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- [00:00]
A
There's been four periods over the past a hundred plus years where the stock market's done 15% per year for over a decade. And they all have names. Roaring 20s, you know, nifty 50 period, Internet bubble and Covid meme stonk, whatever we're calling this era. And you know, on the backside of those, you had some pretty tough times. If we say today, and I will say this, that the US stock market is very expensive, I will say that they assume that means it has to crash, it has to go down. That is absolutely not what it means. If you look at a portfolio of cheap cape ratio countries, so ex U.S. countries, that strategy is now outperforming the S and P over the last one, three and five years. 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.
- [01:04]
B
Hey Matt, welcome back to Excess Returns.
- [01:07]
A
Great to be back guys. Good to see you. Go Dodgers.
- [01:11]
B
Nice. We in our audience always enjoy having you on. It's such a wide ranging discussion we can have about markets, investment strategies, ETFs and I think a lot of other, you know, investment related topics and themes. It's, it's, it's interesting. I was just looking because I was like, how many, how long has Cambria been around? I was just curious as to like what. And actually November. I'm sure you know this, but the firm is going to be coming UP on its 20 year anniversary. Of what?
- [01:43]
A
Yeah, what should we do? How should we celebrate? Well, it's the 20 year anniversary anyway. I don't know. Is that Ruby's diamonds? Whatever it is, you know, it's funny because I, I find myself as I get older and I'm sure the listeners can have the same experience, which is, I'm like, man, I was talking about college the other day in Virginia and I was like, man, you know, I graduated in the year talking about the bubble year 2000. I can't believe that was like 10 years ago. You know, like in my head I'm like, I can't believe the GFC was only a couple years ago. And I'm like trying to do the math. And I was like, yeah, wait, we've been around 20 years. So it's, it feels a little crazy for sure.
- [02:20]
B
No, but I think it's, it's awesome and it's a testament to sort of what you and the team have built over there. And so, you know, for people Listening to this, you can learn about all the different things that Mev and his team are doing. ETF, trend following strategies, 351exchanges. You can go to a couple different places. Cambriainvestments.com Cambriafunds.com and also one of the original guys in the investing podcast space.
- [02:44]
A
If you're watching this on YouTube and you see this sweet new swag hat I'm wearing, you guys email me, I'll send you one or a book. It's funny, I gave a speech to Google back in 2014 and in that speech I say, if you're watching this and you're in the audience you're watching on Google, email me and I'll send you a hat. I still get emails this day from people that are watching this video on YouTube being like, can you send me a book? And I was like, bro, this, this was 12 years ago. Like, come on, you still send a thing at some point. Well, I put most of them, most of my books are for free online. You can get the ebooks, almost all of them free. I got into a big fight with Jeff over at Amazon. I said, you know what, buddy, forget it. I'm just gonna put all my, all my books online. Or at least, at least that I can help it.
- [03:30]
B
Well, that's the cool thing with YouTube though. Stuff does resurface. So to your point, you know, something that was given over 10 years ago, people are still watching it and I'm.
- [03:38]
A
Sure good and bad, you know, that's the good and bad part about it. Yeah.
- [03:43]
C
Dan, I don't think I want my tape. That small cap value is gonna outperform from a decade ago. I don't think that I want that thing resurfacing. So I guess it depends on what it is.
- [03:50]
B
So. Okay, so there's a number of kind of topics that we thought we'd just try to work, you know, through with you today. And the first one is, you know, the U.S. since the financial crisis, really speaking of that, you know, the US has been sort of like the dominant stock market in the world aside maybe from there's been a couple little fits and starts with different international markets this year being one of them. But overall, when you look at like the long term, 15, 10 or 15 year return, you know, the US market has just basically beaten the pants off almost everyone. And, and at the same time, like the US stocks have kind of been in most of that period, like above average historical valuation. So we just thought it'd be interesting to get your take on do you think something has maybe permanently changed with US equities in particular where they're, their valuation today, you know, it's just permanently higher than it maybe has been historically for whatever reason. Maybe they're more efficient, maybe they're more tech based and more growth oriented.
- [04:53]
A
I don't know.
- [04:54]
B
We just want to start there and see kind of what your, what your thoughts were on that.
- [04:57]
A
Well, the short answer is absolutely not. The longer answer is, look, it's, it's been an amazing time to be an investor, y'. All. I gave a speech this past week in Minnesota and I said to the crowd, you know, it's a lot of planners. I said, I'm sure you're sitting down with your clients in year and saying to them, by the way, this is as good as it gets. Like I just want you to appreciate client. It does not get better than this. For US Stocks, there's. We do a. My favorite chart of the last year or so has been a rolling 10 year return to the stock market. And there's been four periods over the past 100 plus years where the stock market's done 15% per year for over a decade. You get really rich quick at 15% per year, by the way. But it's only been four times that's happened. And they all have names. Roaring 20s, you know, nifty 50 period Internet bubble and Covid meme stonk, whatever we're calling this era. And you know, on the backside of those you had some pretty tough times. Great Depression, inflationary 70s, Internet bubble burst as well as the GFC. But the whole point is being that you have these periods in markets. And I'm actually writing a new book, should be out in Q1 about the history of the stock markets back to 1600. And you can kind of look and see that. Look, these regimes happen throughout time. And the really technical way to say it is the good times tend to follow the bad. And what we can kind of learn from this. You know, I was watching NBA just started back up this past week and they were asking a bunch of the young players and said, hey, we're doing this new feature. What do you remember from NBC, you know, doing NBA in the 90s, and you just saw this like blank expression from all the players and they're like, I wasn't even alive yet. Like what are you talking about? You know, this goes back to the early part of our conversation. Like what do you mean, the 90s? Like Michael Jordan maybe? Like, I don't know, literally all of them Are, were, had not been born yet. But the point of the reason I'm, I mentioned that is that all of us are extrapolating from our own lived experience. And if you're a younger person, living this 15 years is like a career, right? You know, that's a really long period in markets for kind of it being one environment which is romping stomping US stock market, largely creaming everything else until recently. We can come back to that. But to answer your question on valuations, you know, for perspective, we use the 10 year P ratio, but we publish five different ones for all the global stock markets. And it doesn't really matter which one you pick, they all say the same thing. Doesn't matter if you use forward pe, doesn't matter if you use backwards PE one year, if you use price to book, if you use Tobin's Q market cap to gdp, on and on, they should all rhyme when something's expensive like the broad US stock market is now. So the 10 year PE ratio, let's call it 40, dividend yield of 1.17. Both of those are knocking on the all time lows for dividend yield. 1.1 at the Internet bubble peak and then the CAPE ratio of 44 and a half. But that's the thing with valuation. I feel like this is the biggest misconception when it comes to valuation is people assume, if we say today, and I will say this, that the US stock market is very expensive. I will say that they assume that means it has to crash, it has to go down. 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. And that just means it, you know, it went up more and got more expensive and that's how it works. But I think the odds change, right, that the spectrum of future probabilities of what can and should happen, just like at the blackjack table, the poker table, I think you, you have to play those odds and in history, and I'll wind down here, we examined when all the global stock markets, when they closed the year at 40. So we haven't closed the year 40 yet. We got a few months. But let's say we close at 40. 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, meaning, let's call it a 5% real return, right? So it's never, not once. So when you guys have me back on in 2035, we're doing holograms at that point, I don't know. And we look back, you know, the chances, the odds are that the future returns for the market, cap weighted, that's the key word here, will probably be pretty subdued.
