Vanguard’s like, “Yeah, maybe you get four percent, maybe.” That’s nominal, not adjusted for inflation. You’re talking some very low forward-looking numbers from here in U.S. stocks. It is telling, at least from the way I look at things—and I’m an old Ben Graham guy—I look at book value. It’s screaming something entirely different about Japan, about pockets of Asia, and about Europe. If you look at a lot of these forgotten places—and I even include small mid cap value in the U.S. here—you know, some of these are at some of the widest valuation spreads, certainly over the last handful of decades. The opportunity set looks particularly rich in foreign developed and emerging. Really, in our shareholder yield funds, you can find single-digit PE companies that have great valuations that are paying out—excuse me—ten percent shareholder yield through dividends and buybacks. Foreign, it tends to be more dividends than in the U.S., because the U.S. is a bigger culture of buybacks than outside, but that’s changing. If you look at the last few years, you’ve seen a number of countries start to lean heavily into starting to buy back more shares. Japan, China, the U.K. On top of that, it’s not just they’re buying back shares. It’s also that you’re avoiding the share issuers. There are serial companies, particularly in my home state here, California. There are companies that love to give the C-suite a bunch of stock-based compensation, reloaded every year. They get this constant dilution to shareholders. Sometimes it can be material. In some cases, it’s like five percent a year. A lot of people out there don’t see that, don’t know that they’re getting diluted and ending up over time owning less and less of the company. Historically, it’s been a very bad factor for future returns—stock issuance.
TIM MELVIN: Let’s talk—since we opened up the door—let’s talk about small cap deep value in the United States for a minute because this is an area where, I mean, the common perception is that value is dead, right? If it’s hanging on, it’s only hanging on until Warren dies, and then it’s really dead, even though Warren hasn’t actually done deep value in a long time. Deep value is dead, and there’s no small cap anomaly. It doesn’t really exist. I hear this all the time, these two arguments. You referred to the valuation gap. How are you looking at that from a valuation perspective and from a historical perspective, more importantly?
MEB FABER: Yeah, it’s interesting. You know, if you look at—there’s often in markets sort of on a Venn diagram, there’s overlapping circles. Sometimes things that have done very poorly are somewhat co-inherited or related. If you look at things like small and mid cap, they’ve done very poorly for a long time. On the similar register is value. There’s some correlation there. The opportunity set—there are a lot of companies out there that are trading at totally reasonable prices. It reminds me—I try to shy away from analogies in general, but there’s definitely some late nineties vibe to this, where a lot of the indicators and comparisons I think are pretty reasonable. That’s true elsewhere, and the funny thing about value, you know, is that it’s like a swarm of bees or starlings that kind of morphs over time, and it’s not always the same. To give you a good example, for our shareholder yield strategy in the U.S., tech is a very low allocation. That won’t surprise people if you say “value investing.” Well, you don’t invest a whole lot in tech, right? That’s because in general, tech stocks are expensive and they’re traditionally share issuers. In our emerging market fund, tech has consistently been the number one or number two biggest sector. It’s not just that value avoids tech. It’s just value avoids tech currently in the United States but loves it elsewhere. These things have a way of kind of bouncing around. The opportunity in one place can be much better than the other. Something as simple as value this year—there’s a fifty percentage point spread between one of our funds that does value and another one that does value this year. That’s a Grand Canyon-wide difference. When they try to make generalizations about value, you know, investors, when they love to say it’s broken or it’s dead, I have to follow up and ask them, “Well, where? What time frame are you talking about?” Because in certain areas, it’s doing amazing. On average, though, we certainly love value anywhere around the globe.
TIM MELVIN: I just tossed out a figure that shocks a lot of people. When you look at the last three years, and you pointed out that deep value foreign markets have outperformed, the cheapest markets have outperformed the mag seven. You know what else has outperformed the MAG-VII and not by a little bit? Foreign banks below book value. You tell the average American that you want them to buy a French, German, or Austrian bank below book value, I mean, they’re going to think that you’re just the worst human being on the planet and terrible investment advisor, but they’ve minted money over the last several years.
