[00:00:00] Gavin: Welcome to The Gavin Graham Show, sponsored by

SmartBe Investments. And for this episode, we're delighted to have Meb Faber

of Cambria to talk about virtually anything that might be of interest as far as

investment and or, indeed, life, the universe, and everything as The Hitchhiker's

Guide to the Galaxy so wonderfully put it. Meb, could you just briefly tell the

listeners a little bit about yourself and how you got to your present position of

eminence?

[00:00:28] Meb: My current is in Los Angeles. It's a beautiful Fall day here.

But before that, I was born in Colorado. I grew up a Denver Broncos fan and a

skier. I also grew up partially in North Carolina. Went to college studying

engineering in biomedical. Fully assumed I was gonna be grad school in that

topic, and I did do some grad school. But I was also seduced by the great

investment bubble of our time. Well, so far. At least in the US. Which was the

late 90s internet bubble, which was also a biotech bubble, and so I was fully

caught up in that seduction.

[00:01:09] And so I started out, was supposed to be a sabbatical, a break to

work as a biotech equity analyst while going to grad school before going back

to grad school full time. That wedge kept getting wider and never happened.

And my career, and my interests, and hobby kind of switched places after the

destruction of the internet and biotech bubble. I said, you know, this game is

little more interesting and complicated than I assumed. It's not just as easy as it

was from '96 to 2000, which was when I was in university and watching my

professors trade. And then kept on the quantitative path out here in California,

in San Francisco, and Lake Tahoe. And then started Cambria, which is our asset

management company, in 2006. Started to manage money in 2007. Here we are,

a dozen funds later, over a decade later. Over 15 years later! Geez.

[00:02:04] Gavin: Yes, I know. Doesn't time fly when you're having fun?

[00:02:07] Meb: It's funny because all the media still calls us an emerging

manager and I'm, like, at what point is it? Is it either the age vintage or the size

that we're no longer emerging? Like, I'm ready to have emerged and at least be,

like, a medium size manager.

[00:02:19] Gavin: Indeed. Well, the great thing is you're not submerging, which

would not be good.

[00:02:24] Meb: Yet. That's my favorite quote. As I say, the biggest compliment

you can give someone in the investing business is that you survived. You didn't

get taken out of the game. So we're still here. We're happy to still be here.

[00:02:34] Gavin: And how much do you have in the way of assets under

management?

[00:02:36] Meb: Right around 1.6 billion. And we have, this is a cool stat to

me, over 125,000 investors. We take that with a lot of gravity and seriousness.

We often don't sound too serious when we're talking about things on the podcast

and elsewhere, but it is a serious blessing.

[00:02:55] Gavin: No, it's a big responsibility. You are looking after people's

life savings and you want to try and do the best job you can for them. Would

you say you have a specialization in a particular area? Is there something that

you are really, you feel, excellent at? Or are you excellent at everything?

[00:03:08] Meb: What's interesting is that in a world of 10,000 plus funds out

there, why do we need any more? The beautiful part about, and we often say

there's never been a better time to be an investor. And so here we are in 2022,

and you can buy the global market portfolio for roughly free. That's the benefit

of the Vanguard Complex.

[00:03:28] Gavin: BlackRock, whatever. Yep.

[00:03:29] Meb: Yeah. Or the Death Star, depending on your perspective. But

it's amazing time to be an investor. So what in the world do we need any more

funds for? Well we look around often and scratch our heads and say, "Hey,

there's an interesting idea. Why doesn't this exist?" There tends to be a lot of

group think in our world, right? And so you'll see one funder idea, and then

every single fund complex will copy it. I'm looking at my whiteboard and we

have another dozen ideas.

[00:03:54] There's four criteria when we're launching a fund. The first is either

it has to not exist, or it has to be, what we say, quote: "much better or much

cheaper." You would think those would be rare, but all of our funds are cheaper

than the category average, and we actually have a couple that are the cheapest in

the entire category. But we like to be, what we like to call: concentrated, weird,

and different.

[00:04:13] The second is it has to be based on some sort of academic or

practitioner research. Usually we do it. So we publish books and white papers

around the topic before the strategy goes live so people can get comfortable

with what it's doing.

