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Hello and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway and I'm Joe Wisenthal.
Joe, do you.
Ever feel like the investment gods are punishing you?
Oh? My god. I think about this all the time. Like, you know, when I first started investing my money, I'm like, I'm going to be a very prudent diversifier, and I'm going to buy some bond funds.
Some hard assets, some star funds.
I'm going to invest internationally. I'm going to invest a little bit in emerging markets. I'm going to buy some ETF so I get a little income. Yes, I thought I was being very smart for that, but all it turns out is I should have just bought QQQ or you know, the big tech stocks how to inspire die? Yeah, yes, or over time I've become a little bit more aspired.
Dye. H.
You capitulated, Yeah, it capitulated probably means it's the top.
Now I have the same thing. So obviously we're journalists and we can't really invest. We don't trade, right, we don't trade. H But for instance, we have retirement options yeah, right, And there are retirement options that are like, oh, an ex Us dividend fund or something like that. And I remember in the sort of mid twenty tens people talked a lot about international equity. Yeah, and like, don't just
put all your eggs in the America basket. Make sure you have exposure to emerging markets in China and like Europe, even coming out of the Eurozone crisis. And it turns out that was a bad idea totally.
You really should have just bought us big caps.
You know.
You mentioned like retirement like in our like four to one K options. I think I have money and some sort of target date funds. Yeah, which is a cool idea because as you get older and one right, I think so, you know, and like in theory, as you get older you're supposed to take on less risk and stuff like that, and so great, it seems like a good idea to want to like think about it too much. So it'd be nice if we're just sort of automatic.
But man, all of this diversification is killing me. What a mistake.
All right, Well, today we need to talk a little bit about why diversification for the past ten years or so at least, has turned out to kind of be a bad idea. You would have made a lot more money just putting stuff in the S and P five hundred. You certainly would have made a lot more money if you just, I don't know, bought Apple.
Or QQQ, Yeah, just big cap tech.
So why is that we need to talk about why we're being collectively punished for being prudent. We have the perfect guests to talk about this. We're going to be speaking with someone who I actually can not believe hasn't been on the show before. I feel like he has, but then I realized that, like he's sort of like the Rocky Mountains in the sense that he's just always kind of been there, but you kind of take him
for granted. He's like out there, you know him, you read all his stuff, maybe listen to a show, see him on Twitter, certainly, and yet we've never had him on the show. We've just taken him for granted.
Or outrageous oversight that we must now rectify.
Yes, Okay, so I'm very excited to say we are going to be speaking with Med Faber. He is, of course, the co founder and CIO of Cambria Investment Management and also the host of the Med Faber Show the podcast, So meb thank you so much for coming on all blots. I feel so bad that you haven't been on before. I can't believe it.
It's great to be here y'all. As a Colorado native. Maybe the Mountain analogies spot on.
Oh that was better than you real. By the way, we're still out even though it's long past. We are recording this at the future Proof conference in Huntington Beach, California. Maybe you live like an hour away.
Huh.
Yes, Sadly we invited Joe and Tracy come surfing. They skipped out again for our surf lessons. But beautiful day, glad y'all are here.
I'm not good with cold water, so I'm just gonna be like one hundred percent honest. It's like sixty five degrees at the moment in Huntington Beach. I could not fathom going willingly going into the water in this temperature.
Who just talked about surfing, Actually, Joe mentioned that he likes getting punished in the market. Surfing will be perfect, right, It's the ultimate humility. You get out there and just get tossed.
Pounded by the waves of bad decisions over and over again. Yeah, that sounds about right. Okay, Wait, so I mentioned that you've sort of always been out there, and certainly for as long as I can remember, in financial journalism, you were always there. Cambrio was always there, and so I never really stopped to think about what it is that you actually do. But what does Cambria do?
Yeah, So we like to think of ourselves as the odd lots of ETFs.
You know.
See, But I'm being serious, you know. We fast forward from getting started pre GFC the company launched its first ETF and twenty thirteen, so over a decade old now, and we often tell people the best compliment you can give anyone in investing, but also in the asset management and entrepreneurship is just surviving. So Alpha all that extra wonderful,
but just surviving is a big compliment. So we're near three billion in assets, sixteen ETFs now, but we often say it's the best time ever to be an investor. The choices are limitless. You can invest in ETFs for near zero fee, thousands of choices. But in that world, if you're going to charge more, you better be doing
something weird. We're concentrated in different and so we try to only launch funds that don't exist in in a world of ten thousand plus funds, that seems like a hard goal, or that are sufficiently we think we can do cheaper or quote better and better off is a lofty goal too, But it has to be something I want to put my own money into. It has to be something that's backed by academic and practitioner research, and
so that versus a lot of the industry. And I love our friends here that throw as much spaghetti against the wall and see what sticks. We want products that we want to invest in that don't exist.
Speaking of academic research, didn't you write some like it was one of the most downloaded papers ever on SSRN about market timing?
