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Hi, I'm Jim O'Shaughnessy and welcome to Infinite Loops.
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Sometimes we get caught up in what feel like infinite loops when trying to figure things out.
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Markets go up and down, research is presented and then refuted, and we find ourselves right back where we started.
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The goal of this podcast is to learn how we can reset our thinking on issues that hopefully leaves us with a better understanding as to why we think the way we think and how we might be able to change that to avoid going in infinite loops of thought.
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We hope to offer our listeners a fresh perspective on a variety of issues and look at them through a multifaceted lens — including history, philosophy, art, science, linguistics, and yes, also through quantitative analysis.
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And through these discussions help you not only become a better investor, but also become a more nuanced thinker.
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With each episode we hope to bring you along with us as we learn together.
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Thanks for joining us, now please enjoy this episode of Infinite Loops.
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Disclaimer: Jim O'Shaughnessy is chairman and Co-Chief Investment Officer of O'Shaughnessy Asset Management, where Jamie Catherwood is an associate.
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All opinions expressed by Jim, Jamie and podcast guests are solely their own opinions and do not reflect the opinions of O'Shaughnessy Asset Management.
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This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions.
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Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.
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Jim O'Shaughnessy: Well, hello, everyone.
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It's Jim O'Shaughnessy with another episode of Infinite Loop.
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Today, I am very lucky to have with me Meb Faber.
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Now, Meb wrote something in 2007 that attracted me to him, and immediately, I'm going to ask him maybe as his first question, but Meb is very well-known in the investing community.
2:07
He's the Co-Founder and the Chief Investment Officer of Cambria Investment Management. He's written, what? Four books?
2:18
The ones that I remember and have read and reread are The IV Portfolio and Global Asset Allocation. You've got a podcast.
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I mean, you are a triple threat guy. Welcome.
2:30
Mebane Faber: It's great to be here, Jim.
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A little reluctant to be here, but it's great to be here. Jim O'Shaughnessy: Okay.
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Now, okay, so that's my first question.
2:37
Why are you reluctant to be here?
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Mebane Faber: I mean, Jim, it's that old phrase about you don't want to meet your heroes.
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I think joining you today, you can, at this point, probably really only disappoint me.
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Jim O'Shaughnessy: Of course.
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Well, that's the case with everyone.
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Mebane Faber: Things can only go down from here, but look, man, you're on the Mount Rushmore quants, the quants that share and educate.
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We put Ed Thorp on there, maybe Rob Arnott.
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Really, listeners, I'm just trying to butter Jim up.
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So this is really simple and easy softball chat, but it's awesome, man.
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It's good to join you today. Good to see you.
3:17
Jim O'Shaughnessy: It's great to have you.
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Meb, flattery will get you everywhere with me. Mebane Faber: Good.
3:24
Jim O'Shaughnessy: So you've picked the right path.
3:28
So I read a piece that you wrote I think in September of 2007, and it was called, "Replicate the Yale endowment with these ETFs."
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I was absolutely fascinated by that piece.
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So why don't you tell our listeners a little bit about it and, gang, note when Meb wrote that, 2007, not 17, 2007. Tell us about it. Mebane Faber: Yeah.
3:58
I mean, there's a lot of time and energy spent all day long.
3:58
What does everyone talk about all day long?
4:06
It's how to allocate your assets, right?
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We have an infinite, it's like the grocery aisle of cereal, an infinite amount of choice, "Do you want some gold ETFs?
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Do you want some market neutral mutual funds?
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Do you want a timber fund?" on and on and on, right?
4:24
So everyone spends so much time, "How do I put all this ingredients into this cookie recipe together to bake the ultimate cookie?" Right?
4:31
So back then, we loved diving into a lot of the portfolios, the guru portfolios of famous people because there was a lot of famous people that would come out at various points and actually state, "This is how you should invest."
4:46
Warren Buffett, 90% stocks S&P fund, 10% T-Bills, which I think is horrible advice, but we can come back to that, but looking at a lot of what the endowments did, David Swensen, really the G. O. A. T.
5:00
of the endowments, recently passed away, wrote some awesome books.
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There's even some older books looking at the Harvard endowment from many, many decades ago, and they often took a different path.
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If you look at Yale's portfolio today, it has 2% enlisted US stocks.
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Now, that's a really outlier portfolio.
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Now, of course, you could actually, and listeners, you should definitely Google and search the various Yale yearly updates because they're wonderful letters, almost like a Buffett level of required reading per year, but if you look at their portfolio, and it is extremely different than what most institutions look like.
5:43
Now, some institutions have "copied" this Yale model over the years, which really is a riff on the Harvard model of years passed, but so much of it was put away your business career risk and we're going to go wherever these ideas and opportunities leads us.
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In many cases, it leads you to some pretty weird and different places and looking a little wonky.
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They were early into things many, many moons ago like timber and forestry, they were early into foreign markets.
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They were early into funds, VC, all sorts of things, but as a good young quant, man, Jim, you're dating me.
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I would've been in my 20s at the time, was writing about some of these ideas and said, "I wonder how much of this we could replicate looking at some of these top institutions," which have been fantastic ways to allocate.
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The basic conclusion was you could do 90% of the heavy lifting by having a diversified portfolio.
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The Yales of the world, which are the huge outliers, the vast majority of institutions and endowments, you could replicate with a basic portfolio.
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Now, others have done work here.
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Peter Mladina, local friend, has looked at this and said, "You can actually replicate Yale based on basic factor-based exposures," speaking your language here, and a little bit of leverage, right?
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Some of these are leveraged.
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Some of the assets themselves have embedded leverage.
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Some of the funds leveraged.
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So you can mix and match this recipe and come up with a pretty awesome portfolio.
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Now, there's some good things about the endowments.
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There's some bad things about the endowments.
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We learned some of the bad things in '08-'09, which was a big lesson in illiquidity, but for the most part, this broad diversification, getting really cheap beta when that's what you want but going where alpha opportunities are, I think are good timeless lessons and being mindful of fees, too.
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The endowments have always been very interested in what they pay for it, and Swensen was certainly a great example of that, of long term partnerships, but we could spend probably this entire time chatting about some of the lessons of endowments, but it gives you a pretty base case great portfolio.
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Jim O'Shaughnessy: Yeah, and the reason that I was so taken by the article, I'll date myself, I was, what, 47 at the time, was because that was the topic of my first book, Invest Like The Best, how you could basically clone any ...
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I was looking at- Mebane Faber: I thought that was the name of a podcast, one of my favorites. Jim O'Shaughnessy: Yeah.
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I think there might be some rinky-dink podcast that's named Invest Like The Best. I'm not sure.
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Mebane Faber: You know what you should do?
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You should be like Adam Neumann and say, "Patrick, I trademarked the rights.
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You got to pay me a million bucks for this.
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I'm sorry, you're in the family, but this is infringement at this point."
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Jim O'Shaughnessy: Well, yeah, no, I was brought up under the PP model, which is Parents Pay.
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So I can't be done in my kids.
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Mebane Faber: There you go.
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Jim O'Shaughnessy: So I wrote that in, I think, 1994 and back then, nobody knew what a quant was. Nobody knew.
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I mean, academics did, right, but in the general investing population, nobody knew what a quant was.
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They didn't know what factors were.
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So I started life as a consultant to pension plans, and that was fun because we would build these factor-based portfolios that mimicked the underlying manager, the theory being, "Can we see how much value the manager adds or subtracts through their actions throughout the year?"
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One way is to freeze their portfolio on January 1st.
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Another way is to have an independent normal portfolio to rank them against, but that's why I thought that this was such a cool idea.
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Mebane Faber: It's interesting because that idea itself, there's so many ways that could go with it and some have been developed and some, I think, still have a lot of runway.
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I mean, part of the way you could take that is, "Hey, we could replicate a lot of these managers for little to no cost."
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Another way is the consultant analytics like the Barra model, which is like, "Hey, we're going to do this really expensive software and tell you are your analysts and PMs actually good at position sizing and doing what they say they're doing or they're actually doing something else."
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We ended up doing that many, many years later with the Invest with the House book on hedge funds, same thing, replicating versus 13Fs.
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I had a really hard time saying to a lot of people.
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I said, "It makes it a really hard argument to have to pay two and 20 when many of these actual replication strategies beat the underlying manager because the two and 20 is such a giant fee differential," right?
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So this world to me of what you were writing about a long time ago, I still think there's massive opportunity in some of the ideas there, but only so many hours in the day.