- [09:32]
B
So, so play that through in terms of like what, how an investor should sort of think about this. Because I'm thinking like, you know, international diversification could be one good idea, maybe adjusting one's return expectations could be another. You know, maybe paying a little bit more attention to tax, you know, efficiency would be another. So just kind of work through some of what would be the, I guess you could call it tactical and strategic things that an investor should be thinking about with valuations where they are today.
- [10:07]
A
Yeah. So let's assume this is a tax exempt account. You can just do whatever you want. You're not worried about taxes. You know, when we started that bull market back in 2009, the CAPE ratio was 12. Right. So screaming cheap. And then on average, roughly it, it hangs out most of the time, kind of that 18 to 22 area. We actually wrote a piece and I think this is really important because the thing that people get wrong with valuation, they assume the menu on the restaurant is stocks or nothing. Us more spy or nothing. And so that is like the place, like I said, if I, if I'm out of US Stocks, the alternative is nothing. But that's not the case. You know, it's not like a in and out menu where you have two things. Like there's a whole secret menu of things you can do. You can move to cash, you can go in t bills, you can move into foreign stocks. And we have an old post, and we were kind of talking about how, you know, some macro commentators were talking in the early 90s that stocks were expensive. And not to dunk on Seth Klarman, he's a world class hedge fund manager, but he was talking about how stocks were expensive. And I said, what if you just got out of stocks, you know, when they went above a Cape ratio, I don't even remember 20, 25, something not that high. Terrible idea, right? Like, horrible idea. If you did nothing with that money, if you actually went into bonds, it was totally fine. And if you went into a different choice, which is you stayed in stocks, but they were global stocks. So like value, global value stocks. You can see I'm wearing a G Val hat. It was actually a great idea. Right. So you, you totally preserved your wealth. You just moved out of the one country. So what are your choices here's? Here's the, the main choices that I think make the most sense every time I talk to US Investor. Y' all know this. They're all in on U s stocks. 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. That's the market cap. Like that's where you should start. So if you're valuation conscious, you could argue, hey, maybe I'll do even more informed, maybe I'll do a GDP weight or something. So within the US you can break the market cap link. You can do things like equal weight will be better. You can do things like will likely be better. You can do things like we like shareholder yield but value multi factor that you all talk about. You could do things like adding foreign and emerging. You know those, those broad markets are like high teens, low 20s, totally reasonable. And then you can do value globally in addition to all the other asset classes. The two big mistakes that we see people make in the US is way too much in the US So US only. And second is they almost never have real assets, tips, precious metals, REITs, on and on. So those two big factors I think would be a huge benefit to portfolios. I mean we wrote this piece a couple years ago called the Bear Market and Diversification talking just how tough this period was for any asset allocator, financial advisor, any diversified portfolio relative to the S and P. But I think that's changed. So this was arguably the worst period in history. The only thing that's even close is post World War II. I think it's shifted actually. So I think the bull market and diversification has begun because it was something like 12, 13, 14 years in a row where the US pummeled any diversified allocation. 2022 was kind of the only, the only survivor. But here we are in 2025 and I think it's shifted. And I'm going to drop you a spooky stat because this is right around Halloween time we're talking about this. Not a single listener is going to believe what I'm about to drop. So you can go check it yourself, y'. All. But if you look at a portfolio of cheap Cape ratio countries, so ex US countries and we have a fund that does this that I've already mentioned, that strategy is now outperforming the S and P over the last one, three and five years. And I don't say that as if this is the most magical, amazing Fund because it was pretty stinky before that. What I'm pointing that out for is that it feels like there's been a disturbance in the force. So because the U.S. is at all time highs, you go turn on CNBC. All they're talking about is U.S. stocks, Nvidia, MAG7AI. And now a little gold, right? Gold has entered, entered the chat because it's at over 4,000. But other than that, no one's talking about foreign, no one's talking about deep value. And that strategy is up almost 50% this year. So pretty soon I think people start taking notice. And so every advisor who sat with a client for the past 10 years, and that client said, you numbskull, why in God's name do we own emerging markets? Are you joking? Why do we own small cap value? Why do we own all these things? They're going to sit down by the end of the year and be like, you numbskull, I told you. Why don't we own emerging markets? Why don't we own gold? You know, the memory is short, but I think, I think it's shifted. So there's a lot of choices out there on the menu. I like animal style as my secret choice.
- [15:16]
C
You're basically summarizing every conversation I've had with clients in the past 10 years. Why the value, why the international? To your point, at least this year we have some positive stuff going on. What do you think about trend following as somewhat of a solution for an overvalued market? Because one of the things of research you did that was kind of eye opening for me is this idea that I believe if you look at the quadrants with respect to valuation and trend, I believe an expensive uptrending market is actually the second best quadrant to invest in. So you could argue maybe using trend as a way to help me here deal with this could be a good solution.