[00:04:25] Third, it has to be something we wanna put our own money into. I

put all my public assets into our funds. The average fund manager in the US

actually has nothing invested in their own fund. Which is a weird state of

affairs.

[00:04:37] And lastly, is it something people want?

[00:04:38] Gavin: What's been the most successful amongst those of your 1.6

or whatever? Where is the largest amount of assets?

[00:04:44] Meb: Our oldest is the largest. It's done a great job. One critic once

called me the King of Back Tests. And I think he meant that in a derogatory

way, but I actually took it as a compliment because, you know, as a quant you

can come up with any sort of historical view of the world and any beautiful

back test that makes it look like this is the best strategy on the planet. But really

until you start running it in real time, does it really matter?

[00:05:09] The big challenge with any strategy, and we tell people this all the

time, is that it doesn't matter if it's something like stocks versus bond, US versus

foreign, some sort of active strategy versus passive. Trying to come up with any

sort of conclusion from looking at one month, one year, three years performance

is total folly. And I think that's even true with five to 10 year.

[00:05:32] So the good news is, is that our oldest fund, which is called a

shareholder yield ETF, it's a traditional sort of value quality type of strategy. But

there's really nothing like it in the US. It's a 10 year track this spring. And I

think, I don't wanna jinx it, but it's currently the number one ranked fund in the

entire category of hundreds of plus funds since inception.

[00:05:53] Gavin: You got stuff that's done really well and that's worked really

well. Would you say that the macro background with the return of inflation is

making the world a somewhat different place? Cause I mean, you mentioned

that '96 to 2000 internet bubble bull market, and that was, I don't know about

you, but there were lots of echoes in this last five years with the FANG stocks

and the rest of it. And then you had a complete reversal. And what was last was

first, first was last. Does your experience lead you to think that maybe there's

been a major change?

[00:06:20] Meb: Something happened in, I think we pin it to really 2020. You

could mark it as the election. Most likely it's interest rate bottom or the sort of

the Covid low. But there's a very real regime change that happened in 2020.

2021 you had some exhaust from some of the investments still moving. So

there's a lot of shifting waters.

[00:06:42] But 2020 to 2021 very clearly to us was an inflection point. An

inflection point on the big one. Interest rates and inflation. 2022, which is where

we are today, that trend is starting to accelerate. So currently, we said this on

Twitter yesterday, through Q3 we have what would be the worst, it's rare we get

to say this, the worst year for this traditional 60/40 performance in the last 100

years. This is after inflation. On a nominal basis, it's still in the top three. I think

there's an entire generation of investors that have really only been investing or

managing money in one type of environment, which is declining interest rates

for the last 40 years, and that's no longer the case. And that has a ton of impact,

a ton of effects on the portfolios.

[00:07:35] Gavin: It's been a falling interest rate environment. We've gone from

15% to less than 1% on the 10 year US Treasury because inflation was falling.

And now they've let the genie out of the bottle. Oddly enough, it wasn't

transitory. One has to say that, as you said, the worst performance for a 60/40

portfolio. Because of course bonds have absolutely cratered. Do you have any

fixed income exposure? Or do you just look at it in terms of changing the macro

environment for what you're doing in equities?

[00:07:59] Meb: If you look at our allocation strategies, there's sort of a barbell,

and we'll start with the first side. So on the buy and hold side, meaning we

wanna reflect what we call is the global market portfolio, which is roughly

about half stocks and half bonds, about half US and half ex-US. Now we

implement that with not market cap weights, so we move to factors like

Momentum and Value, which we think is important, but also there's a very

sizable real asset component to this portfolio. So commodities, reads and tips. I

always laugh when I'm talking to my Canadian and Australian friends because

they understand this. But the vast majority of Americans, and many people

throughout the world, don't invest in real assets other than say their house. And

so if you look at something like this year, real assets (some of them) are helping

or at least outperforming.

[00:08:51] So that's on the buy and hold side. And traditionally that's a great

portfolio. It does well over time. The problem with buy and hold is it's really

hard to sit through the drawdowns. Drawdowns are a part of life that's a part of

being an investor. We like to say that to be a good investor, you have to be a

good loser. Meaning you spend most of your time in a drawdown.

[00:09:10] There's only two possible binary outcomes or status for an investor.