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Jim O'Shaughnessy: Totally agree, and that was one of the first things I thought about back then was, "Man, this could be a pretty amazing product," but I was a little ahead of the technology, right?
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So we are now at a point, as you say, where some of these ideas have a lot of runway left, and I forgot to mention your other book with the house.
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I love that book, same reason, right?
11:19
This leads me to the next question, which is, okay, so there's a lot of smart guys like you out there freely sharing the information, freely basically taking investors wherever they are on the continuum of newbie all the way to a pro, taking them, showing them step-by-step how to do it, and my question becomes why don't they.
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Mebane Faber: It's funny because when we started this chat, when you said, "I read this piece in 2007," I actually thought you were going to talk about my very first white paper, which is on trend following, and that was the initial paper that put me and our work on the map.
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I was giving a talk in London at some point and a big institution, institutional conference, big institutional manager, I was talking about the paper, which is very simple.
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I mean, look, this is based on stuff that's been around since time in Charles Dow 100 years ago.
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So nothing too crazy, but putting it in simple terms.
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A guy raised his hand and says, "Meb, great paper. Loved it.
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Why would I ever pay you to do this when I can just do it on my own?"
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I sat there and I was quiet for a second and I said, "But will you?" Right?
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When the time comes for you?"
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Listeners, this paper was based on very simple trend following methodologies.
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Its' something like looking at asset classes like the S&P or real estate or commodities, looking at long-term trend.
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The most talked about is the 200-day moving average, but we used in the paper the 10-month moving average, simplest quant strategy in the world, either you're invested when the price is above the average, you're out when it's below.
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The problem is how many people are actually going to comply with that.
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When it comes time to sell after a romping, stomping bear market, will you?
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If it comes time to buy after five losing whipsaw trades in a row, oh, my God, it's going to tell me to buy gold again.
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The last six times I was supposed to buy gold were losers. Will people follow it?
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We talk a lot about the two sides of this, buy and hold.
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We run buy and hold strategies.
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We love them, but the biggest challenge of buy and hold is the hold part, right?
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Jim O'Shaughnessy: Right.
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Mebane Faber: The compliance, and the hard part with trend following is the opposite.
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It's usually they do well during market downdrafts, but it's a lot like death by a thousand cut losers and trend following is having an amazing year in the last year, but for five, six, seven years was like a heartbeat flat while the S&P just romped to new highs.
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So it's all hard to comply with, right?
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So the old turtles of trend following lore, Eckhardt and Dennis, many moons ago, they were teaching traders these trend following rules a long time ago and they said, "Why are you teaching this?
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We could put the rules in the newspaper."
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No one's going to follow them.
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So I think that's the emotional side, which you talk a lot about is the final boss is the barrier we all have to face, which is the hardest one.
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Jim O'Shaughnessy: So I got asked the same question after doing What Works on Wall Street.
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People would come up to me and they'd say, "Thank you.
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Thank you for putting all of these strategies in here, but why on earth would I give you any money?"
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I'm like, "So try it, and about a year, year and a half later, you're going to come and you're going to hire me, and you're going to be very happy at that time."
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They were paying 100 basis points.
15:01
Oh, a note from one of my new colleagues, I'm getting this staff of young guys and women and they're like, "Jim, don't use jargon.
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We're trying to appeal to everyone." Mebane Faber: Good luck. It's a couple of quants. Are you kidding me? Come on.
15:19
Jim O'Shaughnessy: Quick story on that because I thought of it when I was reading his note.
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So I only wrote one mass market book and it was called How to Retire Rich.
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I got lucky enough to get invited on the Oprah Winfrey Show to talk about it.
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So they were doing it live back in those days.
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Literally, when they went to commercial, people just sat there like a sports event, right?
15:42
So anyway, to go into the show, you go from the green room into the darkest space I have ever been in my entire life.
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Literally, you cannot see.
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If you put your finger right here, I'm putting it right in front of my nose, guys, you couldn't see it.
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So I'm surrounded by all these producers and they're firing all these last minute instructions at me, and one of them is, "Please don't use any complicated or jargon language," and I'm like, "Okay. No problem.
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I won't," and I said, "Just to check, give me an example of what you would think of as jargon," and she said, "Well, Dow Jones industrial average." I'm like, "Okay.
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This is going to be harder than I thought."
16:26
Mebane Faber: Yeah, yeah, yeah.
16:29
Jim O'Shaughnessy: So I think when you're a veteran of this stuff like you and I are, and I'm much older veteran than you, it's just like we could take full page ads in whatever newspaper actually still prints on newspaper or we could put it on Twitter or StockTwits or wherever, we could show, "Here are the rules," and then we could show, "Here are the base rates of those rules.
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Here are the max drawdown.
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Here's the standard deviation of return," all this stuff wouldn't matter.
17:09
Mebane Faber: If you go back to an analogy we always give, going back, circling to the endowment portfolio in the beginning, and everyone's in search of this optimal portfolio, and we talk a lot about, this is an unpopular take, non-consensus view, but if you talk about just buy and hold, we say over time your asset allocation actually really doesn't matter, and people are always really surprised by that comment.
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I say, "Look, go back to 1970s."
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The Global Asset Allocation book, you're talking about, models 20 different famous portfolios, risk parity, 60/40, permanent portfolio, endowment, on and on and on.
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Basically, they all end up in the same place over time. It's zig and zag.
17:48
If you're missing some key ingredients, so if you're all in on stocks or bonds or you don't have real assets, they suffer relative to the others, but in reality is they all end up in the same place over time, which is, I think, a surprising take for many, but the bigger challenge I think for many is the compliance.
18:12
I like doing polls on Twitter like you like gifs.
18:12
So Meb is the polls as Jim is the gifs.
18:12
I do all these polls all the time and I have to mute Jim on occasion because he'll give the answer away before everyone sees it because he's like the encyclopedia and he knows. I was like, "No. Quiet, Jim.
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Stop giving the answer away," but we did one.
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We said, "Look, do you have a written investing plan or do you even have a plan at all?" Everyone says, "No."
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Even the professionals, even if they say they have a plan, they really don't.
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I go and talk to so many investors, professional, very serious, they say, "Meb, I've examined one of your funds.
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We have 12 now in and out.
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I've read the prospectus.
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I've read all your books.
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I've read the white papers," yada, yada.
18:53
They understand it probably better than I do, and they talk about, "We invest based on process, not performance."
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I say, "You say that," but 99% of the professional investors I talk to, and we love to look down upon the crazy retail Robinhood crowd, but pros are just as bad, and they say they invest on process, not performance, but it's on the buy decision.
19:20
You wait till they have to go and sell something, and there is almost never process-based.
19:26
It's, "Did that underperform?"
19:26
The timeframe they're looking at is zero to three years, which is the exact opposite of what you should probably be doing.
19:40
So if you don't have these written rules, and being a quant certainly can help, but even just a couple bullet points.
19:44
When it hits the fan, you're going to do dumb stuff, and people love to do dumb stuff over and over and over again.
19:52
So you and I can probably spend hours and hours talking about the final 10% of investing debates and ideas and strategies, but this very simple how much you save and invest and not doing dumb shit is the main 90%.
20:06
Now, we can debate the rest of this chat, but getting that first part right and not mucking that up is really the whole point of all this.
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Jim O'Shaughnessy: Totally.
20:25
Totally. We are so asymptotical on all this stuff that, obviously, we have written investment policies around each one of our strategies, and the whole idea of having things in writing, I always try to convince people, even just the amateur investor, just write it down, write it down so that you can at least have something to look back
20:52
on because the other aspect of writing things down is you're going to really quickly find whether you understand what you think you understand because, "Oh, this is going to be my investment policy," and you take pen to paper and you start writing and you're like, "Oh, that sounds really dumb." That's a benefit, right? Because then you get to say, "Oh, I guess I'm not going to do that. Let me That's a benefit, right?
21:09
Because then you get to say, "Oh, I guess I'm not going to do that.
21:09
Let me do some more homework," but again, it's like much of life, right?
21:14
Woody Allen, what, 80% of success is just showing up. It's pretty true.
21:20
90% of what we do, and we're crazy because we're obsessed and we want to see that last 10% that you're talking about, but I have over the years really just come to say to people, "Look, if you're not obsessed by investing, index your money or use it in a quant fund and just forget about it, man," and they can't do it.