Yeah, well, it's funny you mentioned market timing. The original title was a better Approach to market timing, and no one would read it. I got a lot of really nasty responses from probably some prior a lot guests, but a lot of famous investors and a lot of really wonderful thought for responses too, and I changed the title to Quantitative Approach to Tactical Asset Allocation. Oh more, sounds way more like consultant speak. But it also there's a
lot of luck. It came out pre financial crisis. Is a very simple trend following methodology, and trend falling goes back one hundred years, so nothing particularly new, but it would have worked great as trend falling tends to do during crisis and big bear markets, which we haven't had in a long time, and so it became very popular. Clearly, if I published in twenty ten, probably have zero downloads as well.
It did better under the second title than it did under the market timing title. That's kind of crazy from a headline perspective.
Well, tactical, I think is a great word to have, all right.
The headline of this episode is going to be like med Faber on tactical allocation. Yeah, all right, okay, Well, so you mentioned in the beginning that if you are charging clients more, you better be doing something interesting and worthwhile. Convince me why I shouldn't just put all my money in spy.
Long dramatic pause. So a couple of things.
We always say the global market portfolio is the best starting point. And what is the global market portfolio's If you buy everything in the world, all the public assets, and that is roughly half stocks, half bonds, half US half foreign roughly speaking, and that's actually a really really.
Hard portfolio to beat over time.
But if you were to go back one hundred years, one hundred and twenty years, we were doing odd lots in London, sipping on some tea, drinking some champagne in eighteen ninety nine and trying to project what would be the successful country. You know, maybe we pick the US, Maybe we pick Argentina, you know, maybe we pick other countries and areas and stock markets. And my favorite investing book, Tryumph for the optimists, you know, outlines the historical returns
of stocks, bonds, bills and all these countries. People always think the US is the best. It hasn't been. I think Australia and South Africa had better returns. But the US has darned near over two thirds of the world market cap today. So even if you invest in the global portfolio, you're putting ten times as much in the US stock market as any other country. And let's be honest, US has been on a roll. You guys know. I
love to do my polls on Twitter. We did a poll the other day and listeners, you got to answer this before I give the answer up, I said, what do you think US stocks have done since two thousand and nine? And the multiple choices were do you think they've doubled, do you think they've tripled? Do you think they've quadrupled? And the fourth answer, which I had to google was non you polled, which is nine times, and then deck you polled, which is ten times. So listeners,
think about what do you think stocks had done? The answers is almost a ten bagger. So one hundred grand in stocks in two thousand and nine, if you didn't sell, or you held, or you bought in March, you now have a million bucks million bucks. You got ten million bucks amazing fifteen percent returns. So you should have invested in spy right like you crushed everything in the world.
But historically that concentration has not been rewarded. If you look at the other forty five countries and you talk to someone in Greece or Japan, or China or the UK, they would tell you that investing all their money and their home country was a terrible idea. But diversifying globally, particularly into the US, has saved their bacon for the past ten fifteen years.
So Tracy mentioned that much to our regret we've never
had you on the podcast before. I have interviewed you, however, once maybe twice on TV, and you're talking about some of these similar themes about international diversification, and I think if I recall, he was talking a little bit also about like sort of international extension of some of the ideas that Robert Schiller has talked about, and the idea of Schiller cape ratios, looking at market valuation from that point and opportunities to essentially invest in cheap markets overseas,
and this idea that if it works in one country, maybe it works internationally. What's the basic idea behind that? And then you know, you mentioned, okay, the US has just like totally clobbered everyone else. Give us the rundown of like, I don't know, it was probably ten years ago or maybe eight years ago, what's happened over the last eight years internationally?
So if you rewind the clock and look at these various regimes, and everyone wants to focus on what's the FED doing, what are earning? Is going to be what's going to happen this month, the election next month? A lot of these regimes play out over not.
Just years, but decades.
Right If you look at not that long ago, from two thousand to the financial crisis, the US stock market got creamed by everything.
Else in the world.
Reads, gold, foreign stocks, merging market stocks, and so you go through these periods where various assets have their time in the sun and day in the shade. If you look at the US market, say nineteen eighty super cheap, right, the US has been a long term KP ratio of five before, it's been as high as forty five at the peak of my favorite bubble ninety nine.
Mine too.
Yeah, it's a great time in the nineties, but if you look on average, it's usually like in the low twenties if inflation is chill. But you have all these countries and other examples. The classic we always talk about is Japan. You know, Japan was darn near one hundred in the nineteen eighties and then went nowhere for multiple decades. Now it looks great today after an entire generation has
made no money in the Japanese stock market. But that's how long it often plays out in Japan's not some tiny economy, you know, this is a top three world economy in stock market, and what's the biggest stock market in the world at that time where the US is today, and the US isn't expensive today, it's in the mid thirties. It's not a bubble, but it tends to be a weight, right. It tends to be a headwind over time, because you're buying all the.
Future cash flows.
The good news is most of the rest of the countries around the world are reasonably priced to really cheap.
The really deep.