- [15:47]
A
Yeah. You know, we probably love Trend more than any advisor in the country and we like to point out and talk about, you know, we have soon to be 20 ETFs, so when you got 20 ETFs, something's always stinking it up. And so a handful of years ago I was getting a little frustrated with, you know, everyone on, on social just always talking about what they were doing. That was amazing. They're traders, they only make money. And I was like, if you're an older trader, you know, you got a lot of scars. Like it's, it's, it's not, that's not what it's like. Do not confuse These young people, it's mostly about losing money and not losing all your money and just surviving. Going back to the 20 year. We often say it's like the most best compliment you can give someone if you just survived. And so we wrote a profile of a fund. Our first one we said totally not crushing it. It was about a fund that essentially does that quadrant strategy. So it buys, it's called vamo. It buys a hundred stocks with good value and momentum strategies, but it'll hedge the portfolio in 25% increments based on half of its top down trend and the other half is top down value. So not surprisingly right now it's 50% hedged because the market's expensive. But going up that fund for a long period was super stinky, did not do a good job, trailed the S and P, everything it owned underperformed, hedging with the S and P hurt. And so we wrote a profile of the fund and said hey look, we want to talk about our worst performing fund, we want to talk about why it's doing so poorly and do we think it's broken or is it just in a, a random period, a bad regime, on and on. And of course we concluded we thought this was a pullback, a great time to be adding and I think you know, sacrificing at the altar the market gods is a good karma thing to do. And like almost to the day that fund has turned around and done wonderfully. We actually did it again with the global value devalue strategy. And almost to a day that fund has turned around and I now I need to write it about our manage futures strategy because our managed futures this year along with everyone else is like the worst 12 month period in the soc gen trend index history. But it's a good point. We talk about things like trend or things like value so people will say hey Mev, your value fund is stinking it up. And I say well to be clear, you're talking about the one in the US that's targeting small and mid caps because the value funds outside the US like I mentioned earlier are up 20, 30, 40, 50%. So just saying value, there's a wide spread between what it means. Same thing with trend. You know we have a handful of trend funds I think just to show the dispersion, there's one that's up 20 something percent this year and there's one that's down five. And so the choice of markets traded, the choice of the trend algorithm, meaning is it long, is it mid, is it short? But the biggest one is it, you know, is it going long and short? And so you know the, the benefit of a traditional long short is I think that's actually the best diversifier to a normal buy and hold allocation. But you're going to look the most different usually. So if you're just doing trend on the portfolio alone, long, flat, totally, totally would be my choice. But if you have a buy and hold portfolio and say I just need something to hedge, this long short would be my choice. But this year is a great example of diversification, meaning always having to say you're sorry, there's something that's going to stink. But that's a feature, not a bug.
- [19:21]
C
Since you asked about managed futures, I want to ask you about this whole idea because this is something we do with clients a lot. Like we've never run really like more of a traditional stock and bond portfolio. We run something that's sort of based off the permanent portfolio or we've always got some gold in there. And then when I did some research, what I realized is putting managed futures on top of the permanent portfolio like as a fifth thing has incredible benefits because of what it does in the drawdowns and because it's doesn't have huge losses. So how do you think about that whole idea of like running a stock and bond portfolio which you know, we just had Rick Ferry on and he will tell you is a very good long term strategy and you shouldn't add anything to it. But like when you do the math, like adding these other things in tends to add a lot of value. I think. How do you think about that?
- [20:00]
A
You cannot be an honest person with a straight face, a mathematician, a quant, a scientist and look at the historical evidence and claim and I love Rick, this isn't about Rick and claim that managed futures and trend is not the premier diversifier to a traditional portfolio. And it's for a couple reasons. So looking at a traditional US portfolio, most people again going back to our own lived experience, right? You've been managing money last 15 years, all you've known is us up. But it varies based on when you were born, where you were born. So not just what country but what part of the country. You know Vanguard's got a great study that shows equity allocation just by when people were born and it's hugely different. So if you started learning when the GFC was going on, totally different than you know, YOLO culture of today. But the point being is that this is true for asset classes, this is true for, hey, your perspective on Gold, you're born in Australia or Canada. Guess what? You're, you have a, probably a much higher allocation to gold or China or India than you do if you live in the US on and on and on. And so two of the benefits to a managed futures or trend. A lot of people have come to the assumption that bonds, hedge stocks, Treasuries, hedge stocks, and that is a very dangerous assumption. They do sometimes. But as was evidenced by 2022, they didn't. That was a very painful year for a lot of traditional US stock bond investors the first half of the 20th century. Bonds often didn't help during downturns. And if you hadn't studied that period, you would have assumed that stock. The bonds always hedge stocks. So what does help that portfolio? Well, one of the benefits to a traditional 60, 40 in the U.S. a managed futures or trend is two things. One is in uptrend. So like this year, this is a great example for a lot of certain type of exposures. You don't have exposure to things like precious metals and gold. Right. Normal portfolio, y' all do permanent, but most people don't. And so those type of portfolios will give you those exposures. But the big part is on the risk management downside, you know, where when things really hit the fan, and let's be clear, they haven't in 15 years, you've had a couple of these little 20% dippers in the U.S. but nothing, nothing real bad like we've had in a lot of other places. You know, that tends to be where it shines. Manus futures did great in 2022, as is like the only thing on the planet that's going to be short bonds. Almost no active manager, long, short, you know, on and on is really going to benefit you in that environment. So I think there's a lot of benefits. We're probably furthest out on the spectrum of advisors in what we think a reasonable allocation to trend is. And I think you can argue 50%. And I haven't met an institution ever that really goes above, you know, 10 if they've bought in 20% if they're crazy, 25% if they're willing to lose their job. But we tend to be the nuttiest of them all. And our default is 50.
- [23:12]
C
Yeah, it comes down to the difference between math and behavior. I think, like the math of it makes 100% sense. And then you can only use as much of it as your clients can deal with. When it's like my managed futures fund is in the tank, this Year and stocks and bonds are up. Like you've got to do it enough that you know you get the benefit but the people will stick with it during those bad periods.
