[00:01:05]Meb Faber: Well, I miss you guys, you know. This isn’t quite the same as doing this in a radio booth in Cayman. I miss my chauffeur, Mike, who would drive me around the island, pick me up. We’d go wing foiling. I’m a little melancholy this morning, being back here in Los Angeles, but, good to see you guys and hope the holidays… It’s got to be a little weird being on island for this time of year but, I’ve come around to 80, to 80 degree weather in December, so not so bad.

[00:01:37]Mike Philbrick: Yeah, it’s definitely not going to be a white Christmas, but, I don’t know, how you guys doing. We’re ready over here. We’re pretty much, shopping’s done. The presents are wrapped and under the tree. My wife’s …

[00:01:46]Meb Faber: We are having a holiday stroll walkabout tonight in Manhattan Beach. So by the time this publishes, sorry listeners, you’ll miss it if you’re local, but we have all sorts of goodies and treats and cookies and wine, but if you miss this listeners, you can come see us anytime in in Los Angeles. We have an open door. Come say hi.

[00:02:09]Mike Philbrick: Love it. And he, and Meb means it, so.

[00:02:12]Adam Butler: He does. Yeah.

[00:02:14]Mike Philbrick: So, we were just talking before the show Meb, and you mentioned the Leuthold report that you’d come across that you had found some, uh, pretty interesting insights in. You want to, you want to dive in there first as we’re, uh, chatting today?

[00:02:27]Meb Faber: Sure. Well, Leuthold is a little boutique asset manager based out of, I believe, Minneapolis. So, the opposite of the Christmas we’re going to have. And every month they put out a publication called The Green Book. If you can get it, listeners, it’s always worth reading. It’s like, probably my favorite thing to read each month.

But it’s kind of a quant investor’s dream because they talk about things like asset allocation and strategies and portfolios and very esoteric trivia. By the way, my email research service, The Idea Farm sent out 75 Facts of 2023 and did you know, the fact, my favorite fact I sent out this morning, half of the world’s cashews, otherwise known as the worst nut, are sold by Costco. Do you guys know that?

[00:03:15]Mike Philbrick: No, I did not know that, but I have been guilty of buying those buckets full of cashews from Costco on many occasions.

[00:03:22]Meb Faber: I signed up for a Costco account, which I have no interest in being a Costco member because it’s sort of my nightmare. I have no interest in getting, you know, 75 rolls of toilet paper at once. But, specifically because I wanted to try to buy one of their gold bars. They were selling gold bars on Costco.

If you guys remember is, I don’t know if it’s a PR stunt or real, but they sold out in like an hour. Anyway, so Leuthold had a fun chart where they were talking about, you know, everyone, everyone’s topic of the year, this year, is the mag seven, right? These, these large cap US stocks that are just ripping and pulling the market cap weights higher. And so, a lot of investors that have been market cap weighted, congrats, drink some champagne, some Labatts. What’s the Cayman beer? I’m trying to…

[00:04:13]Mike Philbrick: Caybrew.

[00:04:16]Meb Faber: Caybrew, have a Caybrew and celebrate and say, man, I was totally right for buying more cap weight. But, they have a chart that looks at the annual spread between equal weight and cap weight for various indices. They look at it in the S&P, they look at it in Russell, S&P, Russell Value Growth 2023. 2023 is either the second worst year ever or the third worst year for all three of those, going back for the last 30,40 years. Some of them had happened, you know, not surprisingly in the nineties, where cap weight just stomped on equal weight, or growth beat value.

But, one of the worst years ever, which I think just gives you a little perspective on kind of what sort of year we’re having, where everyone’s celebrating these great stock market returns. But once you kind of dig beneath the surface a little bit, broadly speaking, it hasn’t been as good. It hasn’t been terrible, but it hasn’t been as good for the rest of the stocks out there.

[00:05:23]Mike Philbrick: Yeah. I mean, I’ve also noticed the drumbeat on the low-vol type strategies have, has dimmed quite dramatically as well, due to the lack of performance in particular over the last couple of years, as that market capitalization has intensified, leaving sort of the fundamental screens in the dust, if you will, and …

[00:05:46]Adam Butler: It’s sort of the apotheosis of a trend that we’ve seen over the past kind of 10, 12 years, right, where you’ve got a very narrow group of primarily tech leaders, mega caps or ultra caps, that completely dominate the returns of the of the index, and it requires a leap of faith that investors haven’t needed to make previously, right?

Where typically, if you own an index, you genuinely do own, I mean, there’s a, it’s a Pareto distribution of market caps where, you know, definitely large caps dominate small caps to a greater degree than you’d expect, if the weights were kind of normally distributed, but it’s taken on a whole new level.

I know we saw something kind of like this back in the sixties, but I think this is a whole new level and it requires investors to have this massive leap of faith about the prospects for these high price to sales, high P/E tech growth stocks, because if they falter, they drag the entire index down with them and it doesn’t really matter how well the rest of the economy is doing or the rest of the constituents in the index are doing, because these tech stocks have so much weight and they’ve sucked all the oxygen out of the other dimensions of the market. So any attempt at diversification has made you look kind of foolish, right, made you look foolish over the last 10 years. And it’s made you look especially foolish this year. And, let’s hope this trend doesn’t continue.

[00:07:31]Meb Faber: I have to, I need like one of these tech enabled, one of the biggest takeaways from my trip to Cayman was I need to level up my tech stack and AI game. Talking to Adam about his AI stack made me feel very inadequate. I need almost like a Miriam Webster, like apotheosis, words that I just, I’m going to have to Google after this episode, but I need to learn. I was loving the AI was I went on TV this week on Bloomberg, and the closed caption translated Meb Faber as Brett Favre, the former quarterback, so Brett …

[00:08:08]Mike Philbrick: Something About Mary.

[00:08:11]Meb Faber: …investment officer of Cambria Investment Management. I thought that was really funny, so we’re not quite there yet for the Turing test, but, you know, it, thinking about sort of this balance/imbalance, another stat in this 75 Facts from the Idea Farm was, Apple’s market cap today is the same market cap as the entire stock market in 1990, which is kind of astonishing.

You know, the scale of numbers as we start to get into the trillions, it’s hard to say, but that’s the natural progression of the world, of course. But, one day, we could make a bet on who’s going to be the first, world’s first 10 trillion company. We have an old tweet that looks back over the years on, you know, what was the like million, a hundred million billion dollar companies, all the way back, and, I think Apple was the first trillion. I can look it up while we’re talking, but I think so.

[00:09:13]Adam Butler: Yeah.

[00:09:14]Meb Faber: It’s, yeah, but you know, it, we were thinking yesterday as I was, I was chatting to look, you know, the US, we’ve been talking about this for a while, talking about how you want to be diversified globally.

And someone said, but Meb, international investing has not worked for the past, how many every years? 10, 15, 20, 40, whatever. And I said, let me be clear. What you’re actually trying to say is international investing for Americans has not worked for the past 10 15 years because for the other 44 out of 45 countries it’s worked splendidly, if you look about past 10 to 15 years, because you diversify globally. So one sample size out of 45 is not a good batting average, right?

