Cambria CIO Meb Faber: Masters in Business (Audio)

Guide to Asset Allocation. And what's within this fairly simple but very powerful theme is the idea of let's look at allocating to various asset classes on a strictly tactical basis with a quantitative methodology. That is simply a ten month moving average when when any asset class breaks its ten month moving average, which looks similar to a two day moving average, but as a little little more sophisticated, it doesn't have as many signals, not as many whipsaws.

You only get a signal once a month because it's a monthly not a daily moving average. That's a sign that markets are are in a significant down trend and usually suggest that there's more downside. That paper coming out as it did right before the financial crisis is one of the most downloaded papers um of the past decade in finance, and really uh turned a lot of people's heads about how simple a a tactical portfolio could be and yet still reduced volatility, reduced draw downs, and be

very competitive with a benchmark. But what MEB does these days is essentially create new ideas for e t f s and he has had a number of these that have been very, very successful. The two we really spend a lot of show today talking about. The one is called shareholder value, and it's what happens if we sift through the universe of of domestic or global equities and evaluate them on the combination of dividend yields and stock

share buy back. As it turns out, when you screen for those two factors, you eliminate a lot of junk. When you're issuing a dividends, you can't phony up your accounting. We've seen a lot of questionable accounting over the past couple of years and decades. Hey, that dividend check has to go out every quarter. There's no messing around with that. So dividend yield turns out to be a fairly good

metric if you're looking for quality of earnings. There's no it's very hard to phony up dividend yield because you have to issue a check each quarter. And then the same thing with share by back UH stock share by back means that you're actually putting money to work buying shares back, reducing the float, and that actually makes your earnings on a per share basis look better. When you do both of those things, buy back shares and increase your divd ends, that tends to create a stock that

does better than average. And so the idea behind this divon end slash share buy back e t F has been here's a way to get a form of quantitative management with a fairly low course ratio and not especially active. It gets rebalanced quarterly. I know there is some activity in it. I wouldn't call this a passive index, but it's done fairly well. It's attracted a decent amount of money in a fairly short period of time. UH. That was the e t F that MEB put out a

couple of years ago. The most recent one he put out. UM is this global value asset allocation and what makes it fascinating is there is essentially zero fee associated with it. There's no internal expense ratio where almost a zero internal expense ratio, and there's no almost no close to buy it.

That's very unusual in the world of ETFs. But the way MEB describes it, we're looking at a universe where costs are compress and there is a pernicious effect of costs over the long haul, and so that's why this is developed. I know MEB for a good couple of years. I find him to be as far as quants go, and he describes himself as a quant light, but I don't know if that's really accurate. As far as kuantsco, he's very articulate. He speaks English well, um live, he's

a surfer dutey lives out in in California. And what I mean by speaks English well, speaks English good is that very often you get the mathematically minded people um who are very intelligent, very erudite, but they lack an ability to communicate on a simple basis with lay people who may not have PhDs in mathematics or economics, and and so you'll find his approach is very straightforward, fairly simple,

completely rational, completely evidence based. I think if you have an interest in investing or the quantitative approach to to finance, you'll find this to be a fascinating conversation. Without any further ado, here is my interview with me Mand Fabor. This is Masters in Business with Barry Ridholds on Bloomberg Radio. My guest today is Meb Faber. He runs Cambria Investments.

He's the chief investment officer and founder. He's also the author of a number of books, Shareholder Yield, The Ivy Portfolio, Global Value. Meb, Welcome to Masters in Business. Great to be here. Thanks so Meb and I know each other for a good couple of years. Um, I've been a fan of your research and writing for quite a while. A little background on who you are. You're live in Manhattan Beach in California, a little bit of an aspiring

surfer dude. UM graduated from University of Virginia, double major engineering and biology. You're not the first double major we've had with some science and either mathematics or computer science or engineering. It's amongst the quants that seems to be a fairly popular combination. You know, it gives you the analytical background, right, or at least at least that's what approach to how do I make sense of all this data? How do I organize it? And what does it what

does it mean going forward? You have hold both the Chartered Market Technician designation and the Chartered Alternative Investment Analysts. That's something that I don't see a lot of these days. I took him in the early days when the tests for a lot easier, So I don't know if I could pass them today, but both both good experiences. I say that about the bar exam. Back when I took it, it was, you know, a couple of drinks and and that was it. Now it's a real test. So you

be let's talk a little bit about your background. What did you do before you started working on the street. So I was an engineer, you know, but by trade and as an undergrad, and it was really smitten with biotech.

This is in the late nineties, so a lot of the sequencing of the genome was going on really fun time, right, and so I had take I was going to take a year off after college, so I've done a bunch of grad work as an undergrad, worked really hard and said, you know, what, I'm gonna take a year off make some money before I go back and back to grad school.

And because it could be in the life sciences five six, who knows how many year process, right, So it took a year off, worked as a biotech analyst for a mutual fund that was called the Genomics Fund. Yeah, so basically your timing was fantastic. You started right in two thousands, and so this was what was so exciting. Look, the Internet bubble is peeking and popping, the biotech bubble, same thing.

But I was working in d C and you had a lot of the n I H A lot of the stuff going on was right there, National Institute of Health. I was taking classes at Hopkins and it was just a really fun time. And so after that year and near the end of two thousand, stocks it's started creating, right, especially the biotech peaked in March of that year, and we're down more about half. Nasdaq was cut in half by the end of that year, more or less. And so I was fascinated about the investment side. I mean,

the life science and size I love. But I said, you know what, I'm not quite ready to go back to grad school. I'm more interested in the investing world. I was always terrible in the lab anyway I'd come in, spill virus is everywhere, like just it was awful at it. So I said, you know what I'm gonna I'm gonna give this investing world a little more of a chance. And then just slowly kept gravitating away from the biotech

and more towards the quant side of the world. And pretty soon, you know, my hobby became the career and vice versa. Not not a totally uncommon story. So as you're going through this process of morphing from a biotech and bioscience analysts to really a quant who your early influences, who affected your thinking about that space? You know, a lot of this was self taught in the sense that I went out and read everything I could possibly find.

So what books really resonated with, what authors? You know, who stayed with you, Because look, everybody in this business has read, or at least people who are making an effort have read hundreds of books. But everybody has a short these dozen on my favorites. So there's the classics, right that, there's a reason there's classics. Reminiscence of stock operator, right, one of the best um, extraordinary popular delusions and madness

of crowds. And so one of the most important things is trying to get a history of investing, so not just what's happened here in the last ten years, but what's happened the last hundred what's happened the last few hundred years elsewhere in the world, to really understand what's what's going on. My all time favorite investing book is Trying for the Optimists. You know, it's a big coffee table book, hundred dollars, but it's hundre and ten dollars

at Amazon. It's actually sitting in the shrink wrap on my credenza in the office waiting for me to find a week to attack it. It's it's just such a great history of markets. What's happens. It will show you. For example, if you're an Austrian in the beginning of the twentieth century, you made no money on stocks, but hey, if you're a US investor, where you may have been

domas out, you'd amazing returns. Just little things like this, markets that disappeared or you know, shut down completely, like Russia, just a great um starting point for investing. And so and of course, a lot of the market wizard style books right there, Some really just wonderful overviews of the personalities, and all sorts of different types of investing styles. Right. Some people were value guys, some people were momentum guys. But what you learn is there's no one approach, right,

but many that people have perfected. Um that can that can all work. The fiftieth anniversary of the Buffet Letter came out, and the comments that some of us had was, hey, instead of trying to be like Buffett, uh and invest like Buffett, be like Buffett. Buffett found a formulation that works for him, putting on his suit, putting on his approach may not work for you, to thine own self be true? How did that sort of philosophy of finding what works for you end up pushing you where you

are today? Well, so I traded all throughout college like a lot of people, right, I was making money hand over fist, trading these internet names that you'd come back from class and they would have doubled, right, you know, and so confusing a bullmarket with intelligence, right, So, and of course I blew up at some point. I learned a lot of things, but it what's really important is like you mentioned, understanding your own psychology. So I have

all the behavioral biases. I'm overconfident, I'll take way too much risk, and so this is kind of the whole point of becoming a quant. And it took years and a lot of pain to learn this said. Look, I need to make rules for myself, otherwise I'll do the dumbest possible things you know out there, And but it's important finding a style that it resonates with you. I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. My guest today is meb Faber. He is a quant.