Value like GMO and others talk about, is exceptionally interesting right now, So we manage these shareholders yield ETFs, and so the market cap in the US, the Achilles Heel of market cap indexing is there is no tethered to value whatsoever. It's the stock price times shares outstanding. And that's good most of the time because you're guaranteed to
own the winners. But it's bad in the sense when things go crazy, they're really expensive, and everyone's talking about this, right the bag seven everything else, the really expensive stuff gets the highest weights, and so much like late nineties, a lot of the cheap companies high quality look exceptional not just within the US but in foreign developed and
emerging as well. But everyone's forgotten about foreign stocks. Emerging market stocks wants any but that sets the stage for the next next outperformance as well.
Wait, talk more about the role of the benchmark indices in all of this, because this is one thing that I've been really interested in in recent years. This idea, I mean, this is where the flows before pros kind of comes from. This idea that like, if you want to pick a winner, maybe rather than looking at the fundamentals or trying to see if something is underpriced or whatever, you want to look at where the flows are going. And a lot of those flows nowadays are dictated by
index construction. And so how big a role does that indexing actually play in I guess the outperformance of concentration or US versus diversification and rest of the world.
We always say flows drive performance, and you know in a particular small asset class or a concentrated strategy has a much larger impact. You've seen some active funds, some very famous fund managers over the past ten or so years, where the flows a dramatic impact on the way up and also on the way down. But this could also be if you're buying Brazilian small cap tech stocks, right, you can move those around with a lot less money
than you could the SMP. But look, you go back fifty years, the concept of the market cap index set off just this neutron bomb across the industry. But it actually wasn't the index. That was the innovation, you know, John Bogo, Wells Fargos and others. It was what indexing enabled, which is low cost investing because you don't do anything and you're guaranteed to own the winners. So quote passive
investing was an amazing invention. But here we are in twenty twenty four and you don't have to do market cap indexing to deliver the low cost right. We always say ETFs are eating the asset management industry. So you have all this historical very expensive mutual funds with conflicts of interest and front end loans and twelvey one fees that maybe index funds. But the index is not the innovation. It's the low fees, which is what John Bogo used
to say. You know, it's not about index active passive. He's like, the debate is really high fee, low fee, and so now you can deliver these much more interesting exposures instead of just passive market cap waiting.
That should do much better over time.
You know, one of the things that really strikes me. And I think this is an important point that you've already touched on a couple of times, that the beauty of like the sort of modern ETF world is it used to not be trivial right to have substantial foreign exposure. And you know, especially thinking like before mutual funds proliferated, you might say, like, I've like Brazil, but when you like, go out and have a broker make a buye order for every individual stock, Like that's a cost process and
now that's not costly anymore. And I think that's a really underappreciated fact about investing. But just sitting aside the US outperformance, what's going on in international markets so that investors haven't loved them, Like, yeah, why you talk about there must be great Latin American companies, Latin American tech companies, Latin American tire companies and beverage distributors and everything they have. Why haven't investors liked these companies?
The US has certainly had great earnings growth, yeah, for the past ten to fifteen years, right, so it's led the charge.
It's done really well.
But if you look around the rest of the world, you know, and we manage my largest look, by the way, my largest fun long only US stock fund. So talking my book here, But looking at the foreign and emerging you see great companies, and so here's an example. You know, we run a value quality strategy. US shareholder yield doesn't
have much tech exposure. Okay, surprising because tech stocks in the US on average are pretty expensive, but they also do a bunch of share issuance based on stock based compensation, right, so they have a negative buyback yield because they're issuing and issuing a ton of shares. But if you look at foreign, developed, and emerging, our emerging market fund, tech is the largest sector allocation, which is surprising to many people because it's a value strategy.
But we always say.
There's opportunities, people just aren't necessarily focused on them. As an example, our largest holding was a better performer than Nvidia, and it's a semiconductor stock, but nobody knows about it. Nobody talks about it because nobody cares about emerging markets.
But used to be clear, setting aside what people care about at a given time, earnings growth in the US since two thousand and nine or really at any point has been extraordinary and over time. It just there are companies that buy and large are just continue to grow earnings. Has that not been the case internationally?
Yeah, you haven't had the same earnings growth. But also within the US, you have had this tailwind of multiple expansion. Our buddy Cliff was talking about, He's like, the percentage of the returns that are attributal to multiple expansion is pretty high. Right, So you've had the US So back in two thousand and nine, right, we're hanging out in March somewhere at a pub in New York City, drowning
our woes about the world going crazy. The US stock market talking about back to the Shuler cap ratio was low teens, but so was foreign developed and emerging. So the US has gone from twelve to let's call it thirty six today, whereas the rest of the world hasn't. It hasn't had that multiple expansion, and so that can be a massive tailwind and headwind over the course of a decade of like three, four, five seven percent per year, depending on what people are willing to pay for those stocks.
