Meb Faber published his book, The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets, in 2011. The book details how an individual investor can mimic the famous (and relatively illiquid) portfolios of the Yale and Harvard endowments.
Mr. Faber is also the co-founder and the chief investment officer of Cambria Investment Management, a leading ETF issuer. Today he joins the show to discuss whether the Ivy Portfolio is still relevant for individual investors and advisors.
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Episode Highlights
- Why The Ivy Portfolio is more relevant than ever, even as ETFs are bringing increased liquidity to many alternative asset classes.
- A surprising asset mix that outperforms T-bills (with less risk!)
- Meb’s philosophy on portfolio construction, and why it differs drastically from the typical “boilerplate” portfolio model.
- The story behind the Talmud Portfolio, plus how to construct it using modern investment securities.
- A unique investment strategy that Cambria uses (and which has significantly outperformed in 2022).
- Why Meb believes it’s important that he has “skin in the game” in his own funds.
Featured On This Episode
- The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets (Amazon)
- How I Invest In 2022 (MebFaber.com)
- Cambria ETFs (CambriaFunds.com)
Today’s Guest: Meb Faber, Cambria Investment Management
- Meb Faber Research – Official Website
- Meb Faber on LinkedIn
- Meb Faber on Twitter
- Meb Faber on YouTube
About The Alternative Investment Podcast
The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.
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Show Transcript
Andy: Welcome to The Alternative Investment Podcast. I’m your host, Andy Hagans. And today we’re going to be talking about the Ivy Portfolio and David Swensen, illiquid alts, and all sorts of interesting things. And with me today, I’m very excited that we have Meb Faber who’s the co-founder and chief investment officer of Cambria on the show.
He’s also the author of “The Ivy Portfolio” book, which we’re going to get to in just a second. But, first, Meb, I want to welcome you to the show.
Meb: Great to be here. Thanks for having me.
Andy: Yeah. And I’ve been following your work for years. So when I reached out and emailed you, I mentioned I read your book “The Ivy Portfolio.” So it was over a decade ago. I remember when I was first married and since that time, now I eat, drink, and sleep alts as the co-founder of AltsDb.
But looking back, and that book was published, I think, in 2011…we’re not sure about the exact year, but at least 2011 or earlier. And I’m like, “Wow, so much has changed since then.” For me, personally, I have five new additions to my family. So that seems like a lifetime ago, but also professionally in the investment world, some of these hurdles to investing in alts have been removed or some of the friction has been lowered a little bit.
You know, we’ve had COVID, and the lockdowns, and huge market run-up, and now correction. So, Meb, has anything really changed since you wrote the book, all about the David Swenson strategy? If you had to write like an updated second edition, would you add or tweak anything?
Meb: Boy. Probably should write a second edition. I mean, when someone’s had five kids in between writing this book, I mean, we’ve put out I don’t even know how many books since then, four, or five, more, or so. I think there’s very basic takeaways that particularly here in 2022 still stand the test of time.
And there were some things the endowments learned and I think got wrong in the global financial crisis and potentially here again over a decade later that they should still learn from. But first, when you talk about Swensen who recently passed, who was really like the greatest of all endowment managers.
He wrote a couple great books on the topic as well, but when you look at what endowment investing means at its core and you go back decades, not just the last one or two when it became popular, but to Harvard, you know, 75 years ago, it really meant how do you build a portfolio that will stand really the biggest risk that most of these endowments face?
Because, remember, they’re meant to manage assets in perpetuity. It’s not just for current students, and faculty, and alumni, but future students too. And usually, the biggest headwind is inflation. Now, that’s something no one talked about for about 20, 30 years in the United States until the last year and now it’s the only thing people talk about because inflation was going down, it was disinflation and low for many years.
So how do you think about it? Well, what the endowment portfolio meant to me is you start out with a globally diversified portfolio. So most U.S. investors, in particular, and this includes most advisors as well as institutions put most of their portfolio in U.S. stocks and bonds, full stop. And that’s about it.
And U.S. stocks and bonds, not surprisingly to many, are having one of the worst years ever for U.S. stocks and bonds going back 100 years. I think if it closed today, it’d be like a top-five worst year ever. But what they also don’t know, and it’s not down that much, what, let’s call it like 10%, 12%-ish, in that sort of range. The big surprise for many is that bonds are down almost as much as stocks.
But what people don’t realize is that that 60-40 portfolio has declined by over half before. And most people assume that, you know, 10%, 20% decline is really where it ends, but that’s not the case historically. So one of the things the endowments have done historically is think different. So they started with a globally diversified portfolio.
So not just U.S. stocks and bonds, but also foreign stocks and bonds. And that may feel commonplace today, but 30, 50 years ago, most investors, you know, you started talking about foreign investing and it was, pun intended, foreign, but the second part was that you included real assets in this discussion and most people were familiar and most individuals, their largest individual holding is their house.
So they understand real estate, but I’m including that REITs, as well as commodities, and tips. And most U.S. investors, again, have almost nothing allocated to real assets. And we do a lot of polls on Twitter. And so we consistently test the waters and it backs up our views on this. And so most people had kind of abandoned real assets for various reasons.
