Podcast Summary: Excess Returns

Episode: The 40 CAPE Conundrum | Meb Faber on What High Valuations Mean for Markets

Date: October 27, 2025
Hosts: Jack Forehand (B), Justin Carbonneau (C), Matt Zeigler (frequent guest, not listed directly in excerpt)
Guest: Meb Faber (A), Founder of Cambria Investments

Main Theme & Purpose

This episode explores the implications of historically high stock market valuations (specifically referencing the CAPE ratio at 40), the prevailing dominance of US equities, the global investing landscape, and the importance of diversification. With guest Meb Faber, the discussion covers behavioral patterns in investing, the value of trend following and managed futures, portfolio construction, long-term investment outcomes, and practical advice for both individual and professional investors.

Key Discussion Points & Insights

1. Perspective on High Market Valuations

• Meb Faber draws on stock market history to contextualize today's high valuations, likening the current moment to past peaks such as the Roaring 20s, nifty 50s, dot-com bubble, and recent meme stock mania.
• He stresses that while the US stock market is very expensive by all valuation metrics (CAPE near 40, dividend yield near historic lows), high valuations do not guarantee an immediate crash.
  • Quote: "That is absolutely not what it means. The PE ratio could go up to 50, 60, 70, 80, 90 like it did in Japan. There's nothing stopping that animal spirits baby." [05:57]
• Returns after these periods are usually much lower, and not once has the market delivered above-average returns when starting from such high CAPE ratios.
  • Quote: "On average, the future real returns are about zero. And there's not been one time in history where the future 10 year returns were above average ... So, odds are that the future returns for the market, cap weighted, will probably be pretty subdued." [08:40]

2. Portfolio Implications & Diversification

• Faber emphasizes that US investors are chronically under-diversified internationally and into real assets like TIPS, precious metals, or REITs.
  • "The US is 2/3 world market cap despite only being a quarter GDP. But nobody I talk to puts a third in foreign like it's like almost never. And that's just the starting point." [11:26]
• The outperformance of US stocks has made diversification hard to bear in recent years, but Faber notes a shift: "If you look at a portfolio of cheap Cape ratio countries, so ex US countries ... that strategy is now outperforming the S&P over the last one, three and five years. ... It feels like there's been a disturbance in the force." [13:49]
• Investors now face more favorable conditions for diversification, with deep value and emerging markets beginning to outperform.
  • "That strategy is up almost 50% this year. So pretty soon I think people start taking notice." [13:49]

3. Trend Following & Managed Futures

• Trend following is presented as a robust risk management tool, particularly in expensive and uptrending markets. Faber discusses specific funds that employ trend and value overlays, noting that strategy performance can shift dramatically by regime.
  • "You cannot be an honest person with a straight face, a mathematician, a quant, a scientist, and look at the historical evidence and claim that managed futures and trend is not the premier diversifier to a traditional portfolio." [20:00]
• He highlights the emotional rollercoaster of trend investing and the importance of "always having to say you're sorry" due to underperformance in any well-diversified approach.
  • "That's a feature, not a bug." [17:44]

4. Behavioral Issues and the Importance of Long-Term Perspective

• Many investors, professionals included, have a "right hand chart bias," focusing excessively on what has performed recently—especially US equities.
• Faber argues that decisions about when to sell or judge a strategy are almost exclusively anchored to recent underperformance, rather than to robust, long-horizon evidence.
  • "Vanguard has some studies...the best funds over 10 years ... it's a coin flip on any given year. ... Why am I even talking about evaluating this on a one year or even a five year time horizon? It offers you no information whatsoever on a lot of these ideas." [41:42]

5. Market Concentration & The Risk of Cap-Weighted Indexes

• The dominance of the "Magnificent 7" and US tech stocks is reminiscent of previous eras of extreme market concentration—in Japan, the UK, and elsewhere.
• Market cap weighting, while guaranteeing exposure to past winners, has no tether to value and can trail other weighting schemes over time.
  • "My favorite way to beat it by 20 basis points a year, just take out the largest stock. That's it. You beat S&P by 20 basis points, right there." [26:20]