- [23:29]
A
Let me give you one more example on how important it is to be open minded about asset classes and strategies. So you know, investing. So many people come in with almost like a religious cult like belief and there's a very intelligent, I actually really like him so I'm not going to mention his name. Investor who oversees, you know, it's almost a trillion now. But he, he was talking about a while back how gold has no role in a portfolio. And he was comparing it to 6040 and I said let's run a fun thought experiment. I said let's just replace the entire. So 6040 is 60% US stocks, S&P, 40% bonds. Let's call it 10 year bond. Let's just replace the entire bond exposure with gold. Like clearly according to your logic, this is going to decimate returns. No one would ever do this. The dumbest idea on the planet. Guess what? It makes no difference whatsoever to the allocation over the last 50 years, over the last 100 years. And I updated this study was like a year and a half ago. So re updated it's going to destroy 60 40s stocks, bonds. But the point being is like you can't just repeat things. You gotta, you know, test it. Just like what, you know, what does this actually mean? And it turns out, you know, that it's not a dumb idea. It actually historically was a fantastic idea to include gold. Now I think the best interpretation of that is to do both. So to own both gold and bonds. But coming to investing with sort of this closed mindedness on like any asset I think has probably cost people a lot, you know, a lot of missed returns when it comes to different regimes and times when something else does better than their pet asset. And you can apply that to a lot of things.
- [25:16]
C
How do you think about concentration? Because as a value guy, I'm like the guy who was shaking my fist at the mag 7 and like how expensive they are and how cheap value stocks are. But I also have to say on the flip side of that, I mean they have done very well fundamentally. So there is certainly justification for those being the biggest companies in the world, at least right now. Like how do you think about concentration? Do you see it as a risk to the market? Like how do you look at that?
- [25:37]
A
Well, in this new book we're writing, we start in 1600 with some of the first joint stock Companies. And so talk about concentration, because the index was like one company, then it was two, then it was five, then it was ten. But even those, you know, those companies are now gone, right? You're not talking about VOC on this podcast. You're not talking about East India Company or, you know, some of these companies. And what we talk about is a lot of examples. We say, look, the US is 10 times bigger than any other stock market in the world, but it didn't always hold the crown. You know, the Dutch used to have it and UK used to have it, Japan used to have it. In my lifetime. And that's true with the companies. Like, I love seeing those decade charts where it shows the top 10 or 20 companies by market cap and then the flags of where they are. And right now it's all US and US Tech. And. But if you look back a decade ago, there was a lot of China mixed in. If you go back a few decades ago, it was all the empire of Japan. That beautiful white flag with a red dot was most of the stocks. And so these things kind of wash and wane. But the market cap waiting is such a curious idea when you think about it, where it's a great way to get exposure to the overall market and you're guaranteed to own the winners. But the problem is there's no tethered evaluation. And so historically speaking, it's a pretty good exposure. But I think there's pretty easy ways to beat it. The simplest, and I said this on Twitter, I said my favorite way to beat it by 20 basis points a year, just take out the largest stock. That's it. You beat S and P by 20 basis points. Right. Right there. And so there's plenty of things you can do again, you can equal weight, you can evaluate. The problem is, here's the problem, the long history. If you compare market cap weight to anything else, or particularly the very high concentrated, it's a pretty bad strategy. So it consistently underperforms every once in a while. And it's particularly during the bull market romps, the face rippers, it just goes vertical and something that's concentrated, it's all the positions go straight up. But that sets the stage for the next period of underperformance. We put out a paper on this topic and kind of outlined a few of the periods and said this is what's happened in the past. But. But that's the Achilles heel flaw of market cap weighting. It has no tether to value. And so eventually, you know, gravity has its effect and we'll be fondly looking back on all these names in the top 10 stocks 10 years from now and, you know, talking about the new, the new ones. But it's, it can last a lot longer than any of us expect.
- [28:13]
C
How do you think about AI like thinking about these revolutions from the perspective of an investor? Because we're kind of caught up in that right now. And it seems like it's going to be a very, very major revolution. And even I fall into the trap a little bit of looking at it and saying, all right, I got to figure out what the winners are going to be here because the next Amazon or whatever is sitting there in front of me and I got to be able to figure that out. So how do you think about a revolution like this from the perspective of investors?
- [28:35]
A
That's the beauty of having both hemispheres of the brain, right? You got one foot in valuation, one foot in trend. And if you look at like our global momentum and trend ETF this year, it shouldn't ever surprise you what's in it. And so this one doesn't short, it's just long flat, can move to cash. You can almost always guess what's in it. So having heard everything we've talked about today, you wouldn't be surprised to know it's mostly stocks, mostly ex U. S stocks, so foreign stocks, few sectors in there, A huge slug of precious metals and miners and then a sliver of Bitcoin as well. Right. But I don't have to have an opinion on what's happening. And often my opinion is directly inverse to what those positions are holding. And so there's a lot of times think back to 2007, you're like, oh man, I don't want to sell my REITs right now. Like, I don't want the party to be over. I'm not ready for this. And same thing about buying in be like, oh my God, this is going to be way worse. I remember thinking back during COVID being like, dude, this sucker is going to go down 80%. Like, I don't want to be buying now. Like, what a nightmare. And so Trinnd has a way of putting you in some of these things even when you don't want to be. But as far as AI, I'm having a lot of fun. I take a AI class by my one of my local dads, Khee over at Rad Reads, which I would highly recommend. We built a custom GPT on all my content, so we'll put a link in the show notes, but all my books White papers, blogs, Twitter. And you can ask it questions. You can be like, all the questions we did today, we could probably ask them. It'd be fun to see what it does. We'll have like a, you know, a MEB Real podcast and a MEB AI podcast and see if you can tell which one's which. And because it got trained on Twitter, it's a little cheesy. Like, I. I hear some of the responses and I'm like, is that what I sound like? Would I say that? But it's like 90% me. Like, it. It gets all the nuance. Like, you can even ask it portfolio questions. You can be like, here's my portfolio. What would you recommend? And it comes back and I'm like, oh, that's. That's actually probably what I would say. The downside is if you ask it, like a relationship question about, like, your wife or something, it'll. It'll couch the response in terms of risk and drawdowns and everything else. So it's. It's kind of limited to investment world, but it's fun. We've built them with financial historians. So I'll be like, hey, here's my Mount Rushmore. What would these four people say about this topic? And like, Munger will weigh in and Arnot, I'll mix it up with Asness and on and on. And, you know, so it's. It's been a lot of fun. It hasn't made its way that deep into portfolio. It's more been kind of content and ideas around that. But we're open. I. I had a fun podcast where I got translated into Italian and my wife speaks Italian and we sent it to her and she's like, what in the world is happening? It's getting real weird real quick.