And here you are with unexpected and current inflation knocking on almost double digits in the U.S. and commodities are having one of the best years in history this year. And so this concept of building this globally diversified portfolio as a first starting point I think stands the test of time, absolutely.
The problem for most individuals and institutions is their time horizon is not decades. They say it is often. They always say they have long-term time horizon and in reality, they behave on like a one-year to three-year time horizon. So they’ve long forgotten about commodities and real assets and foreign investments, all of which have underperformed, U.S. stocks which ramped and rolled for the better part of a decade post-financial crisis.
But here we are, and the world has changed really starting in 2020, whether it was the interest rate bottom that year, the election, COVID bottom, whatever you want to call it, it’s been a very different regime for this year. And then the second part of where the endowments really differed has been to think independently. If you look at the Yale portfolio, it has something like 3% in U.S. stocks.
How many institutions or individuals have 3% in U.S. stocks? None. Right? Like they put all their money in U.S. stocks. It’s like… And so granted they do have what you would consider to be equity beta, whether it’s through private equity, or venture capital, or hedge funds, or other things, but traditionally public listed. So they think different and they have a lot more on what people would be considered to be alternatives, for better or worse.
You know, some people implement alternatives and many, again, haven’t kept up with something as simple as a SPY ETF for the past decade. But it seems like at least this year…we did a poll on Twitter, said how many people are down on the year? And my investors said 80%, which I think is low.
I think it’s probably closer to 90% of portfolios are down. So you’re starting to see the interest really start to peak again as portfolios start to struggle.
Andy: So maybe investors can all buy in at the commodity’s peak, right? And…
Meb: You know, the funny part is like, if you look at any asset, and this is, I think, one of the hardest things for investors to accept, because almost everyone you talk to say, “No, I’m a dividend guy.
I’m a gold bug gal. I invest in all…” So like whatever it is, people love to have something they can cheer for and get behind. Very rarely do you hear someone say, “You know what, I’m asset class agnostic? And I realize that gold will do well sometimes and terrible other times. I realize bonds have a role in the portfolio and sometimes they’ll be terrible, and I realize that U.S. stocks could be good sometimes and other times they’ll go down 50%, 70%.”
You don’t hear that much, but it’s the reality of this world. And you look at commodities, you see these 2000 to 2008, everything crushed U.S. stocks emerging markets, commodities, the bricks. And then here we are, the decade after, it flipped, right, it’s almost the exact inverse.
And that’s of the way this world works, is that, you know, people love to chase the hot manager, the hot strategy, the hot asset class, and very rarely does that work out long term. The converse is probably a much more thoughtful investing strategies. Look where people are really throwing up their hands and saying, “I can’t take it anymore. This is an awful investment.”
I mean, think back, it wasn’t that long ago when oil futures were trading at negative values, when energy stocks got to about 2% of the S&P. I mean, at one point they were almost a third. Okay? And so these trends tend to have these giant Buffett-style, Mr. Market psychotic moves both up and down.
And trying to be thoughtful about that, and mindful, and not get swept up in the euphoria is tough.
Andy: Yeah. And, you know, I want to dig in a little bit to the Ivy Portfolio model. I thought you did an awesome job kind of detailing the global asset allocation and being a little bit more agnostic about, you know, portfolio construction.
But a big take-home for me also from Swensen and everyone uses this model is the illiquidity premium. You know, just the idea that valuations will be more favorable for illiquid investments versus liquid investments. So, for instance… I don’t remember if this was from your book or somewhere else I’ve read it, but just the idea of buying just a ton of forest land and investing in timber way back in the ’80s or ’90s, that was really hard for most retail investors, even accredited investors to do.
Whereas if you’re running the Yale endowment and you have, you know, hundreds of millions of dollars, you can buy 5,000 acres here, 5,000 acres there. It’s more doable also because of your time horizon being generations rather than just a decade or less. So one question I have is a lot of ETFs have launched, even since 2011, even in the last decade, a lot of ETFs have launched and they bring liquidity to these different sectors that were previously more illiquid.
Do you think that that just sort of intrinsically lowers the future prospective returns of those asset classes when they become more liquid with like an ETF launch?
Meb: I think there’s no question that flows change factors, and this is a very simple investment maximum you can just write on the wall and it applies to anything. Now, some asset classes are a lot more liquid and it takes a lot more to impact that. You know, if you’re buying shares of Apple, that’s different if you’re buying Brazilian microcap tech stocks, right?
Same thing. If you’re buying farmland in Nigeria or a trailer park LP fund in Oklahoma, whatever may be. So, you know, goes back to the old Charlie Munger, you know, fish where the other fishermen are not fishing or fish where the fish are, something like that, right? But I think that applies to everything.
And so the challenge, of course, is these cycles can play out over short term or long terms. And you have periods where excitement and money flows into something. I think, you know, certainly expensive tech stocks over the past couple years, not just tech, but just expensive stocks, in general, had a ton of flows.