He runs Cambrian Investments. You put out a kind of fascinating commentary of blog post that was headlined there's never been a better time to be an investor than today. Explain what you've had over the past thirty years, really since the forty years, actually since the first index funds started coming out, is an opportunity where the fees of investing, so even simple brokerage commissions. That was one of the first right Charles Schwab, the discount brokerage, the whole run

of stuff in the seventies. They for people who aren't old enough to remember this. The commissions were fixed by regulation, and when that was deregulated, people could cut their rates from fairly high to much much less expensive. And now that that process has continued in the advent of mute real funds and now e t f s, in this

competition between firms that have allowed fees. If you remember back to the seventies and eighties, I mean, the fees on these funds were just atrocious, right, five percent loads on the front and back end, twelve B one fees, annual management fees up north to three percent with standard right, But you have now this this move towards and vanguards certainly one of the pioneers, but a lot of following.

You can gain access to an investing portfolio for a really cheap amount, right, And so you've had an advent, I know, you've been working this space to a lot of automated investment solutions for one, just things that can give people access to a global, diversified portfolio for really cheap and it's a wonderful thing. Now there's a lot the flip side of that is a lot of the access simply allows people to trade more, which isn't a

good thing, right because usually there are their own worst enemy. Um, it's like giving a you know, a drug addict a bigger needle. But but overall it's been a vastly uh positive benefit to the to the individual in mester. So let's talk a little bit about quantitative investing. Uh. Some previous guests on the show of included Cliff Fastness of a q R, Jim O'Shaughnessy of osam Um rob are not of research affiliates. These are guys who are essentially

legends in the industry. And you describe yourself as a quant for listeners who may not be familiar with what quantitative investing is, give us a quick description. I like to say I'm a quant light So I like to come up with approaches that work where you take a ten thousand foot view and say, look, here's some basic, simple rules. There's rules to sort investments, so say stocks, for example, to be able to say, look, we're gonna pick these stocks based on these rules for buying, these

rules for selling. So that way you remove the emotions of saying, man, I really love apple products, we should be buying it, or I really hate the CEO and it gives it a foundation of logic, right, so it as opposed to emotion right, and it um it allows you to come up with the rules based process for any market environment or a style, and and and a big thing that can also be dangerous if people abuse it.

It allows you to look back in history on how such a system would have performed, how that logic would have done in various market environments. So at least you have an idea of what's possible. So is that what attracted you to a client based investing being rules driven and objective as opposed to more intuitive and depending on

whatever you had for for breakfast? I say, you remember, coming right out of college, I was doing biotech and it was long only, so it didn't matter if you pick the four or ten best biotech stocks out of the sector, they all went down sixty right, So wanting to understand that process which automatic leads you to become macro and the and the one of the fun and challenging things in our world is that these these market

regimes can go on for years. Right there, there's how my mother grew up investing is totally different than the environment I grew up in, or a Japanese investor in the nineties. But those can last for years and decades, and it completely um excuse your your belief of what's happening. You know, like people in the nineties to believe a year it was reasonable for stocks, right, Whenever you have a big rally and U ask people, what are you expecting?

We sort with house prices, we sort with equities, what are you expecting from this asset class in the coming year. It's always a reflection of of what just took place. It's pure recency effect and no recognition of the underlying long term averages. And you almost have to be a comedian or at least appreciate a with a little humor

the possibilities of what can happen. Right, So it'll be able to look back to a nineteen eight seven style event, or be able to say, with two thoughts in your head that stocks could easily double from here or decline because both have happened in the past. But to be able to believe in that possibility, however rare is really challenging. But I think it's also important. So when you look at markets mathematically, what is it that you're actually looking at?

So we believe there's two main sort of schools of thought in what works historically and investing, and it's rare to find someone that believes in both. It's kind of like talking about religion or politics. There's not a lot of people that are both Democrat and Republicans, right, So so my value and momentum or trend right, And usually those two styles and people that follow them don't believe in that in in each other. But it's true they

both worked historically. Value buying stocks that are cheap, for example, whether it's by dividends or some other earnings metric, but also momentum and trend buying markets that are going up, but also importantly avoiding the ones that are going down. Both can work great. Our favorite setup is when they intersect, you know, when something is cheap and going up. But really those are the two main schools I thought we

use when when we're applying the quantitative logic. It's funny you mentioned that because Cliff Astness talks about the advantage of purchasing value and the impact of momentum. And then somebody else who I really should get in here one of these days, I think you know Wes Gray of Alpha architect. His book Quantitative Value looks at the combination of less expensive stocks that are doing well or are trending upwards but are cheap to begin with. It's it's

a fascinating combination. How a lot of different quants. You know, you have a parable of the six blind men um describing the elephant from John Goffrey Sachs's poem. I've used that metaphor many times, but it looks like a lot of quants are describing the same elephant. Yeah, and they apply different ways, of course, right, Some are doing it in the stock world, some are doing it sector rotation.

Some you're doing it a cross countries or even across commodities and bonds in a in a multi asset class portfolio. There's a lot of different ways to attack the problem. Um in different ones work, you know, better and worse. But we are were firm believers there. I'm Barry rid Helt. She' listening to Master's Business on Bloomberg Radio. My guest today is me being Fabor. He's a quant and chief investment officer of Cambria Investments. He's also the author of a

number of books. Will share some of the other ones later. What I want to talk about now, is the IVY portfolio, your analysis of some of the strategies the big uh endowments like Harvard and Yale put to work. If you look at back at the biggest endowments, so it's particularly Harvard Yale. They allocate their portfolio in a certain way and historically it's had a number of features. One, they have a true global focus, so they're not just investing

in the US. A lot of American investors and this actually happens in every country the home country book to bias. In the US, they invest se of their equity exposure to US stocks. It's huge beat a minimum or maximum it should be fifty as as a percent. So they have a global focus. They allocate to real assets, so

think about real estate and or commodity type of projects. Um. But but most of it is equity like assets, low amount of bonds with the long term time horizon, and so they do some weirder stuff to a lot of private vehicles like hedge funds and private equity, and so

there's some benefits to that allocation over time. It's a great allocation, but it can run into a lot of trouble as markets Gyrade in the short term, which we saw in two thousand and eight, two thousand nine, many of these endowments on paper at least lost half at some point brush they really got shut. So let's talk a little bit about numbers. As of the most recent data we accessed. Harvard thirty six point four billion dollar endowment.

Makes you wonder why anyone there even pays tuition, Yale twenty three point nine, Stanford one point four billion billion with a bat. These are enormous sums of money. What are these guys? You mentioned what they do? Right? Why did they run into so much trouble in O eight oh nine? It doesn't look like they've fully recovered. And here we are, jeez, it's seven years after that and they are whereas the US markets have gotten back to their pre O eight highs, and then some these guys

are still pretty much under water from that. Two problems. One is that we talk a lot about looking at history. Oh eight O nine was not really an environment we've seen in the US since really the thirties, right where everything kind of went down and a lot of people that had been investing. It's almost like a deflationary shock where the real assets went down, All the equities went down. The only thing that did well was bonds, which they

don't have much of. So that's one problem. Four kind of similar but more inflation area is opposed to right inflationary equity wise, almost the same fall over a long period of time. And the problem with having it's not problem, it's just a feature of having an equity heavy portfolio is that it's gonna get creamed. Right. So you go through these huge bearer markets and they say they have a time frame of you know, a hundred years or just forever, but they had a mismatch with their cash

and liquidity needs. Right, So they're supposed to be paying for these buildings and a lot of these endowments are generating something like a third or half of the budget for the school, right, so they run into these huge liquidity crunch. So it's a mismatch. And in the private equity and hedge funds aren't liquid for the most part, right, So it was kind of a perfect storm. You know.