21:50
Mebane Faber: Yeah, and that's part of the hard part, too, I think, is the mismatch on education and expectations.
21:54
So all the polls we do, we love to bring them up because so many people, I think, actually have good intentions.
21:59
They want to be good investors, they want to do the right thing, but then they just don't have the basic understanding of the possibilities.
22:12
So this past week I was saying, "Look, this is one of the worst starts of the year ever for a 60/40. It's down 12%."
22:17
So already, you're checking off one box, which is people expect US stocks and bonds to be non-correlated and zig and zag, but that's not guaranteed as we know.
22:30
So they're both down, they're both getting whacked.
22:35
It's one of the worst years ever to start and the worst year ever was 30% down, but we asked people, we said, "What was the biggest peak to trough drawdown loss at one point?
22:47
What do you think it was, universe?"
22:47
80% of people underestimated it.
22:47
I'm convinced at this point that the only people who are getting it right always just choose the extreme answer because they know that the poll's going to be trying to demonstrate a lesson, but the answer was over 60%, right?
23:03
Obviously, it was during the great depression when stocks lost well over 60%, I mean, over 80%, excuse me, but people, if you don't have that foreknowledge with how bad something can get, you're only going to get your expectations surprised the downside, and that's when all the compliance goes out the window of good behavior.
23:20
So if you're like, "Well, I only expect my retirement savings go down 5% or 10%," and then they tick 20, 25, 30, and you sell at the bottom.
23:31
I mean, Jim, how many people have you talked to, because for me the list is endless, that come to you after, not as many now, of course, but after the financial crisis say, "Jim, I sold in '08-'09.
23:42
I couldn't take it anymore.
23:42
I just couldn't take it, and I never bought back in," and that conversation could have been in 2014, 2016, 2018?
23:49
So this very real pain of the mismatch on expectations, of how bad it could get, I think, it helps to have that knowledge.
24:05
Doesn't make it any easier when you go through it.
24:05
When you read it on paper, you go through your advisor and they say, "Okay.
24:09
Can you handle 50% loss?"
24:09
You're like, "Yeah, no problem."
24:13
Jim O'Shaughnessy: "Sure."
24:14
Mebane Faber: Then it happens and you're like, "Well, shit. Okay.
24:16
Now I got deal with it," but also, that's one of the challenges of buy and hold.
24:22
I think, as a great portfolio, the difficulty for many of buy and hold usually getting whacked when everything else is going out the window and it's hitting the fan makes it doubly hard.
24:31
So it's the recession, unemployment's going up, you lost your job, everything looks crazy, and that's public markets in general, and you alluded to one of the challenges is the daily liquidity.
24:46
I think we just lock people up for 10, 20 years on annuity type of products.
24:46
You could end up with better compliance, and there's some innovation that I think really could happen there, but the challenge with those up till now, I think, is there's been a lot of fees, a lot of just fat that's in between a good outcome, but yeah, the behavior side I think is always going to be a challenge.
25:12
So we set really low expectations.
25:12
So I always tell investors, they'll complain to me and say, "Meb," and we got so many funds, something's always doing terrible.
25:20
They say, "Meb, bought this fund three months ago.
25:24
It's awful, keeps going down every day.
25:24
I think I'm going to sell it, but I like you, I'm going to give you three more months."
25:29
I say, "Oh, it can get way worse than that."
25:31
They say, "What are you talking about?" I say, "Oh, no. That's not even bad.
25:32
That fund could easily go down 70%."
25:32
They say, "What are you talking about?" I say, "What?
25:33
This is a long-only stock fund. What do you expect? That's what they do."
25:33
Don't get mad if the dog bite.
25:43
That's a dog being a dog.
25:43
Stock fund long-only, that could go down 70%-80%.
25:48
So I think being honest and having the humility of what can happen as opposed to just saying, "Hey, all my funds are going to do 50% a year," the investment gods reward humility, and nothing they like more than the opposite side, which I think we see time and time again in our world.
26:10
Jim O'Shaughnessy: We definitely do, and you're also right about humility.
26:12
Wasn't it where the customer's yachts, if you don't know yourself, the stock market's an expensive place to find out, Adam Smith, which was his pseudonym, but- Mebane Faber: My favorite quote along the same lines, and I attribute it to Mark Yusko, I attribute all my quotes to Mark Yusko or Morgan Housel.
26:35
I know you love to quote Morgan, and 90% are not attributable to either, but it's like Mark Twain.
26:42
I want 50 years from now that them to have this entire almanac of quotes that they never said, but I love this quote, and it's probably my favorite quote of the past year is, "Every trade makes you richer or wiser, but never both."
26:58
Jim O'Shaughnessy: Never both.
26:59
Mebane Faber: Never both at the same time, right?
26:59
What do you learn from these trades?
27:02
You make a ton of money on usually nothing. It's the scars.
27:02
You and I could take off our shirts.
27:07
We're not going to do it, YouTube.
27:07
When we take off our shirts, we got scars everywhere from the late '90s, 2000s, and on and on.
27:11
We've made the mistakes, but you wear those with the badge of honor, right?
27:17
It's like we're Russell Crow in Gladiator, Jim, you and I, but that's the whole point.
27:22
So the people going through this cycle that are younger and listening, you end up losing a lot of the money, learn from it.
27:27
Don't just blame the fed and your crappy broker, your neighbor who put you into Shiba coin or whatever.
27:33
Learn from it and move on.
27:39
Jim O'Shaughnessy: Again, I feel like I'm interviewing myself here, Meb, because- Mebane Faber: We got to find some stuff to disagree with, Jim, something that it's going to be you and I arm wrestling over something along the way.
27:52
Jim O'Shaughnessy: It's got to be because as I'm preparing for this, I'm going through the stuff I'm like, "Fuck, I can't see anything-" Mebane Faber: We should have crossed all those out that, "No, we agree on that." I have a whole thread.
28:04
I would actually love to see you do this at some point where it's basically like, "All right.
28:08
What investment beliefs do I hold that the vast majority of my peers don't hold?" So it's 75% plus.
28:14
So it'd be fun to do that at some point to go over, "All right.
28:22
What are some things you believe that people would shake their head at or be like, 'That's crazy.
28:22
How could you possibly believe that?'"
28:29
That list is getting long.
28:29
I think it's almost 20 for me now.
28:33
Jim O'Shaughnessy: I love it.
28:33
Mebane Faber: So we'll figure it out.
28:33
By the end, we'll figure out something to list. Jim O'Shaughnessy: Okay.
28:36
We'll find something to fight about, but the other thing, I mean, I've had that conversation you just went through, not a million times, I'm exaggerating, but thousands and thousands, and it's been like three acts and it always is the same.
28:57
When I was younger and started doing this, what surprised me most back then was that some of the smartest, objectively or subjectively, I found them very intelligent people fucked up the worst because the whole curse of knowledge, "I'm right.
29:09
I think that I know everything about everything." No, you don't.
29:16
Back to your humility thing, I mean, again, old traders, bold traders, but no old, bold traders.
29:24
If you don't understand that and if you don't understand that the market, not you, the market is always right and the market's going to pound your ass, and I always say that a career in active management is like a sine wave, right?
29:46
Hero, goat, hero, goat, genius, idiot, and if you don't have the scars, you're going to get the scars if you want to keep doing what you're doing.
29:55
So back to the whole thing, "Oh, I love the way you do that because I used to do that too," when I wrote What Works, most of the money came in over the transom, literally.
30:07
Again, couldn't happen now because back then when the first edition came out, that kind of book, just there wasn't anything like that kind of book.
30:14
There was there was French-Fama, and there was all the academic stuff, but I mean, who in the general public is reading that stuff other than guys like me and you? They would always come.
30:22
When they would come in, back then I took high net worth individuals directly instead of going through advisors, and so they'd come into the office and, Meb, I shit you not, they always asked for the strategy that did the absolute best on an absolute basis in the book.
30:44
Mebane Faber: I like to humorously shame people, Jim.
30:44
I think it's the nice way of putting this, but we would also have people ask me similar question and I would respond, I'd say, "I assume you're asking me this because you want to avoid that strategy and you want to see," and these are live strategies that work but are underperforming, "because you want to avoid it currently and you want to go to something that's not working, right?"
31:09
They follow and say, "Well, no. Why do I want that?"
31:13
I'm like, "Well, you don't want to just chase the hot fun, which is reams and reams of research shows doesn't work on and on." They quietly ...
31:24
Usually, those are terrible clients, anyway, as you know.
