It was a pleasure to host a discussion with Meb Faber, the Founder and CEO of Cambria Asset Management. Our conversation begins with the question of whether it’s a good idea to buy the market at an all time high. To this, Meb argues it’s actually a great idea, pointing to the data and that markets in an uptrend continue to move higher.
We incorporate the notion of a trend following strategy, which Meb illustrates can be helpful in managing the inevitable and substantial drawdown which forces many investors out of the market and destroys the value of compounding in the process. No strategy is perfect, and trend following can underperform during sideways, choppy markets. But it has proven important to cut off the deep left tail with reasonable success. We also explore the work Meb has done on shareholder yield, a strategy that he’s passionate about and argues works particularly well in foreign and emerging markets.
Lastly, we talk about that a vastly under-appreciated aspect of return generation in investing: taxes. The team at Cambria is doing some interesting work on this front, utilizing a feature of the code that helps investors diversify risk in a tax efficient manner. I hope you enjoy this episode of the Alpha Exchange, my conversation with Meb Faber.
[00:00:01] Hello, this is Dean Curnutt and welcome to the Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return, and the deployment of capital in the alternative investment industry.
[00:00:19] It was a pleasure to host a discussion with Meb Faber, the Founder and CEO of Cambria Asset Management.
[00:00:25] Our conversation begins with the question of whether it's a good idea to buy the market at an all-time high.
[00:00:31] To this, Meb argues it's actually a great idea, pointing to the data and that markets in an uptrend continue to move higher.
[00:00:38] We incorporate the notion of a trend-following strategy, which Meb illustrates can be helpful in managing the inevitable and substantial drawdowns,
[00:00:46] which force many investors out of the market and destroy the value of compounding in the process.
[00:00:52] No strategy is perfect and trend-following can underperform during sideways, choppy markets.
[00:00:57] But it has proven important to cut off the deep left tail with reasonable success.
[00:01:02] We also explore the work Meb has done on shareholder yield, a strategy he's passionate about and argues works particularly well in foreign and emerging markets.
[00:01:12] Lastly, we talk about a vastly underappreciated aspect of return generation in investing, taxes.
[00:01:18] The team at Cambria is doing some interesting work on this front, utilizing a feature of the code that helps investors diversify risk in a tax-efficient manner.
[00:01:27] I hope you enjoy this episode of the Alpha Exchange, my conversation with Meb Faber.
[00:01:35] My guest today on the Alpha Exchange is Meb Faber.
[00:01:38] He's the founder and CEO of Cambria Asset Management, an ETF shop doing some really interesting things around the tax and factor front.
[00:01:48] Meb, it is great to finally meet and have you as a guest on my podcast today.
[00:01:52] Long-time listener, first-time caller. Glad to be here.
[00:01:55] Excellent. As I said, I feel like we've traveled in overlapping circles and certainly your thought process around markets.
[00:02:03] And what I would just call a deep degree of intellectual honesty around markets, I think, is important to me.
[00:02:09] This is tough stuff. Nothing works all the time.
[00:02:12] And so what I was hoping to do in the course of 50-odd minutes is just get inside your thought process, your investing framework,
[00:02:19] some of the impetus for the ETFs that your firm has launched,
[00:02:25] and bring in a lot of what investors are challenged with these days, which I think is portfolio construction,
[00:02:31] finding diversification, avoiding very large drawdowns, but still making return in the process.
[00:02:37] So we'll have plenty to dive into. Get us going. Tell us a little bit about the period right before you founded Cambria
[00:02:44] and then the founding of it, what it's intended to do, and then we'll take it from there.
[00:02:48] Oh, man. I graduated during the great bubble of the 90s, which was my favorite bubble in history.
[00:02:56] People forget, but it was not just an internet stock bubble, but also a biotech.
[00:03:00] I was a biomedical engineering undergrad, graduated right at the peak of it, and was neck deep in biotech stocks and internet stocks and all that fun stuff,
[00:03:09] but had really assumed I was going to be an academic in the biotech world, went to grad school at Hopkins.
[00:03:16] But I also worked during the day as a biotech analyst for a mutual fund and kind of just got bit by the bug.
[00:03:24] My career became my hobby and vice versa, and I kept getting further and further away from biotech and more and more quant.
[00:03:31] I really wanted to understand how these stocks could drop by 50, 80, 90% back in the early days of the internet winter.
[00:03:40] Then moved out to West Coast, San Francisco, worked at a quantitative commodity trading advisor,
[00:03:48] what people would call a CTA or CPO.
[00:03:50] Didn't last very long, but was able to work in Lake Tahoe, which was pretty nice.
[00:03:54] I really say glorified ski bum, and then moved, traded my skis for a surfboard, moved to Los Angeles, Manhattan Beach to start Cambria.
[00:04:03] This would have been pre-global financial crisis.
[00:04:06] Didn't really know what we wanted to be when we grew up.
[00:04:08] Started managing separate accounts and private funds and started publishing at that time, largely out of necessity.
[00:04:15] When you're young and starting a company and bootstrapping it as an entrepreneur,
[00:04:19] you don't have a lot of money to hire people or advertise or do marketing.
[00:04:22] So the best marketing has always been content in our world.
[00:04:25] And to me, in the early days, that was academic papers and books and blogging.
[00:04:31] More modern, that's YouTube and podcasts and Twitter.
[00:04:34] And I'm told we're on TikTok, though I can't watch it.
[00:04:37] And so the business has evolved over the years.
[00:04:40] We're mostly known as an ETF manager now.
[00:04:42] We got almost $3 billion in assets with 16, soon to be 17 funds and over 150,000 investors all over the world.
[00:04:50] So one of these overnight successes, what is that, 20 years, almost 20 years in the making.
[00:04:56] Two and a half decades and some gigantic bubbles, some gigantic drawdowns, and then some epically low vol periods, too.
[00:05:03] So we get to see everything if we observe markets for long enough.
[00:05:07] You mentioned the start in biotech.
[00:05:09] And we're having this conversation literally one week before the election.
[00:05:13] Wake me up when it's all over, right?
[00:05:15] So we'll get past that and see what becomes of markets and the electorate.
[00:05:20] And we've got a new all-time high just about in Bitcoin today.
[00:05:23] So tons are going on.
[00:05:25] And what's so interesting to me, and I'll tie this back to your work in biotech, is you've got so many dynamics going on here with this election, right?
[00:05:33] I mean, Elon Musk owns Twitter.
[00:05:35] He's tweeting like crazy.
[00:05:37] I was making the comment that Polymarket allows you to put these bets out there.
[00:05:41] And if you could just bet on the over on how many times Elon will tweet in a day, just take it, whatever it is, right?
[00:05:47] He's going to get there.
[00:05:48] But you also have DJT, the stock.
[00:05:51] And the stock's going absolute bananas.
[00:05:53] And what was so striking to me was that if you look at the options that expire this Friday, the first, so before the election, versus the following Friday after the election,
[00:06:03] the vol spread was on the order of 180 or something.
[00:06:07] And I was just saying that the November 8th options at 400 vol, it really reminded me of a biotech in a phase three trial.
[00:06:16] I have looked a lot at options around biotech events, and those vols can just get sky, sky high.
[00:06:22] They're so binary.
[00:06:23] You're bringing up a lot of PTSD for me because at the end of our podcast, we often say what's been your most memorable trade.
[00:06:29] And for a lot of the famous investors and people who've been around, the biggest compliment you can give someone in our world, you survive.
[00:06:36] Simply that you've existed.
[00:06:38] You haven't been taken out of the game.
[00:06:39] And so many of us that have been around long enough, like we understand losing is a part of it.
[00:06:43] We have the scars to prove it.
[00:06:45] And for me, my biggest memorable, terrible trade was in the early 2000s was a biotech strangle or straddle.
[00:06:54] I can't remember which one, but essentially an option trade where I eventually lost all my money.
[00:06:58] But it definitely taught me a lot of lessons and kept pushing me down the quant path, making everything systematic.
[00:07:04] This ties back to my single favorite investing quote, which is every trade makes you richer or wiser, but never both.