We propose some ideas in the book of how people can replicate the endowments but also use things such as trend following to be able to move to cash during the long bear markets that we think we're great, but probably something that an endowment for various reasons can't or doesn't want to do um and they think you know that the biggest problem in eight o nine was the illiquidity.

You had a paper that came out before the financial crisis titled Quantitative Approach to Tactical Tactical Asset Allocation, which essentially said, hey, this isn't rock and science science. Just use a ten month ten month moving average and that's your warning sign to get aggressively defensive. We could could big endowments actually follow that with their liquid investments, They could easy, and they could do it with futures. They don't because it's a philosophical and mindset. But it's also

a big business career risk. Right. So if you're hedging and the hedging doesn't work, if you look at say since oh nine until about last year, a lot of the trend following programs really struggled. They've done great in the last year, right, But but it's it's a it takes a philosophical mindset to be able to look at it. I mean, the funny thing is, trendvolking is nothing new. It's been around over a hundred twenty years. Dow theory right was was people were talking about it in early

twenties entry. But it works, and it doesn't work for usually the reasons people think, and that it's some massive return generating engine. It usually it works by reducing volatility, reducing draw down. But that's really the number one rule of investing or trading. It's to live, to to trade another day, to survive, right to not engage in behavior

that either a destroys your capital um. The Bill Gross talked about, you know, the gamblers um risk that you can't completely destroy your your seed capital, and then of course you mentioned career risk and Paul Tutor Jones was listening to an interview with him where he said, if he had to use one indicator would be the two hunter day moving average, if you just had to look at one thing. And that's just a great example of

how you know. It's a very simple indicator, but it can help you be on the right side of the market and certainly to to survive. I'm Barry rich Helps. You're listening to Masters in Business on Bloomberg Radio. My guest today is Meba Burke. He's the c i O of Cambrian Investments. And before the break we talked a little bit about how the financial services industry is being disrupted. Let's let's discuss that a little bit. What do you

see as the big disruptors. So we started out managing hedge funds at our firm back in oh seven and individual accounts, and we eventually moved into launching our own e t F s. And one of the reasons why we think it's a great structure for the individual and look, Wall Street's been selling various products forever, right, but this is one of the best and cleanest that doesn't have a lot of the baggage of old mutual funds that

were sold to people, right. So a lot of the fees, the twelve B one fees, the various loads you know, aren't a part of the e t F structure. It's easy. Usually it's just a management fee. And so we started we thought it was a great way for people to be able to access the strategies, you know, we wanted to launch. Um. There's a lot of other great stuff

going on. The automated investing solutions being put out by Vanguard or Swab or firms like yours, you know, are wonderful way is to be able for individuals to invest with with having a rules based approach and not being able to left to their own devices of being able to do the really dumb stuff that costs them a lot of money. So you're seeing a lot of different great things going on, uh that we're pretty excited about.

We call that dumb stuff the behavior gap, and that shows up in all of the annual return data that shows how individuals radically under perform um even a simple sixty forty portfolio. They're not capable of keeping up with it. So you've cranked out a number of different ETFs. There are a few that are really interesting. Before we talk about the specific ETFs, let's talk about that process. What's it like creating and then getting an e t F

approved in trading? So I have a couple of criteria that we we use when we launch an e t F. It has to be something I want to put my own money into, so I have of my net worth invested in these funds. That obviously has to be different than what's out there already. So Vanguard State Street, these guys can do and have launched hundreds of funds that are great for a certain asset class just an exposure,

so we'll never copy cat that, right um. And it has to be something that people also want, right so there has to be a demand out there, and and and the biggest is it has to be something that we think works or is unique. So um, but the process you got you have to get SEC approval to be able to launch ETFs. I think this will change the company or no, across the board. You need to get an exemption to launch ETF and that tape. It took us about fourteen months, and it's it's expensive. That's

just getting allowing you to play in the sandbox. Right. That will change at some point. I don't care how long it takes now because now that we have it, it's more of a mote, right like SCC can just continue to have a buck log. I don't care. But it's a shame they'll they'll figure it out eventually so that people can launch funds. It's more similar to to mutual funds and so um. Once you have that permission, then you can get a fund out if it's fairly

plain vanilla, it's nothing crazy, triple leverage derivatives. And about three months so we've launched five. We have four more queued up that we'd like to get out. But we have a little bit different approach. You see, a lot of the E t F shops will do the shotgun. They'll throw everything against the wall, see what sticks, see what the market likes, and hopefully the people will chase returns. But but we like, I've watched the I've so let me jump in here. I've watched you launch ETFs. They

invariably start with a white paper. Well, you describe philosophically and quantitatively what you're hoping to accomplish. Then the fund comes out, and then you uh do a follow up papers. So let's talk about one as an example. And I happen to have your book shareholder Yield here, so so let's begin with that. Tell what shareholder yield is and how that morphed into an E t F share Older yields a concept that people have been writing about for

a long time, so it's it's nothing new. O'Shaughnessy mentioned his book He's Been He took the theory back to the twenties. But it basically says, look if companies can distribute their cash flow, which investors love, it makes no sense to just look at dividends or buy backs. Really, it's the holistic cross between the two. The investors care about is how much are you paying me? Because they're

exactly they're the exact same thing. If a company is trading an intrinsic value, explain that how our dividends, which is a check I get quarterly, the same as a share by back, which I don't notice in my monthly portfolio. Right, So you end up owning a larger percentage of the company. It just it reduces the share account. You have a higher percent equity ownership and earnings per share than then go up. So the stock appears cheaper at that point.

And so all the research has shown and what you what you find is there was a structural shift in the early eighties. Uh, there there were some tax law changes, there were some provisions that made it easier for companies to have safe harbor to buy back their own stock. So what you've seen since the eighties is each year more and more and that the kink was right around nineties seven where share buy backs constitute a higher percent payout than than dividends do. And so you have to

look at it historical. We think looking at either dividends alone or buy backs. It's the same mistake. You need to look at both. Apple is a great example, right where they have a two percent dividend yield, but hey, they also have this buy back yield. And one of the problems with dividend investing, and there's a lot is that for for one example, you could have a company paying a two or three percent dividend yield, but they're also you know, picking your pocket by issuing three or

four percent a year in new stock. A lot of tech companies do this, right, was notorious for this. The share account just crept up over the years, so that you're actually getting a negative yield if you think about correctly. So if you go back and back test it, that shows up the shareholder yield companies do much better, uh

than than either dividends or buy backs alone. So we we've been writing about this since oh six, and it was shocked that no one had launched a fund and said, look, I really want to be able to invest in this. It doesn't exist. There's some mutual funds, but they're twice as expensive as what we do. She said, let's let's launch a simple fund, and so we put that out

a couple of years ago. So let's let's mention it's the shareholder yield dt F is s y l D and then there's the foreign shareholder yield d t f F y l D. Does the math work the same for foreign companies as does for US? It works the same. There's not as much of a culture of buy backs yet in a lot of countries it's changing, right, more

of a dividend culture. So for example, if you're doing a shareholder yield portfolio here in the US, you may end up with on aggregate, let's call it a two percent dividend yield, but maybe a six percent buy back yield. So you're getting up around a high single digit yield, right, that's great. If you look at the SMP right now, you're you have maybe a two percent you a little lower now, but no net buy back, so it's a

six percent delta. That's amazing because there have been so many major you know, you see the big buybacks like the Apples and the Microsoft's and the Intel's, but you forget about everybody else's. And this is why the buy back indusseries and the shareholder yield have been creaming the dividend indusseries for the past couple of years is because the buy back yield amount is much higher than the

dividend yield amount. And one really quick point is that any factor, so it's called dividends or buy backs, goes in and out of favor. So if you remember back to late nineties, no one wanted dividend stocks, right, You couldn't sell someone one that was the best fattest pitch to invest in dividend stocks. Ever, so what's happened since then? Right, people have flooded into dividend stocks in the search for yield, and dividends work historically because they traded a discount of value,

discounted the overall market, but that varies. So in the highest it's ever been fifty percent discount of the overall market in two thousand seven, two thousand eight or its so maybe it's even more recent two thousand ten, two thousand eleven, dividends traded at a premium to the overall market, so you're getting these junkier companies, but now that are more expensive. And that's one of the reasons that if you look at any factor, sometimes it's great, sometimes it's terrible,

