The Meb Faber Show - Better Investing Folgen

As we recorded Episode 28 on Halloween, it starts with Meb referencing his costume from the prior weekend’s festivities. Can you guess what it was? He stayed true to his financial roots, dressing as Sesame Street’s “Count von Count.” (Sorry, no photographs.) But the guys jump in quickly, beginning with the subject of Larry’s 15th and latest book – “factors.” Larry tells us that the term “factor” is confusing. He defines it as a unique source of risk and expected return. So which factors should an investor use to help him populate his portfolio? Larry believes there are 5 rules to help you evaluate factors: 1) Is the factor “persistent” across long periods of times and regimes? 2) Is it “pervasive”? For instance, does it works across industries, regions, capital structures and so on. 3) Is it “robust”? Does it hold up on its own, and not as a result of data mining? 4) Is it “intuitive”? For instance, is there an explanation? 5) Lastly, it has to be “implementable,” and able to survive trading costs. The guys then switch to beta. Larry mentions how valuations have been rising over the last century. He references how CAPE has risen over a long period, and points out how some people believe this signifies a bubble. But Larry thinks this rising valuation is reasonable, and tells us why. Meb adds that investors are willing to pay a higher multiple on stocks in low-interest rate environments such as the one we’re in. Next, Meb directs the conversation toward a sacred cow of investing – dividends. He asks about one particular quote from Larry’s book: “Dividends are not a factor.” Larry pulls no punches, saying, “there is literally no logical reason for anyone to have a preference for dividends…” He believes investors over overpaying for dividend stocks today. He thinks it’s unfortunate the Fed has pushed investors to search for yield, inadvertently taking on far more risk. Dividend stocks are not alternatives to safe income. There’s plenty more on this topic you’ll want to hear. Eventually the conversation drifts back toward market values. Larry tell us that when the PE ratio of the S&P has been around its average of 16, it has about a 7% expected return. So now that the CAPE is roughly 25, and the expected real return is around 4%, some people are shouting “Sell! Huge crash coming!” Larry disagrees and tells us why. But the guys just can’t leave dividends alone. They swing back toward the topic, with Larry telling us the whole concept of investors focusing on dividends literally makes no sense. If you want a dividend, create your own by selling the commensurate number of shares. There’s far more in this episode that you don’t want to miss: the correlation of value and momentum… trading costs… the use of CDs in your fixed income allocation… corporate bonds and an eroding risk premium… the state of the ETF industry 10 years from now… There’s even a warning – if a former Miss America is pitching you a mutual fund, beware… In what weird context does that advice apply? Find out in Episode 28.

Episode 27 starts with a quick note from Meb. It’s a week of freebies! Why? Meb is celebrating his 10th “blogiversary.” (He’s officially been writing about finance now for a decade.) Be sure to hear what he’s giving away for free. But soon the interview starts, with Meb asking Porter to give some background on himself and his company, as Porter’s story is somewhat different than that of many guests. Porter tells us about being brought into the world of finance by his close friend and fund manager, Steve Sjuggerud. This conversations bleeds into Porter’s thoughts on how a person should spend his 20s, 30s, and 40s as it relates to income and wealth creation. But it’s not long before the guys dive into the investment markets today, and you won’t want to miss Porter’s take. In essence, if you’re a corporate bond investor, watch out. Porter believes this particular credit cycle is going to be worse than anything we’ve ever seen. Why? There’s plenty of blame to go around, but most significantly, the Fed did not allow the market to clear in 2009 and 2010, and it means this time is going to be very, very bad. Porter gives us the details, but it all points toward one takeaway: “There’s going to be a big bill of bad debt to pay.” Meb then asks what the investing implications are for the average investor. This leads to Porter’s concept of “The Big Trade.” In a nutshell, Porter has identified 30 corporate offenders, “The Dirty 30.” Between them, they owe $300 billion in debt. His plan is to monitor these companies on a weekly basis, while keeping an eye out for liquid, long-dated puts on them that he’ll buy opportunistically. He’ll target default-level strike prices, and expect 10x returns – on average. Meb likes the idea, as the strategy would serve as a hedge to a traditional portfolio. Next, the guys get into asset allocation. Porter’s current strategy is “allocate to value,” but for him that means holding a great deal of cash. Meb doesn’t mind, as wealth preservation is always the most important rule. This leads the guys into bearish territory, with Porter believing we’ll see a recession within the next 12 months. This transitions into how to protect a portfolio; in this case, the guys discuss using a stop-loss service. Porter finds it invaluable, as most people grossly underestimate the risk they’re taking with their investments, as well as their capacity to handle that risk. He sums up his general stance by saying if you don’t have a risk management discipline you will not be successful. Next, the guys get into the biggest investing mistakes Porter has seen his subscribers make over the years. There’s a great deal of poor risk mitigation. He says 95% of his own subscribers will not hedge their portfolio. Meb thinks it’s a problem of framing. People buy home insurance and car insurance. If we framed hedging as “portfolio insurance” it would probably work, but people don’t think that way. He sums up by saying, “To be a good investor, you need to be good at losing.” Porter agrees, pointing out how Buffet has seen 50% drawdowns twice in the last 15 years. If there’s a takeaway from this podcast, it’s “learn how to hedge.” There’s far more, including what Porter believes is the secret to his success. What it is? Find out in Episode 27.

If you’re ready to dive straight into the deep end, Episode 26 is for you. The guys waste no time, starting off with complicated topic of currencies. Jeremy takes issue with the currency-stance belonging to some former, unnamed Meb Faber Show guests. Specifically, he challenges the idea that currency hedging is expensive. Not true, he says. It’s only “selectively” expensive. You can actually get paid to hedge certain currencies. He gives us more details, leading to his overall takeaway: You should be hedged a lot more than you are. Meb then asks about any rules that might be applied when using a dynamic currency-hedging strategy. Jeremy gives us his thoughts, telling us when we want to be hedged versus when we don’t, as well as two good signals to use – interest rate differentials and momentum. Where are we overall today? Well, Jeremy says that there is no country so cheap that his shop would take their hedge ratio to zero. Eventually, Meb switches the topic to factor investing. Jeremy gives us his take, noting that minimum vol is where things are most expensive. The guys then discuss factor investing as it pertains to the bond space – in essence, moving away from market cap weightings. Why is that important for bond investing? Well, do you want to give the most weight to the countries issuing the most debt? Unlikely, but that’s how market cap weighting works with bonds. Next, Meb steers the conversation toward liquid alts, specifically managed futures. That’s followed by a great discussion on corporate buybacks. Gotta watch out for that dilution from new share issuance. Interestingly, it turns out that buybacks are largely a U.S. phenomenon. Jeremy agrees, but points out some spots around the globe where that might be changing. As we near the end of the show, Meb asks about the opportunities Jeremy sees going forward. His response in a nutshell? “People are underinvested overseas.” There’s plenty more, including an asset class that is coming up on being down a whopping six years in a row, as well as how Meb hacked a VPN service that enabled him to watch the last Super Bowl from a tiny village in Japan. How’d he do it? Find out in Episode 26.