[00:07:12] And I love that because a couple of years ago, 2021, you really had a darn near repeat of the late 90s, the craziness that was going on.
[00:07:23] And you see some echoes today.
[00:07:24] You mentioned with DJT and other things going on.
[00:07:28] And I never thought I would see it again in my lifetime, at least not in the US.
[00:07:32] But here we are where we have a whole tweet thread called What in Tarnation, where it was just a bunch of crazy charts one after the other, each one crazier than the next.
[00:07:42] So that's the beauty of markets.
[00:07:44] Every day is a new chapter.
[00:07:46] And despite how much history we can all study, the future is always going to be weirder and more different than we could even possibly imagine.
[00:07:54] Yeah, I mean, that meme stock episode and the force with which those stocks went up and the way in which information was shared on Reddit and Wall Street bets.
[00:08:04] One of my little sayings is markets are never say never business.
[00:08:08] Whatever you think might happen, you just can't handicap it enough.
[00:08:11] And you mentioned this idea of survival and the lessons that markets teach you.
[00:08:16] They can teach you some painful lessons on both the long and, well, certainly the short side if you're the Melbourne Capitals of the world.
[00:08:23] But even the underinvesting side, right, the folks that experienced the GFC and had the scars from the GFC probably spent a long time.
[00:08:32] Of course, in hindsight, it's very easy to say it's 2020, but spent a long time being vastly underinvested in what was a pretty sweet period of wealth accumulation.
[00:08:43] Right. All the way into the pandemic with, by and large, very little volatility from you call it post the sovereign crisis in Europe into 2012.
[00:08:51] You had a seven year run with not a lot of drawdown and low vol, decent returns and very high sharp ratios.
[00:08:59] So you can suffer on the underinvesting side as well.
[00:09:04] And so maybe this is where I'll just try to tee you up a little bit, because I'd love to get some of your thoughts, maybe starting with the S&P 500.
[00:09:13] It's a beast of a benchmark.
[00:09:15] I mean, this thing is just absolutely brutal to try to track.
[00:09:19] Well, it's easy to track, but it's very difficult to outperform.
[00:09:21] And you've called it really a momentum strategy.
[00:09:25] It's the result of a momentum strategy.
[00:09:28] And I'd love for you just to kind of share your thoughts on this.
[00:09:31] I think the number is maybe nine trillion that's passively indexed.
[00:09:37] Certainly multiples of that that are implicitly indexed, right?
[00:09:40] There's a lot of benchmark hugging going around.
[00:09:42] But when you look at the S&P 500 and its benefits, its flaws, maybe from a factor perspective, I'd love to get your thoughts on that.
[00:09:52] Yeah.
[00:09:53] Wow.
[00:09:53] Okay.
[00:09:53] There's a lot.
[00:09:54] But let's say you go back 50 years.
[00:09:56] I know you're very dear friends with the Fama crew that really talked a lot about markets and efficiency.
[00:10:05] But John Bogle and others in the 70s really made this amazing practitioner, not discovery, but implementation where they really rolled out market cap weighting to the masses.
[00:10:17] And the beauty of what they did, I actually have a non-consensus view here where I don't think it's actually related to market cap weighting.
[00:10:27] Now, everyone listening to this knows this, but most of your clients, spouses, nieces, nephews don't know this.
[00:10:35] Market cap weighting is just price of the stock times shares outstanding, right?
[00:10:38] You buy the market.
[00:10:39] If stock goes up, you own more.
[00:10:41] If it goes down, you own less.
[00:10:42] Like it's the ultimate trend-falling strategy.
[00:10:44] Your position sizing algorithm is simple.
[00:10:47] Your money management algorithm is simple.
[00:10:50] Now, it's an odd way to invest, but it's beautiful in its simplicity because you don't do anything.
[00:10:55] And because you don't do anything outside of corporate actions, et cetera, you can implement this for very low fees.
[00:11:03] And so in my opinion, the massive innovation that Bogle and others implemented in the 70s was actually not market cap weighting.
[00:11:10] It was low-cost investing.
[00:11:12] And so 50 years later, when people talk about passive and everything else, they get mixed up.
[00:11:17] I mean, Vanguard is, I believe, the largest active manager in the world.
[00:11:22] They have more active funds than they have passive.
[00:11:24] And that blows people's brains up every time we mention it because, again, it's not just a market cap story.
[00:11:31] So in 2024, where you can implement things in a non-market cap weight, that can be interesting in a tax-efficient manner.
[00:11:38] However, however, we wrote a paper earlier this year called The Bear Market and Diversification.
[00:11:43] And you mentioned that this simple kind of idiot's guide to investing, like the dummy's guide to investing, you just bought SPY for the last 15 years.
[00:11:52] You've smoked everybody.
[00:11:54] I mean, it's done 15% per year.
[00:11:58] That's a 10-bagger since the bottom in 2009.
[00:12:02] Like, let that sink in, listeners.
[00:12:03] Most of you don't probably think your portfolio has been a 10-bagger if you didn't sell.
[00:12:08] You reinvest all your dividends, right?
[00:12:10] You sat in the S&P.
[00:12:11] That's creamed everybody.
[00:12:13] And arguably, that's been the worst period for a diversified portfolio, arguably in history, in terms of absolute underperformance.
[00:12:22] Doesn't even matter what.
[00:12:24] 60-40, permanent portfolio.
[00:12:25] But also in terms of years in a row.
[00:12:27] And that's the most painful because it's like 13 of 15 years you underperformed the S&P if you did anything other than the S&P.
[00:12:35] Now, that leads to a lot of behavior.
[00:12:38] You mentioned and alluded to the period post-GFC where everyone, I couldn't take anymore.
[00:12:44] I sold everything.
[00:12:45] And then may not have gotten back in until 2010, 2012, 2014.
[00:12:49] But now everybody is in, right?
[00:12:52] If you look at stocks as a percentage of household net worth, if you look at all the various valuation metrics, like there's no question U.S. stocks are owned at the highest levels they've ever been.
[00:13:02] And there's no question in my mind that they're expensive.
[00:13:04] So what?
[00:13:05] Right?
[00:13:06] I published this paper in February.
[00:13:08] Guess what?
[00:13:08] S&P is up 25 this year.
[00:13:10] So it read the paper and said, hold my beer, Meb.
[00:13:13] But if you look at investing, these regimes can last a long time.
[00:13:16] Everyone wants, particularly in this TikTok age, wants certainty at the weekly, monthly, quarterly, yearly timeframe.
[00:13:25] And that's not how it works out.
[00:13:27] That's not what the markets do.
[00:13:28] They often play out over decades.
[00:13:31] And so half of our brain is value.
[00:13:33] The other half is trend.
[00:13:35] And historically, the best market environment for U.S. stocks, the S&P, has been a cheap uptrend.
[00:13:41] But the second best has been an expensive uptrend.
[00:13:43] And that's where we are.
[00:13:44] Market's expensive.
[00:13:45] It's going up.
[00:13:45] So what?
[00:13:46] So we always say, like, the yellow flashing light, yes, they're expensive.
[00:13:50] But until you get the market rolling over into a downtrend, to me, that's the red flashing light.
[00:13:56] So we're kind of in this just cruising along period.
[00:13:58] We don't know how long it lasts.
[00:14:00] It could be a week.
[00:14:01] It could be a month.
[00:14:01] It could be five more years.
[00:14:03] But you only have to rewind back to when I graduated college to know that an entire decade could look different, where everything smokes the S&P.
[00:14:12] It doesn't matter what you invested in back then.
[00:14:14] And you beat the S&P for a decade.
[00:14:16] So it's been a pretty unusual period.
[00:14:18] There's really only been three other periods like this in history for U.S. stocks, where they've done, let's call it, over 15% compounded for a decade.
[00:14:28] And it doesn't mean it has to crash or end poorly.
[00:14:31] But usually, the good times follow the bad and vice versa.
[00:14:35] But valuation has never been a great timing indicator as far as when do I get out.
[00:14:42] And you've got, I think it might be your chart, but you've certainly spoken about it, the forward returns based on buying the market when it's at its all-time high.