and aggregate, it works out. But that's why dividends have really struggled the past couple of years. They simply got too expensive. If you look at the largest dividen in e t F has a lower yield than the SMP. We're speaking with Med favor of Cambrian Investments about some of the e t f s. His firm has created what's the typical number of holdings in these domestic and overseas UH divon and yielding e t shareholder deal So

it's a hundred stocks in each. Yeah, And so like Cliff talked about in one of your your earlier podcasts, is that you know quantz love breadth diversification, right, but but it's a fine line between wanting to be concentrated enough to be different so to allow potential out performance over the market cap benchmark, but also diversified enough that you are getting um some diverstication across sectors and companies in any one company doing poorly, and I would imagine

this sort of e t F has been doing well and attracting assets that it's technically the largest active equity e t F out there. It's an active fund. May mean that's kind of like saying you're the best. You have the home run record for trip you know, single a baseball, right, But um, but it yeah, it's it's it's a clean, basic strategy that we think has a lot of appeals. Certainly certainly right now, how how often do the constituents change within the e t F? You

don't want a quarter? Oh so it's it's active, but not hyperactive. And let's talk about Um, you recently came out with an e t F that has no internal fee structure. But before we talk about that, what's the internal expenses on the domestic and overseas e t s? We we try to get most of them right around the average et F expense ratio, which is around point five nine the foreign or a little more for holding fees point six nine. But that's that's the highest you'll

ever see out of us. But now, how the people don't see that? It just comes out of the total return. But you produced a new globally TF that has no internal expense ratio. Tell us about that. You know, Look, we said, and I've been writing about this since oh six or seven, and said, look, I have no problem with buy and hold investing. We talked about it in the Ivy portfolio. It's a great way to invest if

that's how your emotional makeup is set. So we looked at fifteen at the best guru portfolios around the world and found that even though they're really different, shockingly the performance over the last forty years is pretty close to each other, mainly because they all had a little of each and so we wanted to say, look, we'll offer

the global portfolio but for zero percent management fee. We end up making a little because it owns some of our own at F, but the total expense ratio is it's the cheapest acid out case ETF out there is zero point two. That's that's amazing. We've been speaking with me being favor of Cambrian investments. If you enjoy this conversation, be sure to check out the rest of it. You can find that podcast on Bloomberg dot com or at

Apple iTunes. Be sure and check out my daily column on Bloomberg View dot com or follow me on Twitter at rid Halts. I'm Barry RIDH Halts. You're listening to Masters in Business on Bloomberg Radio. Welcome back to the show. This is the podcast portion of our interview where we let our hair down a little bit and have some fun with our guests before we continue on with our questions. I really have to, you know, let people know MEB and I know each other for um a good couple

of years. We've we've wreaked some havoc in some restaurants and bars. Uh in l a As and and not too long ago here in New York. Um. Somebody described our last outing as the Justice League of Finance. Who is you me? Um Patrick O'Shaughnessy of of oh Sam Josh Brown reform broker, Um, Mike Batnick irrelevant investor J C. Perette's of All Star Charts. That were about a dozen people out. I'm drown a blank on the guy's name from from Wisdom, Jeremy Schwartz, Jeremy really nice guy, really

interesting stuff. Morgan Houseel of Motley Fool and the Wall Street General was at with us. It was really a lot of fun and that ran h. I understand. People went out after I went home. People went out to dinner and stayed out pretty late, having a little bit of ongoing financial debate. If if I had known you were buying the Happy Hour, I probably would have had a few more beers than than I did. But but it's it's good that at least the comments weren't that

we were the supervillains of finance. That's right. And and by the way, the secret to picking up the tab at happy hour is just not to tell any then when the check comes it's actually fairly h fairly reasonable. So early on you described when you were doing um bio and biotech work that you were slowly attracted to finance.

How did that transition happen? What What was it about money and the management of money that made you say, well, biotech is fascinating, but really the asset management side is intriguing, you know. I mean, like many investors, I grew up chatting with my father and my mom about investing, and both had very different styles. Right you look at moms she said meb you just buy and hold and hold forever. And in retrospect, looking back now, I said, well, of

course that makes sense. You're investing career was mostly in the eighties and nineties, right, it made sense to just buy and hold and forget it. If she was a housewife in Japan, and she probably wouldn't have had that same philosophy, not at all. And so you know, so she uh, and not to mention her father worked at R. J. Reynolds, one of the best performing stocks of our generation. And my father was an aerospace guy, so his was a little more specific. He tried to do domain knowledge in

the areas he knew about. But but like I mentioned earlier, had many of the same um but different behavioral biases. He would never sell so often, for example, things would you know, watch it go all the way? So had a culture of learning about investing growing up and then started to do it on your own. And the lesson that many traders learn at some point and hopefully early when they don't have much money is blowing up at some point, you know, losing all your money. And that's

a very painful but beneficial process. And as we see this year six seven bullmarket coming and there's so many people out there who have never lived through one. You know, the pain of losing money is very real. It's it's a very physical pain, especially um when you have a big loss thirty fifty um. But until you live through it, it's hard to describe that as someone the line I began on a trading desk, and the thing that I

used to hear all the time was about new traders. Oh, the worst thing that can happen to him as he makes money, Suddenly you think it's easy. And I started in the mid nineties, and if you want putting up fifty year numbers, you were a bump and people thought that was normal. When you ask people what are you looking for next year? I'm looking to double my money. Really, what are the odds that you're going to do that well? And people we talked about this in one of our

first papers. They use a different part of the brain when they're making money and losing money. You're making money, you're thinking about your vacations, how smart you are, can't wait to tell your friends you're checking your balance ten times a day on online. When you're losing money, you don't open your account statements in the mail, You're so angry at your neighbor broker for recommending that app company.

You know you It's it's the flight response, right, So it's a totally different It's emotional, so so is the making money, but it's more of the neo cortex. The limbic system is the law system, which is I think you gave a speech to uh A Google Talk. Is that right? And you talk about a lot of the same um behavioral economics and neurofinance stuff I to talk about what kept you alive on the savannah doesn't help you in in identifying risk and managing losses at all.

If anything, it sends you running in the wrong direction. And it creates opportunities. Of course, it makes markets that you know, create bubbles, which I love from a from a standpoint of an asset manager. You did a white paper on bubbles. What was the title of that, Learning to Love Investment Bubbles, which was which is actually a fun white paper a phrase that's not spoken off and the subtitle what if Sir Isaac Newton would was a

trend follower. But what you find in bubbles across history is that they've been happening forever, and we go back a couple hundred years and you find them in various places. You know, the past decade has created the vernacular bubble. Everyone talks about bubbles now, bubble bubbles. They're pretty rare, right, you know, we had talked a lot about bitcoin, for example recently being having a lot of bubble type of behavior, specular behavior. But one of the things if you apply

trend following methodology and look at them historically. It's great because it has an exit that allows you to hopefully live to play another day, right, instead of the psychological and real pain of losing in a in a draw down in a bubble. But what you find is that as people lose money when they're below the trend, volatility is so much higher, right, So volatility explodes to the both up and downside. So all of the best and worst days occur, not all, but two thirds occur after

markets have already been declining. And that's simply because they're more volatile. So if you can avoid those periods by having a trend falling approach, it makes life a lot easier. And and here's a little bit of an anecdotal data point that I'd love to do some deep research on. I can't help but notice that when entire sectors fall about eight or so, that's a pretty attractive entry point.