Like what you want to be saying is, you know, hey, maybe it works most of the place, most times. So you actually validated the point of being diversified globally. And we were looking, so for example, a lot of the mag seven, in our foreign and emerging market strategies, our largest holding and emerging market strategies, like a five bagger this year. But it’s a semiconductor stock. And so, whereas value type of strategies tilt away from a lot of tech in the US, it’s actually one of the largest holdings in emerging markets. So an interesting idea for people, they always seem to think very myopically about sectors and opportunities, but a sector in the US may look from, different than a sector in say emerging markets.

And so there’s really opportunity everywhere, and looking to a single geography, the US for example, being of the developed market countries, the country with the least amount of revenue from outside of its shores, from international, which is usually the reason people give for you’re diversified in the US, which is actually the least of all the countries. So I’m, in a global perspective, as we turn the page here on 2023, is a big opportunity, of course, in foreign. The old JP Morgan guide to the markets, which I love, they have one chart that’s like a mountain range and it shows when it’s flipping between foreign and US outperformance and they finally declared the US outperformance is over, and there’s this baby, tiny little sand hill next to Mount Everest, which is the giant US performance since 2009. We’ll see if it flips again, because this year foreign has definitely not kept up with the US, but it’s done decent. So we’ll see what next year brings.

[00:11:44]Adam Butler: Well, foreign cap weighted, I think, have outperformed US equal weighted, right? Again, just back to the complete and utter domination by US mega cap tech, as you know, everyone sort of thinks the entire stock market is doing well, but under the surface, it’s a much more nuanced picture.

[00:12:06]Meb Faber: Yeah.

[00:12:06]Mike Philbrick: Yeah. And I think the old valuation ideas is to understand that when you have high valuations, you’ve pulled future returns into today. And when you have lower valuations, you have potential returns waiting for you in the future, which is very counterintuitive, and emotionally very difficult for investors to handle to say, well, how can I leave what’s treated me so well, what I like, know and love, trust? So, well, how am I going to make a break from that? And because, if I would have made a break last year, the year before, the year before, the year before, it hasn’t really paid, returned dividends, if you will, and so you end up in that cycle of the turkey trusting the farmer.

Thanksgiving does eventually come, as we know, and often lasts for decades at a time. And so if, as, you say, Mab, if you’ve had a wonderful run, maybe it’s time to crack some champagne or a Caybrew or a Labatt, and maybe look at rebalancing the portfolio a little bit.

I think the other thing that tends to be lost is that portfolios seem to resemble this zero rate environment allocation. And we are not in that, at that zero rate environment anymore. You know, late 2008 to early 2022, you had basically a timeframe where the risk free rate was incredibly low.

And so the option to invest in bonds or fixed income securities in order to buffer an equity portfolio in times of growth shocks was less appealing, but that’s not where we are today. There are yields out there that are somewhat attractive and can help create a more balance in the portfolio and pay you while you wait, and pay you a pretty handsome yield.

[00:14:07]Meb Faber: T-bills and chill, that was kind of the theme of this year. You know, bonds is interesting, because bonds obviously have gotten decimated and we, I’ve talked to a lot of investors. I said, you know, if the US stock market was down 50%, people would be losing their minds. Social media would be intolerable. And I said, it’s funny because no one seems to be batting an eyelid about a lot of these long term bonds being down 20, 30, 50%. And, it’s actually the first year in a hundred years where the US long bond will be knock on wood, we’ll see what the year ends, down three years in a row.

It’s actually pretty rare for, excuse me, the second time ever, it’s down three in a row. The first time was late 70s early 80s. It’s pretty rare for these big asset classes to go down three years in a row, for five six years in a row, on sectors, industries. It’s different because they’re extremely concentrated, but for the big asset classes, S&P 500, bonds, commodities, less so commodities, but we’re right on the verge for three years for a positive, negative yield in the long bond this year.

So we’ll see if it happens, but you know, part of that, if you look back at when it happened, then, totally different environment, obviously in the late seventies, early eighties than today, but some rhymes as well. But you would think people would be losing their mind more, but I think people don’t really think in terms of bonds as actually even having capital losses, right? I don’t even think they think bonds can lose money. And if you look at tweets I have about it, people like, well, yeah, but I’ll get paid back at par. And I said that, you know, and that’s not how this works, right? That’s not how any of this works.

Like, what are you talking about, but, I think people, it’s a different mental bucketing for bonds than it is for stocks, because if the market was down 50 percent, people would be a totally different.

[00:16:08]Adam Butler: But that mental bucketing actually makes it a greater mystery to me because that’s supposed to be the safety side of the portfolio, right? It’s supposed to be the side of the portfolio where investors can count on Steady Eddie with no major drawdowns, right? I mean, that’s the way that they’re sold.

That’s the way 60/40 is sold in terms of KYC’s, and, you know, growth or aggressive growth balanced conservative mandates. They all emphasize greater allocations to bonds as you get more and more conservative. Here it’s the more conservative allocation that’s down, depending on your duration, 20 to 50 percent, and nobody seems to care, but like you said, if equities were down 20 to 50 percent, then the tone of the media, and I think the general psychology of, you know, just people operating in the economy would be in the toilet. Like it really is a really strange mystery.

[00:17:17]Mike Philbrick: Do you think that’s a function of them reducing exposure to bonds over the 10 year, 12 year period between 08 and 2022, so that many don’t have that much exposure to bonds anymore? Is it an 80/20?

[00:17:31]Meb Faber: The vast majority, I think the vast majority of investors don’t rebalance to target. I think they kind of let their portfolios float. So if you look at one of my favorite charts, what Jesse Livermore said was, the best stock market indicator ever, but, it’s the percentage of assets allocated to stocks and households.

And you can run this back since like the 1950s or something, and there’s two peaks on this. It’s the nifty fifties, when investors put about half in stocks, and then the 2000 bubble, and then, the crash back down during the internet bubble, and then GFC, and then rip right back up during meme stock era, and if you invert that chart, it is like an absolute perfect future decomposition of returns. Like, it has the highest correlation, R-squared, whatever you want to call it, to future returns. And all it is, is that investors let their investments float. So the reason it got high is because the price went up and on aggregate, right, that’s what most people are doing. And so if they have less than bonds, it’s largely because stocks have gone up as a percentage. I don’t think mentally most investors were really doing the hard math on allocating less to bonds. I think people still, on aggregate were buying them. It didn’t make a whole heck of a lot of sense.

But what you do see now is, is actually the opposite, is what I’m saying. You know, certainly people are behaving with their cash money markets, you’ve seen explosion in assets. And I think people see this almost as like winning the retiree lottery all of a sudden, where they’re like, Oh my God, 5 percent yields.