6. AI & Technological Innovation

• Faber is optimistic and open-minded about AI in both content creation and portfolio development, but sees it as currently being most useful for content and idea generation, not for revolutionizing portfolio management—yet.
  • He built a custom GPT trained on his own work: "It's like 90% me." [29:30]

7. ETF Industry Lessons & Business Evolution

• Faber discusses the evolution of the ETF business, emphasizing the advantages of launching a diversified ETF suite due to the unpredictability of which strategies will garner assets or perform well in a given regime.
  • "The asset management business is a pretty garbage business at no scale ... And then at scale it's the best business in the world." [48:37]
• Advice to new ETF issuers: Diversify products, expect some to underperform or gather no assets, and beware that even "brilliant" ideas can flop.
• Notes large fund families close many more funds than small newcomers, debunking the myth that big asset managers are "safer".

8. 351 Exchanges and Tax Efficiency

• Faber explains the 351 exchange, a method for contributing equities to an ETF structure in a tax-deferred manner:
  • "If you have SPY, you could theoretically contribute 100% SPY because it looks through the underlying holdings." [51:15]
  • Main use cases: concentrated low-basis holdings (e.g., employees at large corporates), direct indexing transitions, and strategic rebalancing for tax-burdened portfolios.
  • Suggestion for RIAs: "If I was an advisor, I would go to every public company within a 500 mile radius ... I know Nvidia, you have 5,000 employees that have a 20 million net worth or more and you're stuck in the stock and you can't do anything with it. ... It is like the biggest legion possible." [54:09]

9. Historical Lessons & "Time Billionaires"

• Markets and investor behaviors have changed less than people think; new generations tend to rediscover the old temptations and traps (e.g., speculative trading via meme stocks, options, etc).
  • "I try not to be too dismissive of the youngins ... but, let's be honest, that would, that was probably me in the 90s." [57:29]
• Faber’s forthcoming book, Time Billionaires, aims to remind investors of the compounding power of staying invested for decades rather than chasing short-term frenzies.

Notable Quotes & Memorable Moments

• On market cycles and recency bias:
  • "All of us are extrapolating from our own lived experience. ... If you're a younger person, living this 15 years is like a career, right?" [06:35]
• On common investor mistakes:
  • "The two big mistakes that we see people make in the US is way too much in the US [and] almost never have real assets, tips, precious metals, REITs, on and on." [12:53]
• On trend following's value:
  • "If you just survived [in markets], that's the most best compliment you can give someone." [16:18]
• On selling strategies:
  • "How are you putting your clients and life's savings to work and then not even having a framework for how to think about getting rid of this?" [41:38]
• On why cap weight isn't always optimal:
  • "The Achilles heel flaw of market cap weighting: it has no tether to value ... eventually, gravity has its effect." [27:27]
• Advice for ETF entrepreneurs:
  • "I would have loved to have launched all of our 20 funds from day one. The problem is ... these are liabilities when they launch." [47:37]

Important Segment Timestamps

| Topic | Timestamp | |-------------------------------------------|-------------| | Historical context for high CAPE | 00:00–09:30 | | Diversification and global value | 09:32–15:14 | | Trend following and managed futures | 15:15–23:12 | | Behavioral/psychological biases | 23:12–29:28 | | Market concentration & pitfalls | 25:16–28:12 | | AI’s impact on investing | 28:12–32:07 | | Cycle analogies (dot-com, today, etc.) | 32:12–35:56 | | Long-term value investing & selling | 36:41–44:56 | | ETF business strategy & lessons | 44:57–51:03 | | 351 exchange explained | 51:03–57:08 | | What’s changed (and not) in investing | 57:08–end |

Tone & Style

Meb Faber’s tone is informal, thoughtful, and occasionally irreverent, blending historical context, quantitative analysis, and grounded advice. He habitually challenges mainstream narratives and encourages investors to see beyond the most recent "right side of the chart" when making portfolio choices.

For Listeners Who Haven’t Tuned In

This episode is essential for understanding the risks associated with today’s high US equity valuations, why diversification is due for a comeback, and how thoughtful portfolio design—embracing global value, trend, and real assets—can deliver resilience. Faber’s insights on behavioral pitfalls and practical tax-efficient reallocations (like 351 exchanges) are actionable for sophisticated investors and advisors alike.