You look at the NASDAC dot com bubble fell, you look at the real estate bubble, the public trade it stocks dropped about that much, and then you look at the banks in that space. I'm not suggesting you try and catch anyone falling knife. But buying a whole sector that's down, just so long as it's not your leather belt and steam sector um isn't a bad entry point. So we've actually run some studies on that, and the empirical data shows that an actual ad yes it usually

is a pretty great idea. The challenge, of course, you can't do this with an individual stock because they can go to zero, right, But because we've seen old too many times, if you buy a big enough basket of whether it's a sector or a country in general, yes, it's a great time to be buying it, the further it goes down. But there's you go back to the old famous investing joke, what do you call something down? That's something that was down then went down another fift

in half, So you can. And the reason we talk a lot about this is because the drawdowns often correlate very highly with value. Value is nothing more in most cases than something that's just already gone down fIF So if you look at the way the world exists today, there's a lot of countries out there that are cheap, but they're cheap like Greece or Russia or you know, getting cheaper and get so one there's a lot of

risk because they can get cheaper. But to uh, they're simply cheap because the P and the pe right, it's not the earnings that's changing, it's the price, and so they've already declined fifties. But that's what generates a lot of opportunity. That's that's really interesting when you look around

the world. Let's talk a little bit about valuation um because by many measures, stocks in the US if it depending on what you want to use as a as a valuation tool, you could cherry pick valuations that say stocks are cheap. You can certainly charity pick valuations that say stocks are expensive. Merrill Lynch puts out a whole spectrum of valuation analysis, and it's hard to look at that and not say stocks at best aren't fully valued

in the US. Here's the challenge with the Meryoral Report, and I've seen that is that you have to have a consistent start period that's long enough for enough history.

None of them are more than twenty years. And in the Meryal Report compares many certain indicators which i haven't existed for a long time, so it ticket for you know, grain of salt, but some haven't have only existed since two thousand or nineteen ninety, well, the majority of that period has been been very bubblicious, right, So it's like an example, if you're only looking at Japan from nineteen seventy to nineteen ninety or two thousand, well, almost entire

period was the biggest bubble we've ever seen. So if you take any value in and value indicators their blunt tools, right, in general, you want them to line up on the same side. So usually they say the same thing. It doesn't matter if you use Schiller's ten year pe ratio so CAPE, or whether you use you know, market cap to GDP or Tobin's Q. We tweeted out a stat the other day that the median stock and the SMP five hundred back to nineteen sixty is the highest price

of sales ratio it's ever been. It's like two point one, right, the average over time is point nine. So in my belief is that I think U S docks are expensive. I don't think it's a raging bubble. But being a quant the boring thing to say is that, well, it just means future returns are going to be lower. Expected returns are going to be below average expect you we look at it like low single digits. I don't think they're negative yet. And with the point they go negative,

that's what I start to call bubble. But that's really for Cape. For example, I love, I love, I have to interrupt you. I love cliff Assness is definition of a bubble, which I'm going to paraphrase, which is, there is no reasonable or reasonably foreseeable course of events that generate a positive return from these price levels. And the key is reasonable. And that's great because if you look at history, let's say historical CAPE ratio seventeen to twenty,

it's been as high as forty five. In the US, it's been as low as five. So you can make the case that, hey, look, stocks could easily double from here, and the only reason is because that's what people are willing to pay. Who knows Elon Musk could invent cold fusion? You know, I make lots of things like what could happen? Who knows? To be quiet? So you know, But in Japan they hit a ratio of almost a hundred. But that's it's simply one hundred. The CAPE ratio of the

highest we've ever seen. Rights amazing and there's a reason that there's been lost decades. People are always saying, no, it's because they're not competitive, or that you know, the demographics were bad. Well, yes, it was all true, But it's because they're working off the largest bubble we've ever seen, which the bigger it is, the longer it takes takes bubbles all. What all that bubbles do is they pull

forward future years and decades of returns. So after the bubble collapses, hey, you've already gotten the past ten years of games. You just have to get through that before you're even starting to unline. So in the US it took from the bubble, it took two o eight to get back to even so eight years, but Japan took, you know, decades, right, And the irony is they finally got to a cheap valuation a couple of years ago. And what happened they were the best performing at creating

market in the world. Right. So, but but here's my whole takeaway. So that's the bad news. The US is expensive, um, but the good news is most of the world is cheap, and Europe fairly cheap, and much of the world is incredibly cheap. So so even just buying emerging or developed markets. You're getting evaluation ratio of around fifteen US is seven, right, so and half the world by market caps foreign of the world by GDP is foreign. So at a minimum

you should have fifty and form. But if you want to get really interesting, you know, we go and buy the cheapest eleven countries in the world, but you're buying the junkiest of the junk. You're buying Russia, Brazil and then almost all of Europe, right, you know, Poland, Czech Republic, Yeah, Greece, Italy, Spain, and at some point with valuations, cheap gets too cheap. But but here's the funny thing is that the geopolitics and the news flow is always terrible. And but the

name's change. And if you go back a few years, you know Norway was going through a banking crisis late nineties, yeah, right, so late nineties it was um the Asian countries and early eighties was the US. So the name has kind of come in and out of favor. It's a tough strategy for me Emotionally, I'm not built to be a great deep value guy, so I allocate to it knowing that hey, this only rebounce is once a year, right,

you could even rebalance it once every two years. Because these deep value strategies like the one you mentioned earlier about stuff that's down, those are usually great buying opportunities, but you gotta give him time to work. You know,

it's funny you mentioned the rebalancing. We've done a lot of work on that and shifted from a more frequent rebalancing to a less frequent because we found that the rebalancing clearly generates net positive returns over time, but the tax implications and the costs of rebalancing aren't worth to do it as as there are people rebalance flee quarterly. We looked at a number of different things and pretty much came up randomly rebalancing once a year based on either a fixed time in the year or win a

specific account was opened and money was deployed. Seems to be the most efficient effective way we We've always said, and it matters even less the more assets you have that that don't correlate, but say a great global portfolio, we always say, look, you should rebalance. It's important. But at some point you can even rebalance every three or five years and it's not going to make much of a difference. One year is great because it gives you one of the better tax treatment for long term holdings.

But also it's nice to have sort of a one year review. Right, So hey, we can go do this, but you can do it based on tolerance bans. We always tell people if it's in a taxable account, hey, rebalance into you get some money or a bonus or salary, put it into the stuff that's down the most. You gotta take money out for a house, take it out of what's appreciated the most. But yeah, it doesn't matter that much as long as you do it at some point makes a lot of sense. You know you mentioned

the news flow. Um, I'm pretty sure you know who Las Law Borrini is. His firm puts together a book every quarter of all the major media stories about markets, stocks, major news items, the economy, and when you read them with the benefit of hindsight, they're utterly hilarious. You go through the screaming headlines, these front page stories, and you could see in hindsight how people make bad emotional decisions. They what looks like the most important thing ever turns

out to be an irrelevant blip three months later. Well, it's hard because when you look back at some of the academic studies where they sort countries into you know, trailing GDP, and ironically, you want the countries that have the worst GDP trailing. So you're investing in stuff that looks the most miserable but has already become the most inexpensive. So you know, same thing, you want the ones with the worst currency returns, and and those are things you don't.

I mean, it's hard to invest in things that are doing terrible. It's much easier to invest in the company you know that's beating earnings and that's that's doing one feels much better, right, But it's it's harder to do. And you know, I give these talks where I say, look,

you know the biggest problem. You listen to this and then want to go by Russia or Greece while Russia's invading the Ukraine, while Greece is talking about leaving the Euro everything that's going on, um, and then you go tell your husband or wife or your client, Hey, I got this great idea. This is what we're gonna do. Massive career risk, right because if it goes down, you know,

and they do worse, you're gonna get fired. If they do a little bit better, okay, great, but it's it's it's a challenging and one of the reasons it works. If you look at Russia, one of the best performing equity markets in the world, that you're now that they were probably the worst last year. But it's it's tough. It's always tough to be you know. One of our favorite Um Templeton quotes was always that he said, don't tell me where things look the best. Tell me where

things that's the wrong question. Tell me where things look the most miserable. Well that's I call that the earth factor. And I tell stories about Apple. In the early two thousands, I got my hands on one of the I apologized to listeners. They've heard the story before. I was a Mac fan boy for many years. I got invited to an Apple event where they were rolling out This is

before Apple events were events. They're rolling out this new fangled iPod and I missed it, and so I contact somebody I knew it Apple, and I get an obnoxious email back from the PR department. We're not giving any press iPod reviews. A I'm not a member of the press, or certainly wasn't at the time and be I just want to know where I could go see this, and they write me back, you could go to the Apple store. There's one in Albany. That's how long ago. This was.