- [31:28]
C
And I believe. Didn't you also make a video of you at one of the major pension boardrooms saying something?
- [31:32]
A
That was CalPERS. That was. That was an AI. That was a real. That was a real video of everyone crying when I told them that I'm going to fire all. All of them and all the private equity funds and replace them with ETFs. It's weird. They all look like Lego figures. But the most unrealistic part of that video is I'm drinking a beer and squinting as if I really hate it. So maybe that beer was like an amber. I don't love Ambers. I can't. I. I'm too old for IPAs anymore. I drink them now and I just. It just gives me a hangover. So Maybe that's the key that, that it was AI driven.
- [32:03]
C
We've got to teach the AI how to make you enjoy your beer. I guess that's the next level of AI driven.
- [32:08]
A
It's a lot of fun. It's a deep rabbit hole. Once you, once you start creating, do.
- [32:13]
C
You, do you think at all about comparing like this period to the dot com bubble? I mean, some people will try to like take lessons from that or you know, other people will say, who think this is nothing like that, will say, you know, we're not dealing with Cisco at 100 times earnings here. Like these companies are trading in much more reasonable valuations. You know, we could have a long way to go. Do you think there's any value in comparing this period to that period?
- [32:31]
A
Yeah, I, I don't get too caught up in the analogs. I, I feel like that's very tempting and seductive. People really want to do that. I think they always rhyme and in different ways. You know, markets are always like a swarm of bees or a group of starlings. Like you see them like shifting in the sky and moving, but they're always a little bit different. I definitely think there's some rhymes. And I try, you know, part of me, I'm like, look, baby, let's, let's take out the 99 highs. Like, I'm ready. Come on. I asked Professor Schiller a couple years ago, I was like, do you think, do you think we're going to take out 45? Do you think we're going to take out, you know, these. But if you look back, he wrote a fun paper. We can put in the show notes where he was looking at cape ratios on sectors in the Roaring Twenties and Great Depression and the hot tech stocks of the day were utilities and railroads. I mean, I guess utilities are kind of hot again. This was another fun stat. By the way, I'm fun full of trivia today that you could pull up the QS versus the utilities. Historically, they have like the same return. I feel like everyone just assumed the QS crushes everything, but like you pull it back since inception and it's like they have the same return anyway. Going back to the Great Depression in the Roaring Twenties, you know, those, those sectors were trading at capes of like 50 or 60. And then fast forward a couple years and guess what? They were too. So, you know, there, there are rhymes on opportunities and booms and busts and kind of what's going on. I would never, you know, bet the farm on, on something like that. You know, saying hey, this is 90s, I gotta sell everything, I gotta panic. Which is kind of the beauty of, of having a diversified global allocation plus trend as well. It's like you, you, you never have to be all in on something which I feel like is almost like the biggest detriment to a portfolio. People, people, these binary approaches to markets. How many people do you know sold in 2009, couldn't take it anymore and then never bought back in? Right. Like that's heartbreaking to hear. Yeah, yeah.
- [34:33]
C
One of those interesting stats going back to the permanent portfolio before is I believe, and I don't know if it's been broken now, but like 2009 was like the biggest year for inflows in the permanent portfolio ever, which was not the. I mean, I'm a big fan of the permanent portfolio, but the time you wanted to be adding to it was not the beginning of 2009.
- [34:48]
A
Yeah. If you look at sort of the global permanent and the permanent Mark Faber, no relation. You know, these type of portfolios going back, one of the benefits of all the various portfolios is they all do well. Does we often say in our old global asset allocation book, which we hope to update next year, said doesn't really matter which one you pick over time. And the keyword being over time. The problem is, you know, best to worst of all these portfolios, the yearly spread is like 30%. So it always looks like there's massive crazy stuff going on in the world. Fast forward like 30 years and the spread is like 1 percentage point. So it's tiny. It's like very, very precise. But if you look at things like the 70s, you had to have some sort of real assets or value to even really survive that decade. But the permanent portfolio and things like that historically have been one of the most consistent across decades and periods of all the types of portfolios because they do have that sort of real asset component that's often lacking in many modern portfolios.
- [35:56]
C
How do you think about AI from the perspective of people like us who are building portfolios? Do you think it's going to offer a lot of value to us? Do you think we're going to be typing in? You are Seth Klarman. Give me the best portfolio for the next ten years or something. Do you see any value from it from the perspective of building portfolios?
- [36:14]
A
Probably, probably. So when you guys figure it out, let me know. You know, people have been using various sorts of these techniques for quite a long time. But, but I'm open. I try to operate on an extremely Long time horizon where we're trying to take advantage of people's just general stupidity, which I feel like is a lot easier than some of the short term ideas, but I'm open to it. You guys find some secrets passing them along.
- [36:42]
C
Yeah, no, we're working on it as well. I mean, I agree with you. I think there's going to be a lot of value in it. We just got to figure out what it is. So speaking of long term time horizons, I guess we can transition to value investing now. I want to get your thoughts on that in general because we have seen some better performance from value recently. But you have a lot of people arguing, particularly the simple value strategies, they're just chopping it to deciles based on various metrics that those things just don't work anymore, that things have changed, everybody's doing it or whatever it is. Those types of strategies aren't going to work going forward. And I just want to get your take because you're, as you mentioned, you're one of the longest term thinkers I know. Like how do you think about those types of strategies, those simple value strategies going forward?