31:24
You don't want that client because they're going to go chase the next thing in three years, the next thing in three years.
31:34
I love to divert people to the really bad ...
31:34
That's bad marketing, though.
31:34
That's why we're probably not 10 times bigger than we are because if you sell what's working, that's easy, right?
31:46
We wrote a piece last year back.
31:46
This was a sacrifice to the humility, the investment gods where I said, "Totally not crushing it," and we profiled a strategy we had that had been absolutely atrocious for the past five years.
31:59
So it was a factor-based value and momentum strategy, basic stuff, could write it down in five minutes on an napkin you and I, but it also would hedge the portfolio from zero to 100% based on top down level measures of what we consider to be stock market valuation and trend.
32:22
So you had five things going against this, right?
32:29
Large cap growth outperforming small cap value-y statistics, hedging it all during a romping, stomping bull, you had the whipsaws where at the end of the year it'd go down, and then buy the dip, on and on, right? Just absolutely.
32:41
The choice of hedge, the futures were even worse because they don't have S&P versus the underlying portfolio, absolutely.
32:47
So we talked about it and said, "Look, we want to profile this," and small fund, no one cares about this fund because it sucked so bad.
32:57
However, we appeased the gods and it's been the best performing fund in the past two years, and AQR and Vanguard, by the way, has a market neutral fund.
33:02
A lot of people don't know that and they were equally as stinky, but now they've been equally as good the past two years.
33:08
So now, we're starting to get inquiries and I'm like, "You're asking me now? Come on, guys.
33:18
Let's talk about it when it was really sucking it up, not now. Come on, man."
33:26
So I'm just going to do that every year, just profile our worst fund.
33:28
Jim O'Shaughnessy: Worst fund. Please do that.
33:31
Please do that because I almost always just put my public money in our own stuff, but I might make an exception.
33:37
If you profile like your worst fund, I might buy it when you profile it.
33:45
Mebane Faber: We used to do it for a long time way back to Ivy.
33:49
We talked about some of the meaner version ideas where we talked about what happens when you buy an asset class like US stocks or foreign stocks, big asset classes when they were down multiple years in a row or when they were down 60% to 80% to 90%, and then we expanded it to sectors and industries.
34:05
You had to expand the length of time because, obviously, if you're looking at a tiny industry, it's going to be more volatile, but we used to do an annual post trying to find basically the most hated asset class, and for a number of years in a row, it was everything in the ag and energy world.
34:20
So it was coal stocks, then uranium stocks, then I think last year it might have been Pakistan.
34:25
I can't remember, but things that were down five and six years in a row.
34:31
Then eventually, things stopped being as terrible as they are and revert, and here you are where they have multi-baggers, but when they're truly hated ...
34:36
I mean, I was talking with Jan van Eck yesterday, and they closed the coal ETF.
34:41
So there wasn't even a way to do it anymore, and then now it's booming.
34:46
So I love strategies that are out of favor.
34:46
We were talking on Twitter, I think, last year and you were looking at the number of short selling hedge funds.
34:53
They're basically extinct, right?
34:59
If they weren't almost extinct, then Melvin and the GameStop and Reddit situation made them go extinct, right?
35:05
They're all gone at that point.
35:05
I was like, "This is the best time in history to start a short fund."
35:10
Jim O'Shaughnessy: Exactly.
35:11
Mebane Faber: Obviously, didn't do it.
35:12
We should've, but here we are as a lot of those names have really imploded.
35:18
So I always love looking for things that are hated, but then, so cheap, hated, and then I really like it when they start that uptrend.
35:26
That's the trinity for me, the three ideal characteristics of my favorite investment, cheap, hated, and then uptrend. Jim O'Shaughnessy: Yeah.
35:36
That was what we found was the best performer over time.
35:38
Cheap stocks on the mend is what I called it. It's absolutely hated.
35:44
I didn't know that the Wall Street Journal had a Texas edition. Did you know that?
35:44
I don't know if they still do. Mebane Faber: No.
35:51
Jim O'Shaughnessy: This is back in the '90s.
35:51
So I get this call, right?
35:51
The guy's from Texas and he's like, "We have our own version down here.
35:56
Would you run this list?"
36:01
because it was about the cheap stocks on the mend, right? So I said, "Sure. Absolutely."
36:06
I sent it down to him, and he calls me back two hours later, and this is when people still fax things back and forth in the paleolithic era.
36:12
So he's like, "So Jim, I don't even know whether we're going to be able to publish this because down here in Texas, we'd say this dog is so ugly you'd have to shave his butt and train him to walk backwards. He'd look better." Mebane Faber: Love it.
36:33
Jim O'Shaughnessy: The good news for guys like us is we're going to keep our day jobs because, again, what you said earlier, execution, very easy to say, almost impossible for many to do.
36:43
I got interviewed once later in my career and they're like, "Well, what are you proud of?"
36:49
I said, "Honestly, I think I'm proud of the fact that I never overrode a model," even during the financial crisis, even during, I mean, people were screaming at us like, "This is your fault," and I love how it all becomes, right?
37:09
Mebane Faber: You're like, "I didn't come to work for a month because I didn't want to have the temptation to override the model.
37:18
I may have pulled the plug on the computer for a few days, but never technically overrode a model."
37:22
Jim O'Shaughnessy: That's right.
37:22
It's basically, well, that's another kind of belief I've always had.
37:25
So it's just part of OSAM's culture is you don't have to talk to clients when we're doing really, really well.
37:33
You absolutely must make all outgoing phone calls when we're absolutely taking it in the shorts because that's when your client needs to hear from you.
37:47
Also, guys, when you're on the phone, own it, own it.
37:47
Don't say, "Well, we would've been right."
37:56
Some people who I have some respect for in our industry, I've seen these, "Well, I was right, and then these are all the things that happened that made it not work, but I was right."
38:03
It's like, "No, you weren't. You were wrong." Just say, "I'm wrong."
38:08
I love the piece about your worst performing strategy. Mebane Faber: Yeah.
38:16
I mean, we say all the time, we wrote an article about this a while back, we said, "To be an investor, you have to be a good loser."
38:20
There's only two states to the market.
38:20
It's all time high or some form of drawdown. That's it.
38:25
Jim O'Shaughnessy: Exactly.
38:26
Mebane Faber: There's no in-between.
38:26
So markets spend 80% of the time in some form of drawdown. Some markets it's less.
38:33
So on top of that, so you're always at some percentage away from all-time highs usually, and then on top of that, if you look at ...
38:41
We talk about trend following.
38:41
I say trend following batting average, for many cases, like if you're a major league all-star hitting 300 or 400, that's like an all-world trend falling return stream, right?
38:54
You have the big winners and consistent losers.
39:00
So you get used to losing and then same thing with like angel investing like you talk about it, and no one thinks about it in terms of their actual portfolio.
39:04
They're like, "Well, my S&P this year was driven all by these five stocks and I had 200 losers."
39:08
They think of it only in terms of SPY, but the same thing with angel investing.
39:14
It's like you're going to end up losing half or something of the name, zero- Jim O'Shaughnessy: If it's just half, that would be great.
39:24
Mebane Faber: Yeah, more.
39:25
Jim O'Shaughnessy: If you only lost half, yeah, more, for sure.
39:26
Mebane Faber: So you just got to get used to it.
39:29
It's got to be like Eli Manning.
39:29
Got throw a pick and you just rinse, flushes the toilet, and would be out there slinging again the next play, so having that ability to move on, but people get so attached to the losers, but I agree with you.
39:44
I want to hear the people that, and this applies to founders, too, the ones that own it and just say, "It's part of the journey," right?
39:57
We're all going to have them, and so don't blame it on the fed or the macro or COVID or whatever it is.
40:03
Be like, "Hey, it's part of it.
40:03
Whatever we had stunk it up, and here we are." Jim O'Shaughnessy: Yeah. Shit happens, man. Mebane Faber: Yeah.
40:15
Speaking of shit happening, Jim, we can't do podcasts anymore because 100% of the time you and I do a podcast, the market goes down 4%, 5% for my tech buds.
40:19
So we're only going to have to time this like you did with your puts in '87, ahead of time. We'll schedule it.
40:32
Let everyone know, "Jim and Meb are doing a pod.
40:36
Everyone clear their portfolio for the day."
40:36
Jim O'Shaughnessy: Just think of the power that gives us, though, Meb. Okay.