And you saw the benefits that autocorrelation to the upside and then now you’re seeing it to the downside, right, as money comes out. And so I think for a public portfolio, we say this a lot, that investors should spend the majority of their time designing it ahead of time, putting it together, and then just put that sucker on autopilot and be done with it.
And you should spend about zero time on your public portfolio. And that’s what I do and that’s, I think, a thoughtful approach. Now, as you wade into like harder and harder, you know, that’s like, to me, like the football analogy that gets you to like the 10-yard line, you’ve done 90% of the work, that gets your kind of base core as you start to think about, “Where will my time be best spent? Where can I actually make an impact?”
It’s probably not analyzing Apple. There’s 70 analysts that are well more capitalized than you and have all these hedge funds, etc., that are spending a lot more time on that company, but maybe that might microcap down the road from you in a tiny town in Florida, you know, there’s no one covering that or on and on with alts, right?
And so I think alts, as well as asset classes, can get popular. I mean, you could just go through the last 20 years and talk about like the asset class de jure, whether it’s MLPs or right now, hey, look, one of my favorites, managed futures. I was in Barons again for the first time in probably, you know, a decade. Everyone’s all of a sudden saying, “Oh, my gosh, these funds are up 20%, 30% this year. What are these managed futures funds?”
And they forget the last 10 years of struggle many of those funds went through. And so just thinking about that in general, I think that’s a great investment rule. It’s like if you get caught up and are chasing the hot dot. We have some Twitter threads on this where we cite Vanguard Research and Bogle wrote about this with mutual funds and saying, “Look, you buy the best funds from this past decade and chase into them, guess what? They underperform the next decade.”
And it shows it for the ’70s, the ’80s, the ’90s, you know, on, and on. Same thing with individual managers, etc. And so I think trying to look into areas that are less efficient or where you can be honest and say, “Do I have some value-add?” And there’s some that are just hard to allocate. We talk a lot on the podcast. If you look at the global market portfolio of public assets, it’s about half stocks, half bonds, half U.S., and half foreign.
And then the couple things that are not really well represented would be single-family real estate, huge asset class around the globe, hard-to-buy funds that capture that. But also farmland is a big one. And farming is obviously becoming front and center as we’re hitting supply chain issues as crop prices for many traditional row crops like corn and wheat are kind of going vertical.
I come from a farming background. We have personal farmland in the Midwest, as well as we have a lot on our podcast interviews with farmland platforms and have been talking about that for years. There’s only like one or two public REITs that do farmland investing. So it’s a private.
Bill Gate’s largest farmland holder in the U.S., although probably not for long if he’s going through his divorce. But the challenge is it’s like, it’s hard. Like you want to go own a farm, believe me, that’s a huge pain in the [bleep] don’t do it. You know, you want to probably hire some operators to go run it and to drive the combine, you can go visit maybe.
But this applies to anything, whatever asset may be. I’ve spent a lot of time in the past decade getting neck-deep in angel and startup investing. You know, that’s an area to me that there is a huge value-add that, you know, is a lot less efficient than say perhaps public stocks. And this comes from a public fund manager, right? But we put everything, we’re quantitative rules-based, put that sucker on autopilot, put it over here, and almost treat it as a cash savings sort of mindset the same way you would your checking account, which is not a consensus belief.
So long windy answer to your question, but the thoughts in my mind is a lot of these areas are a lot harder and require more time and due diligence than simply buying an ETF. Now, some of the traditional adoption curve from what you’d consider to be private alts has been adopted by ETF.
So there’s a lot of things you can buy in ETF structure now that weren’t available 5, 10, 20 years ago, but there’s some that never will be. Like, you want to go buy a fund ETF that buys catastrophe bonds, like you can’t or it shouldn’t ever be, it’s too illiquid. But a cool asset class and an awesome strategy. So I think there’s a lot of innovation still to be had and a lot of opportunity, but, again, it’s trying to fish not on the Salmon River in Alaska where there’s 400 people standing side by side, but rather, you know, the creek or the river where there’s no one else.
Andy: Yeah. No, I agree. And I mean even within a particular asset class, you know, for instance, real estate, like let’s take multi-family, you know, you can look at publicly-traded REITs and you can look at private REITs or even private deals and there usually is that liquidity premium. So it’s kind of like yeah, you probably will get higher returns when you go illiquid, you know, probably, there’s a lot more risk, but you kind of have to earn it by doing your active research, doing your due diligence, or you mentioned with like angel investing, that’s only viable if a person has some expertise, certain amount of free time, and ability to diversify.
Meb: You know, part of what you just talked about too, there’s feature and bug properties of illiquidity. You know, we used to talk a lot about in a disparaging sort of condescending way about illiquidity. You know, you buy something you’re stuck with it in many cases, 5, 10 years, or longer.
We have over 100,000 investors. And so watching investors behave, individuals and professionals alike, realize that forcing people into lockups is not necessarily a bad thing. Like it can be a good way to ensure good behavior.