[00:14:50] It's a result you wouldn't logically anticipate, but it's a powerful result anyway.
[00:14:57] You do well.
[00:14:57] Yeah.
[00:14:58] Yeah.
[00:14:58] I mean, buying all-time highs.
[00:15:00] As a trend follower, we did a paper.
[00:15:01] It's called, are buying all-time highs a good idea?
[00:15:04] No, it's a great idea.
[00:15:05] And so all-time highs in and of themselves are actually bullish.
[00:15:08] It's uncomfortable for people, I think, to buy things at all-time highs.
[00:15:13] But markets only exist in two states.
[00:15:14] It's all-time high or it's in a drawdown.
[00:15:16] There's no in-between, right?
[00:15:17] That's just math.
[00:15:18] And most of the time, markets, they'll spend in some form of drawdown, even though they're going up most of the time.
[00:15:24] It's kind of a weird dichotomy for people to settle.
[00:15:27] But on average, the challenge of all this is you want to put money to work.
[00:15:32] You want to have a plan, save and invest, and diversify in a way that keeps you in the game.
[00:15:39] Like, that's the whole key.
[00:15:40] You can't get taken out.
[00:15:41] So is there someone who has the emotional fortitude to just hang out in the S&P?
[00:15:47] God bless them.
[00:15:48] That's not me.
[00:15:49] There's periods where S&P has gone decades underperforming bonds or cash or other assets.
[00:15:56] I think since 2000, S&P is not even the best-performing asset.
[00:15:59] I think gold has outperformed the S&P over the past 20-some years.
[00:16:03] Gold's an all-time high as well, by the way.
[00:16:05] So who knows?
[00:16:06] But we think it's leading to two big opportunities.
[00:16:09] U.S. stocks are expensive on average market cap weight.
[00:16:12] But if you go below the surface, value stocks, small, mid-cap, looks a lot better.
[00:16:18] We talk a lot about shareholder yield.
[00:16:19] Foreign stocks, we think, certainly look better now, partially because they haven't gone anywhere
[00:16:24] for 15 years relative to the U.S. and certainly emerging markets in that same bucket.
[00:16:29] But value and quality across all three geographies, we think it makes a lot of sense to tilt away
[00:16:34] from the U.S. big market cap, MAG7, et cetera.
[00:16:37] So when you look at the S&P, as you mentioned, you've had this fantastic run.
[00:16:42] When you think about drawdowns of significance, and you're sort of alluding to it, the issue
[00:16:47] is that it forces your behavior.
[00:16:49] I mean, anyone could put a dollar in the market and never look at it again, but of course,
[00:16:53] it's not meaningful.
[00:16:54] So in some sense, the sort of tension is sizing.
[00:16:57] And you know if you've sized too large based on the drawdown and it kind of forcing your
[00:17:03] behavior, basically you've got more volatility than you anticipated, the unwelcome kind.
[00:17:10] And I'd love for you just to walk through kind of high level how trend following, nothing's
[00:17:17] perfect, right?
[00:17:18] So you can kind of get chopped up in trend.
[00:17:20] But when you think about minimizing the drawdown, which forces your behavior, how does a trend
[00:17:26] following strategy, just big picture, facilitate that, avoiding that gigantic drawdown?
[00:17:33] Yeah.
[00:17:33] And we'll talk about one asset as an example, but certainly we could talk about this in terms
[00:17:38] of a portfolio context.
[00:17:40] Let's say your only choice is S&P or nothing.
[00:17:43] And that's obviously, you go to the grocery store, it's never just brand flakes, right?
[00:17:47] Like there's more choices, but we'll stick here for a second.
[00:17:50] The challenge with the S&P, you go long over time, 10% a year, you 10X your money in 25 years,
[00:17:57] you 100X it in 50.
[00:17:58] I mean, my goodness gracious, that's amazing, right?
[00:18:01] Like the magic of compounding.
[00:18:02] But as you mentioned, the path is what takes people out in the body bag, where on occasion
[00:18:07] you'll have these losses of 50%, and you got a real chance of an absolute haymaker
[00:18:13] where you're going to lose 80 or 90.
[00:18:16] So we call that the Great Depression, but it's happened in plenty of other countries.
[00:18:19] And if you look at it on an after inflation basis, there's plenty of other times where
[00:18:24] it can be extremely painful for very long periods.
[00:18:27] I mean, you look at foreign markets, I mean, Japan gone nowhere for 30 years.
[00:18:31] I mean, China, I think currently has had zero stock market returns for 30 year plus.
[00:18:35] So there's times when it can last a while.
[00:18:38] Anyway, but let's say, what do you do about that?
[00:18:40] Well, for the S&P, theoretically, trend following, and we'll do our most basic when we published
[00:18:46] a paper back in 2006 on this, you could use something like a very simple technical indicator
[00:18:52] investors have been using for probably 100 years back at the time of Charles Dow and Dow
[00:18:57] Theory, who started the Wall Street Journal.
[00:19:00] But we'll use something like the 200-day moving average, super basic type of indicator traders
[00:19:05] have been, again, using for forever.
[00:19:07] And you do something and you have a basic rule, you say if price is above it, we're long.
[00:19:11] If it goes below, we hang out in cash or bonds or whatever your safe asset is.
[00:19:15] And it turns out across almost any asset you could possibly come up with, this type of strategy
[00:19:21] will give you similar returns to buy and hold with lower volatility and lower drawdowns.
[00:19:28] And part of the reason is because you're hanging out in cash for the periods.
[00:19:32] And part of the reason is that drawdown number, you're usually chopping off kind of that big
[00:19:37] left tail.
[00:19:38] So instead of a 90% drawdown, it usually cuts it in about half of whatever the drawdown was.
[00:19:43] You're not going to miss the 5% or 10% returns.
[00:19:45] You may not even miss 15% or 20% at some point.
[00:19:48] And you have the bigger struggles, the choppy markets in between.
[00:19:51] But on average, it reduces risk and it reduces drawdown.
[00:19:54] Not guaranteed though, of course.
[00:19:56] Like 1987 rolls around, depending on your indicator, if you had the 200-day moving average
[00:20:01] or shorter, you would have been out during the crash.
[00:20:03] If you had 200 or longer, you would have been in during the crash.
[00:20:07] And that's a very binary outcome, right?
[00:20:09] That's a career definer.
[00:20:11] But people struggle with that.
[00:20:13] Well, first of all, they struggle with buying hold because you don't do anything in the
[00:20:16] downturns.
[00:20:17] And if you live through 08, 09, if you live through other market downturns, that's hard because
[00:20:23] you don't know how far it could go.
[00:20:26] And second, the trend following is also hard, but it's usually not because of the downturns
[00:20:29] because you're usually hanging out in cash and bonds.
[00:20:31] It's for the choppy periods or the periods where you look worse and stupid.
[00:20:36] So think 2009 all the way through 2020, a trend following approach would have done worse than
[00:20:43] buy and hold because you would have been kind of whipsawed during some of those markets.
[00:20:47] That's the basics of it.
[00:20:48] Now, there's reasons why it works.
[00:20:50] And the main reason is when markets are going down, they're much more volatile.
[00:20:54] And why are they more volatile is the reasons we just discussed.
[00:20:57] Lehman's going under.
[00:20:59] You got fired.
[00:21:00] Front page of the newspaper is about stock market crashing.
[00:21:03] People use a different part of their brain when they're losing money than when they're
[00:21:07] making money.
[00:21:07] When you're making money, you're thinking about going to Cabo, buying a new house, going
[00:21:12] out to dinner, how smart you are, how you need to tell all your friends at happy hour
[00:21:16] that they should have bought NVIDIA and how smart you are for telling them to buy NVIDIA
[00:21:21] and they didn't.
[00:21:22] But when your stock market's down 50% or your Bitcoin or gold or whatever is down 50%, you're
[00:21:28] embarrassed and there's shame.
[00:21:29] And so this whole key to trend following is just avoiding those highly volatile periods,
[00:21:34] which also include, by the way, the best days in the market.