The closest Apple store was three hours away from New York City. So I knew people there and I responded to them and beat a bunch of people I knew. Hey, listen, I want to review the product. I'll mail it back to you. Just get me one. And the next day of fed xbox arrived and I had it, and at the time pre not counting splits, and there have been two for one and seven for one. At the time it was fifteen dollars with thirteen cash. Hey, this is the new Sony Waffman for the next generation. I remember

saying this to people, you're risking two dollars. They have thirteen cash. It's fifteen bucks or really about two dollars, you know, or dollar with after pre split. And the response universally was the same response you get about I want to put money into Russia. I want to put money into Greece. Uh, And I catch myself doing it. Someone said to me not too long ago, hey, you should buy some Dell down here it's cheap. And my response was, oh, wait, usually is a good thing. Let

me take a look at it. And apples interesting because, um, you almost have the opposite scenario now, and it's maybe not the best example because it's still cheap, and it's because it's because it's cheap and a ton of cash and it's distributing it. So the full disclosure, you know, we own it. But however, you look at the historical studies.

You had Rob on the show where his firm says, look, the biggest company in the SMP five hundred underperforms that index for the next ten years by about three percent a year. Same thing happens in sectors, and that's just capitalism, right, although that hasn't been true the past two years since it became the biggest, right. So you know, Apple is now up to four percent of the SMP five hundred, and usually that's been a graveyard for other companies once

they hit that four percent mark, because what happens. You know, there's companies and ages that you know, what, we're gonna make phones too and come off, and that's what they're doing here and and so historically, but it's just creative destruction. Right, it's capitalism and that's the beauty of it. But but it's funny because if you look at Apple right now, it's the exact flip side of when you saw it. So right, it's it's there's no reasons almost not to

invest in Apple, right. It's they're coming out the world changing products I own. I'm looking at my iPhone I own, you know, probably half a dozen different Apple things. Um, but it's it's much or you know, maybe probably you know. I'm a gadget NERD so I'm an early adopter, but I'm I'm not a huge watch guy. So the thought of having to charge it every day, um, I'll end up losing it. So if I do, I'll get the whatever the cheapest version is. See I I've learned to

get the second generation everything. Um, to say the least. But I had worked with a technician many years ago who used to say to me, beware of three things. Be aware of a stock that's had an enormous run, that has huge institutional ownership, and has tremendous analysts strong by coverage, and that probably is described Apple for for

quite some time. The question is they disrupted music, they disrupted the computer space with tablets, they disrupted the phone space with the iPhone, They've disrupted a number of industries. Will the watch be disruptive for where bulls and everything else?

Or is it going to be really a peripheral product that isn't Look, you know, the phone itself is bigger than the SMPI companies, just the revenue for the iPhone, and people talk about the iPad as it's fading, it's not selling as strong as it's a twenty seven billion dollar product. How many companies generate twenty seven billion a year in sales even like their weakest product is a monster. Can they continue doing it? Is really the key question.

And there's a great chart that shows that if you just buy the biggest company in the SMP versus the SMP you know, back to the seventies that Nett Davis puts it out and it's a massive underperformance. But you know, it's had all the names walmartsof Exon over time, and it's usually been a terrible thing to do, but but not always. Did Cisco ever make its biggest in I remember when we were talking about Cisco. This is in

the late nineties, the first trillion dollar company. Well, It's funny because if you look at the composition of markets, you know, the late nineties bear market, or so early two thousands bearer market, it was a very different bear market than the two thousand and eight two thousand nine because it was a very concentrated market cap bubble in

the most expensive tech names. Right, so if you had the average stock or even dividend stocks, many didn't even have a bear market two thousand, two thousand three, But market cap waited, so the SMP did because that had so much And this is one of the problems in market cap waiting. Why it's so, I mean, it's a great first you know, invention, but it's not the best way to wait an index, and so you could wait it by almost anything else and you end up with

a better portfolio. So that that's really that's really robbed. Are not philosophy. I'm gonna do this by memory, so I'm sure these numbers are wrong. Two thousand, we saw the NASTAC full just under I want to say seven. The SMP five hundred, which had a lot in the Nastack stocks ended up dropping about thirty five, and I think the DOW was about But that's just by memory, there was a huge gap between the broad market and the sectors that was tech, telecom, um and and online.

But let's talk a little bit about what you just mentioned in terms of waiting portfolios not by the size of the market cap, but by some other fundamental factor. What are not does it? Raffie is come up with a variety of different ways to wait a portfolio. And for those of you who haven't listened to the are Not podcast, take a look at four inches below this one. You should absolutely um download that and listen to it.

He talks about using factors like earnings, like sales growth, like book value, and putting them into the context of what is the footprint of this company within the broad economy. And he had a great paper that not only said if you take these metrics that are not cap but sales divin and yield revenue growth go down the whole whole run of this profitability. Not only is that a better way to create an index than a than a market cap, but the inverse of those turn out to

be better than market cap. Well, that's the thing, is almost anything other than market cap works fine? Right, So there was the joke someone made. It may be Robert can't remembers it like you could sort it by the CEOs that wear ties or bow ties, and that will

I'll perform the SMP. So anything equal waiting. You know, obviously we like shareholder yield, But any way you wait, it will beat the SMP by let's call it one or two percent historically because you're not overweighting the expensive stuff. And so at the end of that cycle, at the end of the run. By the way Patrick O'Shaughnessy put a portfolio together, he said, only picked companies that begin

with the letter C, and it beats market cap. And you can actually pick any letter and it still beats marketing. And this is a there's a great example of US right now, not in the US, because what's happened in the US is the spread evaluations have condensed. So small caps last year got to one of the most expensive they've ever been relative to large caps. But that's come in they had a terrible year last year relative to

large cap, so that spread is narrowed. But you've had the all of the US market get more expensive, so it doesn't have the huge range like but what you do have you look at the global market cap portfolio, the largest chunk is the US at half. Well, what's one of the most expensive. It's the US. So it's the same sort of phenomenon, but now on a global stage. So art thesis is you could wait the global portfolio by anything as long as you're moving away from the US,

and it will likely outperform in the coming years. Um. But it doesn't even matter how But so that's the problem with market cap by definition is what's getting more expensive because the price is going up, is going to be the biggest chunk of that of that portfolio you mentioned. UM career risk, we run a broad asset allocation that's global in nature. And every year for the past three years, the conversation goes something like like this, So here's our

our portfolio, and here's how it's done. It's done pretty well versus its benchmark. It's a pretty typical seventy portfolio. Uh, what's done really well has been the U S stocks and oh, look at the bonds. They've done really well. Corporates have done well, Treasures have done well. Now let's talk a little bit about our emerging market holdings and

our develop nation holdings. They continue to lag and it's an annual conversation, and it always ends with, Look, all we can do is rely on history, and history says over time they're gonna reverse. But how long can we continue to have this conversation with clients before they go that's in I'm all in on the SP five. I don't want to own anything else. That'll probably be right.

And there's that classic chart where the periodic table and investing returns right where each year you show how everything bounces around. But right there in the middle is is the aust allocation portfolio. Never the best, never the worst, but kind of right there in the middle. And kind of like we mentioned before, it doesn't even matter how much of the dials. I mean, when we looked at these in our new book, fifteen different portfolio is based

on the most famous investors. And if you exclude permanent portfolio because that's got a lot, it's got twenty percent cash allocation, so it's lower volatility, right. So but if you look at the other fifteen it's you know, portfolios by dahlio By are not all these recommendations over the years, Mark faber Um, they cluster, They're all within about a percent and a half of each other. Right. So they

now some do much better in various mark environments. So the ones that had a huge allocation to inflationary type of assets real assets in the seventies, So like Mark Faber in gold, that's gonna do much better in the seventies, but much worse in the eighties and nineties. Right, So they typically balance the two thousands and terrible this decade.