I haven’t had this in 20 years. People were, it hasn’t really caused any competitive sucking out of the market cap weight of the US yet, but it’s certainly, you’ve seen the flows and those type of funds and accelerate…

[00:19:44]Adam Butler: Yeah, no, it’s crazy. So shareholder yield, man, like, I am, I remember when you first published on that concept, and it was over a decade ago, and I, you know, I’m pretty sure you were banging the drum. It was your favorite way to sort of combine the concept of value and quality. And you’ve written about it many, many times since, and lo and behold, miraculously, as you look across the graveyard of back-tested strategies that have gone live and disappointed, you know, this has been a pretty amazing success. What do you think makes the concept of shareholder yield so timeless.

And do you think that it, a small part of me thinks that it’s got, kind of gotten better over time for certain structural reasons. Where are you on this concept today?

[00:20:50]Meb Faber: Yeah, so if you were to go back, the late great Julian Robertson of Tiger, said, his advice to a young money manager, said hey, I advise, I’m starting a fund. What advice can you give me? He’s like, be really lucky, meaning like in the first year. Get great returns and everyone will think you’re a genius.

You know, I think, I’ve certainly put out my share of research. Other investors have called me the King of Back-tests, which I think was meant to be derogatory, but I take it as a compliment. And you know, I think it’s one thing to put out a bunch of research and I think it’s another thing, obviously with real time and real money and, you know, our, our shareholder yield strategy, the domestic is over 10, almost 11 years. The foreign actually just hit a 10 year track last month, and the emerging will hit one here in the next year or two.  You know, you start to get into decade long periods and you start to get a fair amount of data to look at. There’s a great, Ken French of the famous French-Fama pairing, where he’s like, investors always ask, we had an institution recently driving me absolutely nuts. Was getting really upset because they allocated to some of our strategies, September 2022, which I think if you can recall was basically, or October, the bottom of the S&P in the cycle. And I, you know, I try to use my famous quote with them.

I said, you know how many times over the past 20 years, someone has come up to me and said, Meb, I bought your fund, I bought your strategy. It’s done terrible relative to what we were expecting. And so we’re going to have to sell it or we’re going to have to redeem, whatever the word is. I mean, hundreds of times, I’ve probably heard this. And the number of times someone has said, you know, Meb, I bought your strategy, bought your fund and it’s done so much better than expected. We have to sell the allocation. I’ve heard that zero times, and it’s happened, by the way. So our oldest strategy is the number one performing strategy in its category over the past decade, out of hundreds of funds. One of the best performing funds in the entire market. You know how many people have sold that because it’s done so well? Zero. What most people do is say, aha, and then you know what, you’re very smart. You’re brilliant. I love this strategy. We’re going to allocate more. So part of this whole discussion that’s challenging.

And you guys know this, on process versus performance. Everything to do with how a fund and strategy will do in the short term is often very much noise. And so the, the French quote was, he’s like, people are crazy to draw inferences for asset classes and strategies on 1, 3, 5, even 10 years of data, which is so hard to say to people.

I mean, if you say to the average Japanese, hey, stocks for the long run, I say, what are you talking about? Stocks have literally gone nowhere for 30 years. Why would someone invest in the stock market? It’s a big fat zero. So, anyway, I think shareholder yield, which is the concept of value investing, but also companies that distribute their cash flows through dividends and net buybacks. The key unlock here was that there was a very real structural change in markets where companies started buying back more stock. And if you’re a high yield investor, a dividend investor, or even just an investor across the market, then you ignore that data, you’re ignoring a very key piece of information on how companies use their cash.

And so I think you can model this out historically. Shareholder yield historically in the back-test looks much better than any yielding strategy you can come up with for a hundred years. And I think, if I recall, I don’t think there’s even a decade where the higher dividend yielders outperform the shareholder yield companies because the shareholder yield, it’s all well and good that it’s buying the companies that are doing buybacks and cash distributions, but it’s also avoiding the ones that are doing share issuance, and share issuance is one of the absolute worst places you can hang out if you’re a stock investor, is a company that’s consistently issuing shares and you’re getting diluted. It’s one of the worst ways to invest.

But if you don’t include that information, it can be pretty suboptimal anyway. So the strategy right now, as we’re drinking that champagne at year end, one of the crazy parts is, it’s done great over the past decade, but the discount, so as a value strategy, it should have a discount to the overall market, but these discounts kind of move over time.

It’s one of the high, excuse me, I can’t say one of the highest. It is the highest over the past few months that it’s ever been, relative to the category and broad market. This is also true in foreign. This is true in emerging. So this value trade that everyone’s talking about, to me seems like a pretty obvious opportunity right now.

And normally over the number of years, I would say foreign and emerging are cheaper than the US on market cap weight. And that’s still true. But on the shareholder yield, we’re only, you’re only selecting a hundred or 200 companies out of thousands. All three actually look pretty great. Now we’ve seen this because of a lot of the studies and charts that show that small caps have underperformed large caps.

And it’s going back to like, you know, close to record levels, where small caps have done so poorly. So I think the combination of all these sort of overlapping circles, if you do the Venn diagram, small cap, value, shareholder yield, is setting up for a pretty exciting future on, as far as prospective returns, certainly relative to the market cap weight. But we’ll have to do this again in 2030 to see how this all played out.

[00:27:01]Adam Butler: It is astonishing how much better the shareholder yield screens did than basically, all of the pure value screens over the last decade.

[00:27:14]Meb Faber: I garner a fair amount of humor though from like, you know, when people will look at the various ones and they’ll be like, you know what? Price-to-book is a garbage statistic now, you know, for various reasons. And here’s why it’s changed over the years. And then sure enough, price-to-book will come raging back and have a great year, and I think in value in general, when we’re looking at value quote, We just want to be in the right side of the universe, you know. We just don’t want to be in the expensive part.

So people love to get to the, you know, second decimal and when it comes to valuations, and to me, it’s more of like, are you over here and for those listening on audio? I’m pointing to one side of my office, which is now a wrapping room, or are you over here, which is the other side of the world. So, and that’s the same thing with the buybacks too. It’s like, it doesn’t matter if you’re buying back 10 percent of your shares per year, or eight. It’s are you buying back eight, or are you issuing 5 percent a year?

And by the way, all three of these, when you screen, you end up usually with a low double digit shareholder yield for stocks coming in. And so let that 2 percent dividend yield. So if you think you’re getting a 2 percent net yield versus single digit, low double digit, that is a massive spread. And on the buyback side, assuming if the stocks are trading low intrinsic value, you’re getting that arbitrage where you’re buying the stocks cheaper than those selling it.

So I think particularly in this cycle, we talked about this at dinner when I was down there, but you know, certainly my neighbors here in L.A. and up in San Fran, the tech space has been just absolutely going nuts with share compensation this past cycle. And so avoiding those serial diluters, and aiming for the cannibals, as the late Charlie Munger would have said, I think is a pretty thoughtful way to go about it.