40:43
Let's shift gears because I don't really actually don't disagree on this, but I'm going to act like I do anyway.
40:48
So you did a piece on dividends and you're like, A, "Why did people like dividends?"
40:56
which I thought was pretty cool.
40:56
You're looking at Coke and Pepsi, but then you also developed a thing where you could replicate a dividend strategy without dividends.
41:09
Talk a little bit about those.
41:09
Mebane Faber: You've probably done this somewhere in secret in your layer, but I had seen very little in the academic literature about this.
41:18
So apologies to the listeners who can find some papers because I couldn't find really anything.
41:25
So my concept was, all right.
41:25
Let's say you're wealthy, so Jim, not Meb.
41:31
Let's say you got a bunch of money from just selling a company and you think about investing.
41:36
Jim O'Shaughnessy: Hypothetically, hypothetically.
41:39
Mebane Faber: Hypothetically.
41:39
So you think about investing, and someone was tweeting about this the other day, and I think Buffett really gets this.
41:43
He's really a great example of it.
41:49
There's nothing that makes people lose their mind more than this concept of capital allocation in the CEO role.
41:53
It regularly triggers me, and then I've essentially come to peace that that's just going to be the way it is with the world and politicians.
42:04
We have a piece on our blog called FAQ on share buybacks and dividends and a bunch of stuff.
42:04
It's got about 30 papers.
42:10
You guys have written a few of them.
42:10
So listeners, you really want to go deep on the topic. Check it out.
42:15
Basically, trying to say, "Hey, look, being agnostic as to how a CEO runs the business, diverting their resources to the best place they can for it to be a good investment."
42:27
However, thinking about a stock strategy, what are dividends?
42:34
You guys had one of the most illuminating pieces that really opened my eyes to this years ago, which was looking at high dividend yielding stocks in their valuation over time.
42:48
So there was a time in the late '90s when dividend stocks traded at a massive discount to the overall market, and there's been other times when they've traded it premiums, yada, yada, on and on.
42:57
At the core, what are dividends?
42:57
It's just a return of capital.
42:57
I know retirees love them.
43:03
They think they're getting paid.
43:03
There's a check on the mail, the whole fire crowd like you're on a desert island, sipping piña coladas, getting these dividend checks in the mail.
43:08
The problem with dividends, it's a nonsensical investing strategy, so investing based on say high dividends alone, because what you end up getting is a value tilt and not a particularly good one.
43:27
If you're going to do value, we say, "Just do value," don't do it by getting its weird cousin dividends, but the biggest problem, I live in California and it's expensive to live here, I love it, I think it's worth it, but my goodness, if you make a lot of money, you pay a lot in taxes.
43:43
So dividends, you have to pay taxes every year.
43:43
So theoretically, a wealthy person may not want to pay taxes every year on dividends.
43:49
So we said, hypothetically, what if you could replicate the outperformance?
43:57
So high dividends over time have outperformed a market cap weight over time, but we said almost anything outperformance market cap weight over time, if you're thoughtful about it.
44:08
So we said, "Could you replicate a high dividend strategy using value cousins, but avoiding dividend stocks altogether or mostly?"
44:15
It turns out if you include taxes, avoiding high dividend yielders and investing in low or no yielding dividend stocks that have value characteristics is a better investing strategy in taxable counts than either the S&P or high dividend yielders.
44:35
Now, that is quite possibly the least marketable investing strategy on the planet, Jim. You like it.
44:45
I have a couple of these funds filed for five years now and I'm like, "I can't launch them until we get much bigger because no one will invest in them, and they're going to sit at $2 million until people eventually get it."
44:56
There may be some weird CPAs that are going to say, "Okay.
45:01
I understand this," but the reality is it's hard, if not impossible, to argue with the data.
45:09
So this concept is our least downloaded paper, I think.
45:15
We wrote one during the pandemic.
45:15
It's probably last at this point, but this concept to me, I think, is sound and thoughtful, but it causes you to red pill, blue pill and be like, "Wait.
45:27
I've been told my whole life, dividend growth, dividend stocks outperform, but no one's publishing the after tax."
45:31
Morningstar does some now, but nobody looks at those, right?
45:36
No one's looking after tax returns, but it's hard to argue with.
45:43
So we've received zero pushback on this paper partially because I think no one cares, but I think it's an of a little weird part of the world that if you did get that wedge in and certain people did understand it, it's a blue ocean opportunity idea, but I got to think of a better marketing phrase.
46:00
Low no yielder is probably not the right.
46:06
We have a constant back and forth with the SEC over our naming.
46:06
We've had a number of challenges coming up with names we like that they don't particularly like.
46:11
So if you, listeners, you guys come up with a good name for it, let me know. Jim O'Shaughnessy: Yeah. Deal. Mebane Faber: Yeah.
46:23
Meanwhile, on the Coke, Pepsi, I absolutely hate Coke.
46:23
I absolutely hate Pepsi, by the way.
46:23
So Coke tastes absolutely much better to me, and I think I could nail it in a blind taste test.
46:32
Wine, forget about it, but Coke, Pepsi, I think so.
46:39
Jim O'Shaughnessy: I was glad to get some of our research because we're on the same side of the whole buyback question.
46:41
So we have the numbers, right? This is old.
46:47
I just grabbed it from something I had here at my house, but it was between '86 and 2016.
46:53
So just like you, we just looked at the data, what does the data tell us, and it's on capital allocation, right?
47:03
So companies that are losers, they're issuing stock. They're minus 3.
47:03
9% from the S&P 500 or we use large stocks, which is essentially the same thing.
47:12
If you take on a lot of debt, that's minus 3%.
47:18
Expansion of your company, ooh, that's the winner at minus 4.
47:18
5%, and then acquisitions, minus 1. 6%.
47:28
Essentially, the two that are positive are paying down debt, tiny, just very little, but buybacks, 250 basis points better than large stocks.
47:42
Mebane Faber: I think the thing that you guys did in this paper that was so clear was that you basically showed particular levels of buybacks, so the CEOs that were buying back a lot versus buying back a little versus issuing than the valuation level.
47:59
So it turns out, and this is crazy, I know people love to dunk on CEOs, but they're not dummies, right?
48:04
The ones that objectively have a cheap stock price are buying it, and the ones that have expensive one on average are selling it.
48:10
The media loves to find the one example and they say, "Oh, this is stupid.
48:16
Look at this company that's been buying back stock for 10 years and the stock price is going down."
48:20
I say, "You know what you never hear?
48:20
You never hear, 'Hey, look how much stock Apple has bought back over the past seven, eight years and they're now a $2 trillion company,' right?"
48:31
There's no front page article in the journal for that like, "Look how smart these guys are for buying back their stock."
48:38
So much of what we struggle with in our world is narrative, right?
48:45
To the dividends, it's like why do dividends persist, it's because they have a great brand.
48:51
Why do buybacks get continually misunderstood, and granted, that gives us opportunity, I think, for folks like you and I, it's because they have a terrible brand.
49:02
We should have named them something else.
49:02
We used to say tax efficient dividends, right?
49:02
Different, life insurance, death insurance, we needed a better name for them, but really, it's the most boring topic ever.
49:14
It's capital allocation in a company.
49:14
Who could even get upset about that? So it goes.
49:20
Here we are in the modern world.
49:20
Jim O'Shaughnessy: Yeah, and I love it.
49:22
Again, though, you said the key word there.
49:22
I don't want the majority of people to say, "Yeah, Jim, I totally believe what you just said.
49:30
I think that's right and that's bang on," because then I have no opportunity, right?
49:36
I want people to look at me and say, "Well, that's fucking insane, man. Why would you do that?"
49:43
Then I know I'm onto something. Mebane Faber: Yeah.
49:48
We get that a lot every day.
49:50
A day doesn't go by where we don't get trolled.
49:50
We've actually started compiling.
49:56
I haven't mentioned this, but for the past decade, I told my team, I say, "We've had a lot of trolls over the years.
50:03
Some really nasty, some really famous, some particularly cruel, but publicly," I said, "let's compile those because I want to show some of our investments in overlay."
50:16
It's like the old stock charts like, "Here's World War II.
50:16
Here's [inaudible] Here's the plague."
50:20
I want to do that with either one of our investing strategies and like, "Meb is a fraud. Meb is an idiot." There's a great one.
50:24
I was on TV the other week on CNBC and they said, "Have fun losing money and your hairline."
