The Meb Faber Show - Better Investing

In Episode 37, we welcome John Bollinger, creator of Bollinger Bands, one of the most widely-used analytical tools in investing.

As John is also a market historian, Meb start by asking him about his historical influences – those individuals who helped shape John’s perspectives on the markets and trading. John gives us his thoughts, identifying who he believes is one of the most important figures in technical analysis. This leads to an often-forgotten takeaway – that many of the most effective market concepts have been around for a long time. Some very profitable strategies that still work today were being explored 100 years ago.

Meb redirects, asking John about his background. It turns out, John was in the film business as a cameraman. But by a few twists of fate, he ended up in front of the camera, providing technical commentary on markets for a fledgling financial broadcast network.

This leads into a discussion of John’s famous “Bollinger Bands.” He gives us an overview of the tool, and how he came to establish it. In essence, Bollinger Bands can help investors identify relative market bottoms and tops, helping find direction for profitable trades.

Meb then asks if John’s thinking on Bollinger Bands have changed since the early days. John tells us that the core concept stands the test of time, though he has added some extra indicators.

Next, Meb asks about combining two types of analysis – technical and fundamental – something John calls “rational analysis.” For many people, you fall into one camp or the other. But John was able to find overlap between them. He tells us how, and even ropes in two additional types of analysis to include – quantitative and behavioral. He thinks combing all four works better than using any single one. Meb asks how you actually use them all together, to which John gives us his thoughts.

Meb then asks which sector John is currently identifying as a good source of potential trading profits – but he immediately discounts the validity of his own question. You’ll want to hear why. This leads into a great takeaway – using the right charts for entry/exit in a trade. Specifically, a trader may use a short-term chart to initiate a position, but then not move to a medium-term chart to help him navigate how long to hold the position. Instead, he keeps looking at the short-term chart, which obviously will oscillate, and potentially scare the investor out of the trade. John says “People have this time frame confusion that I think does a huge amount of damage.”

Meb then asks about trade management. John says the most neglected issue is position sizing. People need to know how much capital to commit to their strategy, and there is a mathematical “optimal” answer. In essence, the problem is “betting too large.”

This leads John to reference the trading concept of “regret” – the percentage of time you’re in a drawdown. Turns out it’s about 80% or 90% of the time you’re invested. The only times you’re not in a drawdown are when you’re setting new highs, and that’s pretty rare. But most investors hate drawdowns and just don’t do well with this reality (part of the reason why investing is so hard for most of us).

There’s far more in the episode, including the most influential books John has read, Bitcoin, currencies, how to trade volatility, and John’s most memorable trades (good and bad). What were they? Find out in Episode 37.

We’re back with the first Q&A episode of 2017.

We start by discussing the “Zero Budget Portfolio,” about which Meb wrote a recent blog post. The quick idea is that when considering your portfolio, you should start from scratch, or “zero.” Imagine your perfect portfolio – which markets you’d like to own, which assets, tilts, etc.

Now compare that perfect, hypothetical portfolio to your actual portfolio. To the extent that your real, owned assets have a place in your perfect portfolio, you’ll continue owning them. Any assets that don’t fit, you sell immediately.

But it’s not long before we dive into listener questions. A few you’ll hear tackled are:

-         How do I decide whether I should use a robo-service or manage my portfolio myself? How likely am I to underperform a robo?

-         We know that value can lag market returns, but should lead over time. What is the time horizon by which you determine whether a strategy like value is successful?

-         Are there are country ETFs that you would not trade in a global, low-CAPE portfolio because of country risk?

-         How has your timing model performed since you introduced it a decade ago?

-         Will you discuss momentum investing versus chasing performance? It seems that a long-only momentum portfolio basically chases what has already gone up.

-         Given real world tax issues, is active investing still a better strategy than buy-and-hold?

-         Given that 44% of the S&P 500 revenue and profit comes from overseas, is there really a home country bias if you are invested in the S&P? And with this in mind, what is the right allocation to Emerging Markets?

As usual, there are plenty of additional rabbit holes, including options, currencies, and even the Baltic Dry Index. What’s Meb’s take on it? Find out in Episode 36.

We’re back with the first Q&A episode of 2017.

We start by discussing the “Zero Budget Portfolio,” about which Meb wrote a recent blog post. The quick idea is that when considering your portfolio, you should start from scratch, or “zero.” Imagine your perfect portfolio – which markets you’d like to own, which assets, tilts, etc.

Now compare that perfect, hypothetical portfolio to your actual portfolio. To the extent that your real, owned assets have a place in your perfect portfolio, you’ll continue owning them. Any assets that don’t fit, you sell immediately.