It's either you're at an all time high or you're in some form of drawdown. Now,

it may not be much, maybe a percent or 5 or 10 or maybe 50 or 80 or 90. You

don't do anything. And a lot of people struggle with not doing anything.

[00:09:25] So on the flip side, you have what we call our Momentum and Trend

Strategy. Which is highly tactical and can move all the way from a hundred

percent cash and bonds to 100% invested in various global assets. And, not

surprisingly, that fund is almost entirely in cash and bonds. Currently with a

smattering of natural resources, which will probably be exiting soon as they've

been also declining. And so the goal on that fund, traditionally it does well

during market downturns, that strategy. But it's also not simple to follow

because it often looks worse in the romping stomping period. So you know, the

entire decade of the 2010s. People struggle with trend following because you're

often looking wrong. They want to pick the tops and bottoms, but that's not

really what it's about. It's about participating in the meat of the move, but also

avoiding the big losses.

[00:10:15] So we've come up with a philosophy where you kind of combine the

two. It's about half buying hold and half Momentum and Trend. We call it Buy

and Trend or the Trinity Strategy. And to us that's a really nice balance between

the two philosophies. The biggest thing is I think it keeps you out of trouble.

[00:10:31] Gavin: Years like this one you can lose an enormous amount. It

takes you a heck of a long time to get back there. I'm not sure whether Nasdaq

was 5,000 in January 2000 and it didn't get back there till what, 2015? You say

you're almost totally cash with a little bit of natural resources. Do you see any

likelihood of changing that in the near future? What would make Cambria say,

"Actually interest rates have probably peaked because the authorities have

recognized they're going to break something and we ought to actually, if not

pivot, at least stop raising them." Or do you think it's gonna continue for a while

yet?

[00:10:59] Meb: So the nice thing about being a quant is it doesn't matter what I

think. I could sit here all day with you over happy hour, or coffee, and tell you

all day long what I think. And then the good news is it doesn't make it into our

models. And so one of the benefits of designing these ahead of time, and I think

this is a struggle for a lot of my bearish friends, they sold everything in 2008,

2009. Like they just couldn't take it anymore. They sold all their investments

and then speaking to them in 2012, '14, '16, '18, they never got back in. They

never found that moment where they just could get back invested. And so the

beauty of being a quant is you have strict rules and criteria for how you

approach your investments. And I think this all goes back to having an

investment plan in the first place, which most investors don't. Or a written

investing plan. It's like having a diet, you know, if you're not gonna codify it,

then you wake up in the middle of the night and you go open the fridge and

there's a cheesecake or piece of pizza. What are you gonna do? You're gonna eat

it.

[00:11:52] The nice thing about the Momentum and Trend is it's about as

bearish as you can get. Which is rare. Like usually something is going up, but

it's really not the case. If you were specifically looking at US stocks, so we have

another tactical fund that's called Value and Momentum, and that one combines

half in value and half in trend. I think a lot of people struggle with one concept,

which is, hey, we're down a lot. It can't get any worse. But so the 60/40

portfolio, for example, let's call it we're down 20. The max drought on that is

over 50. And so imagine things getting twice as bad for that. It's hard to

imagine. But the thing is, particularly with US stocks, the rest of the world is

different, but US stocks if you're looking the long term valuation in PE ratios

the highest when I graduated college, so December '99 was at a long term PE

ratio, ten year chiller cape ratio of 45. This cycle peaked at 40. So the good

news is we're down to about 27. It's come down significantly.

[00:12:47] The bad news is the long term average. If we go back to an inflation

of sort of that 2% to 3% is around 22. So that's still lower than we are. The

really bad news is if we sit around here hanging out at 8% inflation, but even

call it 4% or 6%, the average multiple people have been willing to pay

historically in the low teens. That's like 50% from here.

[00:13:08] I'm not trying to be like a huge doomer about this, but it's just more

like, hey, this is what you have to at least be prepared for. And my guess is

come mid-October when we have the next CPI print, it's gonna be high again.

And people are gonna look at that and say: OMG! WTF! Whatever the acronym

they want to use is, and say, "This is not going away yet." That's my personal

view.