[00:21:38] And people are always surprised about this.
[00:21:40] Yes, you avoid the worst days, but you also usually avoid the worst.
[00:21:43] And if you avoid both, you actually end up in a better place.
[00:21:47] It's sort of a weird takeaway, but we call it avoiding the volatility gremlins.
[00:21:52] You got all this volatility going on.
[00:21:54] If you can just chill out and avoid that, you end up in a better place at the end of
[00:21:58] the day.
[00:21:59] Now, some of these strategies like trend have nicely defensive characteristics during difficult
[00:22:05] markets.
[00:22:06] It's sort of a conditional correlation that sets up, well, I wouldn't call it a tail hedge
[00:22:11] by any stretch.
[00:22:12] AQR has got some work.
[00:22:14] They call it hedging fast and slow.
[00:22:16] So the slow hedge is kind of trend and the fast hedge is more options-based insurance.
[00:22:21] In doing a little bit of reading, I love your ETF's tail and fail.
[00:22:26] Good names.
[00:22:27] Now, I just was curious if you could talk a little bit about how you think about the downside
[00:22:33] in the context of this way it's characterized as fast versus slow hedging and how you think
[00:22:38] about it.
[00:22:39] Yeah, we've written a couple of papers on similar topics, one of which is like, how do you diversify?
[00:22:45] And we often joke that the average financial advisor is like four times leveraged the stock
[00:22:52] market and doesn't know it.
[00:22:53] They own stocks in their portfolio.
[00:22:55] They own stocks for their clients.
[00:22:57] They're fee-based.
[00:22:58] So when stocks go down, their revenue goes down.
[00:23:01] If they don't own their own company, if there's a recession or depression, their company may
[00:23:07] downsize or go under.
[00:23:09] So there's an argument that there's no reason that your human capital should actually be tied
[00:23:15] to 4X revenue stream of just the US stock market.
[00:23:20] It's a very strange setup.
[00:23:22] Theoretically, you would want your portfolio to be inverse of your human capital.
[00:23:27] So when you're losing your job or times too poorly, you actually are not doubling, quadrupling
[00:23:32] down on the bad outcome.
[00:23:34] Anyway, so how do you diversify?
[00:23:36] Well, first is the most basic that a lot of people do, which is other assets.
[00:23:41] So you don't just own US stocks.
[00:23:43] You also own foreign stocks.
[00:23:45] You don't just own stocks in general.
[00:23:47] You also own fixed income.
[00:23:48] You don't just own stocks and fixed income.
[00:23:50] You own real assets like tips and REITs and on and on.
[00:23:52] And you get to these diversified portfolios.
[00:23:55] And that's a much better place to be.
[00:23:57] I don't think it really matters how much you own of each one rather that you own them
[00:24:02] in the first place.
[00:24:03] And if you ignore any of those main three categories, you're often in a worse place than if you
[00:24:08] just own one.
[00:24:10] Then gold would be in the real assets and Bitcoin too.
[00:24:13] And then, okay, well, you got that portfolio.
[00:24:15] Well, there's no scenario you can find me historically, listeners.
[00:24:20] Feel free to email me if you do, where you find a portfolio of buying whole global assets
[00:24:24] that's not going to decline by at least a quarter at some point, probably a third,
[00:24:29] particularly after inflation.
[00:24:31] And so that can be painful for people, certainly.
[00:24:34] There's ways they address that.
[00:24:36] They will invest in private assets.
[00:24:38] But that's really just an ostrich strategy, meaning you're putting your head in the sand
[00:24:41] and not looking, except for once a year.
[00:24:43] You mentioned Cliff, he talks about that.
[00:24:45] Second, you can start to try to do active strategies that may diversify even more.
[00:24:51] Trend following, and I'm probably the biggest outlier in the entire institutional world here,
[00:24:56] I think is really the premier strategy to diversify a buy and hold allocation.
[00:25:02] And historically, that's meant managed futures, but really ideas where you can go long flat or long
[00:25:08] short a portfolio of assets and complement that to a traditional portfolio.
[00:25:13] I really think there's nothing out there that is quite as premier as trend is.
[00:25:18] But there's other things.
[00:25:19] You mentioned tail risk hedging.
[00:25:20] And that's almost, you can't say guaranteed in our world, but almost guaranteed to hedge
[00:25:25] a US stock downdraft.
[00:25:26] But it's a cost in other times.
[00:25:28] And so it's almost like buying house insurance.
[00:25:31] House insurance certainly is going to protect you if your house burns down, but you're paying
[00:25:37] a monthly premium.
[00:25:38] So you do all these sort of things and kind of put them together and come up with a portfolio
[00:25:43] that's resilient.
[00:25:43] For us, I think trend following can be as much as half.
[00:25:47] Now, I don't know anyone on the planet that says more than really 20%, but we think if you
[00:25:52] run the optimizations and the modeling, it certainly could be the case.
[00:25:55] Now, we're fine, totally fine with buying whole portfolios.
[00:25:58] We manage a lot of them.
[00:25:59] But for a lot of people, the path is really challenging.
[00:26:02] And all of this having been said, to tie this back to the earlier conversation,
[00:26:06] we got an election coming up, probably done by the time this comes out.
[00:26:10] We have a piece.
[00:26:11] We actually wrote this four or eight years ago.
[00:26:14] We just republished it every four years where we were like, all right, we got an election
[00:26:18] coming up.
[00:26:18] It's kind of the choice between a shark or a lion.
[00:26:22] No matter what your perspective, half the country is going to be upset in a month.
[00:26:26] I was like, but sharks and lions actually don't kill that many people each year.
[00:26:31] What does kill a lot of people that no one's worried about is the mosquito, you know,
[00:26:35] kills like a million people a year.
[00:26:36] Sharks and lions are very little.
[00:26:38] If you actually look in the top five and top 10, it's a bunch of stuff nobody's ever heard
[00:26:42] of.
[00:26:42] It's like snails and worms and all sorts of weird parasites.
[00:26:46] But the analogy we liken this to in the investing world is what do we talk about all day?
[00:26:50] And it's worth talking about.
[00:26:51] Should I invest in US stocks?
[00:26:53] What's the Fed doing?
[00:26:54] How much my portfolio is in trend?
[00:26:56] On and on and on.
[00:26:57] And we kind of gloss over two massive alpha generators, which are simply just expenses,
[00:27:03] fees and taxes.
[00:27:04] I was like, taxes are the mosquitoes of the investing world where people often only look
[00:27:12] at them come April when they get their bill.
[00:27:15] But really, like thoughtfully planning about how to allocate and invest for taxes can be
[00:27:21] multiples more important than what you actually invest in as far as some of these other ideas.
[00:27:27] So anyway, yeah, I'm shark or a line.
[00:27:29] Take your pick.
[00:27:30] We're going to finish this on the taxes and the stuff you're doing with alpha architects
[00:27:35] on the 351 idea.
[00:27:37] And I agree.
[00:27:38] It's not sexy, but it's incredibly value added.
[00:27:41] It doesn't get enough focus.
[00:27:43] You had said something about kind of a bear market and diversification.
[00:27:46] And I think what you mean by that is the S&P has just been such a gigantic wealth generator
[00:27:52] that to do anything else is sure, maybe you lower your overall portfolio of all, but at
[00:27:58] a almost unacceptable expense.
[00:28:00] I remember Cliff had published a piece saying, we're doing it.
[00:28:04] We're going to overweight international.
[00:28:06] Maybe it was like six, eight months ago.
[00:28:08] For him, and not trying to time things, but the valuation discrepancy against, I think it
[00:28:14] was Europe, but just generally foreign markets versus the S&P had gotten significant enough.
[00:28:18] And he calls it sin a little bit.
[00:28:20] Within the S&P 500, you have a lot of concentration risk.
[00:28:25] I've actually called the S&P itself, it's magically diversifying.
[00:28:30] In other words, if you look at NVIDIA, Apple, Microsoft, Google, these stocks are obviously
[00:28:37] the biggest.
[00:28:37] They're the drivers of the wealth and the performance, but they are unusually, and I would just argue
[00:28:44] unsustainably low in terms of their correlations.
