The Meb Faber Show - Better Investing

Episode 17 starts with the guys from ReSolve discussing how they view asset allocation and top-down investing. They start with the global market portfolio which is the aggregate of what every investor in the world owns, yet interestingly, nearly no individual investor allocates this way. They then adjust the global market portfolio by striving for balance, specifically, risk parity. They discuss how leverage enables an investor to scale risk and target a specific volatility level, therein equalizing the portfolio. Risk parity gets you to start thinking about risk allocation instead of capital allocation. And this is helpful as “you’ve always got something killing it in your portfolio…and always got something killing you.” The topic then moves to valuation. The guys from ReSolve tell us how they see today’s market—near the peak of a cycle and expensive relative to history. What does this mean for returns over the next 10-20 years? They think 1-2% real. This leads to a discussion about the Permanent Portfolio and its pros and cons in various markets. Then Meb doesn’t miss the chance to bring up gold, as he suggests Canadians love their natural resources (ReSolve is based in Canada). Next, Meb asks the guys their thoughts on currencies. Here in the U.S., it’s rare that we factor currencies into our investing decisions, but it can be more of an issue for many non-U.S. investors. The conversation circles back to risk parity, this time in the context of bonds, and where yields might be going over the next 5-10 years. There’s plenty more, including managed futures, assorted risk premia, and an announcement from the ReSolve guys about a new service offering. What is it? Listen to episode #17 to find out.

Big news today! This isn't our usual podcast. Instead, Meb has an announcement for his listeners. It's only a few minutes long, so don't miss this one!

Big news today! This isn't our usual podcast. Instead, Meb has an announcement for his listeners. It's only a few minutes long, so don't miss this one!

Episode #16 is another “Listener Q&A” episode. With Jeff asking follow-ups, here are a few of the questions Meb tackles:

-         Given low bond yields, what asset would you suggest holding in a trend following strategy while in “cash”? Would you stick to short-term bonds, diversify with several bond funds, or actually hold cash?

-         I struggle with a way to screen for quality. I just listened to your podcast with Pete Mladina and he alluded to profitability as a factor. Have you done any work here?

-         Do you believe that the development of smart beta (momentum, value, low vol…) will kill the edge of these factors?

-         It’s difficult to distinguish signal from noise when evaluating different indicators, such as forward PE versus TTM PE. What suggestions do you have for evaluating the myriad indicators out there?

-         I just came into a lump sum of money. Is there any research on the best way to invest it into a pricey market? All at once? Average in? Buy on the pull-backs?

-         Should your primary residence count toward your asset allocation and portfolio?

-         What do you mean by rebalancing taxable accounts by cash flows?

There are many more questions that touch upon topics including currency exposure, tweaks to shareholder yield, and the effects of hefty fees. All this and more in Episode 16.

Episode #16 is another “Listener Q&A” episode. With Jeff asking follow-ups, here are a few of the questions Meb tackles:

-          Given low bond yields, what asset would you suggest holding in a trend following strategy while in “cash”? Would you stick to short-term bonds, diversify with several bond funds, or actually hold cash?

-          I struggle with a way to screen for quality. I just listened to your podcast with Pete Mladina and he alluded to profitability as a factor. Have you done any work here?

-          Do you believe that the development of smart beta (momentum, value, low vol…) will kill the edge of these factors?

-          It’s difficult to distinguish signal from noise when evaluating different indicators, such as forward PE versus TTM PE. What suggestions do you have for evaluating the myriad indicators out there?

-          I just came into a lump sum of money. Is there any research on the best way to invest it into a pricey market? All at once? Average in? Buy on the pull-backs?

-          Should your primary residence count toward your asset allocation and portfolio?

-          What do you mean by rebalancing taxable accounts by cash flows?

There are many more questions that touch upon topics including currency exposure, tweaks to shareholder yield, and the effects of hefty fees. All this and more in Episode 16.

Meb tries something new in Episode 15. In “audio book” style, he walks listeners through his latest research piece: The Trinity Portfolio. “Trinity” reflects the three pillars of this investing approach: globally-diversified assets, weightings toward value and momentum investments, and active trend-following. On one hand, Trinity is broad and sturdy, rooted in respected, wealth-building investment principles. On the other hand, it’s strategic and intuitive, able to adapt to all sorts of market conditions. The result is a unified, complementary framework that can relieve investors of the handwringing and anxiety of “what’s the right strategy right now?” If you’re an investor who’s struggled to find an investing framework able to generate long-term returns that make a real difference in your wealth, Episode 15 is for you.

Meb tries something new in Episode 15. In “audio book” style, he walks listeners through his latest research piece: The Trinity Portfolio. “Trinity” reflects the three pillars of this investing approach: globally-diversified assets, weightings toward value and momentum investments, and active trend-following. On one hand, Trinity is broad and sturdy, rooted in respected, wealth-building investment principles. On the other hand, it’s strategic and intuitive, able to adapt to all sorts of market conditions. The result is a unified, complementary framework that can relieve investors of the handwringing and anxiety of “what’s the right strategy right now?” If you’re an investor who’s struggled to find an investing framework able to generate long-term returns that make a real difference in your wealth, Episode 15 is for you.