So just on this point, one of the criticisms that is sometimes leveled against diversification or strategies that are focused on diversification is the idea that well, your purposefully kind of adding losers to your port, Like you're not really trying to choose winners, You're trying to distribute your risk
among a bunch of different entities. And the analogy that I sometimes use, which probably will not resonate for either of you or like most of our listeners, but I sometimes think it's kind of like trying to find a single guy over forty in New York City, Like there's a reason they're desirable to single women. But on the other hand, like, there's probably a reason that they're single over forty. There's probably something wrong with them, right, and
that's why this is good, That's why they're single. So I sometimes think about diversification or like value investing in those terms, why should you seek out things that are probably going to be losers at least for you know, the short to medium term.
There's the late Peter Bernstein had a great quote which I'll get directionally correct, which was he's like, look, acid allocation is a defensive strategy, but it's also an aggressive strategy because you never know where the next windfall is going to come from.
Look around the.
World, today gold all time highs. Nobody's talking about it, at least at this conference that I'm chatting with. But you never know if you look at various assets, whether it's coffee, whether it's the yen, whether it's foreign stocks, merging markets, reads, bonds, even US stocks value right quality, you never know the exact timing of it. And that's hard, you know, And we have a lot of non consensus
views when it comes to acid allocation. I actually don't think if you're doing buy and hold, your allocation matters much at all, which I think it's like my mom is a Southern cook and you know, you make She makes chocolate chip cookies with just by by a feel right, She tastes some. But as long as you have the wheat, the flour, the butter, the chocolate chips, like it's going to end up okay, you totally omit one thing and it's probably going to be suboptimal. And that's the way
with this ass allocation. You have some global stocks, some global bonds, and some real assets, meaning like tips reads, the allocation percentage doesn't much.
And when we wrote this book, this.
Acid Allocation book a decade ago, which were updated, we actually found that if you look at overtime the last fifty the last one hundred years, and compare the best performing strategy relative to the worst. And we looked at all of them en DOWNMNT permanent portfolios sixty forty, on and on, we found the spread was actually pretty tight. They all returned about within a percent or two percent of each other. And the crazy part is if you took the best one, you say, all right, Joe Tracy,
I'm gonna give you crystal ball. We'll hop in the Dolorean, go back fifty hundred years. I'm going to tell you which asset out case and strategy was best. How much would you pay me that? You know, PIMCO probably give me a billion dollars for that knowledge. But I said, hold on the genie. There's one rule. You have to implement it with the average mutual fun feed of today, not back then one point two five percent today that takes the best performing allocation makes it almost as bad as the worst.
Wow.
So all this time we spend on the FED, on gold or whatever. And this is for buy and hold, just market cap indexing. We're not talking about all the good stuff that we do. Trend following value, YadA YadA, just the basics. And so we often say, you're acid, alt care doesn't matter that much, but what does matter is expenses, costs and taxes.
Yeah, yeah, I remember seeing I think, well, it might have been like the bulgel Head Forum is back in the day, and it is so much about like the cost matter is hypothesis as being a more powerful idea than the efficient market hypothesis for this exact reason. So, you know, we've been talking about Okay, since two thousand and nine, we know US stocks have clobber the rest of the world. When was the last time, Actually that wasn't the case.
Well, so we wrote this piece. It's called the bear market and diversfication. Yeah right, and so since two thousand and nine, US stocks again, listeners, think in your head fifteen percent per year. Yeah, that's only happened on a ten year rolling basis four times in history. And they all have names. Roaring Twenties, in fifty fifty, the Internet bubble, and then whatever we're calling this COVID meme sonk Ai era right now, you don't know how long it's going to last.
And on the.
Backside, they also all have names, the Great Depression, the inflation seventies period, the dot com bubble burst in GFC echo and whatever comes next.
Who knows.
It doesn't mean so during.
Those periods that we don't have good names for, international diversification has paid off.
If you look at this period has arguably been the worst period ever for an acid allocation portfolio. And we'll just use the Global market portfolio versus the SMP. The only comparable period is post World War two. And this is not just in terms And first of all, didn't do bad, did like seven percent a year? Totally fine, Joe's four to one k seven percent a year not bad.
But if you look at in terms of underperforming your neighbor, so an absolute underperformance versus the sb But the worst part is not the absolute poortance, it's the years in a row. It is something like thirteen of fifteen years. It's funder perform the SMP. So it's just bodyblow after body blow of looking less smart than your dope neighbor who bought the cues.
And that's upsetting. Yeah, I know it's not fair.
I'm trying to process this because it bothers me so much. No, okay, well, since you brought up taxes and the cost base as such a big factor to investment success or outperformance. Talk to us about what you're seeing there in terms of I guess innovation, because we often talk in the investment space in ETF certainly about the race to the bottom in terms of costs. And to me, I look around at some of the tax yields on these things, it feels like you can't get that much lower, but maybe you can.
