Meb Faber on stock market overvaluation and post-election outlook

0:01i'm ashton addison from event chain for investmentpitch media and fintech news network and today on blockchain interviews we have meb faber the founder and chief investment officer at cambria investment management and the host of the meb faber show meb welcome to the show and thanks for taking the time to be here my pleasure i'd love to kick off our

0:19interview by just starting with a little bit of your background in finance and what are your current focuses right now in this market uh we're based here in los angeles uh we are a quant investment manager so we have about 12 funds i manage almost a billion in assets everything from stocks to bonds to asset allocation all in between i cut my teeth university as an engineer and then

0:43worked as a biotech analyst and then as a quantitative analyst for a commodity trading advisor before starting uh founding cambria in 2006 started managing money before the last financial crisis uh before this one in uh in 2007 so i've been at it for a little over a decade here and uh yeah if anybody finds themselves in los angeles come come say hello to distance very cool and

1:10that's an interesting background and yeah a lot's happened since the financial crisis and it seems like uh we're heading into a predicament in the in the market with the stimulus and the debt and we can jump into that but i want to talk about the the equities market right now uh it's you know a v-shaped recovery it's doing well moving into the election which is always

1:30what the people that are getting elected want to see um but there's also caution because you know fundamental values aren't really the same as they were and there's a lot more hype and other factors involved into what's making the market you know what's pricing the market can you ex can you take a look you know give your take on how do you see this market post-election

1:52are you approaching it cautiously and should others do the same oh boy it's a lot uh okay so first of all if you want to start with stocks i mean u.s stocks where most people tend to be interested in you know we tend to have a long-term perspective which you know i think is pretty uh significantly important with with markets and so u.s stocks our opinion it's no question they're

2:16expensive the question is does that matter and so if you look back in history for u.s stock valuations you could take them back to the 1800s on average if you look at long-term p e ratios around 17 low inflationary times around 22 right now in the low 30s that's high it's not as high as it's ever been in the late 90s it's been as high as 45 in the u.s now it's been as low as five

2:41as well uh and why does that matter what matters because in any sort of investments whether it's cars whether it's houses whether you know it's a private business valuation matters and on aggregate having a higher valuation just means it's going to be a headwind and so most investors expect around 10 returns in u.s stocks which is roughly what they've done over the past

3:07120 years the problem with that is that you're starting with a low dividend yield even if you assume historical growth largely because we've come off a decade of amazing returns in the u.s stock market that valuation compression which is most likely you know if you go to vegas and you're playing poker blackjack it's the same way to think about it which is

3:28probabilities the most likely scenarios valuations drift back down to normal in which case uh you get about a four percent return in u.s tax again not horrific not terrible um but also not great and the challenge is you see these survey after survey and ask people what they expect and usually it's around 10 the most recent survey in the us by schroeder's

3:50uh had u.s investors expecting 15 percent in u.s stocks so there's this big disconnect where people extrapolate the most recent past u.s stocks in general versus the rest of the world having um such significant outperformance is not normal um it happens uh but it uh you know you have to go back to the late 90s to have a decade where the u.s stocks outperform the rest of the world as much

4:16as they have and then before that all the way to the 1920s so it's it's it's always dangerous to extrapolate what's been uh going on the most recent past but again not horrific not a bubble not like the worst thing we've ever seen just not great it's an interesting take and you know investment firms they have to have that long-term approach but because of the low interest rates and

4:36people looking to move capital around you know a lot of retail investors have jumped into robin hood and become you know investors what they as they think or swing traders and they're sort of just jumping into whatever's hot do you see that as a dangerous move and you know likely the majority of people end up losing money to a small amount of people is

4:57that do you see that playing out potentially on on average hyperactivity in general and this doesn't just apply to individuals this applies to the world's biggest institutions that manage hundreds of billions if not trillions of dollars they make the same mistakes they may describe them in different terms uh use more sophisticated committees and analysis but they end up with the

5:19same behavioral human problems that we have as individuals which is uh the time frame for these investments to play out i guarantee you you must ask most your audience it's in terms of months quarters years but for most people it's around two to three years how long they'll give an investment and i used to tell investors the answer is is they say hey matt how long should

5:41i wait for an investment uh or a manager or whatever to see if it worked out and i used to say 10 and they would laugh and now i actually say 20. and let me give you an example real quick you know almost everyone the most universal held belief in all of investing is that stocks outperform bonds i don't know anyone that doesn't believe that over time

6:02the problem they run into is the overtime concept where you ask people how long they would give stocks to outperform bonds and almost everyone is you know three five years maybe ten there was a period this year in 2020 in march where u.s stocks had had similar performances bonds for 40 years not 10 not 20 40 years and so wow this concept of if you're going to

6:27be different if you're going to allocate to something the time horizon mismatch creates problems and so back to original question a great example is uh what used to be popular is foreign exchange trading and a lot of these foreign exchange brokerages and these brokerages had to publish the percentage of traders that were pop uh profitable and i think many of the numbers it was