So they typically balance out over time. Because but that's the point of an asset ation is you want asset classes that balance each other out in any market environment. So whether we have deflation, inflation, disinflation, growth recessions going forward, you want something that that the mix will balance that out. And it shockingly doesn't matter that much what the percentages are um of the allocation, but rather that you stick

to it, don't pay huge amounts of fees. Those are the two big ones you talk about that periodic table of asset classes. Howard Mark says something really fascinating about not trying to be in the top ten percent or

even top two. He said his goal is to be in the top forty on paraphrasing, somewhere in the top and if you do that consistently over time, you end up in the top decile, because the guys who are top decile any given year are usually shooting the lights out, and that means the year before and the year after they're getting shell act because often they're exp opposed to either some sort of factor or some sort of style that will have those years of runs or or bad

good performance and bad. I mean, if you look at the dollar weighted returns of mutual funds versus the time weighted by morning Star, and they show this every year where because people chase the performance of the good funds and then they get out after they do very poorly,

they always lag the actual returns of the managers. I think the best performing manager in the nineties was maybe Ken Heabner's fund c GM, right, and so, but if you look at the dollar weighted returns when people came in, they came in after he had, you know, a sixty seventy percent year run. Then he has a sixty seventy draw down. Everyone pukes it back up, they get out of it, and the up is at a hundred million

and the down is a two billion. And so if you look at over the whole period, yeah, he actually had great returns. One of the better managers. But if you look at the returns of the investors, it's horrific, right, because they came in at the wrong points. But but that's the challenge, right, One of the lessons will oft until investors say, look, all right, I want you to look back in the last three and five years pick the worst performing asset classes. That's probably where we want

to be tilting. Think about how bad that feels, like, oh my god. The last thing I want to be investing in is commodities and emerging markets right now. But historically that's been one of the better places to be. But that's why it's so hard, right, No one wants to invest in the manager that's that's really or the style or the asset class that's really struggling. You much rather be investing in things that are hitting all new time highs. You know, I was at a conference at

the Kennedy School. It was the Houser Institute for Responsible Investing, And I apologize to whoever I'm stealing this from, maybe with Simon lack Um who wrote a book called the Hedge Fund Mirage, but he talked about or whoever this person was talked about dollar weighted returns versus um the annual raided returns. And I think the person he used as an example was the John Paulson Fund. Now Paulson is famous for a phenomenal bet during the financial crisis

against mortgages that netted him five billion dollars personally. But when he began that process, he was a relatively small firm. By the time he came out of the financial crisis, um he was a pretty decent sized firm, and a few years later he was like a thirty five or forty five billion dollar firm. And at that point, at forty five billion dollars, he loses one of his funds loses thirty percent, which is more than he made um previously. So when you look at it on a dollar weighted average,

it's a debacle. When you look at it at a return weighted average, oh well, this was just a bad year. And this is you know, goes to show that institutions are no better than individuals when it comes to emotions and and who they allocate to often in their process for it. You know, hedge funds in general have the biggest problem being they charge a lot the two and twenty fees that that's a heavy, heavy bogey to overcome so many of the hedge fund what's beautiful about where

we're investing now? Many of the hedge fund style strategies you can now allocate to an e t F form or mutual mutual fund form. You know, one of my all time favorite strategies, you know, managed futures trend following type of strategy. UH. I think if you were to put together for portfolio most people, that's the biggest part that's missing, is a trend following or managed future style allocation.

But the problem is most of those guys charge so much, right, So if you can get that allocation at all, at all lower cost, I think it's a beautiful, beautiful UM active strategy that has worked great. His story. How does someone get exposure to that via an e t F? UM? When when is your ETF for that coming out? Well, we may file from one, not because I want to UM, because there's there's no better choices currently. UM. You know, there's a couple of e t f s out there.

They're all based on the same index, and the index is really suboptimal. For example, it doesn't short energy. So let's think about that for a minute. It's long short everything but except for energy, because when they is that, that's kind of crazy. I'll tell you why. It's the number one classic mistake that quantum back testers should make, which is fitting it to the period. So when the index came out, oil is it what fifty right? So

it's only gone one direction. So they said we're not going to short oil because of geopolitics, Well, of course, what happens Oil is now down to fifty right, you know, two thirds drop and so managed future is the whole point is that it's a strategy that will help protect you in various market environments, inflation or deflation. It's done great for the past year, now horrible three or four years before that. One of the few asset classes that

really outperforms during big bear markets, like a OAIT. So the E t f s are not ideal. There's some mutual funds that do it. Um there's a couple of good options, but it's still they're on the expensive side. A q R and PIMCO both have fun out there that that we think are are probably pretty good ideas. But but in general, this trend following approach, we think there's a lot of merit either whether you do it on your own or allocate to a trend style fun.

So let me ask you the last few couple of questions that I have before we uh have to send you back to California. UM, who are some of your favorite quants? Who do you who do you read? Who do you like? Who do you admire their approach to investing? UM? A lot of the ones we were probably a happy hour with last night or you've had on this show. One of my all time favorite quotes that I put I tweeted about this the other day was actually from a U one of the most famous quants of all time.

You know, Jim Simons, professor Stony brook you know, mathematical genius runs Renaissance technologies, right breaker, and he's a he's an older fellow. Actually ran across him randomly on a hike in the woods in the island. I was at a wedding. UM it was near Stony Brooks, and you know, I I nudge my girlfriend, I said, I can't believe we saw She's who's that? You know, who's that older guy? And I said, you know, Jim Simon. She's like, who's that? Right? And I was like, She's like go talk to him

like one of the world. Am I gonna talk to him about in the woods? But but he has a quote in this speech that has permeated a lot of my life and thinking about investing where at you know, near the end of the speech, someone says, hey, you know,

I want some advice. Do you think and I think they were talking about mathematics, But do you think I should study math in a very specific niche so focus intensely laser like in this one area, or should I study a much broader perspective to be able to come up with, you know, a more of a ten thousand foot view and be able to apply to any sort of discipline? He says, you know what, I can make the cliche either way, so meaning like I could show that either case would work out, you know, good or bad.

And so often when talking about people where people were giving advice or thinking about investing, you know, I often go back to this and say, hey, look, I can make this example work out almost either the way. It's neither are certain. All can do has come up with, you know, tilt towards expected realities and bets that are on your side. So in that same vein you know Ed Thorpe classic the Dealer, the dealer beat the market. You know, one of the true um one of the

most amazing fun performances for many years. Princeton Newport his fund. And you know a true quant I mean it's convertible, are but I think so a lot of those classic old school guys. And then there's a lot of people that you know are quant like but you wouldn't necessarily think about as quants. So, um, those are those are a lot of good ones. So for people who don't know who Jim Simons is, um, he's now sort of retired. He was the code breaker in World War Two, sort

of the American version of Alan turing Um. He was the chairman of the mathematics department at stony Brook And had you met him, I was applied mathematics and physics undergrad at stony Brook. He is the outgoing math chairman, as I was the incoming student. And if you met him, you wouldn't want to give him a dime. You would say scraggy bear, chain smoking, you would you would last

personal world you would give money to. By most measures, the most successful hedge fund of all time was the Medallion Fund of renaissance so successful that after a number of years they said to their outside investors, here, take your money back. We don't have enough space for you. It's just gonna be our money. And and that was after a four and forty fee four percent a year

management fee performance, right, and they still outperformed everybody. And he had actually a great quote early in his career where he said something to the effect of, you know, I started you hear some crazy quotes where people are like, I've never met a rich technician or essentially in my mind, a rich quant right, which is which is kind of insane. It's insane because he says, look, I used to trade on you know, fundamentals. It gave me ulcers and we

eventually you know, quantified everything. And that was that. But but you know, it goes to show, look, if you have an edge, it's it's you can you know, print money and whatever that edge. Maybe go down the list of quants. John Henry rob are not cliff ass nous. These guys are all uber successful billionaires or near billionaires, and their funds and their investors have done exceedingly well.

The hard part, it's easy to look back after forty years and say, hey, Renaissance was great, but you go back to who's going to give money to this guy? It is so much harder to pick the emerging managers than people realize. Hindsight is in the beginning. It's an emotional thing. And you know, quants aren't necessarily the most expressive articulate people. They tend to be math people in that language. But I think both are not and as a really exceptions that they're both unusually arctic of lit

and have a way with words. I'm both of them right fairly regularly, and they're both really really good writers. Most most of us are all just a bunch of nerds. And I can say that because I was an engineer.