Say, “All right, you say your time horizon’s 10 years, good. Like you’re stuck in this sucker for 10 years. You better do your due diligence ahead of time and you better be ready to stick around.” You know, ETF stock, people can just hop on their app, flick, sell it, be done with it. And usually, that’s to their detriment. That having been said, you do see this sort of wink, wink, nod, nod in alts and the marketing of certain funds where people would be like, “Oh, no. This real estate fund is at a 4% vault, right?”
And you’re like, “Well, you know, that’s simply because you are updating the non-asset value once a year. So really, like, you know, if you’re going to be honest about this, the sucker is a lot more volatile than you think it is. And private equity is sort in that same genre where, you know, I was getting emails about kind of like thinking about that in the terms, I say, “Look, if it helps you behave, God bless you. Great.”
It’s a positive feature. But you cannot say with a straight face, “This tech private equity fund is trading at this sort of volatility levels,” just because you don’t look, just because you… It is the ostrich’s style, right? You put your head in the sand, don’t look. You can’t claim it’s a four wall.
But again, I’m okay with that. We talk a lot about most investors don’t have a written investing plan. You know, they spend 99% of their time deciding what to buy. So listeners like, “Okay, you spend all your time worrying about the fed, or what’s gold doing, or stock’s expensive and you come to a fund or ETF and you buy it and you say, did you establish how you’re going to sell that fund at the time of purchase?”
And it’s like 99% say no. I’m saying, “Well, what the hell? Are you just going to wing it? You know? So what happens if it goes down 20% for no reason? What happens if it goes up 20%?” And people, this causes a lot of bad behavior because as you know, you go out to your garage and look around at all the crap in your garage and say, you know, “Why do I still have all this stuff?” Well, you have an emotional attachment to it.
You certainly wouldn’t go buy it tomorrow. If you had a clean garage, you’re going to go buy all this stuff, you know, get that nasty aquarium and say, “I’m going to look on Craigslist for seven Pogo sticks and three rusty bikes.” No chance. And so, you know, I think the same thing applies to portfolios. You buy investment, a security, a fund without establishing ahead of time how you’re going to get rid of it, and that can cause some very real bad behavior, which I think is unfortunate.
Andy: Yeah. You know, one thing you mentioned, the feature, not a bug aspect of illiquidity, and I mean in financial theory, the idea is that we get paid to hold illiquidity, right? Or that we sacrificed some returns in return for liquidity. But Jimmy and I were talking… I don’t remember if this was during an episode we recorded or during our pre-show banter, but, Meb, you’re an angel investor.
So let me pitch you on my idea.
Meb: Yeah.
Andy: You can tell me if you want to invest in this. So Jimmy and I, we work in the QOF world. And so QOFs like automatically have a 10-year lockup because you have to hold the asset inside the QOF for 10 years to get the massive tax benefit. So anyone going into a QOF, you know the lockup period is 10 years, like period. Part of the legal structure of the wrapper.
So my idea is you take a wrapper, kind of like a QOF. It wouldn’t actually be a QOF. It’s a guaranteed 10-year lockup. And all this wrapper does, is it buys an S&P index fund. Like it can buy the Vanguard one and we charge like, you know, two basis points higher than the Vanguard fund or something like that.
And that’s it, that’s the whole product. Invest with us, we’ll buy the index fund. And our tag…oh, our tagline. That’s the best part. Our tagline’s going to be, “You’ll thank us later.”
Meb: Yeah. I mean, look, we were kind of laughing and joking about this. I went to a local chat and was hanging out with professor Dr. Sharpe of Sharpe ratio fame, Nobel laureate. And I asked him a question.
I said, you know, “Doctor, president calls you and he says, ‘You know what? I’m concerned about the wealth and income gap in the U.S. I want to make the U.S. retirement system the envy of the world and gold standard.’ Like, how would you go about it?”
And, you know, he kind of went back and forth on this discussion between how this country used to have defined benefit plans, now it’s defined contribution. Public sectors still a lot of defined benefit, whereas private sector’s defined contribution, and trying to think about how can we, A, incentivize every investor in the country to be invested in the business of America, but also do it in a way that they actually receive those benefits, which means they hold, right?
And they compound for decades, not months. And so I think the topic you’re hitting on while we laugh about it is probably like not too far away from a solution that would probably raise hundreds of billions of dollars if you did it correctly. Annuities are certainly a way in the U.S.
but traditionally have been hampered by very high fees, and middlemen, and complexity, I think. But this concept almost of like a personal pension would say, “Hey, look, we’ll do this in the right way, but you’re going to be stuck holding it. Like, you’re not getting out.”
And so we had joked, there was an old idea we had, which isn’t too dissimilar, but basically called the Forever Fund where we said, “Look, we’ll launch a fund,” similar strategy, globally diversified, just some good stuff, you know, not that complicated, “but if you sell it in year one, you get a 10% withdrawal fee.” So that’s like the dissuasion, the pain, the stick.
But I said, “We won’t keep it. We’ll distribute that as a dividend, the remaining shareholders at the end of the year as a carrot for behaving.” And so to me, that’s kind of a cool idea because it gets carrot and stick that you can also claim you have 2% volatility because it never goes down on a year-over-year basis that much. But I actually think it’s close.