There's a lot about ETFs that I think that people don't know. First of all, a lot of public funds will do short landing and return that revenue to the consumers. So on top of the fee you have, let's say like we charge half or percent well the short landing revenue, and some funds at may be ten basis points, at maybe twenty. In some cases it could be very material fifty over one hundred basis points. So there are plenty of ETFs out there that actually already have a negative
expense ratio. So let that sink in. You're getting paid to own this fund. That's pretty cool, right. Second is the ETF expense ratio is also tax deductible. Right, It's coming out of the income. So if you're comparing that to a traditional separate account, which is not deductible. That's an additional essentially benefit of the ETF over these traditional structures. But here's the challenge. If you've been participating, you're one
of the lucky ones. You bought a bunch of stocks, you own a bunch of Nvidia since two thousand and nine. You're sitting on a ten bagger gain. And if you talk to older generation, if you look at Buffett, you know all these decisions that he has to make on Apple where he has to eventually pay the taxes. Right, you talk to the order gender and say, well, I just can't sell my Microsoft or GE or IBM because
the taxman would kill me. We had Hank Bessenbinder on the show recently, who did the famous paper to stocks outperformed T bills. We had Hank run for the past one hundred years. I said, hey, what's the best forming stock of all time? And listeners, you have to guess this too.
You may get it.
Of the top five, the top three, I don't think I could guess two or three ever heard of them, but Vulcan Materials I think two.
Kansas City was.
Third and number one was railrud Yeah, okay, and this is just you are optimizing on length of compound.
Yeah, so one hundred years.
But Altria you put It's like you put one thousand dollars in al three hundred years ago, you now have two billion. Anyway, the point being is that if you invest, you eventually have a bunch of capital gains. Great good problem to have, right if you're in a taxable investor, and if you have been invested in the US stocks in two thousand and nine, you have ten x capital gains on average. Right, So that's a problem for investors, right, because you got to make a decision. Am I just
going to bite the bullet? Sell this, pay the taxes and move on. Because these power laws dominate everything we do in investing. It's in VC, it's true in public markets where the best performers, it's like five percent of stocks generate all the return. So if you end up with one of these, your whole portfolio is now this appreciated stock or portfolio. What I'm getting at is what do you do well. There's actually been something that's been
around for one hundred years called the exchange fund. It was popularized really in the nineteen seventies by eat Advance by now Morgan Stanley Goldman does it. And it's like a ten thirty one exchange.
If you have a portfolio, this is it.
The ten thirty one is that how real estate investors never have to pay ten.
That's like when you buy a house, if you buy an if you sell it and then buy another.
One commercial you buy it, you buy a hotel, you buy some farm.
Commercial real estate. People love this. This is like the essence, what's it?
Indefinite tax referral. And it builds generational wealth. And it's why you see so many people that you know, they they talk, well, my grandmother bought this property at ten thousand dollars and now it's ten million. You know, So it's great. It's a huge wealth compounder over time. But so with stocks, you eventually have to pay the pipers. So there's this thing that's been around forever called exchange funds.
And the way they work is if you have highly appreciated positions, you get a bunch of other people, you contribute them to a portfolio, and there's some rules. You've got to be accredited or qualified. You've got to hold it for seven years and at the end of seven years, you get back at diversified portfolio, so you you eliminate your concentration risk. But the problem of the course is it's run by the traditional asset managers who love to
charge exceptionally high fees. They're going to ding you probably a percent or two just to get in, and then they're going to ding you a percent or two every year for seven years for the privilege of having this exchange fund. So there's others trying to do this. There's a company called cash that's doing this, trying to disrupt this.
But if you think of the ETF structure, which is a massive innovation where you're having actively managed portfolio at index portfolio, you're only paying taxes when you sell that fund, so the turnover doesn't matter. I think that's well understood by most investors today, hopefully. But if you look back at Spy, if you bought it in ninety seven, I've paid no capital gains at all, despite the fact that
trades consistently. That's not a feature of mutual funds or hedge funds, and that's why ETFs are eating asset management. They're vastly more tax efficient, which on average is probably about a seventy basis point after tax benefit relative to mutual funds. Monster number probably more important than the expens ratio. However, what if you've got a bunch of stocks have gone up a ton, so you could go to this exchange fund route, you're stuck.
You could sell it.
But what you've started to see over the past five years, you've seen the riding on the wall, and the traditional mutual fund industry is doing one of two things. They're going Ostrich style head and sand I'm just going to ride this till I retire and we'll just deal with the outflows and someone else's problem. Or their shops like DFA, they say.
You know what, we're going to convert.
We're going to They do fifty billion of mutual funds to ETFs. And then you see some innovation going on where a group we're partnering with Wes Gray and his team at Alpha Architect ETF Architect, they we're able to go to an asset manager and say, okay, well.
Let's convert your clients.
So they had five thousand clients from separate accounts to an ETF and it's not a taxable transaction. And so I started to think about this. It's called a three fifty one exchange again, been around for one hundred years, and you start the brain working in an odd lot's way and taking this to its logical conclusion. I say, this is a really cool idea, and to my knowledge, we're going to be the first to do this. And so I said, why can't we open this to everyone?
Why can't we make this so that it's disrupting the entire industry. You make it democratize it where you don't have to be a qualified investor. You can just be any investor that's sitting on capital gains.
And so the way that works.