[00:13:32] Gavin: It probably therefore would indicate regardless of what your

or my opinion might be, but probably that if those models continue to have the

validity that they've had in the past. We are going to see more downside.

[00:13:43] Meb: But there's some places you can hide. So if you look at the

1970s, 1940s, periods that had high inflation in the US, what was one of the

best places you could hide out? Value stocks or factor base exposures did great.

Particularly on a relative basis. We see what we consider to be one of the largest

value spreads ever. Still. Which is crazy because its had a significant

outperformance in the last couple years, but...

[00:14:06] Gavin: Sorry there Meb. You're saying that value stocks are as cheap

as they've ever been in relation to growth stocks? Even though...

[00:14:12] Meb: Expensive stocks.

[00:14:13] Gavin: Yeah, expensive stocks. I'm sorry.

[00:14:14] Meb: The expensive stuff. And so that's true in the US. It's also true

globally. Just moving away from that market cap index to something else,

preferably value tilt or a multifactor tilt, is one of the smartest things you can do

around the world.

[00:14:29] Gavin: And even though you've had a big relative outperformance

so far this year, it still is pretty enormous. So is that simply muscle memory

from investors? Simply because you've done so well for so long, you find it

enormously difficult to buy stuff that's cheap?

[00:14:43] Meb: Look, it's a story as old as time and markets. People get

excited about something and it gets into favour and something else is totally out

of favor and eventually it goes too far in the reverse.

[00:14:52] I mean, a good example of this, of two sectors that everyone's

familiar with is technology and energy. And you can see these as a percentage

of the S&P. Energy bottomed, I think, at like 2% or 3% of the S&P when once it

was a third. And then same thing with tech. You know, it has its moments when

it becomes the biggest component and then it gets pummelled and goes down

70% or something. And then everyone hates it, and that's usually a good time to

buy it. So you see these oscillations, the greed, the fear, the envy that play out.

We have a Twitter thread from really the peak February of 2021 of just the crazy

behaviour. And there's like 50 charts that you just look at and you're like, what

were people thinking? What was going on?

[00:15:31] Gavin: And the answer is that this has worked and continued to

work and the Central Bank's asleep at the switch and not actually starting to

raise rates once you saw those inflationary pressures coming through. Again, I

think energy, was it 1980 that it was at its peak? Perhaps a reflection of the

underlying inflation situation?

[00:15:47] Meb: There's obviously a lot of places. If you have a balanced

portfolio all these ideas are good right now, but they're good all the time. I have

a balanced portfolio of stocks, bonds, real assets, global focus, tilt away from

market cap waiting. And then have that set on autopilot. That's the way to go for

me, man. I don't wanna have to worry about this all night long, all day, when

things are going crazy as they always do when it comes to markets.

[00:16:10] Gavin: Do you automatically rebalance? Do it on a quarter basis?

[00:16:13] Meb: It varies by fund and strategy. Some are as fast as weekly and

some are as slow as yearly. But in general, they always are quantitative and

rules based. Discretionary is my nightmare. Can you imagine? Oh my gosh. I

don't wanna think about it.

[00:16:27] Gavin: As you say, quantitative and rules based. And have you

found that those rules have changed at all over the 20 years you've been doing

it? The 15 years that you've been doing it for the public? Have there been some

refinements and tweaks or something that maybe you didn't think about before?

[00:16:40] Meb: You know, we like to say the philosophy and theory that

underlies it is usually pretty consistent. But don't wanna be fools. And if there's

a structural change in markets, in particular, we want to be aware of that and

cognizant, and make changes. Now what we're not doing is trying to change the

strategy based on what's working and not working. Which is a huge trap that

everyone falls into. I can't tell you how many professional investors call me and

start talking about three year performance. And I say, "I assume the reason

you're asking me is because you wanna do the opposite?" And they kind of get

caught off guard and they're like, "What are you talking about?" I say, "Well, the

research shows over thousands of hiring and firing decisions that people love to

chase short term performance usually to their detriment." That applies to asset

classes and active strategies on and on. But we want this to be a very slow and

thoughtful process that we design ahead of time.

[00:17:30] And this goes back to studying history too. If you study history of

markets, you understand they're super weird and crazy stuff happens all the

time. That's the base case, but it's always gonna be weirder in the future. But if

you don't study history and you don't know that say 60/40 has had a 50% draw

down before and then you get into it. That's when the emotional fractures

happen and people start to go crazy because their expectations don't meet

reality.