- [37:21]
A
One of the, there's oftentimes you hear something in markets, an idea. This is like true in life too. And you can't forget a thing, right? Like you learn something and, and you can't forget it. And so Edward Macquarie, who is an academic historian who did a lot of work talking about how did stocks and bonds do in the 1800s. And he was pushing back a little bit against Siegel for saying, hey look, you know, stocks may not have done as good as you were saying and bonds a little more competitive, but not really the point of what I was saying. He came up with an idea that I heard and it's really hard to get out of my head, which he calls right hand chart bias. And what that means is if you have an asset that's done well recently, or strategy or approach, whatever it may be, it makes it look like it's done well forever. So if you pull up particularly a non log chart of something and it's done well for the past five, 10 years, US stocks would be a good example. And then it just, you pull up the chart and you're like, oh my God, this clearly always been the best choice. And his example is he's like, let's just look at US Stocks versus US Bonds historically, but we'll chop it up in periods. And he's like, there have been plenty of periods where US stocks and bonds had the same return and not just periods of like a year or two, like many decades. And by the way, if you go back a couple years ago, it was like US stocks and bonds, long term bonds had same return for 40 years. I think there was a period in the 1800s where it was like 60 something years. And then he'll look at a decade like the 70s where bonds just absolutely tanked. But because of these way they add up in the most recent performance, it looks like it's always been true. And so I think about that when I think about strategies, things like value, things like whatever it is, momentum, trend, foreign stocks, gold, bonds, on and on. I tend to have a bit of a contrarian streak. And so I'm always looking towards things that have done really terribly. So value fits that bill. But you know, value to me when I think of like broad topics is like what's the alternative? You know, is the alternative that we should invest in companies that trade at 200 times revenue? It's not even 200 times earning the cycle, it's 200 times revenue. Like it's just historically and including this past period, it has been an absolutely atrocious idea. Like one of the worst ideas you can do is buy very expensive stocks consistently. Like that's a, that's a, that's a, that's a recipe for disaster. And so I think, you know, everything would break down if that was true. You know, the whole system makes no sense if cash flow is in the final arbiter. And so all these companies, you know, these mega companies at some point have to generate those cash flows and it comes home to roost. It may not be this month, this year, but eventually. And what those companies are changes over time. You know, back in the day, energy was a third of the S&P and now it's like 3, 4%. So it waxes and wanes. What people get hot and bothered about, you know, maybe gold keeps creeping. Maybe we'll be talking about, you know, gold at 5, 10,000, like what, what, how, how we didn't all invest a third in gold in our portfolios. That was crazy, you know, but that, that tends to be kind of what happens when everyone's, you know, gotten rich off something.
- [40:52]
C
And you wrote a great piece recently, I believe it was titled when to Sell, which gets at this whole timeframe issue, which is, you know, most people want to sell because I've underperformed in the past year and my friends are making tons of money buying unprofitable tech or something. And the real timeframe to judge One of these types of strategies is like exceptionally long.
- [41:09]
A
So thank you for complimenting that paper. Because of the thousands of articles we've written, dozens of white papers and books and stuff, this has been the hardest one to complete and I actually don't love it. However, I had to birth this thing. And the origin of this was my consistent frustration talking to investors of all stripes. Not just we love to look down on the little retail, but let's be clear to me, professionals are as bad, if not worse on this topic. And I basically wanted to publish this to then, you know, very sophomorically send it to people after they sell our funds and be like, I just, I want you to walk through this like an index card. Like, I want to send to people when they buy it and say, let's think about this ahead of time. Because I did a tweet this past week, you know, we have one fund. I said, look, people, I talk to them all the time and they're, you know, say, matt, my dream investment. Here's my dream investment. I want a fund that's been amazing, like a top decile fund. Like clearly is. This is a great strategy, but the problem is like, I don't want to buy it after an amazing period. I want to wait for a pullback and then I want to buy it and then I say, okay, you know, great, I hear you, whatever. And in reality, it happens. And not only do they not buy it, they sell all of it. We're currently experiencing this with one of our funds. So despite doing this for well over a decade on the ETFs, we see people chase performance all the time on both good and bad. So we tried to walk through it, said, hey, look, you know, the, the number one kind of phrase people love talking about today is like, I'm an evidence based investor, you know, And I think people do spend a lot of time on the buy decision. Well, maybe, maybe on some, some people, they put a lot of effort into it and then they buy something. And then, and I often ask them, I said, well, what's like, what's your plan now? Like, how do you plan on evaluating, exiting this? And it's a blank stare 100% of the time. Not even 99, 100% of the time. And really they're like, well, I'm gonna see how it goes. I'm gonna buy this and we'll see how it goes. I'm like, what does that even mean? Like, like, how are you putting your clients and life's savings to work and Then not even having a framework for how to even think about getting rid of this. And usually what it is is it underperforms at some period, you know, for a year or two, and they puke it out and move into whatever's been outperforming. And so this is really frustrating. And we tried to walk through this and say, you know, we had Ken French on the podcast and we said, ken, how long, statistically speaking, do we need to know if an active manager is good? And he said, 64 years. I said, okay, well, let's not go that long. But even Vanguard has some studies in the paper you mentioned. It's like, look, let's say you have the best funds over 10 years. How many years do they underperform? And it's a lot. It's like a coin flip on any given year. And if we know anything about coin flips is you can underperform multiple years in a row. And so we said, look, what are the ways to think about selling that are reasonable? Let's write them down ahead of time. And so it's almost like a diet. And when you get to the point where the sun, where the fund or strategy is sucking it up and you can't take it anymore, you're like, oh, this is why did I buy this? Why did those morons on excess returns talk about this strategy? It's so stupid. I can't believe it. I'm, you know, but then you pull out this card and you're like, oh, wait. Like, oh, okay, find my Zen be like, why am I even evaluate. Why am I even talking about evaluating this on a one year time horizon? Why am I even talking about evaluating this on a five year time horizon? It offers you no information whatsoever on a lot of these ideas. And so I think it's a fun piece. I think no one will read it. I think no one will change their, change their behavior based on it. But at least it gives me a little bit of, you know, good feelings about having to, having to say my piece.