50:34
A lot of them were actually pretty funny, but we had some Nobel laureates, early in my career, really cruel responses.
50:40
I was like, "You didn't need to be cruel.
50:40
Just say, 'This paper's not in my cup of tea.'
50:45
You don't have to be a dick."
50:45
Anyway, in overlay, but also for the entrepreneurs out there because being an entrepreneur, and you've been through this many times, it's the hardest job on the planet, and our favorite phrase there is, the biggest compliment you give an entrepreneur or give an investor is, "You just survive," or a gambler.
51:01
You go to Vegas, worst thing you do is lose all your chips.
51:07
So a company and investing, just stay in the game. So we're going to do it.
51:12
It's like the late show.
51:12
They read the bad tweets, but we have it in our company.
51:16
We're like, "Print them out, and smile, frame them maybe like a wall of haters so we can just have a good laugh about some of the really prickly ones over the years.
51:29
Jim O'Shaughnessy: I absolutely love that.
51:32
I had a similar experience when I started Netfolio, right?
51:32
We were branding everything around personal funds because that was the original idea, right?
51:37
We had the internet and you could personalize the fund to yourself.
51:44
We used our quant models.
51:44
You're anti-smoking, okay.
51:51
Say no to the what best performing stock of all time, Philip Morris, and we'll give you the next one on the list.
51:56
So at that time, we had four no load mutual funds, my first company O'Shaughnessy Capital Management, and we sold them to a company called Hennessy, and the reason we sold them was because I just found the ad.
52:10
We were going through things. I found the ad campaign. It's hysterical.
52:17
We were going right at mutual funds.
52:17
Anyway, so we thought, "Well, if we're going to be branding this around personal funds, probably might look wrong, we got mutual funds."
52:31
The hammering that I took in the Wall Street Journal in some books, in books, the reviews, "Jim O'Shaughnessy's What Works on Wall Street until I wrote this book." Mebane Faber: Yeah. That's amazing. Yeah.
52:52
For the very first couple you get, it's harsh- Jim O'Shaughnessy: Yeah, it stinks, it stinks. Mebane Faber: ...
52:56
as an author, you've written a bunch of books.
52:56
Then I tell my friends, I'm like, "After ..."
53:00
People say, "Meb, are you upset?"
53:00
I'm like, "Dude, that's not even the top thousand."
53:07
I'm like, "I've had way worse than that."
53:07
Jim O'Shaughnessy: Exactly.
53:08
Mebane Faber: Book reviews, in particular, but it is what it is.
53:09
You got to have a good sense of humor about it.
53:15
Jim, I need some Netfolio gear.
53:15
If you dig in, find a little T-shirt.
53:15
I'm a large now, if you find something.
53:22
Jim O'Shaughnessy: You're a large, all right. You know what?
53:23
I have some in the basement.
53:26
Mebane Faber: I'll take Canvas at this point.
53:26
So it's the same family of schwagg, but send it over. I'll wear it.
53:31
Jim O'Shaughnessy: So this was what I'm showing people who are just listening.
53:34
I'm showing Meb what I had underneath the sweater here.
53:40
Patrick had these made when we were doing the last push on Canvas. So I will hook you up. I will do that.
53:48
Mebane Faber: It's funny you mentioned, just real quickly, the best performing two industries in history have been in stocks I believe were tobacco and beer, right? Jim O'Shaughnessy: Yup.
54:03
Mebane Faber: I find so much humor in that statistic of the last hundred plus years of the French-Fama.
54:10
Jim O'Shaughnessy: I absolutely love it, the seven deadly sins.
54:12
We used to have a portfolio at my first company.
54:12
We did it in the early days of OSAM, too.
54:19
Essentially, it bought every vice, right?
54:19
So we called it the eat, drink, and be merry for tomorrow you die. Fun.
54:25
So we bought all the booze makers, the pharmaceuticals, the funeral companies, healthcare companies, et cetera.
54:32
That thing, I mean, and go out and try and market that.
54:41
So everyone was, "That's horrible. That's awful.
54:41
How could you be so cruel?"
54:48
Mebane Faber: Well, part of the career risk, too, talking about the hated assets, looking at some of the names, some of our quant strategies pick at times, I look at them I'm like, "I can't believe we're buying that."
55:00
Almost like, "Oh, my God.
55:05
We can't possibly buy this stock," particularly right now, foreign stocks who've underperformed for who knows how long, and looking at some of the countries and geographies we own where you're just like, "Oh, my God!
55:16
We're going to be buying more of that?
55:16
We're going to be rebalancing into that? Come on."
55:20
Even I at this point I'm like, "Oh, my God!
55:20
Some of these are rough," but you get used to it.
55:25
Jim O'Shaughnessy: They are.
55:27
Mebane Faber: Don't look is the summary.
55:28
Jim O'Shaughnessy: Exactly. Well, it is, right?
55:30
So people wouldn't believe me.
55:30
In my office when we were still, we moved to work from anywhere, so you could work from the office or you could work from your house.
55:42
One of our redundancy things that we did early on was to build a duplicate workstation in every one of our employees' house.
55:48
So we didn't miss a beat when COVID came along, and then people liked it.
55:55
So we were like, "Well, they're getting their ..."
55:55
In fact, in certain cases, we're getting more out of them. They seem very happy.
56:00
So we're just like, "Work wherever you want to work," but the deal that we were trying to figure out was we had this whole series of things that really looked great, and then like you just said, coming up with a name and a marketing strategy, it's just like we just sit around and we just shake our heads, and you just brought up the idea of international investing.
56:31
I, too, if you ask me, "Jim, what should I do?"
56:37
well, if you're just going to just do something and forget about it, get it, get the cheapest all world fund, and people look at me like I have two heads, "Why would I invest anywhere but in America?"
56:47
I'm like, "Well, because there's a big world out there and sometimes those stock markets do really well," but they've done so poorly for so long.
57:00
How do you convince people who are investing in your global stuff?
57:05
Mebane Faber: I don't know that you do, Jim.
57:09
Here we are, there's probably no greater pushback currently that I receive, and it's two sides of the same coin for me than global investing for my American friends, maybe that's changing last week or two, I don't know, but over the past year or two, it's gotten downright angry.
57:28
Jim O'Shaughnessy: Very hostile. Yeah. Mebane Faber: Yeah.
57:32
So there's a blog post we did called The Case for Global Investing that, to me, if you read it is nearly impossible to get to the end and think, "You know what?
57:40
I should have all my money in one stock market."
57:45
So I did a post the other day where I said, "Here's my top five investing mistakes.
57:50
One is paying way too much in fees and costs and ignoring all the various costs of taxes and security lending and expense ratio.
57:58
Number two was investing all your money in your local market.
58:06
Number three was not using value.
58:06
Four was not using trend following," something, something, something.
58:09
Anyway, but the investing all your money in local market, people went crazy about it and it's like, "Here's the weird part.
58:15
The US is a percentage of the world. Market cap is about 60." Let's call it ish.
58:19
As a percentage GP, it's only a quarter.
58:26
So I say, "Fine, put 60 in. I don't care.
58:26
That's already 10 times bigger than the second country," right?
58:31
So you're already of huge overweight relative to everything else, but to the decision that then say, "No, I don't want just 60.
58:37
I want 100%," to me is totally insane.
58:37
People come at me for all the reasons and I say, "You know what?
58:45
Tell you what, how about let's start from zero?"
58:50
First principles is like the phrase of the last year.
58:50
"Let's start from first principles. All right. Scratch US."
58:55
Let's say you're a US citizen.
58:55
"Why don't you put all your money in UK stocks?"
58:59
They're like, "Well, that's crazy."
58:59
I say, "What do you mean that's crazy?
59:02
It's an arbitrary one country out of 45 countries.
59:02
Do you think that's a good idea?" "No." "Okay. Here's a better example.
59:06
Why don't you put all your money in Russian stocks?"
59:09
That's obviously idiotic.
59:09
They just went to zero, maybe.
59:14
We could come back to that.
59:14
That might be actually really interesting, but they said, "That's crazy."
59:18
I say, "Well, guess what?
59:18
Russians put 95% of their money in the Russian stock market.
59:24
Do you think they're stoked on their investments today? No.
59:24
Do you think UK investors are stoked? No.
59:29
They've had horrific returns over this past cycle," on and on and on.
59:34
People are like, "Well, Meb, the US, you've been wrong. The US has been right.
59:40
The US has outperformed." I said, "No. Hold on a second. You are right currently.