[00:28:47] There was a period where Apple and NVIDIA over a three-month period were negatively correlated.
[00:28:53] That's just odd.
[00:28:54] And I just kind of step back and I just look at the impact of that incredibly depressed correlation
[00:29:01] on overall volatility at the index level.
[00:29:04] And I see the S&P realizing eight or nine vol, and you know people size portfolios based on that,
[00:29:10] sometimes programmatically using things like vol control.
[00:29:14] So for me, that's been a little bit of a hidden risk, just that these things, sure,
[00:29:18] they've been uncorrelated.
[00:29:20] We sort of react to what we see, but that doesn't mean going forward.
[00:29:23] So I'd love to just get your thoughts on index concentration.
[00:29:27] Is that something that you see as one of your roles or deliverables to clients of trying
[00:29:33] to sort of help them think about broadening out equal weighted versions of the same thing?
[00:29:38] Or what do you make of the epic concentration at the top?
[00:29:42] You know, there's a whole number of things to talk about here.
[00:29:46] First of all, it's hard for investors to be asset class agnostic, meaning you got people,
[00:29:51] they're like all in on US stocks, or maybe they're gold bugs, or they're Bitcoin blockheads.
[00:29:58] I don't know what the phrase we use for my coiner friends, whatever it may be.
[00:30:02] People love to go all in on something because it's like cheering for a sports team.
[00:30:07] There's no scenario I'm cheering for the Raiders over my beloved Broncos.
[00:30:11] Like there's no argument you could make for me to do that.
[00:30:13] But that's problematic because we get emotionally attached to portfolios.
[00:30:17] The analogy we love to give is go walk out to your garage.
[00:30:21] And if you don't have a garage, go walk in your closet and look at all the garbage you
[00:30:24] got in there and think about your emotional attachment to all these things that there's
[00:30:29] no way you would go buy tomorrow.
[00:30:31] If for some reason your garage flooded and it was emptied out, you wouldn't go buy all
[00:30:35] these old aquariums and lawnmowers that don't work.
[00:30:38] And it's kind of how we are with investment.
[00:30:40] So we get attached.
[00:30:41] And so nothing so is attachment like price going up.
[00:30:45] And so for many, that's the S&P and the Achilles heel of market cap indexing is what you just
[00:30:51] mentioned is concentration.
[00:30:52] And so typically what goes up gets a bigger and bigger weight.
[00:30:56] And because there's no tethered evaluation, it gets more and more expensive.
[00:31:01] And so the broad S&P doesn't matter what valuation indicator you use.
[00:31:07] They all say the same thing, which is the way it should be when something is expensive.
[00:31:11] They should all agree.
[00:31:12] They all say the market's expensive.
[00:31:14] And there's degrees of that, right?
[00:31:16] It's not as expensive as it was in 99, but there's no question.
[00:31:19] It's not screaming cheap like it was in 2009 when it was a long-term, we liked the Schiller
[00:31:24] Cape ratio.
[00:31:25] Everyone else hates it, but it was at a PE ratio of 12 and now it's at 37.
[00:31:30] So arguably second highest it's ever been.
[00:31:32] 45 was the peak in 99.
[00:31:34] But who knows?
[00:31:36] Things can go crazier.
[00:31:37] Japan hit almost 100 in the 80s and then went nowhere for three decades.
[00:31:41] And so after the US hit 44, not quite 45, in 99, it didn't go anywhere, arguably, certainly
[00:31:49] through 2009 and through 2020.
[00:31:52] I think underperformed the long bond for 40 years.
[00:31:55] It was some just monstrous amount of time.
[00:31:58] And I don't think most people would really believe that.
[00:32:00] So look, no one says you have to take the market cap weight, but there's been crazier examples.
[00:32:05] You look at certain countries and certain sectors.
[00:32:08] There's been plenty of countries where you got one stock that's 70%.
[00:32:11] Nokia, Novo, on and on.
[00:32:14] You get these stocks that get to be a huge percentage of the index.
[00:32:18] And so things can always get weirder.
[00:32:20] Maybe Elon Musk finds the moon's made out of gold, not cheese.
[00:32:25] And all of a sudden he creates free energy and Tesla is your first $10 trillion company.
[00:32:30] Who knows, right?
[00:32:32] I don't certainly.
[00:32:33] But that makes part of this game fun and interesting as well.
[00:32:37] So yes, I think the concentration is high, but that's the way it should be.
[00:32:42] Look, we often tell investors around the world, they say, Mab, you preach international diversification.
[00:32:49] You've been wrong.
[00:32:50] You've been totally wrong about that.
[00:32:53] And I say, well, let me check that real quick.
[00:32:55] I've definitely been, quote, wrong in the US.
[00:32:59] International diversification has worked amazing in the other 44 of the 45 countries.
[00:33:04] Because if you're in the UK or Brazil or China or Russia or Japan,
[00:33:09] and you've diversified internationally, it's been amazing.
[00:33:12] Partially because you invest in the US.
[00:33:15] But look, even the market cap weight, let's call it two thirds in the US,
[00:33:19] that's 10x any other country, which is incredible, right?
[00:33:22] Like it's 10 times the size of any other stock market.
[00:33:25] So anyway, we always say the starting point is the global market portfolio.
[00:33:29] So for stocks, that's rounding.
[00:33:31] We'll say 60% US, 30% foreign, 10% emerging.
[00:33:35] No one has that, of course.
[00:33:36] In the US, it's 80%, 90%, 95%, 99% US.
[00:33:41] And foreign tends to be a rounding error, certainly emerging markets.
[00:33:45] I want to talk a little bit about value.
[00:33:47] And I'm sure over your 25 years doing this, you've run a fair number of back tests.
[00:33:52] So you've looked at some data.
[00:33:55] And Cliff was speaking at a conference I hosted two years ago.
[00:33:58] And he was talking about the difficulty of just trying to keep investor capital in the door
[00:34:05] in circa 2021, early 2022, right?
[00:34:09] The biggest valuation spread from rich to cheap in the history of the market.
[00:34:13] And he said, as a Fama French adherent and steeped in this stuff, what do you do during that time
[00:34:20] period?
[00:34:20] You sort of have to acknowledge that the reason your clients are threatening to leave is that
[00:34:26] the world may have changed.
[00:34:27] Peloton may be a $100 billion company.
[00:34:30] It's a whole different environment.
[00:34:32] So you just try to back test things again.
[00:34:35] You try to be honest about it and disprove it.
[00:34:39] But you don't know.
[00:34:40] It's very difficult.
[00:34:41] So back to Fama, what Fama would always say, we only see a slice of the returns.
[00:34:46] We have 100 years of data.
[00:34:47] That's a blink of an eye.
[00:34:49] In 10,000 or 20,000 or 50,000 years, we'll have that much more data.
[00:34:54] So we have a small subset of the returns.
[00:34:57] And I just was, one, curious your experience on the value factor.
[00:35:02] You know, it's ups and downs.
[00:35:03] You seem to have stayed with it.
[00:35:05] I think you're a believer.
[00:35:06] And just curious as to sort of like what the experience of the pandemic kind of taught
[00:35:12] you about the time variation in factors, I guess is the question.
[00:35:17] Right.
[00:35:17] So just like any asset class has its time in the sun and time in the shade, and you could
[00:35:22] do any of them, U.S. stocks, bonds, recently gold, real estate, anything.
[00:35:28] It's got its time in the shade too.
[00:35:30] So just as that's true, the same is true with styles and strategies, trend following, value,
[00:35:37] growth.
[00:35:38] There's a great chart from GMO when it looks at concentration or expensive stocks.
[00:35:43] There's a couple of them.
[00:35:44] But basically, buying stocks that traded 10 times revenue historically has been a really
[00:35:49] stupid idea.
[00:35:50] And that shouldn't be surprising to anyone.
[00:35:52] So God forbid that ones that traded 100 times revenue.
[00:35:54] And on average, you lose money, certainly relative to the S&P.
[00:35:59] But I think 10 times revenue, you don't even keep up with T-bills.