Is you can contribute a portfolio of stocks ETFs whatever, and there's some rules like one position can't be over twenty five percent, the top five can't be over fifty. You contribute a basket of stocks, you get an ETF in return, and you get essentially a tax deferral diversified portfolio that now has a diversified strategy. It could be
whatever strategy. The first one we're doing is actually a riff on an old paper we wrote which demonstrated that if you're a high tax investment in it plays like California or New York. The last thing you want is dividends or high dividends. So we demonstrated that if you had a value strategy that targeted stocks that paid load to no dividends your act after tax, you do much
better than the SMP or high divinut strategy. So this takeaway of this idea is that you can contribute a basket of stocks end up with a great ETF and you could launch a series of these every year, every three months, every six months, and let people opt in.
What do you think, great?
This sounds good. I wish I had some gigantic capital gains that I needed to solve for, but a loss that's not my problem. But let's just talk a little bit more mechanics. So let's say ten years ago, I'd bought a bunch of Apple and Nvideo and Microsoft and whatever else, JP Morgan, a bunch of names that have done well. Okay, So I have these and now I'm thinking, Oh, the market's kind of expensive these days, I'm nervous, et cetera. I'm thinking about I want to sell them, but I
don't want to like write a huge check come next April. Okay, so that's my problem. Talk to me the specific mechanics. Now your fund suddenly, your new ETF suddenly exists. Walk me through the specific mechanics of what I have to do to swap them.
I don't understand how you like deliver it.
Yeah, so I swapped that into this thing so that now I'm in a diversified portfolio that's a little bit de risked. Thanks to diversification, I don't have my concentration problem, but I didn't have to pay the taxes. Talk to me about exactly.
This is why we're partnering with our friends ETF architect like you have things like ten thirty one, have very established, templated rules how to do it.
And this is the first time we going through it.
So I'm sure it's not going to be one hundred percent without headaches and hiccups. But the first thing you inquire, right, So we set up camera investments dot com, forward slash tax. Put in your name, your info. I got this portfolio. Joe's got a portfolio. Swab Yeah, it's I literally do have. So you know, here's I'm interested. Send me more information. I'm sure we'll do a webinar, we'll educate everyone and we'll say here's the menu, here's the process of what's
going to happen on I'm just making up this date December. First, your portfolio will contribute to the ETF.
Everybody, How does that work?
Magic?
Hopefully you know the plumbing and the pipes of it. We'll have to get Wes on the show and get him to get really deep on it. But they just did it with a five thousand account.
But like Schwab or whatever, like, they have mechanisms for.
Yeah, I mean, I'm sure, like I don't know whether it's going to be you know, acadding and whether it's going to be just electronic transfer.
Okay, but you can do that with shares, yeah, okay, Okay.
So we wrangle up a bunch of people with all sorts of different securities and they all contribute them, and then the next morning they have an ETF in their swap account.
It's beautiful.
And then there you know they have a diversified portfolio. And we have a few different ones lined up. We have an endowment style. You guys probably seen me pick my fights with cowpers.
Over the years.
We have a global shareholder yield style. So the menu will be different for people that may want different ideas, but the first one, at least, we're doing US stock exposure.
So once you're in the diversified portfolio the ETF, presumably if you sold that you would still have to pay capital gains, but the benefit is that you're getting out of that like big concentrated position and going into something more diversified.
That's the hope.
Okay, that sounds interesting.
It sounds very interesting. Can I ask a question? You mentioned Wes's company, Wes Gray. You mentioned Wes's company is
called Alpha Architect. Since you've been in the ETF game for a long time, can you talk a little bit about how, you know, if Tracy and I have an idea for an ETF, some strategy that we think could be interesting, how much easier is it today in twenty twenty four to build What is the process of Like, okay, we want to build an ETF around this versus say twenty fourteen or two thousand and four.
It's night and day.
So what's the what's it like?
You know, we originally were gonna sub advise on a couple of funds. The Forbes family was gonna move into ETFs. It's a fun fact they didn't because it was two thousand and nine. So we eventually sub advised on a fund with advisor shares. Because back then it costs half a million a million bucks a year just to get the trust permission to launch ETF, so a huge pain. We eventually bit the bullet starting launching funds in twenty thirteen.
Fast forward a decade in the ETF rule which was passed a few years ago that really streamlined everything, changed it all. And so the two main companies, so ETF architect and then Title, which are both groups that do this white label ETF business. You could go to them now and say, Joe's got his idea for this ETF. It's only going to invest in companies in North Carolina. The letter M like, whatever it may be. You know, who knows. Three months from now you could have a
fund out. Wow, it's going to cost you, I don't know, fifty grand and startup fees. But the big problem, and you know everyone sees the gold at the end of the rainbow, but you really need to be able to get to twenty thirty forty million. So a lot of people sit at zero.
Is that just to make the economics of actually like managing and trading the ETF actually work well.
If it sits at zero, you're on the hook for probably quarter million expenses per year two hundred and fifty grand. But that's if it sits at zero, and so then you're subsizing. You know, writing twenty k checks per month adds up over time.