We’re not quite there. So you and I are going to have to, over a coffee or beer, really get to the bottom of this and design something that I think is going to change the world. But it’s close. Your idea is sound, my friend – Oh, thank you. Thank you. You know, I listened to one of your podcast episodes the other day and I thought it was really cool.
One thing I respect about you a lot is that you’re very transparent about your own portfolio. You know, you mentioned in the episode how a lot of fund managers don’t even have any skin in the game and own their own fund. You know, a lot of really key concepts like this that are maybe obvious to, you know, industry professionals, but I just think it’s good for everyday investors to hear and to kind of soak up that psychology.
And one phrase that you used is like sleeping at night, like at the end of the day, you know, this is just money. You can’t take it with you. You, you know, your portfolio should serve you rather than the other way around. So I want to encourage all our listeners and viewers to check out Meb’s podcast, especially that episode. I really enjoyed that.
But one thing I wanted to ask you, in the episode you mentioned a 2000-year-old Talmid portfolio, which is kind of the rough basis of your own portfolio. So could you tell our viewers and listeners a little bit about the Talmid portfolio?
Meb: Yeah. So we did a book called “Global Asset Allocation.” It’s free to download online, listeners. You can go to my blog, mebfaber.com or Cambria Investments. And it was meant to be a horse race analysis of all the top asset allocation strategies in history. So you hear everyone talking about, “Hey, here’s the 60-40, here’s the endowment, here’s the permanent, here’s risk parity,” all these asset allocation strategies that various fund managers, and researchers, and billionaires have promoted over some period and we said, “Well, how did they do? Let’s find out, we’re curious.”
And so we took it back to the ’70s and there’s maybe a dozen or so of these portfolios. And the good news is they all did well over time. They were all hugely different. So some had 25% in gold, some had 0%, some put 90% in the U.S. stock market. That’s Buffett’s old favorite. And some had 25%. So you would expect these portfolios perform very differently, and they did caveat over short time frames.
Over the long time frame, as you sort of even out the effects of recessions, and contractions versus expansions and bull markets, inflation and disinflation, good periods and bad, there was actually very tight coupling of compounded returns over the period and one of the largest… and this is just buy and hold basic asset allocation stuff, so stocks, bonds, gold, commodities, real assets, all that.
What actually impacted returns more for these basic public assets was fees. So if you went back to the 1970s and simply implemented the best performing portfolio, which was an endowment style. So I think it was El-Erian, very heavy equity exposure. It was the best performer on a compound basis. But the worst performer, and it’s not really fair because it was I think a similar Sharpe ratio, much lower drawdowns and volatility, which was a permanent portfolio-style portfolio which had roughly half in cash and bonds.
The best performing portfolio if you just applied average mutual fund fee, it made it almost as bad as the worst. So that’s interesting because if you say, “Okay, well…” My takeaway from that, different people have different takeaways, but mine was how you implement this portfolio is much more important than the actual ingredients and percentages that you put into the portfolio.
So as long as you have a little bit of the main ingredients, global stocks, global bonds, global real assets, you end up with a portfolio that’s pretty good. And it doesn’t matter if it’s 45% or 65%, it matters a lot more, the implementation. You talk a lot about taxes, but fees in that same cost umbrella.
Now, if you did it with the average financial advisor, which is 1% plus the average mutual fund, and mutual fund today, not mutual fund 50 years ago, which would’ve been way more expensive, you make the best performing strategy far worse than the worst. Okay? So my point, and this circles back to the beginning of the discussion is with your public portfolio, yes, is it worth spending some time designing it, updating it, making sure that you have the main ingredients, upgrading it over time if you think a better widget fund comes out that was 70 basis points.
Now there’s one that’s 20, same index. Like, should you replace it? Sure. But really, you should spend almost no time I think on that public portfolio. And so I joke when you said Talmud portfolio, there’s an old quote that said, “Let every man invest a third in business, a third in land, and a third keep in reserve.”
And that’s a really, really hard portfolio to beat, by the way. So you put a third in global stocks, a third in global bonds, a third in global real assets. I challenge you, listeners, to find me a better portfolio. That’s really hard historically to beat because it has all the main components, right? The real assets do well in inflationary times, equities do well in growth.
The bonds are sort of that stable value that also does well if there’s deflationary inputs. And so we spend a lot of time talking about that. I don’t know that the world received it the same way that I really thought about it. You know, now caveat, so pause, there’s the buy and hold part.
Now, what’s the problem with buy and hold? All these portfolios that were buy and hold in the book? The problem with buy and hold is the hold part, and historically buy and hold… And remember, the vast majority of people own no real assets. So it’s really just stocks and bonds.
But even with the real assets. The hard part with buy and hold is the holding. So you’re sitting there during recession or contraction, your portfolio goes down 10%, goes down 20%, and people start gnashing their teeth, wringing their hands, pulling out their hair because it all happens at the same time. Your portfolio goes down when everything else is hitting the fan.