[00:29:22]Mike Philbrick: Yeah, and there’s that, I think that issuance portion of the shareholder yield. It has a certain magic to it. I mean, there, if a company is buying back their shares, obviously they’re enthused about their own shares. There is also a bid in the market, taking those shares out of circulation. And so there’s a number of layers and dimensions to the strategy that can create some interesting feedback loops that aren’t necessarily considered in a price-to-book type structure.

[00:29:52]Meb Faber: Yeah, the, thinking about this in terms of philosophy, I think no one gets it more than Uncle Warren. You know, they often end up owning a lot of the stocks that we own. I did a fun poll last night on Twitter. As you guys know, I love my Twitter polls more than anything in the world. And I love to kind of point out cognitive fractures that people have.

And I said, okay, investors, this is a riff on an old one I did, which is, I was like, do you think you’re a better investor, do you think you’re a better stock picker than Warren and Charlie? And everyone’s like, no, they’re way better. And then I was like, next was like, do you own Berkshire or replicate their stock picks? And everyone’s like, no, of course not. I said, well, do you see the disconnect here? It’s like, you think, you know that they’re better. But then last night I was like, current AUM levels, would you rather have Ted, Todd and Warren managing your portfolio?

So they have to hang out in their large cap world, because they have hundreds of billions of assets under management. Would you rather own the S&P for the next 10 years, or would you rather own, would you rather do it yourself, which we all know is just a dumpster fire. There’s no chance anyone has a chance there. And the answers were, 43 percent said SPY, and then the other two were close.

Todd, Ted Warren was 30 percent and DIY was 27%, which I thought was funny, because I give both of those zero chance of beating Todd, Ted. I was like, dude, I can’t even remember which one’s Todd, which one’s Ted. But one of them has like a 300, Dillard’s or something, and like has compounded it like 30 percent a year for like 20 years or something. Anyway, I just think it’s funny.

[00:31:39]Mike Philbrick: Yeah, the cognitive dissonance is real.

[00:31:43]Meb Faber: But, so yeah, as year-end, I mean, I think to me, that’s, I think the two big opportunities certainly is value. I love emerging markets as they’ve been somewhat forgotten. I know you guys are Canadians, so gold is hanging out at all time highs. Doesn’t seem like it really wants to make its move yet, but, it seems to be making a third, fourth, fifth, sixth, seventh top. I don’t know what’s the record for most rounded tops before breaking out, but it’s right there.

[00:32:16]Mike Philbrick: It’s trying to set it.

[00:32:18]Meb Faber: Yeah.

[00:32:19]Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind listeners that while we do absolutely love providing our audience with world class guests and weekly investment insights, we wanted to remind you that we actually do our best work outside of this podcast. And we try to do this by providing cutting edge, globally diversified, and systematic investment strategies that are designed to be broadly non correlated to traditional equity and bond portfolios.

So we actually manage private and public funds as well as bespoke separately managed accounts for investors that seek the potential to smooth out portfolio returns in the long run. So, if you do want to see that theory that we’ve been talking about put into practice, please do go ahead and check us out at www.investresolve.com. Now back to the podcast.

[00:33:01]Meb Faber: so what else is on y’all’s mind as we enter the end of the year schtick?

[00:33:06]Adam Butler: I was going to say, I mean, Mike, you mentioned before we started recording, about the fact that this is the time of the year when all of the investment banks and the asset managers put out their 2024 forecasts, right? And it reminds me that we used to publish an article every year. I think it was called, Predicting Markets or Marketing Predictions, right, where we went through all of the literature on market forecasts, right, and for those who don’t already own it, I always recommend this. I think this is my top most recommended investment oriented book, Behavioral Investing by James Montier, and he goes through…

[00:33:52]Meb Faber: You can also kill some large insects with that book. It…

[00:33:56]Adam Butler: Yeah, it’s a big book. Yeah. Well, I love it because it covers kind of both of my, well, two of my big life passions, which is psychology and markets, right? The first half of the book is about cognitive biases and it runs through dozens and dozens of studies and their implications, just to daily life, but also to how we should approach markets. And then the back half of the book, a survey of, you know, dozens of papers on reviewing all the academic evidence on different approaches to investing, systematic approaches to investing. But it lists, there’s a whole chapter on how poorly we are in general, investment banks, the biggest asset managers, et cetera, supposedly the people with the greatest resources and the largest incentives to do a good job of forecasting just how badly they do, you know, the forecast for next year’s equity returns for the, at the index level, if you compare it to just the average, actually has negative predictability. The same for bond yields, the same for earnings. They bring up this Fed paper, I guess Greenspan was Fed Chairman for a couple of decades. They have, and the Federal Reserve bank’s, all the economists need to give their estimates of where they think Fed funds rates going to be one quarter from now. And they studied the calibration of these economists making these quarter ahead forecasts, for Fed funds rates, which the Fed directly controls, and discovered that over Greenspan’s tenure that their forecasts actually had a negative prediction slope. So if they said that they were going to go up, they went down and vice versa, right?

[00:36:04]Meb Faber: Like catnip, man. People want to be told that there’s a guru who knows, can define the future. It’s the same with diet and supplements. It’s the same with all sorts of other areas. People want to know, want to be told what to do and unfortunately in the investing world, you know, a lot of people market towards that desire of certainty.

You know, so I went on TV and this was the, this, I don’t think anyone caught this, this week. My son’s favorite thing to do is, he gives me a word to work in. And this was my greatest challenge yet, because this week I was like, Anton, what, what word can I work into TV? And he goes, Mamma Mia. I go, Mamma Mia? How am I to possibly work in Mamma Mia? Anyway, I got it in.

[00:36:53]Adam Butler: Mamma …

[00:36:53]Meb Faber: …really the point. Yeah, no, I was, because we were talking about sentiment following price. And I said, you know, people aren’t going euphoric about Chinese stocks. In fact, Chinese stocks are down like 20 percent this year. No one’s going crazy about Italian stocks screaming Mamma Mia. And I just kind of went on and on.

And I think these anchors at this point, they’re just like, it’s mad. Like we just tune out as soon as he comes on and check in in five minutes. But I went on and they were talking about markets and predictions or anything. I said, you know what? And I’ve always wanted to say this on TV.

I go, you know, most investors, and I’ll get the exact specifics wrong, I said, you know, due to these low volatility markets, most investors are happy and complacent, you know, because what most people see, what do you hear every day on CNBC and Bloomberg is, in these uncertain times and these high volatility markets, and then they give a prognostication.

I go, but that’s not true. I was like, the VIX went from like 23 to like 12 this year. Markets are up, everyone’s fat and happy. So I’ve always wanted to say that and they didn’t give me any acknowledgement. I was so, so sad about that. But, I think part of this is this whole forecasting world. I mean, people want to hear it. I think it’s useful to still think through less from like, will we get this right, and more trying to drill down to most investors, the range of craziness of what can happen, right?

Is it like, here’s a forecast. At least mentally think about what it’s like if the stock market does three percent for a decade. Because as we know, in relationships, in life, in work, the worst thing that can happen is your expectations are here, and they don’t meet reality, right? Like, it’s where the main mental meltdowns happen. And I think if you expect 17%, which is what people were expecting two years ago in the surveys for US stocks, and you get you know, five, and you’re actually really counting on that, it’s a problem. Super problematic.