But it’s not long before we dive into listener questions. A few you’ll hear tackled are:

-          How do I decide whether I should use a robo-service or manage my portfolio myself? How likely am I to underperform a robo?

-          We know that value can lag market returns, but should lead over time. What is the time horizon by which you determine whether a strategy like value is successful?

-          Are there are country ETFs that you would not trade in a global, low-CAPE portfolio because of country risk?

-          How has your timing model performed since you introduced it a decade ago?

-          Will you discuss momentum investing versus chasing performance? It seems that a long-only momentum portfolio basically chases what has already gone up.

-          Given real world tax issues, is active investing still a better strategy than buy-and-hold?

-          Given that 44% of the S&P 500 revenue and profit comes from overseas, is there really a home country bias if you are invested in the S&P? And with this in mind, what is the right allocation to Emerging Markets?

As usual, there are plenty of additional rabbit holes, including options, currencies, and even the Baltic Dry Index. What’s Meb’s take on it? Find out in Episode 36.

Episode 35 features one of the original Turtle Traders. “What’s a Turtle Trader” you ask?

The story involves Richard Dennis, a great trader from the 1970’s. As the story goes, he made his first million by about age 25. By the early 80’s, he was worth about $200 million. Around this time, the movie “Trading Places” came out (two millionaires make a bet on the outcome of training a bum to be a financial whiz, while taking a financial whiz and, effectively, turning him into a bum). Richard felt he could similarly train a financial no-nothing, turning him into a great trader. Richard’s partner felt it wouldn’t work. So they made a bet. (Though as you’ll hear on today’s podcast, Jerry doesn’t actually believe there was ever a bet.) Regardless, how’d it turn out? Three or four years later, the group Richard trained had made, on aggregate, around $100 million.

The episode starts as Meb asks Jerry how he became involved with Dennis, trend following, and the Turtle Traders. Jerry was hooked on the idea of trend following from the beginning. Meb suggests that many people either “get it” or they don’t – meaning they get hooked, buying into the strategy completely, or not. For many people, the philosophy just doesn’t take.

Eventually the program ended, after which Jerry moved back to Virginia and started Chesapeake, which basically consisted of a telephone, a quote machine, and his trading rules. Jerry tell us how the company grew and how its trading systems developed. They’ve gone from trading around 20 markets to well over 100 now. Meb asks in terms of conditions, what’s been the most challenging market for Jerry in his career at Chesapeake? His answer – the market since 2008.

The conversation eventually steers toward leverage and volatility. Meb says how most people don’t realize how they can tamp down a volatile market through trend following and managed futures. Jerry agrees, and adds that you want to “make the same (volatility) bet” despite different markets, to maintain consistency.

Meb then asks why so many investors, retail and institutional alike, have such small allocations to trend following. Jerry gives us his thoughts, pointing toward the inherent bias people have for equities. He also believes most investors truly don’t realize how powerful diversified trend following can be.

Jerry thinks people have it backward—they see trend following as an add-on to some other strategy, when in fact, it’s the core. Start with the CTA strategy and maybe add some long-only equities.

The conversation then turns toward common investor mistakes, most notably the tendency to hold losses and sell winners short. Simply put, the behavioral side of investing is extremely challenging. This causes Meb to wonder what will happen to the roboadvisors when a bear market finally begins. Specifically, with it so easy to pull your cash out of a roboadvisor (and no live advisor to stop you), how many investors will allow fear to make them liquidate their positions?

There’s tons more in this episode, including how Jerry lost 60% in one day, the differences between technical analysis and trend following, the “turtle program” of the future, and the one market that won’t allow futures trading. Do you know which one it is? Find out in Episode 35.

Episode 35 features one of the original Turtle Traders. “What’s a Turtle Trader” you ask?

The story involves Richard Dennis, a great trader from the 1970’s. As the story goes, he made his first million by about age 25. By the early 80’s, he was worth about $200 million. Around this time, the movie “Trading Places” came out (two millionaires make a bet on the outcome of training a bum to be a financial whiz, while taking a financial whiz and, effectively, turning him into a bum). Richard felt he could similarly train a financial no-nothing, turning him into a great trader. Richard’s partner felt it wouldn’t work. So they made a bet. (Though as you’ll hear on today’s podcast, Jerry doesn’t actually believe there was ever a bet.) Regardless, how’d it turn out? Three or four years later, the group Richard trained had made, on aggregate, around $100 million.

The episode starts as Meb asks Jerry how he became involved with Dennis, trend following, and the Turtle Traders. Jerry was hooked on the idea of trend following from the beginning. Meb suggests that many people either “get it” or they don’t – meaning they get hooked, buying into the strategy completely, or not. For many people, the philosophy just doesn’t take.