Ideally, you would want your fan financial capital to zig when the world is going down the toilet. So think back during Corona, think back to the financial crisis, your portfolio went down just when inflation shot up, your company just went under, like everyone’s going crazy, the world’s, you know, going down the toilet. Theoretically, you would want the portfolio to zig when that happens, when your human capital isn’t struggling.
And so it’s hard. You get a lot of people. Can’t tell you how many clients over the years come to me, 2011, 2014, 2017. They say, “Meb, I sold all my stocks in 2009. I couldn’t take it anymore. And I never got back in. And now I’m looking for, you know, an investing strategy.”
And that’s heartbreaking to hear, right? You want a strategy that should do okay during good times and bad. And so, you know, we run one of the most non-consensus portfolios as our flagship in the entire country, right? And so our two pillars are value on one side and trend following on the other side. And we incorporate both, but trend as a default ends up being half of our basic allocations, we call these the trinity portfolios.
And I don’t know anyone in the country that puts half in their standard allocation. But the funny thing is, and so trend listeners, if you’re following, is an old investing strategy. It goes back certainly 100 years, if not longer time of Charles Dow and Dow theory, but basically, trying to own assets that are going up and sell or short assets going down. Noble in theory and design, a lot harder to do in practice.
And trend following as a strategy, there’s lots of cousins that can mean different thing, but in general, does well during times of crisis or struggle for the buy and hold portfolio. So often they sort of yin and yang on how they’re doing. This year is no different.
Trend following, for the most part, is doing great as most traditional buy and hold is struggling. Ditto for financial crisis on, and on, and on. And so our default is half in trend, and half in buy and hold. Now, trend is hard, not usually when it’s hitting the fan, it’s usually hard during the other times. So when the S&P was going straight up at a 20% CAGR for the decade post-financial crisis, and your neighbor was making hay and telling you about all the SPAXX they invested in, and the killer IPOs, and the tech companies, on and on and on, you know, and you felt that very real emotion of envy, not just the fear and greed, but envy, which is probably the worst, as Buffett would say.
And you say, “This trend following, man, you know, this is hard. I don’t want to allocate to this. This is done poorly.” But that’s kind of…circles back to the beginning of the conversation. So I think trend following is very much considered to be an alt category, but, for me, it’s like the most basic category there can be created.
So anyway… – Yeah. I would point out it’s an alternative strategy, right? So I published a guide at AltsDb, The Guide to Alternative Investments. It’s kind of a short primer because different people mean different things when they use the word alt or alternative investment.
And so it’s kind of interesting, like hedge funds, they’ll own traditional assets, but they will have non-traditional strategies involving contracts, futures. So that’s really what we’re talking about. So it sounds like when the market’s on a run-up, you have a little bit of drag, right? Because it’s like it’s costs to be hedged or, you know, I don’t know that if it’s market neutral or not, but all those things have a cost when the market’s on its way up.
But my guess is, is that it’s a certain type of investor who can even stay invested during that kind of time period, and then they’re rewarded for it very richly in a period like this year.
Meb: Yeah. I mean, the funny thing with trend following too is you put it into any of the quant optimizers and it almost always kicks out, like as for an allocation mean variance, like here’s stocks, bonds, real estate commodities. And this applies to a lot of the alts, by the way, but certainly, for trend, it almost always calculates a huge allocation to trend following, but then if you ask people, “Do you have any exposure to trend following?”
It’s almost always zero. But if you were to come up with a better non-correlated investment to a traditional portfolio, I think trend, it’s my number one, of course, but we’re biased, but it’s hard to argue against. And I think the community at large of investors got enamored with trend after the financial crisis for a couple years and then kind of, you know, it’s the shiny new object, tossed it, started chasing other things, and are starting to wake back up to it.
Particularly one of the things is trend usually means trading all the markets around the world. And so by default, they end up in some weirder places than most don’t. And that often is a lot of the commodities too. And when I said on Twitter a few weeks ago, I said, one of the benefits of trend, many of the funds is they can also short bonds and, you know, most investors don’t have anything in their portfolio that looks like a potential short bond exposure as rates are coming up.
So anyway, enough of the pitch for trend following, but it’s something to certainly look into that is my certainly desert island investment strategy.
Andy: No. You know, I think that’s very interesting. It’s certainly pertinent to Alternative Investment Podcast. And I was going to ask about financial repression because I think it’s just this terrible situation right now. I mean, I historically. I’m even a big 60-40 guy in the sense that even for a young investor, just in the sense, if you can have a portfolio and keep your fees low, expenses low.
something you can buy and hold and sleep at night and not do anything that is behaviorally stupid, you know, just avoid those, those major disasters. You know, what’s the Vogel quote? Something like it’s not the best portfolio, but I can think of infinite worst portfolio.
Meb: Yeah. That’s a great one. Well, hit upon an interesting topic. And so during the pandemic, we wrote a four-part series, because didn’t have anything else to do. But it was…the first one was called The Get Rich Portfolio, and the second one was called the Stay Rich Portfolio, which we’re going to talk about.