MEB FABER: Well, if you—this is the spookiest Halloween stat. If you tell someone, “You’re not going to believe this because the U.S. stock market is ascendant. It’s all anyone talks about on TV.” If you say, “Hey, this global value bucket has outperformed the S&P over the last one, three, and five years,” they’ll say “No way.” It’s true, you know. Sometimes these shifts kind of happen quietly. Then everyone starts to notice. I was talking about this on gold on Twitter when we crossed three thousand. I said, “Hey, you know, gold’s making some moves, but no one’s talking about it really in my world.” Then we passed four thousand. I was like, “Well, people are talking about it. Everyone’s talking about it.” I feel like that’s the same as with any investments. As long as the S&P is doing fifteen percent a year, everyone’s fat and happy. Money doesn’t feel like it needs to move. You know, money is pretty sticky as long as things are going up and things are all roses. At some point, people start to notice. I joke with my financial advisor friends. I say, “For many years, people open up their client statements every quarter, and they’re like, ‘What are you doing? We own emerging markets. Why? We should put all of our money into the S&P.’” Then I joke at the end of this year, they’re going to sit down, they’re going to be like, “What are you doing? We don’t own any emerging markets. I told you we should have owned emerging markets. What are you doing?” Clients tend to have a short-term memory. I think once people start to see an extended period of ex-U.S. outperformance, it’ll start to see some flows and behavioral changes.
TIM MELVIN: Speaking of emerging markets, can you use the same valuation and metrics to invest in emerging markets that we do for more developed markets? Or is there some extreme measure that we need to bring into play?
MEB FABER: I think in general, they’re good. I have a whole series on my blog called “Twenty Things That You May Not Know About Markets.” One of them is if you look at global GDP, the U.S. is only a quarter. Emerging markets are actually a majority of world GDP, which always surprises people. It turns out there are a lot of people in China and India and Indonesia and elsewhere. I think it works even better. Our shareholder yield book, which we just did a second edition of—again, it’s free online. After we published that, I don’t know, twelve, fifteen years ago, a lot of academic research came out, and a lot of it found that that strategy worked even better in emerging markets. The argument would be that they’re less efficient than all the money that’s focused on the U.S. This is also true, I think, between large cap and smaller micro caps, where there’s fifty people analyzing one stock or analysts covering it, and some small cap has zero. Right. With emerging markets, what’s interesting about value and particularly shareholder yield, which is dividends and buybacks, is the biggest nervousness people have about emerging markets. They say, “I don’t trust the numbers. I don’t trust the management.” A shareholder yield approach to me—the best approach, the best takeaway—is that if you’re paying out five or ten percent of your cash flow per year through dividends or net stock buybacks, that screens out a lot of frauds. Because the frauds or people who have crappy businesses are buying jets, they’re paying bribes, they’re naming stadiums, they’re spending the money. What they’re not doing is returning it to shareholders, because returning it to shareholders means you either have to have a ton of cash or you have to be generating a ton of cash. On average, in emerging markets, I think it does a great job of finding high-quality companies that are run with regards to shareholders in mind. It won’t always be, of course. In particular, we have five shareholder yield ETFs. I think the one in the emerging markets is going to be the one that ends up with the most outperformance over time because of that reason. The index tends to be fairly inefficient as well.
TIM MELVIN: Okay. Before we get to the easy ones of new stuff that you’ve got going on, let’s tackle a couple more fun ones that are a little more controversial. Back in two thousand twenty-three, you wrote an article, “Nineteen Things That You Disagreed With Everybody.” You were out on an island. I was there with you on the island for most of them. One where we both got blisters—you more than me because you said it first—you said you think the Fed is doing a good job. Still true or not true?
MEB FABER: You know, I joke that there shouldn’t even be a Fed because you can just tie the Fed funds rate to the two-year and be done with it. Just call it a day. Stay here. Because if you pull up a chart of the two-year versus the Fed over time, and our buddy Tom McClellan does a great job of this, you know eventually they sync up. There are periods where one is way higher than the other, and usually that’s periods of dislocations where they’re way too high for too long or way too low for too long, but on average they catch up. I always joke, I said I could run the Fed. Just once a quarter we’ll get together, have some beers, and then just peg it to the two-year. We can’t tell anyone we’re pegging it to the two-year because then the market will expect it, but on average I think, you know, to me that’s a thoughtful way to go about it.