[00:39:00]Adam Butler: So you…

[00:39:01]Meb Faber: I think it’s useful, less from what they do, which is, hey, we actually think this is going to happen too. Hey, here’s what could happen.

[00:39:09]Mike Philbrick: Thinking through what’s…

[00:39:10]Meb Faber: I don’t know that that’s what…

[00:39:11]Mike Philbrick: …you know,

[00:39:12]Meb Faber: …don’t think that’s really the angle most people go with it when they’re publishing those.

[00:39:16]Adam Butler: The most useful annual review, I think, is the Dimson Marsh Credit Suisse Yearbook, where they update the very long term returns to markets around the world. And I know you study that perennially. II have as well for many years. I think actually I stumbled on it many years ago through one of your Idea Farm emails. But, you know, the other thing that comes out of that is you sort of look at the long-term global equity risk premium, how equities and bonds do in regimes, right? Regimes of higher, low inflation, et cetera, is the importance of diversification and the, a deep internalization of a concept of deep risk, and of course that motivates. One of the Bernsteins, which one was it? The, not…

[00:40:26]Mike Philbrick: Against the Gods

[00:40:28]Adam Butler: Yeah, Against the Gods, Peter Bernstein, right?

[00:40:30]Meb Faber: Is it the one that’s alive or the one that’s dead?

[00:40:33]Adam Butler: Yeah.

[00:40:33]Meb Faber: Because I think it’s Peter.

[00:40:35]Adam Butler: Peter. I

[00:40:35]Mike Philbrick: Peter

[00:40:36]Meb Faber: Great book by the way.

[00:40:38]Adam Butler: Yeah, I agree. But he said diversification is a hedge against our ignorance. It’s not quite right, but it’s something along those lines, right? But you know, all the lessons that you learn, the more you know about deep history and the importance of, and deep risk and the importance of diversification, the irony is the dumber you’ve looked over the last decade or so, right, like, the more you know, the dumber you look. I always say it’s not the triumph of the optimists so much as it’s the triumph of the ostriches.

[00:41:15]Meb Faber: Hmm.

[00:41:16]Adam Butler: Over.

[00:41:17]Meb Faber: That should be Butler’s next book. Triumph of the Ostriches.

[00:41:22]Mike Philbrick: Oh, there’s a blog there.

[00:41:24]Meb Faber: I love it. That’s so good. That’s so good. I’ve got to find that, dig that up. That’s such a great title. But it’s true. But like, look back at that. That’s what’s so great. I, you know, I love that book. I wish they’d write an update to it. Although the yearly updates are free, but the actual coffee table version, because you flip through and you’re like, you know, just how much crazy stuff has happened in this last 200 years of markets. I mean, looking at how many markets have straight up gone to zero, whether it’s through the equity, whether it’s through the bonds, or essentially gone to zero when they went down 80, 90%. I mean, the US had this in the great depression.

And so, you have this perspective and you come around with a profound takeaway, which to me is you want to diversify the heck out of your investments, and going all in on one country, or one asset class, or even one style is the most nonsensical thing. And you guys have a great local third head of the Hydra to kind of give you the very real perspective here. When Rod talks about Latin America and hyperinflation and very personal experiences with this, most Americans, they haven’t experienced, you know. I mean, we, yes, we’ve had a couple light bear markets in the past 20 years, down 50 in stocks and we’re getting slapped around in bonds a little bit now, but nothing like we’ve had in the past.

But also, that many other countries have gone through in the past 20 years, that you ask the average Greek or Brazilian or Russian investor, how smart was it to put all their money in their own country? And they’d be like, hell no, are you crazy? That was a terrible idea. I should have diversified globally. But it’s, that’s the way this goes, right? You do…

[00:43:18]Adam Butler: Yeah. And I don’t know what the right solution is, because it’s, it just doesn’t pay to do the prudent thing based on a long-term understanding of that kind of risk, and the importance of diversification, right? It’s, you know, everyone’s going to always chase the hot dot and it’s like the cat videos, where the guys get the laser and they’re moving around on the, and the cat just leaps from one place to another to chase the, where the dot is going. And it’s just, it’s…

[00:43:59]Meb Faber: Soon into 2024, I need an Adam Butler AI course. I downloaded Perplexity Pro now, so I’m paying for it. And I literally haven’t used it yet. So, you’re hitting my credit card bill. Uh, and I don’t know what to do with it. So I need a, that’s my New Year’s Resolution is to figure this out.

[00:44:26]Adam Butler: Just have to get in the habit of going to Perplexity instead of Google, whenever you want to search for something.

[00:44:32]Meb Faber: Okay, I’ll try it. I’m going to set it as my homepage and force that function.

[00:44:39]Mike Philbrick: Well, I think some takeaways from the last bit of conversation is on the prognostication to remember that the holder of the narrative of the moment is a fickle torch to bear and it’s transient and unpredictable. And there are new narrative kings crowned constantly. And if there were a narrative king that was always the king, everyone would follow that person and the reflexive nature of markets would eliminate that edge.

So we need to kind of eschew the predictions and have some sense of humor about them. And as you guys said, you’ve got to maximize the idea of diversity through the portfolio, but I want to come to a couple of other things. You got to think about balance and then you got to think about risk management throughout the portfolio, so you’re not allowing the maniacs to run the asylum and just run you over in a period of time where a high volatile asset that you’re holding too much of, just because it’s grown to a too large an amount, runs you over in your portfolio. Maybe I’ll throw that back to you guys.

What do you think about balance Adam, thinking about balancing both, you know, asset classes, risk premiums, strategy allocations. Give us som wisdom there.

[00:45:48]Adam Butler: Yeah, well, I always think about diversification as being a combination of two things. One is holding things that, in the portfolio, that are designed to do well and do poorly in very different environments for different reasons. That’s diversity. And the second component is balance. And you can have all the diversity you want, but if there, if those diverse assets are not held in reasonable balance, then the unique properties of all of those different moving parts are not able to emerge.

So, if you hold a 50/50 stock/bond portfolio, and you sort of use an X ray, like a statistical X ray to examine the amount of daily, weekly, monthly, yearly. changes that are derived from the stock component versus the bond component, you’ll see kind of 80 to 90 percent of it’s driven by stocks, right?

So the bonds, they’re designed to do something different for different reasons, but they don’t have any opportunity to provide value in terms of their diversity, because the portfolio is out of balance. Right? So, and then the more you, more components you add in gold, commodities, factor tilts, return stacking, all that kind of stuff, the diversity is fantastic, but most people really only pay attention to adding diversity and their portfolios end up still being profoundly out of balance and they don’t actually get to take advantage of the diversification opportunity that was available to them. I don’t know if you’ve got anything to add to that, Meb.