The third was Investing in a Time of Coronavirus, which was in March, 2020. And then last was How I Invest, which we’ve updated this year with my own personal investments. But the Stay Rich Portfolio is interesting. And you alluded to this where most people, if you ask them, “What’s the safest investment?” They’ll say T-bills. And then you say, “Well, if you look T-bills after inflation,” which is all that matters, by the way.
And so your real purchasing power, T-bills. And I say, you know, ask on Twitter, what’s been the biggest loss for T-bills over the past 100 years? And people say 5%, some crazy say 10%. And the answer’s 50%, right? Because of this effect of these slow erosion periods where there was very high inflation which we call financial repression, right?
When inflation is above the short-term bond yields, which is where we are right now.
Andy: Those are taxable yields too. Like I always point out, even if the taxable yield is 8%, if you’re a retail investor, what are you getting, 5%, you know, after tax? It’s crazy.
Meb: So we said, “Let’s run a thought experiment.” And we said, “Can we design a safer investment than T-bills based on commonly accepted metrics, it’d be drawdown, volatility, worst 12 months, all these things.” And sure enough, if you invest in this basic global market portfolio, which again, half stocks, half bonds, half U.S., half foreign.
And I think there’s a little bit of real assets too, but not too dissimilar from Talmud. And then we showed that portfolio, but also you could layer in 20% T-bills, 50% T-bills, 75% T-bills, but it was a vastly “safer strategy” and you added a couple percentage points to yield. So we said, “Look, theoretically, you should be doing this with your entire cash and savings balance.”
Now, no one will do that, by the way. I do that personally, my company invests its entire balance sheet into… Does it slightly differently for different reasons, but it invests it. And we said, “If you look at some of the metrics,” and right now is a great example. Man, I don’t know how long this inflation is going to last, but if you’re sitting at a bank account… So forget most people with T-bills, Bank of America is like 0.06%, so 0.
You’re going to lose 8% this year, guaranteed. Like it’s not that you’re going to lose… And you may lose 6%. You may lose 5%, maybe 10%, who knows? Gas here right down the street in LA. I don’t know when this is going to publish, but I said the other day on Twitter, I said, “We may see $10 gas here. I don’t know what to do because they don’t have the space for it on the display, like they need another digit.”
So you’re going to lose that money, it’s guaranteed. And so I said, “The only person that’s ever agreed with my way of thinking on this has been Michael Saylor.” Now, he comes to a very different conclusion, which is you should put your balance sheet into crypto, which I think is not wise. But I said this global market portfolio, basically, it’s like, you have to be an owner and participate in this potential inflation exposure, right, over time.
And part of that is bonds, but majority of it is equity-like assets circling all the way back to the endowment discussion in the beginning.
Andy: Yeah. Absolutely. And I think that topic’s going to remain top of mind for a lot of investors certainly for the near future. So I wanted… I had one more question about your portfolio or maybe its implications. So I noted, and it’s really similar to my own portfolio. You know, like I have AltsDb, I own interest in OpportunityDb and some other entrepreneurial type investments.
I own some real assets. And then, you know, I have some liquid publicly traded investments, so pretty active portfolio. And I noted in your podcast, in your article where you detailed your own, you know, again, a lot of active investments, you mentioned that you still literally own the family farm, but you might be rotating out of that into a more passive alternative. So do you have any advice on how to implement this style of portfolio, like an alts heavy portfolio, or a Talmud portfolio, or kind any of these types of portfolios?
If you’re an investor who just wants to be totally passive, like, in other words, I want a good portfolio, but unlike Meb and Andy, I don’t enjoy talking about this stuff or thinking about this stuff. I just want to invest and basically be done of it. So how can you implement and still be passive?
Or is that like an oxymoron that you could be?
Meb: Yeah. I mean, so, look. Here’s my takeaway on it. And, first of all, again, with the public investments, I think you, one… It doesn’t have to be 10-page policy portfolio document. It can be three bullet points. But say, “Look, this is what I plan on doing. Here’s my approach,” share it with your spouse, your children, your neighbor, whatever, try to keep you a little bit honest.
It’s like a diet. And say, “Here’s, you know, kind of how I’m going to approach this situation.” I’m going to design this, for me, public portfolio of assets, and hopefully, just put it on autopilot, right? Like that’s one of the nice things about the robo advisors. We have one in partnership with Betterment. If you can do it on your own, God bless you. A lot of people, you know, their emotions are a negative force, but it just wores
[SP] in the background, right? It just kind of cruises along. You design it ahead of time, make sure you have most of the things you want in there. On the alts side, you know, I certainly think it requires a little more upfront work, but it doesn’t mean maintenance work. So, you know, you allocate to certain funds, or strategies, or ideas. They can be liquid, they can be illiquid, but certainly, you want to cover your bases on, you know, what it means to buy that product.
And I’m not talking about the way most investors do it, which is they buy the headline name of the ETF and they never read the prospectus, right? Like, that’s it. That’s as far as they go. And so it’s the same thing with funds and any alts. For me, there’s a big requirement of… And this is a technical term, but like pain in the [bleep], you know, like I don’t want to be spending a lot of time monitoring.