Eventually the program ended, after which Jerry moved back to Virginia and started Chesapeake, which basically consisted of a telephone, a quote machine, and his trading rules. Jerry tell us how the company grew and how its trading systems developed. They’ve gone from trading around 20 markets to well over 100 now. Meb asks in terms of conditions, what’s been the most challenging market for Jerry in his career at Chesapeake? His answer – the market since 2008.

The conversation eventually steers toward leverage and volatility. Meb says how most people don’t realize how they can tamp down a volatile market through trend following and managed futures. Jerry agrees, and adds that you want to “make the same (volatility) bet” despite different markets, to maintain consistency.

Meb then asks why so many investors, retail and institutional alike, have such small allocations to trend following. Jerry gives us his thoughts, pointing toward the inherent bias people have for equities. He also believes most investors truly don’t realize how powerful diversified trend following can be.

Meb agrees, noting how if you showed an adviser the returns of all sorts of portfolios yet didn’t name the strategies, in almost all circumstances, the portfolios the advisers would choose would have the largest allocation going to trend following. But when you attach the actual strategy names, people shy away from trend following. Meb thinks it really boils down to a branding problem.

Jerry thinks people have it backward—they see trend following as an add-on to some other strategy, when in fact, it’s the core. Start with the CTA strategy and maybe add some long-only equities.

Meb then steers the guys into a discussion about some of Jerry’s most popular tweets. One of which is Jerry’s recent quote: “Beating the market is hard. Even surviving the market is hard. Stamina may be the most underrated quality.” The quote really resonated with Meb, and he asks if Jerry ever wanted to throw in the towel. Jerry thinks discipline is at least 50% of it, and yes, it can be very hard.

The guys then discuss markets, with Jerry noting that there is nothing to be lost from trading more markets than stocks. For instance, he loves currencies. This prompts Meb to bring up a Bitcoin-crash example, where a trend following approach could possibly have saved some major losses.

The conversation then turns toward common investor mistakes, most notably the tendency to hold losses and sell winners short. Simply put, the behavioral side of investing is extremely challenging. This causes Meb to wonder what will happen to the roboadvisors when a bear market finally begins. Specifically, with it so easy to pull your cash out of a roboadvisor (and no live advisor to stop you), how many investors will allow fear to make them liquidate their positions?

There’s tons more in this episode, including how Jerry lost 60% in one day, the differences between technical analysis and trend following, the “turtle program” of the future, and the one market that won’t allow futures trading. Do you know which one it is? Find out in Episode 35.

It’s a special holiday episode of The Meb Faber Show. We thought it would be fun to combine all the “beautiful, useful or downright magical” contributions from Meb and our various guests into one episode. If you’re one of our listeners who has written in to report how much you enjoy this segment, this one is for you.

A quick word – as we move from 2016 to 2017, we want to give a huge “thank you” to all our wonderful guests for having given us their time and wisdom. And, of course, a very special “thank you” to all our listeners. We appreciate your time in tuning in to us, your thoughtful questions and comments, and your overwhelming support.

In order to spend time with our families, we won’t be publishing a new episode next week on Wednesday 12/28. We’ll see you in the New Year!

It’s a special holiday episode of The Meb Faber Show. We thought it would be fun to combine all the “beautiful, useful or downright magical” contributions from Meb and our various guests into one episode. If you’re one of our listeners who has written in to report how much you enjoy this segment, this one is for you.

A quick word – as we move from 2016 to 2017, we want to give a huge “thank you” to all our wonderful guests for having given us their time and wisdom. And, of course, a very special “thank you” to all our listeners. We appreciate your time in tuning in to us, your thoughtful questions and comments, and your overwhelming support.

In order to spend time with our families, we won’t be publishing a new episode next week on Wednesday 12/28. We’ll see you in the New Year!

It’s another Q&A episode before everyone gets too busy with the holiday swirl.

Per usual, Meb has just come back from more travel, this time to Todos Santos, Mexico. He gives us a quick update before we hop into listener questions. A few you’ll hear tackled are:

-         I don’t really understand Trend. In order to maximize return, wouldn’t it make more sense to buy below the simple moving average, then hold or sell when above it? I’m just applying common sense – buy when cheaper than average. What am I missing?

-         If you were building an investment strategy for the next 30-40 years, would it more resemble the one found in your QTAA paper, an absolute value strategy (similar to what Porter discussed in that podcast), or your Trinity approach, which is more buy/hold with rebalancing?