[00:47:26]Meb Faber: I do. I have lots to add. You know, when we had an espresso coffee in Cayman, I was directing you to a paper.  One of the things that we haven’t mentioned at all, which to me is the number one. Diversify. So when I talk to American investors, I usually say three things. I say, first of all, you’re heavily concentrated in US and this applies really to anyone around the world. So if you’re listening to this from a different country, this applies to you too, because everyone puts most of their money in their home country. So they’re home biased. They put all their money for US. It’s US stocks, US bonds second. So first thing I say, you need to have a global approach.

So at least diversify globally. Second is almost no one has any real assets. You guys are Canadian, so you do a better job of this. But having real estate, commodities, TIPS, those type of investments, farmland, and then the biggest number one diversifier is this Trend Following Managed Futures Component.

And to me, the evidence is, you cannot argue with the evidence on this being an absolutely fantastic diversifier. And in fact, so the paper I’m going to guide the listeners to, it was called A Match Made in Heaven where AQR was talking about pairing private equity, which if you’re a public market investor is basically small cap value with a little leverage, either on your balance sheet of the stocks or actually the portfolio leverage, same difference, matched with managed futures, and it’s funny because both of those are very long volatility type of strategies, and I put on Twitter you know, over the years I was getting into it, positively getting into it, debating with, I think it was Dave McClure of 500 Startups.

Maybe it’s Jason Calkanis, and I said, I don’t know a single venture capitalist or private equity guy who invests in managed futures. And I’m like, it is the perfect, I was like, in fact, you should probably put most of your portfolio in this because it’s the perfect, complement, yin yang to this equity portfolio, because this equity portfolio, what’s the biggest risk to a VC is, you go through a long bear market, funding dries up, exits dry up, multiples come down, your stocks are down 50%, so like a Tiger Global. I was like, Tiger Global? They should have put half their portfolio in Managed Futures, and they’d be fat and happy, and on top of that, you have more money.

When the valuations are low and all these secondary transactions are going off at an 80 percent discount, it’s like win, win, win, win, win. And I said, I don’t even know how many institutions do this, where they pair their venture capital portfolio and private equity with a big huge Managed Futures/Trend Following chunk. And they should. And I think we’ve been on record many years, and this is what we do with our public funds. Our flagship allocation, the default allocation is half in Trend and Managed Futures, which I think is certainly more than anyone I know in the country. But most people, even if they get to 10, 20%, they feel like that’s a ton. But it, even in that point, I think it moves the needle. So I think when you, even when you think of a diversification of balance, so many people think they’re balanced. And last year wasn’t that long ago. One of the worst years ever for 60/40.

That was last year. I feel like we’ve forgotten it already, but balance means more than just stocks and bonds. Now bonds at least got a better yield now, but stocks are still on the pricey side.

[00:51:02]Mike Philbrick: I think you nailed it there. You have to have the diversifier in size. It has to make a difference in the portfolio. And having 5 percent is not going to make a difference potentially. So, now this is, becomes challenging to navigate through compliance departments as well, so that is a slightly different, avenue to pursue, but you know, it is a thing where coming back to balance and allocation to the different assets that you could invest to, in the strategies that you can invest in and the low correlated nature of Trend Following as an example, you still need to have size. It still needs to be, you know, 20%, 30%, 40%, and not in one manager, but in various managers, and different …

[00:51:52]Meb Faber: What do investors say when you tell them that they’re going to say, sure, I’m going to put in 40%? No way. They’re going to get, they were going to put in five, and if it does well, then they’ll up to seven.

[00:52:04]Adam Butler: We…

[00:52:05]Mike Philbrick: Yeah. And then 2009, they’ll go all in.

[00:52:08]Adam Butler: The maximum tracking error that most investors or most advisors will tolerate, because it’s just too much trouble to deal with investors with higher tracking error, is about 3 percent annualized, which works out to kind of 15 to 20 percent in Managed Futures on a 60/40 portfolio.

So, you know, I think that’s kind of why people settle in the 10 to 20 percent range, because, on the years that Managed Futures underperform, then, their investors underperform by two or 3%, and apparently that’s intolerable, despite the fact that there are entire decades where equities or bonds profoundly underperform some of them, where equities or bonds underperform T-bills and where Managed Futures have the potential to deliver double digit annualized returns. But, you know, the equity focus is very hard to overcome. Microsoft?

[00:53:21]Mike Philbrick: If listeners are looking at, just take a look at Returnstacked.com. There’s a bunch of portfolio solutions there, where you’re stacking the diversifier on top of the beta that you know, like, and trust, and have had it around for so many years. So you get a little bit of your cake and eat it too.

[00:53:41]Meb Faber: Have you guys tried this angle when you’re talking to people, because I’m always trying to think of going back to the Montier behavioral hacks of like how to describe this in a way that will resonate with people. And I feel like advisors, I often describe or talk about allocating to certain asset classes or funds, where it gives them comfort in, you know, it’s like, look, you got a bunch of clients. Last thing they want to see is a bunch of stocks or funds where it’s like, I’m investing in China or Turkey or Russia, right? Like emerging market funds may give you a little cover for that because it invests in a lot of them, or maybe  globally diversified is even better. So it’s like, almost like you’re kind of hiding it and Managed Futures, the Return Stack, one of the nice things I, this is probably not your marketing angle, but I like it, is you’re kind of hiding the managed futures component. You’re giving it to them in a way that they don’t necessarily, it’s more palatable. And I’ve come to appreciate all sorts of different ideas and hacks to get people to behave in their best interests. What I like to call the Anti-Robin Hood approach.

So instead of leading you to the casino and slaughtering you, you’re actually just saying, hey, we’re going to lead you, at every fork in the road, we’re going to try to take the right way to go. It may not be explicit, but I think that’s one of the reasons so many of these funds and strategies that will couple –  some of the ideas have been successful, and I think you guys can be very successful with these strategies.

[00:55:22]Mike Philbrick: We call it Cloaking.

[00:55:24]Meb Faber: Cloaking. There you go, man. You guys, see, you guys are always one step ahead of me on hiding, not nearly as good as…

[00:55:30]Mike Philbrick: Ha, ha, ha.

[00:55:31]Rodrigo Gordillo: Sorry to interrupt, but I did want to take a quick second to remind our listeners that the team works really hard on these podcasts. We spend a lot of hours trying to get the right guests and we do a lot of prep work to make sure that we’re asking the right questions. So if you do have a second, just do hit that Subscribe button, hit that Like button, and Share with friends if you find what we’re doing useful.

Thanks again. Now back to the podcast.