For me, I see so many friends and people who have made a bunch of money in real estate and they manage real estate. That is literally my idea of hell. I cannot imagine anything worse than managing real estate properties and dealing with tenants or, man… Like, it’s just like brain…
Andy: The three Ts. Toilets, tenants, and trash, right?
Meb: But some people love and they’re good at it, so good for you. I mean, more people made money in real estate than just about anything. But I don’t want that for my investments. I want it to be something that I don’t really have to think about. And so that doesn’t mean you can’t just YOLO into a bunch of funds, right? Like you should do the work, particularly if it’s something you’re going to be stuck in.
And stuck is a good thing, right? Like it’s a great thing if you’re stuck and it fits the criteria you want. And so, for me, you know, I mentioned, I do angel investing, invested in over 300 companies. And what I love about that and which is why I’d be so bad at this on the public side is they go into a lockbox.
I mean, not really, but they’re private and illiquid. So I invest in a company and you can’t sell it. It either is going to M&A, get acquired, IPO, go bankrupt, or whatever. Right? Like, that’s it. That’s it for me. So it’s good because I don’t have to think about it again.
Andy: Oh, as long as they send your K1 on time. That’s my only thing.
Meb: No. They don’t send K1s on time. Let’s just be honest. Like, I’m doing my taxes in August of every year. But I’m at peace with that. You know, so… And there’s another box I think that this may or may not matter to people, it matters to me, is do I care about it? I think for a lot of people, is it something they’re interested in or they care about.
You know, to me, it makes it a lot easier than if it’s something they just absolutely could not give two flying Fs about, right? And that’s fine. Like some people, you’re going to invest in a startup that’s going to optimize and help Google sell more ads, cool. You know, could that be a good business? Yeah, probably. Is it something that I really want to spend my hard-earned money into?
For me, no, but for someone, God bless you. So that’s the criteria for me, but we did a long post on this called journey to 100X where we talk about a lot of the inputs and thoughts. Because what is all this for at the end of the day, right? It’s like my friend, Brian Portnoy calls it, funded contentment, which I love and I’ve been thinking about a lot lately.
It’s like, what is this money for? You know, what is its purpose? For a lot of investors, one of the biggest mistakes they make is they’ve won the game, so, for them, what does that mean? They got $1 million, $10 million, $100 million dollars. And then you see them continue to do things that are really foolish and put that money at risk, right? It’s like, you’re there like you, like, you don’t have to keep playing and risk it all. And a lot of investors that got wealthy because of concentration, and you see this over, and over, and over again with billionaires and decabillionaires, and they blow up and they lose all their money.
And you’re just like, “How in the world could that possibly have happened?” So thinking about its purpose, but that again goes back to the policy portfolio. Like your investment plan should have a section of, “Look, why are we doing this? Are we doing this because, hey, look, we’re wealthy, but we want to donate this money to these causes that I care about, or, hey, we want to travel, or, hey, I want to support regenerative agriculture?”
Whatever, like, you know, but thinking about it, because a lot of people don’t…they just in their head, it’s always 30% more, and you know, that hedonic treadmill, right? But, in reality, that’s not going to hopefully make people too happy than thinking of the purpose of what that portfolio’s for too.
Andy: I love that. I mean, ultimately, we’re human beings. As investors, we’re human beings that, you know, we have families, we have goals, and dreams, and values, and money is just a tool. So really refreshing to hear that from the founder of Cambria, which has all these ETFs that I think a lot of our listeners and viewers would be interested in.
You know, Meb, you’ve barely plugged them at all in this show, but I encourage our viewers and listeners to learn more. So where can they go to learn more about Cambria and all the funds that you offer?
Meb: Yeah. You mentioned earlier the saddest stat in investing, which is the majority of mutual fund managers have $0 invested in their own funds. So whether we do well, we currently have the highest-rated ETF lineup of any company with at least five funds.
So at least for this brief moment in time, we’re doing okay. But I was going to say whether we do okay or whether we just go down with the ship, the captain may… You know, I put vast majority of my public assets into our funds and strategies. So I’ll be right there with you. But to me that goes back to the whole point, is like we design products that we want to put our own money into, not that we think will attract the most AUM.
And if you’ve seen some of the funds and strategies, we try to do our best to launch them, not chasing the hot dot, but often when they’re out of favor, like we launched a global real estate fund during the pandemic. You know, did anyone else do that? Maybe. But we were probably one of the few crazy enough to do that. So Cambria funds is our ETF site.com.
Cambria Investments is our investment advisor. Meb Faber is the blog with all sorts of stuff as well. And you can watch me mix it up on Twitter too with… Not too many Mebs out there. So if you just type in Meb, you’re probably going to get to me some way, or form, function. But Twitter, Meb Faber too.
Andy: Yeah. And he’s got a podcast, everyone. So check out the podcast. That’s kind of how I stay up to date with Meb. And for our listeners, if you want links to all of the resources we discussed on today’s episode, you can access our show notes at altsdb.com/podcast. And don’t forget to subscribe to the show on YouTube and your favorite podcast platform so that you receive our new episodes as we release them.
Meb, thanks again for coming on the show today.
Meb: It’s been a pleasure.