- [44:57]
B
I want to pivot maybe just for the last part here and talk about the ETF business a little bit more. Some of the things you're up to over there. But the question I had for you is, and I think you know, this meb, like Jack and I, when I was at Validity Capital, we had an ETF and I remember going down to, I think it was UBS in like Jersey City or something and sitting with their due diligence team and we were trying to get up on the platforms and Stuff. This was during those, you know, the days where you had to kind of go to the gatekeepers and maybe you still do. You probably don't, given your size. But you know, with some smaller ETF issuers, you still have to kind of do that, do that roadshow, if you will. And I remember them asking us like, you know, what are your plans for launching other ETFs? And sort of Jack and I were always like, well, we don't really have any plans because we're putting all of our resources behind this one etf. Thinking like that was the right answer. But what Jack and I have talked about, like, in retrospect, and it's easy to look at the time and say, we, you know, what should have, what should we have done? How could we have answered it differently? Should we have done. But, you know, we launched a small cap value ETF during a period where it was really, really tough in terms of performance. And eventually we had to shut that ETF down. And so in thinking about what we may have should have done, maybe we should have launched multiple ETFs if we had the capital and resources to do it, because maybe the value one didn't take off. But if we would have had a growth and momentum one, you know, maybe the assets would have come in there and then just overall the validia ETF ecosystem would have been on better footing, healthier ground or whatever, and maybe that ETF would have survived and we would have had other ETFs. But what I'm asking, or the reason I'm telling that story and what I want to sort of ask you is, you know, you've done this for a long time in terms of running ETFs, launching ETFs, having a suite of successful ETFs. But is there something you would have done differently? Looking back, like, what do you think? You know, what maybe mistakes would have you made and what. And what have you done? Well, I guess.
- [47:01]
A
Well, there's a lot. So the people that are listening, the aspiring ETF managers out there, you know, it's a little different today than it was 15, 20 years ago. Back then, you had to get your own trust or partner with someone. And that was really expensive and time consuming. I think it cost us half a million dollars and took over a year. Nowadays, anyone can launch them, so it's a little bit of a different setup. I think your perception is right. I think, you know, diversifying across its suite of position funds is a thoughtful way to go about it because you never know what the regime is going to be. And also, you never know. I mean, the amount of times I see something launch and I'm like, that idea is brilliant. And then it doesn't raise any money. And then today, especially on the daily, I'm like, that is the dumbest idea I have ever heard of. It is predatory, it's expensive, it's tax inefficient, and it raises like $5 billion. So you know, I'm consistently, I'm just. The other half of me is waiting on that bear market to clean out all the nonsense. So definitely, I think I would have loved to have launched all of our 20 funds from day one. The problem with that is, as you know, these are liabilities when they launch. And so we say the asset management business is a pretty garbage business. At no scale, it's expensive. There's massive competition from firms that have infinite resources and four commas in their name. And then at kind of reasonable scale, it's an amazing lifestyle business. Think, you know, Standard Financial Advisor. It's a great, great business. I think it's kind of future proof on many levels. And then at scale it's the best business in the world. Now it's just so like, how do you think about moving from A to B? But even with us, you know, we try to only launch funds that don't exist. There's times when I'm like, oh my God, I'm going to set the world on fire with this fund. I'll give you a good example. We launched at the time was the world's or the US's first, maybe the world's ETF without a management fee. And this was GAA. And this fund was meant it had in its sight the entire trillion dollar plus mutual fund industry that does asset allocation and does nothing. So I'm like, I'm going to do an ETF. It'll be an ETF of ETF. So it's 0% on the wrapper, but I think it's like 40 bips or 30 bps or something. I don't even know, I'd have to look. And I said this is gonna, this is gonna take billions from these old dinosaurs that are tax inefficient. One's one of our smallest funds. I think it's like, you know, the performance has been awesome, it's done really well and nobody cares, you know. So I think, I think diversifying, had that been our only fund, we, we wouldn't have made it. Uh, so I think that's a thoughtful approach. At the same Time. You know, the vast majority of the industry today is on the opposite side of the problem. And this is not the little guys, this is the big boys. Listeners, we did a recent series called 20 things you probably don't know about markets. And this is for pros too. And we consistently get, people ask us, say, meb, you know, I'm worried you're going to shut this fund down. I'm like, you're asking me. I was like, the average public fund half close over a decade and guess who closes most of the funds? The big boys. There's like, there's a lot of these big shops that have closed 30 to 50% of the funds they've ever launched because they're in kind of the spaghetti chuck business, you know, and the average public manager doesn't have any assets in their own fund. So, you know, be wary, listeners, when, when one of the big dudes comes marketing some fun and you know, so you're doing this just because you want to hoover up some assets or do you actually care about it? You know, do you think this is a product people should want and you're applying a fiduciary lens or are you trying to do some ding back strategy just to hit your bonus? And I think a lot of the industry is dominated by the latter.
- [51:04]
B
Talk about the things you're doing with the 351exchanges and kind of what they are and what type of investor would that make sense for?
- [51:15]
A
Yeah, so 351, if you don't know what that is and don't feel bad, 95% of the people I talk to, I've still never heard of this despite my relentless preaching on this topic. When I heard it, this was another idea where I was like, oh, like hold, hold the horses. Like, this is, this is amazing. You know, it's a, it's an idea that's been in the tax code forever but really found its perfect spouse with the ETF structure and the concept. We try to tell people if they're familiar with 1031 in real estate. It's a not too dissimilar idea, which is, you know, we go back to the beginning of our conversation, there's a lot of people listening and be like, yeah, meb, I hear you, but I'm a taxable investor and I got all Mag 7 or US stocks and I can't move to small cap value or foreign or gold or whatever because taxman's going to kill me. So I'm stuck. And so 351 basically allows you to contribute stocks or ETFs to the launch or the seeding of a new ETF, get the ETF back and it's a tax deferred transaction, which is amazing. It's not a tax wash, of course, that would be illegal, but it allows you to contribute properties. So we're doing our next one in December. And so if you're an advisor out there and listening, you're saying, oh, this is perfect for me, amazing. I got all these Mag 7 stocks, whatever, and I want to move into something else. The way it works is there's two main rules. So you can't just contribute 10 million Nvidia. It has to be somewhat diversified. So the top position can't be above 25% and the top 50 can't be above 50%. So what does that mean? You either need to contribute at least 12 stocks or giant asterisks, ETFs are passed through. And so if you have SPY, you could theoretically contribute 100% SPY because it looks through the underlying holdings. And so you get back whatever the ETF is doing. We've done three of these. They're kind of getting bigger and bigger as we go down the road and then we'll probably have some more next year as well. And they've been on different strategies. We've had the world's least marketable strategy, which actually had the tax symbol back in December. Talk about an idea that is going to be a long, long hill to struggle with. And that's US stock exposure with low to no dividends. But we also did a diversified strategy, a global strategy. And so it's. I'm happy to get into any specifics. That's the broad ballpark.