[00:55:53]Meb Faber: But it’s funny. So listeners, you know, as we talk about year end, I think, and talk about ways to, I think Morgan Housel does such a great job of this, but ways to really speak to someone in a, in terms of getting them to really grasp the concept. And I think, the one that we use so often, but you’re in, so it’s, I think it’s timely, is thinking in terms of your portfolio by starting with a blank piece of paper. Pull out a blank piece of paper, write down what you would love to see your portfolio, if you had a cash balance and you’re allocating for the first time today, and it’s almost never what you hold, these legacy funds. We look at so many of these legacy funds that have been absolutely atrocious over the years, and people keep them because, you know, you buy something, you just sock it away. And so the analogy we give is going into your garage, for those with, with that don’t have a garage, go into your closet and say, all right, if I didn’t, if my closet was bare, if my garage was bare, would I own, would I go out tomorrow and buy all these things again? And the answer is no chance, right? All these clothes, all these old things that you just squirrel away in your garage. I mean, I have a mental picture of all the things I have in my garage currently. And I’ve been talking about this for like three years and we renovated our house, so I have no excuse. The broken driver, you know…

[00:57:23]Mike Philbrick: Busted up lawnmower.

[00:57:25]Meb Faber: Dude, all of it. And so I think it’s a good analogy for funds and portfolios, where starting from a blank slate, I think is a really thoughtful way to go about it mentally, getting rid of the clutter. The Marie Kondo approach to portfolio management.

[00:57:43]Mike Philbrick: That’s a brilliant thing to do at this time of year. I wonder guys, are you finished on that topic, Meb, because I want to, I…

[00:57:52]Meb Faber: Yes, but I could always go on for hours. I’m never, never finished on a topic. It just…

[00:57:57]Mike Philbrick: I would like…

[00:57:58]Meb Faber: …more of a pausing on a topic. Yeah.

[00:58:01]Mike Philbrick: No, not done. I love the analogy.

[00:58:03]Meb Faber: I’m going to, this is a typical Meb conversation. I’m going to re- re-engage in a topic. We started 50 minutes ago. I’m going to, I’m just going to read to you guys the top Milestone US companies. First million dollar company, Bank of North America. I don’t know if that stock still exists. I don’t think so. First 10 million company, Bank of the US. First hundred million dollar company, New York Central Railroad. First billion dollar company, AT&T. First 10 billion company, GM. First hundred billion dollar company, any guesses?

[00:58:42]Mike Philbrick: General Electric? Microsoft, GE, GE, of course.

[00:58:45]Meb Faber: Yeah, and then trillion was Apple. So, there we go. Alright, well, sorry, sorry.

[00:58:51]Mike Philbrick: No, I just, I just want to make sure. Do you still have the snow blower from Colorado in the garage in California?

[00:58:57]Meb Faber: No, no, thank God. Although, I was driving around LA and I saw someone with the old school manual, not mechanic, like the…

[00:59:09]Mike Philbrick: Push mower?

[00:59:10]Meb Faber: …lawnmower with no gasoline. No, electric is just like the circular. I was like, wow, I don’t know if I’ve ever seen one of those in the wild. That’s awesome.

[00:59:19]Mike Philbrick: That’s awesome. I used one. I grew up on a farm. Man, it was a rough day when we ran out of gas and you had to do it by hand. I did want to talk about, because we here are largely systematic in our approach to investing. I wanted to maybe run by the question with you, with you guys, of  what are the key principles of the systematic approach that drew you to it and why you like it so much?

I’ll go first, because I’ve got a couple, just so you guys can give it some thought, as you go through it. But for me, it was the ability to enforce some discipline and more consistent decision making. It was the ability to have some sort of process to deal with not only the buying of something, but also the selling of something, and managing the risk around it. The discipline also brings this ability to force you into uncomfortable trades or positions that are ahead of the narrative. There is no narrative yet. And the trade isn’t crowded in any way, shape or form. And, but you’re alerted to it by some sort of whatever your systematic nature of investing is.

It also forces you out of those crowded areas where the narrative is so intense, whether it’s the trend has passed or the actual investment thesis has passed. So, you know, those are some of the things that really drew me to a systematic. You decision making process. Some of the, some of the things we talked about earlier, and we didn’t mention Tetlock, Adam, and how, go through the process of why you want to make these systematic decisions.

But, once you get to, oh, I should systematize my decision making process, those were some things that really kind of drove me to heading in this direction. And maybe I can throw this back over to you guys and you can kind of go through what were your top considerations in kind of moving towards a systematic approach of thinking and investment decision making.

[01:01:19]Meb Faber: I’m going to add something quick, and then I’ll kick it over to Adam. I mean, the funny part of this is like, if you’re not systematic, what’s the alternative? So you’re going to just wake up every morning, just like investing based on like what you feel is going to happen, like absolute, what a total nightmare. The usual route that people arrive at systematic is, the vast majority, is they lose a bunch of money doing a bunch of dumb stuff. When that was my route, certainly late nineties, early two thousands, and it says, this is just unworkable. How am I possibly going about this with all this time and money wasted thinking I’m George Soros, you know?

And so to me, it’s usually people arrive at the promised land. Sometimes they never do. And they’re continuing to muck around, many decades later. And I think if investors had to, one of the best thing brokerages don’t do is give investors a very clear compound return on their assets, right? Like you log into your brokerage account. It’s never like, here’s your return, including money in, money out, right? They never do that, and for good reasons, because probably you’d be like, God, I’m that, I’m this bad at this. No wonder my number never goes up. Anyway, I’ll kick it over to Adam.

[01:02:39]Adam Butler: Is that, your paper, A Quantitative Approach to Tactical Asset Allocation in 2000, and I think you, you wrote the first draft of that in oh seven, if I recall?

[01:02:52]Meb Faber: I think it was even, it was six. It got published in 07, I think. But anyway, pre GFC, going back to our lucky topic.

[01:03:01]Adam Butler: Well, yeah. So in 07, I still thought I was smart. In 09, I knew I wasn’t, so then I was sort of ready to go looking for alternatives and I, that’s when I came across that paper. So that was a big catalyst for our, the migration of our thinking from largely trying to outsmart the market and have a deeper understanding of the narratives than anyone else, to applying systematic thinking and, you know, that led to Taleb and Black Swan and Fooled by Randomness and Tetlock’s, Political Judgment.

And then, you know, all the seminal work by Paul Neal. I mean, once you actually go, and like, I already mentioned Behavioral Investing by James Montier, once you go through the mountain of literature on the benefits of systematic decision making versus discretionary decision making, and I think we should, we should probably not kind of straw man the alternative, right?

Like, it’s, I don’t think people who don’t invest in the systematic funds exclusively think that their portfolio managers are, you know, waking up every morning on a whim, figuring out what they’re going to do today, based on what they think about in the shower or whatever. I think they perceive that there’s some kind of quasi systematic process, but ultimately there’s a human in a chair making a decision about what we’re going to buy or sell today and how much.

And, you know, I think a really cool example of how unhelpful that is, is, the study that Joel Greenblatt performed, which we’ve highlighted a few times. So what was, so Gotham, he ran Gotham Asset Management. He ran, or he wrote the book, The Little Book That Beats the Market. And Gotham also ran separate accounts and sent signals about the stocks that investors should buy or sell. And it was all, as a result, they were able to study the outcomes for investors that just handed over the money and allowed their algorithm to do all the buying and selling for them, versus those that received the signals and then use their own discretion to determine which recommendations they wanted to take and which ones they wanted to ignore, et cetera.