[00:36:02] But on occasion, the world goes crazy and they have a little face ripper up and they do
[00:36:08] amazing.
[00:36:09] And then everyone clamors in for whatever the hot ideas in the past.
[00:36:14] It's been AI, but it could be mobile, internet, utilities.
[00:36:19] There's a great paper by Schiller talks about the 20s.
[00:36:21] People are going nutty over utilities.
[00:36:24] I kind of going nutty over utilities again.
[00:36:26] This time it's nuclear though.
[00:36:27] So who knows?
[00:36:29] Utilities are sexy again.
[00:36:30] But you got to have a sense of humor about what's possible.
[00:36:36] And people always focus on the value part, buying quote, cheap things, buying stocks below
[00:36:41] intrinsic value.
[00:36:42] But it's also what you avoid.
[00:36:44] And you're avoiding the really nutty, crazy stuff.
[00:36:47] So 30 years ago, all you had to do is make one decision.
[00:36:52] And that was sell foreign stocks and buy US ones.
[00:36:55] US was screaming cheap.
[00:36:57] And Japan was screaming expensive.
[00:37:00] That's all you had to do, right?
[00:37:02] Japan was the largest stock market in the world.
[00:37:04] So it's similar, though not nearly to the extreme that it is today, where the US is
[00:37:08] quite a bit more expensive today.
[00:37:10] So you have some of these fat pitches, but they can last years.
[00:37:14] So same thing with value.
[00:37:16] I think you get these, you know, all the quants love to talk about the value spread.
[00:37:21] And they've been talking about how no matter how you measure it, it's at the top 10% or
[00:37:26] the top 1%.
[00:37:27] If you're GMO, you stratify that even further, where they're like the kind of cheap stocks
[00:37:32] are actually not that cheap, but the really cheap stocks are screaming cheap.
[00:37:36] So it's fun to kind of tease out the information, the data, but even then have the humility that
[00:37:41] it could get wider.
[00:37:43] A crazy place to me today that most people don't talk about is fixed income.
[00:37:47] Like we wrote a paper on this T-bills and chill, where it doesn't make a whole lot of sense
[00:37:52] to me to invest in all these risky bonds when they have no to negative yield to T-bills.
[00:37:59] Like why do you want to invest in all these corporate junk emerging markets, all these
[00:38:03] yielding markets where the average yields are pretty low?
[00:38:06] Historically, that's been a really bad idea.
[00:38:07] It's like investing in stocks when they're really expensive, but here we are and hadn't
[00:38:12] changed much.
[00:38:12] So we'll see what happens.
[00:38:14] But I wonder if T-bill and chill is set to make a comeback.
[00:38:17] It felt like the 5%-er was going to be a thing of the past and maybe it kind of hangs out
[00:38:23] for longer than we expected it to.
[00:38:25] Who knows?
[00:38:26] We launched a fund on this strategy.
[00:38:27] It just sits in T-bills.
[00:38:28] And if any of these other 10 fixed income markets get to be where their spread is in the top
[00:38:34] third of history, it'll buy those.
[00:38:37] And then when it goes back below the top half, it'll sell them.
[00:38:41] And it's sitting in T-bills, just cruising along right now.
[00:38:44] So it's saying not a whole lot of opportunity.
[00:38:46] But you see that every, I don't know, it could be every 10 years, 20 years, corporate bond,
[00:38:51] junk bond spreads blow out and they go totally vertical very, very quickly.
[00:38:56] And then they go back down.
[00:38:58] So it's rinse, repeat.
[00:39:00] Who knows?
[00:39:01] One of the things I, in just reading up on some of your products and the work you've done,
[00:39:05] and I feel like it's value adjacent is a passion of yours seems to be shareholder yield.
[00:39:12] You've written quite a bit about it.
[00:39:14] And I just was hoping you could expand upon it.
[00:39:17] Obviously, Cambria has SYLD as one of those products.
[00:39:21] Tell us about that as a factor and sort of how you think about why you advocate for the
[00:39:27] exposure to it.
[00:39:28] This was a book we wrote almost 10, 15 years ago.
[00:39:32] We just finished the second edition, which by the time this publishes should be live on
[00:39:37] Amazon.
[00:39:38] And the subtitle of the original book was A Better Approach to Dividend Investing.
[00:39:43] And so of the 16 funds we've launched, we try to only launch funds that don't exist,
[00:39:47] or we think we could do quote better or cheaper that are backed by academic research.
[00:39:52] Either we do it or someone else does it.
[00:39:54] And it's got to be something I want to put my own money into.
[00:39:56] Then there's times where there's structural changes in markets.
[00:39:59] It's not that often, but there's times where something changes.
[00:40:02] And in the case in the US, there's been this very real change where companies pay out more
[00:40:08] of their cash through share buybacks than they do in dividends.
[00:40:11] And every year since the late 90s, companies now buy back more stock than they pay out in
[00:40:16] dividends.
[00:40:17] Now, there's a lot of misinformation.
[00:40:19] People love to say buybacks used to be illegal, which is never true.
[00:40:22] In fact, Charlie Ellis wrote a book on share repurchases in the 1970s.
[00:40:27] Harvard had some case studies on share buybacks in that same period.
[00:40:31] But really, they've started to ramp up over the past 40 years.
[00:40:35] And that's meaningful.
[00:40:37] And yet here you are, and you have hundreds and hundreds of dividend funds that ignore
[00:40:41] share buybacks.
[00:40:42] And it's important, not just from the buyback standpoint.
[00:40:45] So kind of when we were talking about value stocks, the reason that works is because you're
[00:40:48] avoiding the crazy expensive ones.
[00:40:51] Well, share buybacks is also important because you're avoiding the share issuers and the companies
[00:40:56] that are serially issuing shares, particularly to management, particularly to tech companies,
[00:41:01] and particularly to the C-suite through stock-based compensation.
[00:41:05] And so historically, these are terrible investments.
[00:41:08] And so anyway, shareholder yield, looking at this holistic view of cash, dividends, plus
[00:41:14] stock buybacks, the stocks that traditionally make it into our portfolios have a double
[00:41:18] digit yield.
[00:41:19] And that's crazy if you think about it.
[00:41:21] S&P on a dividend yield is 1.3.
[00:41:23] But the average stock in that stock market is a share issuer.
[00:41:27] So it's certainly a culture of buybacks in the US, much more so.
[00:41:31] Look, nobody gets this more than Buffett.
[00:41:33] We must have 20 quotes from Buffett in this new edition of the book.
[00:41:36] He's been talking about this for forever.
[00:41:38] He's like, look, we've only done a dividend once, and it was the 1960s, and I was in the bathroom.
[00:41:42] Like somebody must have decided this, but they do boatloads of share buybacks because
[00:41:47] he gets it when a stock's trading below intrinsic value.
[00:41:50] And that's the key phrase of all of this, because at intrinsic value, a dividend and
[00:41:54] buyback is basically the same thing, assuming tax rates are similar.
[00:41:58] Below intrinsic value, you're buying $1 for 80 cents, buying $1 for 50 cents.
[00:42:03] So it's a huge transfer of wealth from the seller to the buyer.
[00:42:06] So historically, the shareholder yield concept, we launched a fund on this over a decade ago.
[00:42:12] We now have five shareholder yield ETFs.
[00:42:15] But the rest of the world, seemingly, oddly enough, in the ETF space and mutual fund space
[00:42:20] is still totally focused on dividends, which has been a head scratcher for me.
[00:42:25] Usually, if anything I can say about my friendly competitors is they love to chase whatever's
[00:42:30] hot and whatever's working.
[00:42:31] And shareholder yield has performed great.
[00:42:33] It works particularly well in foreign and emerging markets.
[00:42:37] And part of that, I believe, is because of the governance, where if you're a company that's
[00:42:41] paying out 10% of your cash flows, A, you have to have the earnings or cash flows in
[00:42:46] the first place, or B, you have to have some cash.
[00:42:49] So you're a quality business.
[00:42:51] But everyone's always worried about the frauds and the numbers and foreign shares.