-         Have you ever considered a strategy that buys put option protection for equity portfolios when valuations are historically high? You could buy long puts or long puts/short calls to offset some of the option premium.

-         Are recent bond yield increases causing you to tweak your bond allocations in the Trinity portfolios?

-         How does your use of momentum differ from Gary Antonacci’s dual momentum system?

-         I’m a banker, and can’t tell you how many times I’ve heard a variation of “Rates are so low at the moment, what a great time to borrow.” What are your thoughts on the long-term debt cycle, and how would you “time” leverage?

There’s plenty more, as several of these questions send Meb into deep, labyrinthine rabbit holes – one of which involves his thoughts on how to educate children about investing. He believes most parents today do it entirely wrong. So what’s the right way to raise a world-class investor? Find out in Episode 33.

It’s another Q&A episode before everyone gets too busy with the holiday swirl.

Per usual, Meb has just come back from more travel, this time to Todos Santos, Mexico. He gives us a quick update before we hop into listener questions. A few you’ll hear tackled are:

-          I don’t really understand Trend. In order to maximize return, wouldn’t it make more sense to buy below the simple moving average, then hold or sell when above it? I’m just applying common sense – buy when cheaper than average. What am I missing?

-          If you were building an investment strategy for the next 30-40 years, would it more resemble the one found in your QTAA paper, an absolute value strategy (similar to what Porter discussed in that podcast), or your Trinity approach, which is more buy/hold with rebalancing?

-          Have you ever considered a strategy that buys put option protection for equity portfolios when valuations are historically high? You could buy long puts or long puts/short calls to offset some of the option premium.

-          Are recent bond yield increases causing you to tweak your bond allocations in the Trinity portfolios?

-          How does your use of momentum differ from Gary Antonacci’s dual momentum system?

-          I’m a banker, and can’t tell you how many times I’ve heard a variation of “Rates are so low at the moment, what a great time to borrow.” What are your thoughts on the long-term debt cycle, and how would you “time” leverage?

There’s plenty more, as several of these questions send Meb into deep, labyrinthine rabbit holes – one of which involves his thoughts on how to educate children about investing. He believes most parents today do it entirely wrong. So what’s the right way to raise a world-class investor? Find out in Episode 33.

Episode 32 is like no other we’ve done to date. Local guys, Brew and Brett, run a startup in nearby Manhattan Beach – and it’s disrupting the real estate financing market. It’s not long into the episode before the guys give us the overview of how it works.

Peer Street invests in real estate debt. Now, when most people try this, there are too many intermediaries. The effect is the yield is stripped out. Peer Street is fixing this, focusing on short-term, high interest rate loans. The guys’ vision is to enable investing in real estate lending to be as easy as buying a stock through an online broker.

After giving us their fascinating professional backgrounds prior to starting Peer Street, Brew and Brett dive into how the process work.

There’s always been a shadow, niche market in this space. A real estate investor finds a good property that he/she is able to fix up and sell/rent. But to make the deal happen, the developer has to move quickly, and doesn’t have time to get a traditional loan through a bank. In steps a reputable cash lender, enabling the deal. Brew and Brett are enabling retail investors to take part in these localized real estate deals.

Meb asks about the range on yields… how many current deals they have… just general top-down metrics to paint the broad picture.

Since the end of Oct 2015, the guys have opened around $200M of loans. The average yield to investors is 8.5% net of fees and expenses. The average loan duration is 10 months. And the average loan-to-value ratio is 65%.

The guys then discuss how deals are vetted. There are approval processes, several layers of underwriting, a requirement wherein lenders have to commit their own capital, various data analytics, then stress testing of the loans.

Meb asks what would happen to these loans in a real estate Armageddon situation.

The Peer Street guys tell us they use as much data as possible to mitigate potential losses. And these are only 10-month loans, so to lose money, the borrower has to stop making payments and the value of the property has to decrease by about 35%. To try to protect against this, they run algorithms and compare the data to previous cycles. Then they consider what was the worst decline in that submarket. This helps them do a manual underwrite of the loan, after which they get an appraisal from an independent 3rd party. There’s far more on how the guys manage risk which you’ll want to hear.

Next, the conversation steers toward how an investor would actually take part in the deals. He/she can pick from, typically, 3-15 available deals at a time. Or investors can set up an automated system, establishing parameters from which Peer Street would match them with the right investments. Ten or more loans at a time is recommended for diversification, with the minimum investment being $1,000.

There’s way more in this episode, including Brew’s and Brett’s vision for how disruptive this could be, where this type of investment would fit into an asset allocation model, and an “imposter Cambria” that has Meb very angry. Curious why? Find out in Episode 32.