TIM MELVIN: Okay. The other one is trend following. Trend following is right there with value investing. We all know it works. It’s been proven. We don’t have a little bit of data. We have hundreds of years worth of data that deep value and trend following work. Everybody will try everything else but those two. Does trend following still work?
MEB FABER: Absolutely. Well, you get into the philosophy part of the discussion, right? You know, I think market cap investing is trend following investing. Like, no question in my mind. Like, if you’re Bogle indexing, your algorithm is price of the stock times shares outstanding. That’s it. Price goes up, you own more. Price goes down, you own less. That’s literally the world’s simplest trend-following algorithm. It eventually gets kicked out when it goes down too much or goes to zero. Historically, market cap indexing is trend at its most basic. I think when most people think of it, they think of it in terms of a macro approach. We implement it long-flat—excuse me, we implement it long-flat on our GMOM Global Momentum Fund. We also do managed futures, which is long-short. Just like value, when I said there’s a fifty percentage point spread this year in trend, there’s also a twenty-plus-five percentage point spread based on what markets you trade and your approach. The managed futures world is having one of its worst years ever in terms of twelve-month performance. It’s not bad. It’s like flat or down five percent or something. You know, it’s not like it’s down thirty or fifty, right? It just is not doing great. Over time, to me, they’re the two most sensible investing approaches in the world. They’ve both been around for a hundred years, and they complement each other, which is one of my favorite parts, right? Value—the struggle with value in my mind a lot of the time is, you know, you can be wrong, and it just can go a long period where, you know, the animal spirits of today are just going crazy for just about anything that, you know, is a narrative or a story. Trend—you know, like the cool part about trend is it’s hard sometimes to buy or sell an investment. I think back in two thousand seven, you know, trend signals, “Hey, you’ve got to sell your REITs.” I was like, “Oh, I don’t want the party to be over. You know, it’s not time yet.” The same thing in COVID. I remember, you know, everything was crashing. At one point, trend signals to get back in. I was like, “Oh, man, this feels like this has way more to go. It feels like the zombie apocalypse. I don’t want to get back in.” I think for trend, a lot of times, you know, the good news is for most U.S.-based investors, often trend-style funds that are global not just have the exit, the parachute, the sitting out, the risk management, but it often gives you exposure to assets you probably don’t have. If you think about our global momentum fund, I said it’s mostly foreign stocks and gold and miners. Most investors don’t have that in their portfolios, and Bitcoin. It’s sort of—I often say that trend is the premier complement to a traditional buy-and-hold portfolio. We’re probably the biggest outlier in the whole world on that idea. I say the default is about half is what people should put in trend relevant to a traditional portfolio, but it’s not for everybody.
TIM MELVIN: Just quick answer before we get into what you’re up to going on. Is the two hundred-day moving average still a pretty good trend tool or no?
MEB FABER: Yeah. I think pretty good. Great.
TIM MELVIN: Okay. All right. New stuff going on. You’re up. There’s some pretty cool stuff in the ETF world. I’m not going to try to explain this, but you’re doing something called three fifty-one exchanges for clients. Can you explain what that is and why you might want to consider it?