[00:42:55] We always tell them, you know who's probably not doing fraud?
[00:42:58] The company that's giving you back 10% of your market cap and share buybacks and dividends
[00:43:02] every year.
[00:43:03] Rather, they're probably spending it on naming the local soccer team or buying jets or fancy
[00:43:09] dinners for executives, etc.
[00:43:11] So it's a strategy that seems incredibly obvious to me.
[00:43:15] And you look at case studies like Apple.
[00:43:17] We owned Apple for almost a decade.
[00:43:18] They did both.
[00:43:19] They did both dividends and buybacks.
[00:43:21] Eventually, it got too expensive for us.
[00:43:23] Uncle Warren doesn't think so.
[00:43:25] He still owns a bunch.
[00:43:26] But we think that it's a strategy that right now, the crazy part is it looks incredibly
[00:43:33] attractive to us now where the valuation metrics are a mile wide between the shareholder yield
[00:43:39] portfolios we run versus the broad market cap weight in the US.
[00:43:43] Less so in foreign and emerging because the indexes are lower there because they just haven't
[00:43:47] gone up as much as the US has.
[00:43:49] But still incredibly attractive.
[00:43:51] We're excited about all three regions.
[00:43:53] Are there industries that this tends to be more common in?
[00:43:57] Well, it's funny you mentioned that because they wax and wane over time.
[00:44:00] And it tends to be what's going on in the world.
[00:44:03] On average, though, it's pretty amazing.
[00:44:05] There's a chart that we show from our friends at O'Shaughnessy that buckets the companies doing
[00:44:11] the big share buybacks versus small ones versus share issuance.
[00:44:14] And on average, the companies issuing shares are expensive.
[00:44:19] And companies doing big buybacks are quite cheap, which is the way it should be, right?
[00:44:24] The CEOs, if your stock's cheap, you should be buying back shares.
[00:44:27] If it's expensive, you should be issuing.
[00:44:29] So the sector is wax and wane over time.
[00:44:30] But they also wax and wane by geography.
[00:44:32] So in the US, people always say, Meb, you don't get it.
[00:44:35] You old fuddy daddy.
[00:44:37] You're missing the AI train.
[00:44:38] You're missing tech in the US.
[00:44:39] You got a very low tech allocation.
[00:44:41] It's only 5%.
[00:44:42] And I say, on average, that's true.
[00:44:44] Part of that is because tech stocks are expensive on average in the US.
[00:44:47] And part of it is because often they're big share issuers.
[00:44:50] So people forget.
[00:44:51] They'll say, oh, a company is doing this big buyback.
[00:44:54] It's 5% of market cap.
[00:44:56] But guess what?
[00:44:57] That's only to mop up the share issuance.
[00:44:59] So really, they have a net zero.
[00:45:01] In some cases, it's negative.
[00:45:02] You could have a dividend stock with a 4% yield and a negative 5% share issuance.
[00:45:07] You have a negative yield in company.
[00:45:09] So in the US, across all three geographies, there's a lot of financials, materials, energy.
[00:45:15] And emerging markets tech's the largest sector, which usually really surprises people.
[00:45:19] But I say, well, it's for two reasons.
[00:45:21] One, a lot of these countries have gone down a lot.
[00:45:24] China went down 60% or something.
[00:45:26] And we had a very low China allocation for a long time, but have been adding it probably
[00:45:30] close to a market weight today over the last year.
[00:45:34] But also, they pay out a lot of dividends.
[00:45:37] It's culture more in foreign developed and emerging of dividends, though it's changing.
[00:45:41] You're seeing some of these countries really start to become shareholder friendly, similar
[00:45:45] to the corporates in the US, and much more opportunistic about buybacks.
[00:45:49] But they'll have closer to a 5%, 6% dividend yield.
[00:45:52] So it's closer to like a 50-50 distribution on the buybacks there.
[00:45:56] But it's changing.
[00:45:57] So you don't have also the same culture of share issuance through stock-based compensation.
[00:46:02] All right.
[00:46:02] Let's finish with a quote from you.
[00:46:04] So I'm going to lay this out.
[00:46:06] And then we're going to circle back to some of your work on the 351.
[00:46:10] So you said, it's the best time ever to be an investor.
[00:46:13] And so I kind of agree.
[00:46:15] Not in the sense that there is two and three times levered inverse single stock ETFs.
[00:46:21] But that firms like yours, firms like Simplify, I happen to have a lot of respect for, are doing
[00:46:28] some really unique things and making thoughtful, quanti, legit products available to the masses
[00:46:35] at really low costs.
[00:46:37] And I think that that's financial innovation.
[00:46:39] So I don't know if that's what you meant by it.
[00:46:41] But I'd love for you to just reflect on your competitor in a business that I think
[00:46:47] has advanced a lot, but it's not the fund that's 99% correlated to the S&P anymore.
[00:46:52] There's an opportunity to deliver a lot of unique exposures to folks, get them to diversify,
[00:46:58] and make it cheap too and accessible.
[00:47:01] Yeah.
[00:47:01] If you look back in history, it was always expensive to invest.
[00:47:06] So brokerage commissions, the toll keepers, the middlemen, always expensive.
[00:47:13] And then on top of that, advisors, mutual funds were expensive.
[00:47:19] And today you can open a brokerage account and you can pay zero commissions.
[00:47:24] You can buy one or a basket of ETFs that are not going to pay capital gains, that are tax
[00:47:30] efficient.
[00:47:31] And the rounding error of that portfolio, the expense ratio is like 0.03%.
[00:47:35] So if you include the short lending these funds do in their portfolio, you actually probably
[00:47:40] have a negative expense ratio, meaning you're getting paid to own this portfolio.
[00:47:44] That's incredible.
[00:47:45] Now, as you mentioned, it's also the hardest time to be an investor because you go to the
[00:47:50] grocery store and instead of five types of cereal, you now have 5,000.
[00:47:54] And many, many, many of those 5,000 are like the quadruple leverage frosted flakes.
[00:48:01] Like they're going to kill you if you eat that cereal.
[00:48:04] And despite that's what we ate as kids, like we made it.
[00:48:07] I don't know how because I ate a lot of Froot Loops.
[00:48:09] But yeah, you buy and hold it five times levered, who knows what, like that charges you a percent
[00:48:15] and a half, it's still dangerous.
[00:48:17] And so I think that's a big challenge.
[00:48:19] And, you know, it's a consistent concern, but also opportunity and sort of mission for us
[00:48:25] is to educate investors and get them on the right path versus what I call the Robinhood
[00:48:30] path, which is just leading you to the markets through the casino, which is not hopefully
[00:48:36] where we want people to be.
[00:48:37] So it's one of the best times ever, but also like anything with investing, we're all human
[00:48:42] and it's challenging as well.
[00:48:45] So we talked about taxes a little bit before.
[00:48:47] Let's just finish with some of this innovation that you're doing.
[00:48:51] I'm not exactly sure where you are in this launch, but I've learned a little bit about
[00:48:56] the 351.
[00:48:57] Seems really interesting.
[00:48:59] And I just like the way you kind of sourced the work through some of your own conversations.
[00:49:04] But just tell us about what you're working on.
[00:49:07] So you go back a long time in the tax code.
[00:49:10] There's been some ways that people have deferred taxes.
[00:49:15] Now, they're not avoiding taxes.
[00:49:17] Listeners, this isn't a tax loophole.
[00:49:19] But one of the most famous in history has been the 1031 real estate exchange.
[00:49:23] You buy a property, you decide to sell it.
[00:49:26] It could be a hotel, it could be a house you're renting out to people.
[00:49:30] You sell it, you can exchange it for another property in six months or whatever the rules
[00:49:34] are today.
[00:49:35] And you're not paying taxes on that.
[00:49:38] Generational wealth has been built in the real estate world on that premise alone,
[00:49:42] the 1031 exchange.
[00:49:44] Been around forever.
[00:49:45] There's been some similar ideas in the stock world, historically only available to accredited
[00:49:52] or qualified investors, aka rich people, right?