6:50something like 98 lost money so it's hard on such uh microscopic time horizons the best thing you do as an individual is push that out into uh years and decades definitely definitely and you mentioned bonds you know a lot of people they only only focus on the stock market because it's much more exciting to be talking about tesla than it is about bonds uh but i think

7:11the bonds play an important role in in the stock market and the economy as a whole do you have any insight into should equity investors be looking at the bond market or other leading factors that may affect the equities market yeah so um no matter what over time you want to own assets particularly stocks and businesses they could be public like stocks private businesses

7:34bonds play a unique role cash plays a unique role in that it gives you some optionality one of the biggest problems individuals always run into is they get over leveraged they borrow money so having that cash bond cushion is fine you know no one complains usually as years go by when they go through a crisis say oh man i had too much cash in oh 809 i had too much cash

7:58in march of this year most people have the opposite problem which is they have used leverage and debt bonds also play a role in a deflationary environment and you've seen this around the rest of the world where not only is it just bond yields are low here in most of the sovereigns around the world bonds are actually zero or negative already and so if you have a deflationary push but the

8:19big takeaway is when you put together all these assets whether it's stocks whether it's bonds whether it's real assets like commodities and real estate you know you want to put together a portfolio that lets you sleep at night and you can own for long periods we just did a recent article on the blog talking about the election that you referenced in the beginning and alluded

8:38to we said this is how the trump or biden presidency will affect your investments we did a similar article four years ago the takeaway was that as long as you have some of the main ingredients global stocks global bonds global real assets it doesn't really matter what you have but one of the biggest problems people have is they overpay for all of that

8:56one of the good things about 2020 and there hasn't been that many is that you can essentially get that portfolio of global assets in 2020 for free darn near close with no transactions through uh commissions and also through a basket of etfs uh that are that are almost close to zero in charges amazing time to be an investor but again you want to own a portfolio

9:20those assets and then just leave it alone mm-hmm yeah and that's great advice and you mentioned you know the upcoming election i want to get your take on political risk you know there's so many different types of risk in portfolio and 2020 is an interesting year you know i was just discussing this on another interview that there is political risk but there's also other

9:41risks because the market coming up to the election seems to be in a different spot than in you know the last election um does your firm take into political risk and do you just diversify and hedge that through global investing or what ways do you try to minimize those risks well two two quick comments if you pull up a chart of stocks for the past 120

10:02years in the u.s and overlay all the terrible geopolitical risks that had happened in the past century uh no one would be an investor because you just like world wars atomic bombs you had a you know a real pandemic that was even worse than this one 100 years ago you know all these things one after another and so you consistently have political risk i mean look around the

10:23rest of the world right now our friends in uk going through brexit uh and then you can just go country by country and and look at i mean some of the countries that we've invested in in the past 10 years have essentially gone through their own great depressions i mean places like brazil yeah it's been really tough now the counter argument to that is you know

10:41our largest fund is actually a tail risk fund which helps to hedge it's like an insurance style fund where you know people think in terms of insurance with with their uh car insurance or house life insurance etc no one really thinks about in terms of the stock market and so having a an allocation or portfolio that will benefit when things really hit the han

11:01fan like in march um you know can be a that sort of sleep at night allocation to where uh it lets you survive with the rest of the portfolio um so how trying to come up with that sort of balance um you know a lot of people have their portfolio but they they struggle with what you mentioned is that all of it tends to happen at once terrible economic recession bad geopol political

11:26event portfolio goes down and so having something that will diversify that whether it's through options whether it's through any number of investments you know if that helps you sleep at night and get to the finish line achieve your goals whether it's paying for kids college retirement uh going on vacations whatever it may be that's the most important because the

11:46problem that most people have is they sell emotionally when they don't want to and we see it over and over again we talk people that sold no nine never to invest again sold this year totally out and that's often the wrong way to approach it definitely and you talk about having a balanced portfolio and i'm interested in your take on hedged assets most specifically precious metals as

12:09well as bitcoin you know it seems like there's been a lot of institutional interest in bitcoin and it's done a very nice return so far in 2020 do you see those kind of assets as also a decent hedge to capital markets as well yeah let me um let me mention one more too in this in this composite of of three uh because i don't want to sound like such a debbie downer about u.s stocks

12:34are expensive yada yada the good news is most of the world stock markets are not expensive they're either totally reasonable uh all the way down to downright cheap all the way to screaming cheap so whereas the us is in these low 30s pe developed the most world is around 20 and then the emerging markets are in the low teens and the cheapest bucket is at 10 and

12:55many countries are in single digits so take your pick 50 discount we mentioned the uk half the valuation of the us and historically about the same returns so us versus foreign assets is a coin flip and if for most u.s investors put about eighty percent of their stock allocation in u.s stocks uh when reality as far as as a portion of market uh around the world it's only about half