59:46
There has been plenty of times."
59:46
It's a coin flip, by the way, 50/50 US versus EFA.
59:52
Then there was a stat that I like to give.
59:52
I love giving false sounding stats that cause you to think and one was I said, "The US has outperformed foreign by a percent, percent and a half over the last 70 years," and a percent and a half doesn't sound like much, but then you do the compounding and then the alligator jaws, and it's a huge ending difference.
1:00:12
I said, "How much of that outperformance came since the global financial crisis?"
1:00:16
The answer was all of it.
1:00:16
The entire outperformance had come over the last 70 years from this multiple expansion where US and foreign, and yes, there's been earnings, yada, yada, but US had particularly seen huge multiple expansion in the '09 crisis.
1:00:27
You wrote a famous piece talking about this, but we were in low teens valuations, plenty of countries were in single digits.
1:00:40
The US had a massive multiple expansion over the past decade, and some countries have not had any, and multiples, as we know, they work in your favor sometime, they work against you sometime, but my goodness, you tell people to only put 60% in stocks, and by the way, this is what people always get mad at me.
1:00:55
"So you're just talking in your book."
1:00:58
My largest fund is a long-only stock fund.
1:00:58
So nothing would benefit me more than this continuing to infinity, right?
1:01:05
Jim O'Shaughnessy: Exactly.
1:01:07
Mebane Faber: My company, my personal, but personally, I think, the broad US stock market's expense.
1:01:08
So A, is it dumb usually? Yes.
1:01:14
It's dumb usually to put all your money in one country.
1:01:20
Reams of research on that.
1:01:20
Is it dumb particularly right now? Absolutely.
1:01:20
This is me personally speaking.
1:01:27
I think, and I did a tweet on this today.
1:01:27
I said, "Personally, I think US stocks, market cap weighted are in for an extremely rough period going forward.
1:01:33
For a long time, you've had a lot of the yellow flashing indicators.
1:01:40
I mean, last year was the peak, right?
1:01:44
You had SPACs, meme stock madness, retail going crazy, tons of new supply with IPOs.
1:01:44
You had valuations for me hitting a long-term P ratio, a 10-year P ratio of 40, on and on and on.
1:01:54
Investor expectations were 17% per year, on and on and on.
1:02:01
I said, "However, the final boss was trend, and the trend hadn't rolled over yet."
1:02:08
If you go back in history, 100 years, in bucket US stocks, cheap, expensive, uptrend, downtrend, cheap uptrend, our favorite, on the broad US market does 17% a year.
1:02:23
The second best though is expensive uptrend, which actually does totally fine and expensive uptrend is where we've been the last few years.
1:02:27
The problem comes when you could roll into the expensive downtrend, which is where we are now, Cinco de Mayo.
1:02:30
I think I've seen a picture of you in a sombrero on social media, Jim, at some point.
1:02:35
Jim O'Shaughnessy: Probably.
1:02:38
Mebane Faber: I was going to make some margaritas here and have some margaritas today, but that would go south.
1:02:39
So the challenge I have is, look, is it a dumb idea in general? Yes.
1:02:46
Is it a particularly dumb idea right now?
1:02:51
We could go down the top 10 reasons people justify it, but I'll direct people to that post.
1:02:56
I think it's particularly dumb right now.
1:02:56
I think there's a haven for value stocks in the US, a lot of ideas that probably you would agree with.
1:03:02
I think foreign is cheaper, but they're still stocks.
1:03:07
So US goes down 50, I think a lot of these foreign stocks will go down even.
1:03:12
The even more important entree into the equation of the past year is also inflation.
1:03:12
Historically, investors hate inflation, and maybe it's transitory. I don't know.
1:03:24
We're going to be knocking on $10 gas here in LA soon it feels like.
1:03:28
They're going to have to redo all the signs because they don't have the double digit.
1:03:33
They're going to have to just start mounding.
1:03:36
Jim O'Shaughnessy: I was thinking about that. Yeah.
1:03:38
Mebane Faber: So look, you can tell I'm getting worked up, finally, but the concept of all in on, and it's not just stocks, it's like any asset class.
1:03:48
You got the gold bugs out there.
1:03:48
You got the crypto, my crypto friends, God bless you, but every asset class has its time in the shade, time in the sun, usually, and you go through these periods and you go all in on one.
1:04:00
Look, maybe it'll work out, but look at all the billion dollar investors, Batista, Archegos.
1:04:05
I mean, Tiger's down 50%, on and on and on.
1:04:13
You go through the rough patches.
1:04:13
So putting all your money in one market to me is absolutely insane.
1:04:18
I don't care if it's Greece.
1:04:18
I don't care if it's Brazil.
1:04:18
I don't care if it's Argentina or the US.
1:04:23
Normally, it's the least bad offense in the US because you're 60% of the world market cap.
1:04:31
So if you're 80, okay, whatever, but it's really bad if you're Italian, but they all do it. That's the thing.
1:04:39
It's like the example is everyone does it.
1:04:39
There's not a country, to my knowledge, that does not do it.
1:04:42
That's way more in their own market.
1:04:42
So what are you going to do? Buy the world. Take Jim's advice.
1:04:49
Buy the world and move on.
1:04:51
Jim O'Shaughnessy: Yeah, buy the world.
1:04:51
Patrick, my son, did a paper called Portfolio Patriotism on this idea.
1:04:55
After it was out for a while, I was like, "What do you think of the feedback?"
1:05:05
He goes, "Everyone's just calling me a dipshit."
1:05:09
Mebane Faber: Say, "What's new? Come on. That's just Tuesday."
1:05:12
Jim O'Shaughnessy: Exactly.
1:05:15
Mebane Faber: It's funny, Jim. You travel a lot.
1:05:16
I travel a lot, and you see amazing entrepreneurs all around the world, and even more so going back to the, I think as you were chatting with, man, it was and someone, someone at some point was talking about PHD, poor, hungry, and driven.
1:05:27
In a lot of these countries, the best entrepreneurs are, and I've seen this in private markets.
1:05:37
We did a whole series on Africa Startup Investing.
1:05:37
The startups that are coming out of Pakistan, out of Latin America are incredible, right?
1:05:42
You see these amazing companies.
1:05:46
So this myopic view that one country is going to be deserved of all your money, let's be clear, we're watching Tokyo Vice on Netflix, great show, but it reminds me of this was a different country 40 years ago in Japan, right?
1:05:59
That was the biggest market cap country in the world and the biggest bubble we've ever seen, as big as the one as you and I saw in the '90s.
1:06:04
The Japan in the '80s was crazier.
1:06:09
You probably got better stories than I do from that, but that's taken multiple decades for it to work itself off. Jim O'Shaughnessy: Yeah.
1:06:23
I mean, what I find just amazing is it's just repeat, repeat.
1:06:32
I put a gif up on Twitter quite a bit with the little gremlin, the little green guy.
1:06:32
He keeps touching the hot handle and, "Ah! Ah! Ah!" That's us, man. That's people.
1:06:49
It seems like they just cannot defeat their human programming.
1:06:49
I mean, you did something- Mebane Faber: Here's a curious setup for me right now, and then I'm curious to hear your response because I don't know the answer to it and then we can move on, but sentiment is usually squishy, right?
1:07:05
We did a post where we blinded multiples and value versus bullish, bearish sentiment, and they move in very similar movements over time.
1:07:16
My favorite example, AI, highest bullish sentiment ever.
1:07:16
It was at the peak in 1999, the worst time to ever be bullish in history for our lifetime.
1:07:21
People were most bullish.
1:07:28
When were they most bearish? The bottom in '09. Just crazy, right?
1:07:28
You cannot make this up in the worst way.
1:07:32
The weird part is they also track the percent allocation.
1:07:32
So Jesse Livermore, who you know, had a great chart.
1:07:41
We showed the percent allocation of the US stocks over time.
1:07:47
It's a pretty good indicator of future tenure returns.
1:07:47
All these things are cousins, right?
1:07:51
It's all derivatives of price.
1:07:51
When price goes up a bunch, that's the P and the PE, right?
1:07:55
When it goes down a bunch, it's usually not the earnings that move as much, it's the PEs.
1:07:59
Anyway, there's a curious thing happening this year, and I'm not 100% sure why is that people are full boat-loaded stocks.
1:08:03
So it's one of the highest stock allocations ever in history, if not the highest ever on the various ways to look at it, but the sentiment has gone down the tank, right?