Episode 14 is easily one of our most interesting so far. While there’s great content about trend following, Eric and Meb also delve into the psychological side of investing. There’s a fascinating tension between what people say they want from investing, versus what they actually do. For instance, investors say that want diversification, but very few, in practice, are willing to implement a truly diversified portfolio. Why? The psychological trauma that people experience when they diversify (and watch parts of their portfolio draw down) is simply too painful. This leads into a discussion about one of Eric and Meb’s favorite ways to diversify a portfolio: managed futures. The numbers suggest managed futures are a fantastic addition to a portfolio. Eric ran an experiment with his clients involving portfolio construction. He presented clients the returns and volatility numbers of a handful of asset classes – without revealing what those asset classes were. 100% of the time, when presented blind, people chose managed futures as their core holding. Eric and Meb then move on to the returns of great fund managers like Buffett and Soros. Eric studied these managers with the thesis that they must have done something other investors are uncomfortable doing (which is the source of their long-term alpha). He concludes that this differentiator is actually “underperforming their benchmark.” Eric says Berkshire Hathaway is a “glaring” example. An investor in Berkshire would have underperformed the S&P more than half the time (over various time-periods), but would have made tremendously more money than investing in the S&P. This leads Eric and Meb back to the psychological side of investing, specifically, the pain of relative performance. Meb recalls the Buffett or Munger idea that it’s not greed and fear that drives the investment world; it’s envy. Meb then turns the focus toward playing defense, which leads Eric to tell us how few people realize the impact on their returns of avoiding drawdowns. Avoiding the big losers has more impact on your compounded returns than catching the big winners. In other words, defense is what wins championships. There’s far more: how 80% of all stocks effectively return 0%, while just 20% of stocks account for all market gains… a pointed warning from Meb to listeners about the fees associated with managed future “fund of funds”… and of course, plenty more on Eric’s trend following approach. All of this and more in Episode #14.

Episode 14 is easily one of our most interesting so far. While there’s great content about trend following, Eric and Meb also delve into the psychological side of investing. There’s a fascinating tension between what people say they want from investing, versus what they actually do. For instance, investors say that want diversification, but very few, in practice, are willing to implement a truly diversified portfolio. Why? The psychological trauma that people experience when they diversify (and watch parts of their portfolio draw down) is simply too painful. This leads into a discussion about one of Eric and Meb’s favorite ways to diversify a portfolio: managed futures. The numbers suggest managed futures are a fantastic addition to a portfolio. Eric ran an experiment with his clients involving portfolio construction. He presented clients the returns and volatility numbers of a handful of asset classes – without revealing what those asset classes were. 100% of the time, when presented blind, people chose managed futures as their core holding. Eric and Meb then move on to the returns of great fund managers like Buffett and Soros. Eric studied these managers with the thesis that they must have done something other investors are uncomfortable doing (which is the source of their long-term alpha). He concludes that this differentiator is actually “underperforming their benchmark.” Eric says Berkshire Hathaway is a “glaring” example. An investor in Berkshire would have underperformed the S&P more than half the time (over various time-periods), but would have made tremendously more money than investing in the S&P. This leads Eric and Meb back to the psychological side of investing, specifically, the pain of relative performance. Meb recalls the Buffett or Munger idea that it’s not greed and fear that drives the investment world; it’s envy. Meb then turns the focus toward playing defense, which leads Eric to tell us how few people realize the impact on their returns of avoiding drawdowns. Avoiding the big losers has more impact on your compounded returns than catching the big winners. In other words, defense is what wins championships. There’s far more: how 80% of all stocks effectively return 0%, while just 20% of stocks account for all market gains… a pointed warning from Meb to listeners about the fees associated with managed future “fund of funds”… and of course, plenty more on Eric’s trend following approach. All of this and more in Episode #14.

Stock picking is hard—really hard. Fortunately, there’s a simple strategy you could begin following today to improve your success. It’s simple to implement, takes just minutes of your time, yet has the potential to vastly improve your investing results. Sadly, if you’re like the average investor, you don’t even know it exists. So what is it? Well, consider the world’s star hedge fund managers – the Buffetts, Klarmans, and Teppers – the guys with average yearly returns in the upper teens and twenties. What if you knew what they were investing in right this second? Logic would suggest if you invested alongside them, you too could post their extraordinary returns. Well, it turns out, the option is available to you thanks to the SEC and Form 13F. This is a form professional fund managers with more than $100m in U.S.-listed assets must fill out. Best of all, it’s available to the public, providing you and me a way to “peek over the shoulder” of some of the world’s most successful investors. Of course, there are some issues with this strategy. For instance, there’s a 45-delay in reporting, there can be inexact holdings, and the biggest one – the fluctuating success of your chosen manager. Bill Ackman’s recent debacle with Valeant certainly comes to mind. No, it’s not easy; a 13F investing strategy takes dedication. Many of the star managers who post amazing long-term returns can actually underperform for years at a time. Would you stay invested alongside them long enough to ride out those barren stretches? Or would fear and second-guessing shake you out? Turns out there are a few ways you can improve your chance of success. Find out what they are in Episode 13.