[00:49:55] So you've had the exchange funds that have been around for really the last 50 years.
[00:50:00] You got to go through Goldman or Eden Vance or somebody.
[00:50:04] And there's some challenges.
[00:50:05] They tend to be very expensive.
[00:50:08] Probably going to charge you a percent and a half a year.
[00:50:10] Got to hold them seven years.
[00:50:11] There's some other unfortunate kind of characteristics of these strategies and funds.
[00:50:16] But there's something else that's been in the code called 351.
[00:50:20] And there's been hundreds of these.
[00:50:23] And you've seen in the modern age, a lot of these mutual fund ETF conversions because
[00:50:29] people get it.
[00:50:29] The ETF is simply a better structure.
[00:50:31] Now, don't ask me why the mutual fund world doesn't have the same tax treatment as ETFs.
[00:50:37] They should.
[00:50:37] The regulators, they've decided to bless ETFs better.
[00:50:41] I'm OK with that as an ETF issuer, but it's clearly not fair.
[00:50:45] So you've seen two types of mutual fund companies and private funds, the ones that say, look,
[00:50:51] I'm just going to ride this out.
[00:50:53] And then there's others say, look, for our taxable investors, we need to convert these
[00:50:57] to the better structure.
[00:50:58] Let's convert to an ETF.
[00:51:00] And so you've had a lot of these ideas where you may have a private fund or an asset manager
[00:51:06] that is able to convert a subset of investors to an ETF or seed an ETF.
[00:51:13] And I was doing a podcast with my good buddy, Wes Gray, an ETF architect and Bob Elwood,
[00:51:19] who's a lawyer he works with.
[00:51:20] And Bob did a 351 10 years ago.
[00:51:22] And really, this started to increase with the ETF rule of about four years ago, where
[00:51:29] you can contribute a portfolio to an ETF launch.
[00:51:32] So we're doing one in December.
[00:51:33] This is the first of three.
[00:51:35] We have our tax ETF.
[00:51:37] That's the ticker tax is going to launch in December.
[00:51:40] It's a US stock fund, long only value quality tilts, little momentum sprinkled in and buybacks
[00:51:46] too, but avoids companies that are paying high dividends.
[00:51:48] So it's targeting a low to zero yield, which is actually an academic paper we wrote about
[00:51:53] seven years ago, looking at, can you create strategies that don't pay dividends?
[00:51:59] Because mathematically, that's much better for a taxable investor, particularly a high
[00:52:02] net worth taxable investor.
[00:52:04] Last thing you want is dividends, which I know is a sacred cow that no one's probably going
[00:52:08] to agree with.
[00:52:09] Anyway, so that's unique, but also the seeding the fund.
[00:52:13] So let's say you got 10 million, 100 million in a bunch of these tech stocks we talked about
[00:52:18] earlier.
[00:52:19] Let's say you got SPY, it's up 10X, whatever it may be.
[00:52:22] You can contribute US stocks or ETFs to seed this fund.
[00:52:27] Now there's two main rules.
[00:52:28] The first being the biggest holding can't be over 25%.
[00:52:32] So you can't give me a hundred million of NVIDIA.
[00:52:35] It's not going to work.
[00:52:36] And the second is anything that's over 5% of the portfolio has to sum to less than 50.
[00:52:41] So it's really got to be somewhat diversified portfolio, essentially, meaning you have to
[00:52:45] have probably 11 stocks or more, or ETFs are passed through.
[00:52:50] So if you wanted to contribute our SYLD ETF, you could do 100% in SYLD, because it owns
[00:52:56] roughly 100 stocks equal weight.
[00:52:58] And so what happens now, this isn't a wash.
[00:53:01] So you got Amazon at a dollar and a bunch of these tech stocks, so your cost base is a dollar.
[00:53:06] Your cost basis comes with you.
[00:53:08] But on December 17th, let's say you contribute 20 tech stocks, you got 10 million bucks.
[00:53:15] And on December 18th, you get the tax ETF in return, which is diversified portfolio of
[00:53:20] US stocks.
[00:53:21] And it's not a taxable event.
[00:53:23] So it's a really interesting solution for investors who may have a highly appreciated
[00:53:27] portfolio and names they don't want.
[00:53:29] Think about our parents' generation.
[00:53:30] It's like stuck in GE or IBM or Philip Morris, Altria.
[00:53:37] This generation, it's probably Microsoft, Amazon, NVIDIA, or some ETFs.
[00:53:43] Maybe they're like, look, I'm all in on US stocks.
[00:53:45] Listen to you good, brilliant gentlemen today.
[00:53:48] And I realized I should probably diversify into some other stuff or foreign or merging.
[00:53:51] Our second fund's diversified ETF portfolio globally.
[00:53:54] Our third one is a global stock portfolio.
[00:53:57] And there'll probably be more.
[00:53:58] But the whole innovation we're trying to bring is open enrollment.
[00:54:01] This shouldn't be available to only rich people, to only people who want to do an exchange
[00:54:06] fund, but rather to anyone who wants to see it in ETF.
[00:54:10] I think this will be a giant sea change in the next few years where a lot of fund companies
[00:54:14] will be doing this.
[00:54:15] This is our first ETF architects done a bunch of these.
[00:54:18] But certainly you can email me for more information because this is pretty wonky and complicated
[00:54:23] for a lot of people.
[00:54:24] But hopefully it solves a big pain point for many investors, including the ones that do
[00:54:28] direct custom indexing, et cetera.
[00:54:31] So yeah, that's the idea.
[00:54:33] It's kept me busy the last couple of months.
[00:54:35] Someone who bought the spider, I don't know, a year and a half ago might be up on the order
[00:54:41] of 50% at this point.
[00:54:42] So they put 50K in.
[00:54:44] It's worth now 100K.
[00:54:45] They've got that in the spy.
[00:54:48] They can contribute that.
[00:54:49] I don't know what the level is, but they can contribute that.
[00:54:53] And then suddenly they're along a very different set of risk exposures without actually unwinding
[00:54:58] the spy and buying unit fund.
[00:55:00] Yeah.
[00:55:01] And then they bring the cost basis for some of that 50K.
[00:55:04] And when they decide to sell the tax ETF, they would then pay that capital gain.
[00:55:09] Now, there's things to think about, listeners.
[00:55:11] If you're low tax rate, if you're young, if you don't have particularly a lot of assets,
[00:55:18] maybe you actually want to be booking the capital gains.
[00:55:20] If you have losses, you don't want to contribute those, of course, like you want to book those
[00:55:25] losses.
[00:55:26] So there's a number of considerations really to people that may be interested.
[00:55:30] This financial advisors is probably our number one point of contact because they often have
[00:55:36] a lot of clients that may have similar situations that have been around some of these 10,
[00:55:40] 20, 30 years where they have a portfolio of stocks that they may not want anymore.
[00:55:45] But like if you're Warren, if you're listening, you want to get rid of some of that Apple,
[00:55:49] some of that Coca-Cola, Amex, give us a call.
[00:55:52] I know you've got some big cap gains on some of these, but kidding aside, I think it's going
[00:55:57] to be a really interesting solution for investors going forward.
[00:56:01] Fantastic.
[00:56:02] Med, really have enjoyed the conversation.
[00:56:04] Thanks for taking the time.
[00:56:06] You've been listening to The Alpha Exchange.
[00:56:08] If you've enjoyed the show, please do tell a friend.
[00:56:11] And before we leave, I wanted to invite you to drop us some feedback.
[00:56:15] As we aim to utilize these conversations to contribute to the investment community's
[00:56:20] understanding of risk, your input is valuable and provides direction on where we should focus.
[00:56:25] Please email us at feedback at alphaexchangepodcast.com.
[00:56:30] Thanks again and catch you next time.
[00:56:31] tell you the answer. Payone
[00:56:32] to the周 by closed seeing what we're looking for. I want
[00:56:32] Leo shows up on gamma. Hope belongs
[00:56:32] to the ti-Osya, which is wow. But if
[00:56:32] have a search for anybody, when you cook them put them, you stick their'r simulations on
[00:56:32] Greatgoing Ch