13:18the us is about world percent of world gdp is about a quarter the reason i bring this up alluding to this next part is there's this concept of what we call the global market portfolio if you were to just go out and buy all the public assets in the world what does that look like well it's about half stocks about half bonds about half u.s and about half xus okay

13:38and that's a pretty good portfolio by the way that includes everything now there's a few assets that are hard to include in that through public means when i say public i mean like mutual funds stocks etfs and one of those uh for example is single-family homes the other is farmland which we talk a lot about most most assets you can gold you can easily invest in

13:59as well as real estate and bitcoin is is harder for most as well so we always tell people that's the starting point uh if you're a true index investor john bogle one of the greats that's the starting point and i have no problem with people investing in a proportion of a market portfolio and then going from there and so gold i think it's traditionally

14:22played a gl a great role in a portfolio um it's sort of like this weird cousin that sometimes does great and sometimes doesn't it can spend years decades going nowhere right it's hitting all-time highs which by the way a lot of people get nervous about we actually wrote a paper on my blog called is investing at all-time high is a great idea sorry is investing at all-time highs a

14:47good idea no it's a great idea and we walk through investing in markets when they hit all-time highs it's actually a good time to invest where which is where you're at gold now so gold's a nice diversifier um and then you kind of i put bitcoin in the same category we have been long-time sort of cheerleaders uh not really involved but if you were to look at the global

15:10market portfolio 200 trillion whatever it may be crypto you know still a small small percentage so let's call it 0.1 percent so we often tell people like look you want to put something in crypto bitcoin 0.1 or if you want to go crazy and put one percent to me that's totally reasonable because if it does work out that one percent goes to 10 or 20 in which case it's now meaningful

15:32part of your portfolio if it goes to zero it doesn't really matter it's not going to affect your long-term uh portfolio but that applies to everything that applies all stocks bonds real assets problem most people have is they want to get way too much concentration they want to bet it all on one i'm a gold bug i got 80 gold i'm a us stock guy i'm a i'm a dividend guy i'm a invest in

15:52greek shipping companies or i'm all in a crypto often uh more often than not ends in ins and tears yeah all eggs all eggs in one basket is not good when the basket gets crushed that's great advice meb and we're running out of time but i would love to ask you know the last question is do you have any advice or suggestions or tips for people that are looking to stay ahead in the american

16:15economy you know moving past the election into 2021 and how they can preserve their wealth um i have a lot of opinions versus my sort of professional contemporaries uh that are a bit non-consensus one of which is your asset allocation doesn't really matter that much we wrote a book on this called global asset allocation it's free online you can get on amazon probably

16:39for three bucks we went through all these historical asset allocation portfolios back 50 plus years and they all did well as long as you had some of the main ingredients global stocks global bonds global real assets the exact amount didn't matter but the thing that did matter a lot is implementation and this is boring this causes people their eyes roll back to fall asleep

17:02but fees you pay and taxes you pay have an unbelievably significant impact on your final outcome and in many cases people are still paying over one percent for mutual funds they pay a financial advisor one percent which may or may not be a great value we love financial advisors in general but usually their value is not on the investment side and then taxes laid on top of that and

17:26so uh the sexy the fun part is talking about what investments should we buy you know is it amazon is it apple is it bitcoin is it gold but in reality a lot of people gloss over the part of the behavioral side and also the fees they pay and putting that all together i think is is a really thoughtful approach and then second which you alluded to thinking about the

17:48future you know this concept of trying to come up with ideas that are future-proof that applies to not just career but also all parts of your portfolio and thinking about jobs and where people stand a great piece of advice i heard in the last year was theo epstein baseball executive was talking about how to approach uh you know moving up in your career and

18:12he says look go to your boss uh go to someone uh hire up an organization say look what's the 20 of your job that you hate that i can take over uh and basically the concept is how do you become useful to someone how do you um big benefit is also you learn their job but you they become not i want to say indebted to you but they you took this 20 of this their crappy job they don't

18:38want to do offloaded to you but you're also learning their job and so just so many people as they grow up in their career and in the workforce want to um grow in the in terms of what's in it for them uh but so much the concept of what's really going to push you forward is how can you become um totally useful to someone else and that that's a concept that's hard to

19:04learn i had to learn it throughout my 20s many times over but but once you kind of come up with that idea i think it's it's really beneficial in your career as well i really like that and i think really the goal is to try and help others so i think you're on the right path there meb um you know we're running out of time but uh where can the viewers learn more about your show and the work

19:23that you're doing right now yeah not too many mebs out there we got the med favorite show podcast we have the blog of the same name mebfaber.com my day job is running cambria which is an asset manager so you can go to cambria investments or cambria funds uh to learn about our funds and of course watch me pick fights on twitter at meb faber and again if you find yourself in manhattan

19:46beach come say uh come say hello too sounds great meb i will leave those links in the description box below thanks so much for the time and all the best moving forward and let's follow up in the near future it was a blast thanks you