[00:17:55] Gavin: It's managing people's expectations. Do the 120,000,

125,000 unit holders you have, shareholders you have, do you have a good

feeling for what they're looking for? Obviously if they're buying a particular

fund, presumably they're looking for quality and yield or a value bias or

whatever. Do you get any steer on on where they're coming from.

[00:18:13] Meb: Yeah, it varies by fund. Like an emerging markets deep value

fund or tail risk fund are gonna be very different with very different intents by

the users. So like the tail risk funds people use in different ways. Some people

use it tactical, some people use it as a hedge. Some people use it as a bond

replacement. Things like our largest fund, the long only shareholder yield, I

mean that's a much more traditional sort of style box lego. People say, "Okay,

I'm gonna not do S&P 500. I'm gonna do this instead." And it's a very clean

discussion. But others, they tend to have a varied usage set and also varies by

institution, advisor, and individual. Each end user tends to have a different

reasoning for why and what they're doing.

[00:18:57] Gavin: Do you have any feel for what percentage of your assets are

institutional and what are individual?

[00:19:02] Meb: I would probably say the majority is institutional or advisor.

But we got a lot of individuals as well. It's a pretty nice diverse mix.

[00:19:11] Gavin: That's good to have, because obviously one of the difficulties

with institutional or advisor is that policy changes and it's we decide we don't

like this. Maybe after those three years. I suppose again, that comes back to

managing people's expectations. If they have a clear idea of what they want

when they're coming in, then they're less likely to be surprised, disappointed if

you've got that lag in performance as happened during the decade of the 2010s,

[00:19:31] Meb: We never know what the future's going to look like. Of course,

if you look at some of the current stock market returns in countries all around

the world, there's a lot of countries that have had zero stock market returns for

10, 20 plus years.

[00:19:44] Gavin: The UK is one of them. Yeah.

[00:19:46] Meb: Yeah. We are shareholders now. It's in pretty, it's all value

territory. Last I checked, it was low teens PE ratios. We'll see at the end of this

quarter, you might might be getting in a cheaper. You know, again, like the US

once traded at a 5 PE ratio. So these things have a way. For the last 10 years the

biggest struggle and culminating really in the last year, the concept of global

investing was met with downright scorn from people. And I say, "Look, it's

good you put all your money in US stocks, but why wouldn't you put all your

money in Brazilian stocks?" And they say, "Well, that's crazy." I say, "Okay,

well what about Japanese stocks?" "That's crazy!" "Australian stocks?"

"Crazy!" I say, "Well, you know what? Everyone in those countries does the

same thing. They invest the majority of their assets in their own country. And it

sounds rational to them. And they would say you're crazy for putting all your

money in US stocks."

[00:20:34] Gavin: The percentage of the MSCI World Index represented by

different countries, I can remember, you can tell from my hairstyle I've been

around for a little while. Late 80s and Japan was actually 35 and the US was

less than 30%. Where are we now? If you don't know the history, if you're not

aware of long term trends.

[00:20:48] Meb: What's amazing about that example is Japan's the granddad of

all the bubbles for us at least. Where it hit this long term PE ratio of almost a

hundred. So the US example of 45, Japan was double that. And just to to scale

how enormous that bubble was, you know, it's taken three decades for that thing

to work off. And so you talk to Japanese investors and buy and hold's not even a

concept. They're like, "What are you talking about? Buy and hold? What do you

mean stocks are the long run?"

[00:21:15] Gavin: But now it's solidly in the value box and there's lots of really

cheap Japanese companies selling for less than cash on the balance sheet and

nobody will buy them because you've had that three decade experience. It's been

a really neat chance to chat. Really have appreciated it. And thank you very

much indeed. I hope we can do this again in the not too distant future.

[00:21:31] Meb: It was a lot of fun. Thanks for having me.

[00:21:35] Gavin: Thank you very much for listening to The Gavin Graham

Show sponsored by SmartBe Investments. If you would like to learn more about

the subjects discussed today, please go to our website, at

smartbinvestments.com or @smartbeinvestments on any social media platform.

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