Here's something I always wanted to write about or talk about reverse inquiries in ETFs. I think this is sometimes like an underappreciated perspect of how ETFs come into being. But I have heard that, like a hedge fund or an investor will go out and say, we want the opposite exposure to this particular thing. We want to take the other side of the bet. Will you create an ETF that allows me to do this?
Yeah, you see that more at a lot of the trade specific shops and firms that want those thematic exposures. You know, we tend to focus on ideas I want to put money into. You know, the average mutual fund manager has zero dollars invested in their own fund, which is an astonishing statistic. And half of all public funds close over the course of ten years, so there's a massive amount of turnover and people that don't have skin in the game, and so a lot of these ideas.
You know, I want nothing to do with a lot of these tradeable thematics, right, but if people build them, they want to invest them, God bless them.
Right.
But we we air on the side of things that we think make a material impact to investors, you know, future returns and portfolios and.
A lot of out there.
You know, I wouldn't touch with a ten foot pole, but some of them raise a billion, ten billion dollars or what do I know.
It's interesting hearing you describe how much easier ETF creation has gotten, because it strikes me that it's like the ETF physation of the ETF industry, because ETFs, of course make investing in a country or a theme much easier than if you had to do it by hand and buy a bunch of stocks. And this is essentially taking that same idea except applying it to the creation of ETFs, where you have all these white label things. The infrastructure is already there, so all you have to do is
supply the idea. This gives me just something I've always just sort of been wondering about what happens when in the ETF dies. So Tracy and I launch our fund where we only invest in North Carolina stocks where the ticker has the letter eminem and then, for whatever reason, in two years we have five hundred thousand dollars under management, which is probably high, but clearly not enough to build a business on. You're like, you know what, we don't want to do this. We don't want to write the
twenty thousand dollars checks a month to support this. When we decide to wind it down, what happens.
They go to the ETF ticker in the sky graveyard, you know. I mean it's a pretty orderly process. There's a lot of prior arity, of course, you know, I think on very very rare cases.
The investors get distributed the stock or do they get distributed the cash.
It's usually cash.
But the correct answer for the vast majority of investors just sell it before close it down, you know, you sell it on the secondary market. Yeah, like, hey, we're going to close this into the year. We'll just sell it now and just be done with it. But you know, I think a lot of people take a negative view of the amount of products out there. You often hear people say there's more ETFs than stocks, right, and say, well, there's more words than letters like that, that doesn't ye like.
It doesn't more sentences than words, but.
You have sort of the ability to have this limitless grocery choice. There's a lot of areas that I think haven't developed the way that they will eventually in One example is the all in one acid allocation ETF. We have three of these, but if you look at the traditional mutual fund asset allocation industry, it is multiple, is more expensive and tax inefficient compared to the ETFs, and
yet they still have about a trillion in assets. And you know those type of assets, it's usually death or divorce or bear markets where they all come out all the money at some point, but they never go back to paying two percent. And so I think you'll see over the next ten to twenty years a big shift and assets and structures, but eventually it all leads to the ETF.
You know, you mentioned the sort of global market portfolio, and we can never own the global market portfolio truly, so you only are like trying to get close, right, because the global market portfolio also includes all real estate in the world and just a number of things like you can approach it maybe asymptotically, but you'll never truly own the global market portfolio. But the old academic Reais search says, like to own the global market portfolio every
asset in the world. How close do you get in one of these funds? Are you like ninety five percent of the way there?
I'd say it's closer to like ninety nine, you know. The if you look at one of my favorite examples we always joke on these assy action from portfolios. We have one called the Talmud portfolio, which is based on there's a piece of advice where it was like, let every man invest a third in business, a third in land, and a third keep in reserve, which we interpret is a third in stocks, a third and real assets, and the third and bonds. That portfolio is almost impossible to beat.
And if you look at a lot of like Cowper's Bridgewater, and we do all these articles and say should these big institutions just be managed by a robot? And they, for the most part, usually can't beat these basic asset allocation benchmarks. It's really hard for them. Some you include a little leverage because they have a lot of private equity and leverage vehicles, but these basic portfolios are a heart high.
Bar that's funny.
I hadn't considered talmudic investment philosophy for the wind, but I guess it works. Okay. So this whole conversation has reminded me that I am old enough to remember when active ETFs were first becoming a thing and they were going through like regulatory approval process. Obviously they've become much more of a thing since then, and we've seen mutual funds convert into ETFs. As you mentioned, what's the next big thing in the etfification of the market.
Now, there's a few areas we're always interested in. And when we look at the Vinn diagram or you make the columns of things that are totally fine, Okay, good, there's plenty, right.
You know.
I was chatting with someone last night and he's like, look, I used DFA, Why should I use your funds? I'm like, don't. DFA is fine, you know, but the bad news is like, there's a whole universe of absolutely awful, god awful, terrible. I have a Twitter thread that's just instant. I made the mistake of bookmarking a spammy, sleazy Instagram ad for private real estate. It's always private real estate, right, fifty percent per year.
You know, they're.
Claiming those guys got closed. There's twenty See.