I can say that because I'm a quant But yeah, but I agree that the challenge by far the biggest in quant is is trying to get come up with something long term capital classic example, right like a bunch of Nobel Laurets, but overfitting their system, over starting to believe too much in their own um you know abilities, where the employees there were taking out loans to then invest in the company at whatever the leverage one one what what could really go wrong at a hundred to

one investing in in obscure paper issued by Russian oligarch's it's almost did that possibly blow almost always if you look back at a lot of the and there they weren't frauds, they were just over leverage. But problems in financial and investing it it leveraged somehow and high fees that are almost always permeate permeate the problem. So yeah, it's stay away, stay away hundred one um to say the least. Next question, what don't people understand about bonds

and fixed income that you think they need to know? Um, what you've heard over the last five years certainly is there's a lot of misinformation. People are always saying bonds are in a bubble. And one of your pals, Rosenberg, I remember hearing. I was at a breakfast and he's like, you know, it's David Rosenberg, former chief economist in Maryland.

He Um. He had a great quote where he said something extent of Hey, it's really hard for me to believe in a bubble when every it's universally despised, when everyone hates this asset class. Right, bubble usually involves people clamoring hand over fist to invest in something so so so bonds. It's it's a challenging asset class. You know, we think it's a uh we look historical when we have what's called a five to one rule. So this is net of inflation ten dollusand foot view. That's how

much stocks bonds in short term. You know, bills have earned over history across all the money five percent on global stocks. You know, the US was higher, of course, but it was one of the best performing markets of the twentieth century. Bonds, it's really like one and a half.

But I'm rounding and then bills maybe you know you'll break even or get you know, half a percent term papers, but and and people so when they're thinking about currencies and bonds and what happens, I mean, one of the biggest misinformation is also on the other side, bonds have declined by fifty in the US on a real basis though, so their losses are more the slow bleed of inflation rather than the equities, which is usually a very sharp

long price move of you know, one to three years. Bonds, you have to look at real returns, not nominal return and what we call that in our new book is returns you can eat. But that's really all that matters because it's it's inflation inflation adjusted, I mean inflation returns are are just it's meaningless, right, So, um, So looking at bonds from that standpoint, you know they've had is as big boss is almost as an equities UK bonds of declient on a real basis. However, usually they kind

of zig and zag against a stock portfolio. It's not always the case. It's the correlation changes, you know, depending on where interest rates are. But um, it's a big part of a um of a good asset allocation portfolio, and not just US bonds. We think forn it's it's surprised a lot of people, but the world's largest asset class is non US bonds, right, so the biggest asset cause there's other foreign country bonds, and so we think

it's it's an important part of an allocation. It's just it's hard to get really excited about them in a world where I mean, look at Europe, I mean half a percent and negative you have actually negative yields in a lot of the Swiss and German bonds over the past month. I've been here. I'll give you this money,

give me most of it back. When you're done. And so we've looked at sovereign bonds going back historically, and if you actually sort them based on yield, so the top maybe twenty or actually do quite a bit better than the broad universe. Now it ends up being a little more volatile. Draw downs are comparable or even a little worse. But you end up adding some you know, two percent a year by investing in the high yield.

The problem is, of course, it's the same thing with the problem the cheap country equity markets we're talking about earlier, is you end up in you know, really weird places that are. But you can end up with a seven percent yield, eight percent yield right now, but you're gonna have to close your eyes and hold your nose and go by you know, Brazilian Pakistani type of bonds that are that are yielding a little more. So let me

ask you now come to my last question. Tell us what you know today that you wish you knew ten or twenty years ago, that you wish you knew when

you started out in the business. Well, this is always an interesting question and it applies personally too, as you look back at the times of say hardship, right, So I said, man, I really would love to have not bought that option and straddle on a biotech stock, you know, waiting for phase to approval, and then lost all my money when it happened, but you know, then went right back to the strike price. Like I would love to

have not lost all that money. But however, how much of the drive and interest and nights spent reading books to learn was driven by that pain, right, So part of the journey, part of the journey. And so I always look back and say, you know, I value the difficulties. I value the good and the bad times because they're learning expenses, and wouldn't want to you know, probably color it any other way. There's a lot of lessons that I'm glad to have learned. That's a big one, such

as what what lessons other than avoiding butterfly straddle? The pain of the pain of losing is certainly one. Not putting all your eggs in one basket and risking everything. That's a huge one. To be able to play another day, uh not? You know, um, people often the overconfidence and understanding your own biases. You know, we every time I give a speech, now we'll talk about you know, around and sign a piece of paper. How much do you

have in US stocks? Every single one in the past fifteen times it's around and that's home country by so, and you could go to any country in the world, even like the UK. Who's it's one thing where the US is fifty of global market gap, but the UK is something like six or five percent, and it's the same because it's what's comfortable. You know. I'm a Denver Broncos fan. I grew up Colorado, so I was in North Carolina, but I was always you know, you invest

in your home team, your cheer for him. So that's the reason most Italians are investing in Italian stocks. Most AUSSI is the same thing. But that can be a very insidious problem when you have a massive bear market in that country. Look at Greece, right or look at Greece as a Greek investor. It's painful, right so, But but most important, and this is challenging for people because

they don't always know ahead of time. They take the risk surveys, they say, this is what I think my risk tolerances, and then what's the famous quote the Mike Tyson, Right, you you have a plan until everybody has a plan. It's they get punched in the face, right and so but but that's a lesson. It's hard to teach someone and it's hard to give the expectations. So but that's when you learn and and and it's a part of the maturation process of becoming an investor is learning what's comfortable.

I mean, I'm a trend fall at heart. Half of my portfolio is in tactical strategies, right because I know that that's the way that it's easier for me to sleep at night. And that's always the biggest takeaway. I

sleep great. But it uh, it's saying, you know what, what can you go to bed with each night and not have to worry and not worry about it and move on to the you know, we talked so much on these you know, interviews and everything about how to make money, how to invest, But there's the flip side too,

and it's what how do you use that money? You know, how do you spend it in such a way that you know drives your happiness and and um, you know your goals in life and what you do with it, and a lot of people that is as emotionally challenging as well. Mab thank you so much for spending so much time with us. Uh, give us a list of how people can find you, follow you on Twitter, see your research, give us your rundown of of websites and

and Twitter handles. We'll tell you what. If there's listeners that have made it all the way through this entire podcast, email me, I'll shoot you a free book or to go to free book dot meb favorite dot com and I'll send you your choice. Uh, that's my blog web Favorite dot com over articles on their um plenty of plenty of work to put you to sleep at night. It lists are white papers. There's about a half dozen

we got. Our fourth book just came out. And then book is Global Asset Allocation, a survey of the world's that's the third one. I know I got the third one in the second one, I don't have the fourth one. Give me the full title of that. Global Asset Allocation is Survey of the world's top investing strategies. And your Twitter handle meb favor And then for work you can go to Cambria Funds. That's got fact sheets on all the all the funds we run. And what about idea farm?

Is that the idea farm. Yeah, that's that's geared towards the professionals. But we send out kind of curated the top two or three research pieces we come across each week, and it's it's geared a little more towards you know what I find interesting. But what's the u r L for that? The idea of farm dot com. The idea farm dot com. We have been speaking. Thank you so much.

This was great. This was really a lot of fun. Um. We've been speaking with me Bane Favor, meb Favor of Cambrian Investments, author of Shareholder Yield and Global Value and the IVY Portfolio, and the new one is Global Asset Global Asset Allocation. If you enjoy these podcasts, and you at this point ninety minutes in you probably do, I would tell you look an incha above or below this and you'll see the other thirty nine or so podcasts

that we've um done so far. They they're always with fascinating, interesting people like Meb. And if you're looking for an education, um, you could do a lot worse than listening to some of these. I have to give thanks to my producer Charlie Vohmer, to my engineer Matt Ryan, and to my head of research, Matt Baton Michael bat Nick for helping me put this together. I'm Barry rid Helts. You've been listening to Masters in Business on Bloomberg Radio.