MEB FABER: There are probably people listening to this that say, “Oh, Tim, Meb, I love what you said. This is really thoughtful. You guys are handsome, intelligent. However, all my investments are in taxable accounts. I can’t sell my Microsoft I bought in the eighties. I can’t sell my QQQs that have been a twenty-bagger. The tax man is going to kill me.” Historically, there have been very few choices. You can die, you can donate them, or you can not sell them and just hope things work out. If we know anything about concentrated positions, it usually doesn’t. Lastly, you can just sell it, pay the tax man, and move on. Well, in real estate, there’s been a solution for this forever called the ten thirty-one exchange. You buy a building. Twenty years later, you want to sell it. You’re allowed to sell it, buy a different building. It’s a tax-deferred transaction. Generational wealth has been built this way for a very long time in real estate. Well, there’s been something in the tax code equally for eighty-plus years called the three fifty-one exchange. It’s about contributing assets to a corporation. If Tim and I were starting a farm with a third friend, Tim brings the seed, I bring the barn, they bring the tractor, you put it into a corporation, that’s not taxable. Well, the three fifty-one has found its perfect spouse with the ETF structure because ETFs can trade tax efficiently. The SPY launched in the nineties, rebalances all the time, has never paid a capital gain distribution, thirty-plus years, right? That’s a massive, massive benefit for investors. What happens is investors can contribute a portfolio of stocks or ETFs. It’s got to be publicly listed. It’s got to be tradable. No futures, no options, no Dogecoin. They can see an ETF getting launched and get an ETF back in return. There are two main requirements. The biggest position can’t be above twenty-five percent. The IRS doesn’t want you doing this for tax reasons alone. You can’t just give me ten million in Nvidia. It could be two and a half million in Nvidia and seven and a half million in something else. Then the top five positions can’t be above fifty percent. What does all that blah, blah, blah mean? That means you need at least twelve stocks, or ETFs are pass-through. You could actually contribute a hundred percent SPY because it looks through to the underlying holdings. Who is this for? This is for someone who has concentrated taxable positions. It’s for someone who does direct indexing. It’s for someone who wants to rebalance your portfolio away from maybe something that’s done really well into something else. We’ve done three of these, and they’re getting bigger and bigger. The last one we did in October—two months ago—was one hundred and fifty million. We have another one coming up in December. If you’re watching this online, USCW—see that nice flag? The way that it works is, you know, about a month before, coming up it’s launching mid-December. You know, you reach out to us. We work with you. You say, “Here’s my portfolio.” We make sure that it fills the diversification requirements, blah, blah, blah. The portfolio transfers to U.S. Bank, comes back, you get an ETF. Here’s the great part. First of all, reminder listeners, it’s not a tax wash. You still owe—you still keep the same cost basis. It’s just a great tax deferral to a more diversified portfolio. The cool part is, let’s say you submit twenty positions. You have twenty separate tax slots that you can manage going forward as you see fit. It’s a pretty interesting concept for a lot of use cases for a lot of people. We’ve got a lot of stuff on the Cambria Funds website—PDFs, white papers, videos, podcasts with our buddy Wes, etc. A whole bunch of material if you want to get into it. It’s a little—ninety-nine percent of people have never heard of it. There have been over a hundred of them that have been done. Traditionally, it’s been like one fund converting to another. We’re along with Wes kind of the first to do an open enrollment, which I think is a pretty cool idea.
TIM MELVIN: Okay. All right. Secondly, before we can’t let you go, if you’ve got a new book coming out, you’ve got to tell us about it. What’s going on?
MEB FABER: Time Billionaires, which is going into sort of production at this point as far as all the charts and graphs. You know, I got really frustrated during kind of the COVID period where there were a lot of young investors that became interested in markets. The problem is they got led through the casino door through Robinhood and confetti. “Hey, buy some options. Trade these stocks. Hey, trade them some more. Here’s some more confetti,” and on and on. You have all these products that are, I think, pretty predatory. It’s frustrating because I want as many people to be—I want every American to be invested in the equity market. I think it’s awesome to participate in this amazing thing we call capitalism. At the same time, I want people to understand and learn kind of how this works. You know, you’ve all seen this chart of the U.S. stock market over the last hundred years and all the crisis events over the past hundred years. We’re essentially doing that, but back to sixteen hundred. We’re doing global markets, a history of stock markets, a lot of fun ideas along the way. The goal is to take this long-term perspective, meaning, hey, start to save, start to invest, put it away in these global stock markets, and pretty soon—blink—you’re rich. You’ve made a lot of money. You don’t need to go YOLO into all these meme stocks on a daily basis to try to get those fifty percent returns. Time Billionaires, hopefully out in early twenty twenty-six.
TIM MELVIN: All right. Well, thank you very much. First off, thanks for spending an hour. I told you I wouldn’t keep you an hour. I did. Sorry about that.
MEB FABER Let’s do it again sometime. For the listeners out there, go Dodgers.
Tim Melvin
Editor, Tim Melvin’s Flagship Report