And after several years, when they evaluated the relative performance of the two, those who followed the signals automatically, by just handing over the money to Gotham and letting the accounts, dramatically outperformed the market and dramatically outperformed those who imposed their own discretion. Those who impose discretion, not only underperform the market, but also have negative returns, if I recall, right? So you know, so much of the literature actually suggests that any attempt by a human to impose their own discretion on an algorithm that has demonstrable skill, only degrades the results, right?

So, you know, these are really hard people to take, right? There’s, algorithm aversion is a real thing, but all the literature very, very strongly and confidently indicates that following rules makes sense.

[01:06:23]Meb Faber: Yeah. No, but I think it’s true. Like, I think it’s true from two standpoints. One is like, if you look at the screens of stocks, it’s so easy to be like, Oh, I don’t want to buy that. Are you kidding me? Um, and one that we talk about that we’ve used forever, Dillard’s. Who would ever want to get hot and bothered and excited about Dillard’s?

Like, my God, I haven’t been in a Dillard’s, but also on the Trend Following side, it’s such a great example from two stances. One, three stances. One, you’ve been in an amazing investment forever. Your identity is tied to it. I mean, and for me, like, I remember, real estate being the first one REITs to roll over in 2007, I think. And being like, ah, I don’t want to sell this. Like, now the party’s over. Like, come on. I don’t want to sell it. Ditto, on the upside, is often when like markets are down and I, my predisposition is to be like in a bear market, like, oh, this is going to get much worse, and then getting that buy signal and be like, you know, this doesn’t feel like this is over yet.

And then, the third one, which I think is probably the hardest of the three, is you’ve had like, I mean, here’s gold, you’ve had like 3, 4, 5, 6, 7 losing trades in a row where it’s like going up, you buy it, it goes down, you sell it, you’re going up, you buy it, and you’re just like chop, chop, chop. And the next thing you know, you’re like, you know what, I’m done. I’m not taking this. I’m done with this. And then boom, it goes to like $4,000 and you probably didn’t buy it.

So it’s, those are what’s hard about it. And if you leave that to your own devices, you are never going to pull the trigger. And this also applies to stocks too. I think with people who, even if you are discretionary, we talk a lot about this, particularly with private investments too. I say, you’ve got to think through what’s going to happen on the downside. So if something goes down 20, what do you plan on doing with this? But it’s also true from the upside because so many people, you get a double in the stock market and you’re like, I am hot stuff. You know, like, I’m going on a vacation and came in, I’m buying a new house. I’m buying some new clothes.

But like every five, 10 bagger or even 50, a hundred bagger was once a double, you know, and people, Jerry Parker’s got a great quote that I’ll probably mask here and he’s like, people are hopeful with losses and fearful with gains, where they want to book these big wins, but Trend Following and other ideas like you, and this is one of the reasons that a lot of times private investing is at least helpful, because you can’t sell it. But, it keeps you in when the big life changing generational wealth can happen, and I see it all the time, even in some of these private markets.

I’ve invested in some startup companies where I watched the, unfortunately in some cases, these are SPVs where a syndicate lead has control over the reins, and they’ll have a big return and they’ll sell out on a secondary. And I say, look, that’s not really your job to decide when you want to, I mean, in my opinion, to sell this out. Like you’re supposed to distribute this when it goes public or M&A. And so, but they want to book some compensation. They want to book some Carry. They want to take their gain. But, in very recent example, I had this happen where 95 percent of the return, you know, it would have been a 10x from where they sold it, right? And it, and it’s frustrating because people picturing the upside too is equally as hard as thinking about the downside. Sorry, got a little long winded on that one.

[01:10:15]Adam Butler: Yeah, I mean, but the general take, is that you can’t help but inject your own views and feelings and ideologies, et cetera, on your own decisions. And so it’s, I would argue it’s basically impossible unless you are broken in some other ways, psychologically, to be able to completely disassociate your own personhood from your decisions in markets.

And most of the time, what happens in markets is not perfectly aligned with your own belief system and how you’re feeling, et cetera, and therefore making decisions informed by that are counterproductive. So, um, systematic decision making all the way.

[01:11:05]Mike Philbrick: Love it. Well, we’re over an hour. You guys got anything else that’s hot to trot in your …

[01:11:11]Meb Faber: I’m just warming up. We should have done a word cloud and see when certain topics come up over the course of the hour. We should have picked like three words that we thought the others were going to say. Because I feel like we’ve covered a lot. I haven’t said CAPE ratio. Buybacks was early. Maybe I did say CAPE ratio, I can’t…

[01:11:32]Mike Philbrick: I don’t think you did.

[01:11:34]Meb Faber: But we’ve worked in a lot. Do you guys have any, as you look out to 2024, anything you’re working on, any ideas that got you excited, got you frustrated, that you’re worried about? What’s on your brain?

[01:11:51]Mike Philbrick: I think we’re, I mean, the Return Stacked suite is rolling. I think that’s going to be a point of focus. Adaptive Asset Allocation rolling, continued to carry on its way. And we hope that dispersion may return and provide opportunities for profiting in ways that aren’t traditionally stock and bond profits, which will increase the value of the products we produce for people to add them.

And hopefully what people can do is start to think about that now, given the discussion we had today and whether it’s our products or somebody else’s, right, to start to think through the champagne parade they’ve been in and maybe, you know, start to look at Value, start to look at tilting the portfolio a little bit away from what’s worked so well.

[01:12:44]Meb Faber: I’m not sure why I think about this every time I hear Return Stacked, but Sir Mix-a-Lot, singer, rapper of the famous Baby Got Back, you feel like you could get a spokesman, maybe get him to do some jingles, or maybe some AI, uh, uh, Baby Got Return Stacked. Yeah.

[01:13:04]Mike Philbrick: I love it. I love it. What, what’s on the docket for Cambria and Meb?

[01:13:09]Meb Faber: You know, we’re launching a few new strategies, I can’t talk about publicly, by the end of the year, but you can follow Cambria, my day job to track those listeners. We got a few research pieces that I’m kicking around. Started thinking a little more about the various and myriad types of fixed income, and how they play a role, and when it’s thoughtful to invest in those and thoughtful to avoid them. It was such a weird time in bond markets for the past five, 10 years, having zero and negative yielding bonds. What an oddity that was. Hopefully that doesn’t come back, but that was certainly a weird time to look back on. Anyway, kicking around some of those ideas. And, for the next show, we’ll come talk about them and give you guys some updates.

[01:14:06]Mike Philbrick: Love it. Always a pleasure, sir. Have a very Merry Christmas.

[01:14:12]Meb Faber: Thank you guys. Come see us in Los Angeles. The door is always open. We’ll take you out for a surf or a beverage or for some food.

[01:14:20]Adam Butler: I think, right, in February?

[01:14:22]Meb Faber: Hope so.

[01:14:24]Adam Butler: Awesome. All right. Merry, Merry. Thanks man.

[01:14:27]Meb Faber: Cheers.