Some of the videos are like, if you just commit investment and tax fraud, you can make like a two hundred percent return in six months.
So all my all my ads are now these scams. Right, I just get delivered because they I bookmarked it, so I get all these So just avoiding and doing the really dumb stuff is the key to almost all of this.
Right.
We did an old article about the food pyramid. You remember the food pyramidal?
Yeah, you know.
The base of that when we were kids was eat a bunch of cereal and bread and pasta, you know, and it's kind of inverted now where thinking about it. But the same thing with investing is like the basics. Get the basics right, payloa fees, payload taxes, get your money invested. That's the number one piece of advice of all this is get to work, let it compound, right,
and then the other things take care of themselves. So, but because this is the Wonky Show and we get into this, I think the things like the three fifty one exchange idea we're talking about are going to be extremely material when we're talking about.
This in a year or two.
I've seen some other companies and we don't do this, But I love the idea of taxable target date ETFs. We see people behave better in target date style funds. I think there's some ideas and concepts around building personal pensions where people are locked into their investments and get them to behave in a good way where you know, these fiduciaries, you're kind of forced to hold investments and let the compounding do its work. There's a lot of
innovation in some of those ideas. But if you go back, I have a joke, I'm like, so many of the fintech ideas are just vanguard with a shiny coat of paint, right, Like you already have pretty great out there. But there's there's some more ideas we're working on too.
I love the idea of like a sort of like forced pension because it intuitively it seems like a most people make mistakes when they're like left on their own, so you just sort of want to lock it up, would be. It also seems like there's probably excess returns for like that commitment where if like you trade off the liquidity profile, then you get paid more anyway, med favor. It's so great to finally have the show. Great to catch up with you in your natural environment at.
The surfing on a beach.
Yeah, it's like okay, like, yeah, we didn't have MeV on for a long time, but if we when we did finally have it, we're like literally on the beach right now, listeners.
You heard it here.
They're committed to us serving with this future.
I don't know.
Only I said only if the temperature is above eighty degrees or someone like loans me a what you.
Just it's freezing.
I'm really cool care of it.
I've been cold for two days.
It all right, thanks so much, man, take.
Great, y'all.
Well, I'm glad we were finally able to do that, Joe, as you say, in Meb's natural environment. One thing I was thinking was just about that new fund and the
sort of tax focus of it. It is in interesting because you know, our whole conversation was about how over the past ten years or so, those big concentrated yeah investments are what have paid off the most, and I guess people are now trying to think through how they actually crystallize those wins and so it's interesting to see the market trying to come up with a solution to that problem.
The solution of the problem of people having to pay tax and people having to eventually pay taxes. You know what I think is interesting to me to going back to the sort of diversification story and getting punished for diversification where we started. I like the idea that one day, like the sort of I'm still kind of diversified, you know that, like my prudent approach is going to pay off. But it's also interesting that like the periods that were
paid off are like not great periods. So it's like, Okay, I want my.
Diversification yocer and forgettable.
Yeah, or like the aftermath of a craft and so like I want my diversification to pay off, but I don't want to crash.
This is exactly what I was thinking. The trigger for diversification coming back would be something very bad happening that's right in the US. Yeah, And as people who live in the US were de facto over levered.
Yeah, we're always going to be levered to the US. I mean, our jobs are levered to the US economy, right, So I think about this a lot, which is like Okay, it makes me uncomfortable as not just someone with money in the market, but it makes me uncomfortable as a press of the world that, like, we have this market that is just so heavily concentrated and so levered to the success of Meta and Nvidia and Amazon, and I don't really like that. It rubs me the wrong way.
It doesn't sit right with me as something. But on the other hand, if I think about what would change that, it's nothing good. Yeah, there doesn't seem to be like
a positive version. Now I would see the one exception where maybe this doesn't have to be the case would be kind of like a market in which the investments that are being made in things like the Inflationial Reduction Act and the chipsy Act, where there's like this industrial renaissance in the US and that really started taking off, or where you have such above trend growth and productivity that a lot of the so called like real economy
stocks really start to do well, et cetera. So there is like that sort of golden.
Scenario where more winners come in this right right, and so like having more exposure to potential winners that pays off. But on the other hand, it feels like the downside scenario, where like the current winners just get just.
Are no longer the winners and everyone loses, and then seems more probable. It seems more probable, and so it's hard. Yeah, it feels like when the regime shifts, which will happen because regimes shift, and maybe it'll be one hundred years from now and it will be dead and whatever. But it seems most likely that when the regime shifts, it will not be because things are good.
Yeah, nothing last forever shed dramatic tear, including our time at Futureproof on the beach. So shall we leave it there?
Let's leave it there.
This has been another episode of the oud Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
And I'm Joe Wisenthal. You can follow me at the Stalwart. Follow our guest meb Fabor. He's at meb Faber. Follow our producer Kerman Rodriguez at Kerman ermann Dashil Bennett at Dashbod, and Kelbrooks at Kelbrooks. Thank you to our producer Moses Ondam.
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