- [53:43]
B
And are you finding that advice? I could see from. I mean from both the individual. But I'm curious on the. Is there like advisor adoption of this where if you're an advisor, you have like 100 clients, maybe they're all in SMAs, but maybe not managed like in the same way. So it's not the same holdings. You could maybe get some of that. Well, I guess the advisor doesn't hold the etf, the individual does. But still there's like three.
- [54:10]
A
There's like three main use cases and then one idea. The first one is obviously concentrated stock. So if you're stuck in a bunch of mag 7 or it doesn't even matter, like if you're a C suite executive or you work at 3M or Microsoft or you bought Berkshire in the Nobody wants sell Berkshire. That's a bad example. You bought apple in the 80s, you bought whatever and you hold a ton of it. This is a perfect off ramp. Second is direct indexing. If you're doing long only, that's a great idea. Yeah. And this is all on the individual client level. Third is like a strategic rebalance. So if you're all in on US stocks and bonds and you want to move to say foreign stocks or diversified or something else, this is a good way to do it. Because if you were 60, 40 in 2009, you're like 9010 today. But the big one and I keep. And by the way, zero private equity people have heard of this, zero VCs, none of the wirehouses can do this. And so if you're an independent Ria, you have a moment in time that's not going to last forever. Let's call it maybe a year, maybe two years where you can go to all your friends at UBS or their clients or people that won't even go to an advisor because they got a hundred million but you can't do anything with it. If I was an advisor, I would go to every public company within a 500 mile radius and say, let me give a presentation to your investor relations and employees because 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. And no exchange fund wants your Nvidia stock. So now we have an idea. Let me present to you. It is like the biggest legion possible if you're a financial advisor on the planet. Because you also have this moment where no one else knows about it. And so we're seeing a lot of that. The early adopters, not surprisingly, financial family offices, very tax minded. They understand this. They're, they're kind of. We get an email every day from some family office. It'll, I think 2026 will be the year that it hits mainstream. But given everything I've said in this conversation already, I obviously could be wrong and optimistic for no good reason. But I think it's a really, really fun idea. And by the way, if you want to put on your academic hat, you want to put on your thought about all the dangers of market cap waiting. Why does this persist? Right? Why do you have these bubbles where stock markets go to 40, 60, 80 pe, it's because you have taxable investors that can't sell those positions. And so they don't, they're stuck in these passive index. What if you had a way tax Efficiently to defer those and to rotate into things that are not market cap weighted. All of a sudden, theoretically you make the capital markets more robust, you make them less prone to bubbles. It's a solution to this consistent cycle of boom bust. I have to get my academic friends to work on this because it's above my pay grade. But we'll get Wes and crew maybe to write a paper on that idea.
- [57:08]
B
So you've been on the podcast a couple times, so our standard closing question can't be asked here. But what I do want to ask you is, you know, what do you think has changed most in the markets over the last 20 years? Both at the market level and also.
- [57:24]
A
For.
- [57:27]
B
Investors themselves, like retail investors, individual investors.
- [57:30]
A
I try not to be too dismissive of the youngins. I look at my 20 year old friends that are yoloing into weekly options and dogecoin and prediction markets and everything else and I'd be like, you know, let's be honest, that would, that was probably me in the 90s, you know, like we called it CMGI and trading on E trade as opposed to Robinhood and everything else. But so that's a story as old as time. I don't think that's changed. You know, I think it's the best time ever to be an investor. We've said this over the years. The problem is it's, it's a struggle of choice. You know, you go to the grocery store and you're like oh God, I just like 400 types of beer. Like I can can. I like 200 types of cereal. Which is a great problem to have. Right? But at the same time, a lot of the industry, you know, there, there's a lot of garbage out there. So when you read this new book, I'll send it to you guys an early copy. It's called Time Billionaires. But, but the origin of this book, the idea was that I got really frustrated with the sort of COVID period where all of a sudden all these young people were getting led to the market. I'm like that's amazing. Great. Highest percentage of equities that US investors have held most participation. Awesome, awesome, awesome. But the entree was through the casino, right? Robinhood sending you confetti. Trade as much as you can. Hey, buy these five times leverage things. Hey shiny object. Buy some options in your retirement account. On and on and on. I said let's teach the lesson that's so simple, which is you put money to work and it's just magic. In 25 years, it's a 10 bagger. 50 years, it's a hundred bagger. You don't even do anything. It's the biggest maggots most amazing magic trick in the world. You become very rich. And so the way we tried to do this was with that old 100 year chart, you know, which was the crisis every year. But we took it back to 1600 and kind of said, well, you know, look, if you just put money to work and ignored all the insanity, you don't have to go YOLO into these crazy meme stocks and other things. You actually can get pretty rich pretty quick. So we'll, we'll send you guys that over soon and listeners that should be out early next year, I hope, but nice. So the more things change, the more they don't. I guess in many ways.
- [59:47]
C
The other, the other thing you didn't mention, Justin, is we can't ask me the new standard closing question because we blatantly stole it from him. Which is one thing about investing that your peers would disagree.
- [59:56]
B
That is true.
- [59:57]
A
Oh, dude, we, we need to do like five episodes on that. You guys, I have so many I running list of things I believe that no one else doesn't. And the new series is really fun. The 20 things that most people don't understand. There's some good ones in there.
- [60:10]
B
Yeah, definitely a future episode for sure. So listen, thank you very much. We really appreciate it. Hey, if you go to the, if you go to the World Series with your son, enjoy it.
- [60:18]
A
That's Otho Dodgers.
- [60:20]
B
Thank you for tuning into this episode. If you found this discussion interesting and valuable, please subscribe on your favorite audio platform or on YouTube. You can also follow all the podcasts in the Excess returns network@excessreturnspod.com if you have any feedback or questions, you can contact us@xsreturnspodmail.com no information on this podcast.
- [60:40]
C
Should be construed as investment advice. Securities discussed in the podcast may be.
- [60:45]
A
Holdings of the firms of the hosts or their clients.