1:08:16
So it's like do what I say versus do what I do.
1:08:24
So everyone is super bearish right now.
1:08:24
US stock market is only down mid-teens or low teens.
1:08:31
Usually, you don't see that until you're really down the 20, 40, 60 or whatever, a lot more.
1:08:38
So I'm curious why you may think that is.
1:08:38
Is it because of the dual stock bond or is it people don't like the inflation?
1:08:43
I wonder why the bearishness.
1:08:43
Is it the carnage under the surface in a lot of the tech names?
1:08:50
Why do you think people are so bearish right now and really long and really allocated? Jim O'Shaughnessy: Yeah.
1:08:56
So on your observation that the allocation to stocks is a better indicator of forward returns, we've looked at that a lot and you're absolutely right.
1:09:05
I prefer to look at rather than stated expectations, I like to look at what people actually do, right?
1:09:13
So people, I think, on the bearish side, I think that everything you mentioned might be playing into the bearish, but, okay.
1:09:34
So that's what they're saying, right?
1:09:34
That's their what I would call stated preference, if you will.
1:09:41
Stated preferences over the last 15 years have become more and more falsified.
1:09:41
People have gotten used to simply lying about how they feel, and there's a lot of reasons for that, right?
1:09:57
That's why, again, the data supports this, too, that's why my preference is to look at revealed preferences.
1:10:05
Revealed preferences are how much money do you actually have long the stock market, right?
1:10:11
What's your allocation to the risk asset.
1:10:11
So I think that they'll probably, for right now, yeah, they've definitely diverged.
1:10:18
Mebane Faber: Interesting. Yeah.
1:10:23
Jim O'Shaughnessy: I think that the reasons you mentioned are pretty good ones.
1:10:25
The problem that I have, though, especially with what's going on underneath the index level.
1:10:31
The other reason for that is I think that we probably got more degenerate gamblers in those names than at any other time back in '99 when E-Trade did the Money Out of the Wazoo ad on the Superbowl, right?
1:10:58
So I think that a lot of people who are taking part in those surveys, not so much AAII, this is a disconnect for me because, come on.
1:11:05
I mean, I did a lot with AAII.
1:11:05
It's basically a bunch of just hardcore do-it-yourselfers. They tend to be older.
1:11:11
They tend to be much more conservative.
1:11:18
So that one puzzles me still, the AAII, American Association of Individual Investors, but I do think that the answer to the bearishness that you see elsewhere is there's a lot of people, more people, I think, that any other time since late '99 that are actually long those names that are getting hammered 80%-85%.
1:11:39
Mebane Faber: I think you're probably right.
1:11:44
Jim O'Shaughnessy: Yeah, but your first conclusion, at least from the research that we have done, your first conclusion that you mentioned and attributed to our OSAM research partner, Jesse Livermore, that empirically is very highly supportable, right?
1:11:59
It's not a matter of, "Oh, gee, I wonder why this is happening." It's just like, "Okay."
1:12:04
When the money peaks in the allocation to long risk assets, the next 10 years don't look so great.
1:12:14
When it troughs, the next 10 years look awesome.
1:12:21
That's just pure empiricism.
1:12:21
So I prefer the actual numbers, but that's an interesting question, actually.
1:12:28
Mebane Faber: There's a great quote.
1:12:28
I think it's Ned Davis where it says, "Price is unique in that it's indicator that can't diverge from itself."
1:12:34
Sentiment is notoriously squishy.
1:12:40
I love reading Leuthold, who's based in the area of your old stomping grounds.
1:12:44
Jim O'Shaughnessy: Oh, yeah. I know all those guys. They're great guys. Mebane Faber: Yeah.
1:12:46
Yeah. So they have a great stat where they look at investors' intelligence and they look at the average sentiment over the course of a year, and it's highly predictive of returns of the next year, where if you look at the top 10 sentiment years, this goes back to '60s or something,
1:13:01
the top 10 worst sentiment, the next year does 20%, top 10 best, people are crazy bullish, next year does zero, but you've printed three or four of the top 10 now in the past couple years, and it hasn't had the follow through of the downdraft. So sentiment, it's not something you ever want to
1:13:12
So sentiment, it's not something you ever want to bet all your money on, the magazine covers or whatnot, but it's something I think to be just curious or aware of.
1:13:23
So I'm always just looking at some of those and trying to get a pulse of what's going on, but- Jim O'Shaughnessy: Yeah, and what I believed, again, I don't believe it, the data suggests this, a lot of the younger people that I talk to are like they're ...
1:13:40
I love the fact that they really want to learn about investing. I really do.
1:13:45
I work with a lot of younger people not just in finance, but in tech, and everyone wants to learn about it, which I think is great and I applaud, but trying to get through to them that narrative follows price, not the other way around, right?
1:14:07
Mebane Faber: I got a solution to your education challenge, which is something that long-term listeners of our side know I'd bemoan the challenge of money and personal finance education and the lack thereof in the US. Ready?
1:14:19
Canvas does a leverage buyout or Jim does a leverage buyout of Robinhood because, sure enough, that stock is going down and down and down, and there's some point where you buy up all those accounts, integrate them into your new business line, you relaunch the direct consumer, direct indexer, add the education component, billion dollar market cap overnight on the Canvas side, 10 billion, 100 billion on the easy side.
1:14:51
I did an article or a TV where I was talking about it.
1:14:56
I was like, "Look, Robinhood could be a hundred billion dollar company if they want to.
1:15:00
They absolutely don't want to," right? Jim O'Shaughnessy: No.
1:15:02
Mebane Faber: They could do these five things and become Vanguard 2. 0.
1:15:05
In no way will they ever do these.
1:15:10
So I don't think history's going to judge that company kindly, but there could be the golden knight savior coming in, OSAM integrating.
1:15:17
So maybe wait till it gets down to about two bucks a share and then call your old bankers, let them know.
1:15:26
Jim O'Shaughnessy: "Hey, guys. Look at this.
1:15:28
This Guys, look at this.
1:15:28
This might be something we want to take a look at."
1:15:32
Mebane Faber: We have the LBO ticker.
1:15:34
Jim O'Shaughnessy: Oh, that's great.
1:15:37
Mebane Faber: Going back to the beginning of the conversation, well, it's because we have a private equity replication strategy, and I like to launch some of our strategies when the idea is out of favor or at least try not to launch at the peak.
1:15:47
So this essentially buys some stocks that you would be very familiar with the strategy.
1:15:54
It has a small cap value flavor, but depending on the sectors and the exposure, a lot of these private equity styles, I'm like, "I don't want to launch this and watch some of these go down 70%," which is what they went down in '08-'09.
1:16:09
Wait till it's over, and I keep waiting and waiting and waiting, probably going to lose the ticker at some point, but it's on the to-do list. Yeah.
1:16:16
Jim O'Shaughnessy: That's a great ticker. I love it. That's fantastic.
1:16:17
Well, listen, man, this has been so much fun.
1:16:17
We should probably- Mebane Faber: This is just our one of six, listeners.
1:16:27
We haven't even gotten into it yet. Jim O'Shaughnessy: Yeah.
1:16:30
Wait, this is just the beginning.
1:16:30
I mean, we're going to split this up into a mini-series, but we really should, joking here, because it's against the law.
1:16:34
We should coordinate because every time we do podcasts together, the market's going down. What is it now?
1:16:44
Mebane Faber: 100% sample size success rate.
1:16:46
Jim O'Shaughnessy: N equals two.
1:16:51
Mebane Faber: Yeah, undefeated. We are undefeated.
1:16:53
Jim O'Shaughnessy: All right, my friend.
1:16:57
So at the end of all my podcasts, I make you the emperor of the world, which a lot of people like, and a lot of people really dislike, and guess which group I like better, but you can't kill anybody, you can't put anybody in reeducation camps.
1:17:15
What you can do is I'm going to give you a magic microphone that you can say two things into it and you are going to incept every human on the planet and they're going to wake up the next morning thinking it's their idea to do it.
1:17:27
What two things are you going to get people to say, "I got to start doing this"?
1:17:32
Mebane Faber: So you're travelers, we mentioned before, and I've heard you referenced traveling to Bhutan.
1:17:40
I went there with my mother, father, excuse me, mother-son trip a handful of years ago, had a really amazing time.
1:17:49
The culture, the people, the food, we got a bunch of Bhutanese peppers growing at my house.
1:17:56
You have to take, listeners, if you ever go, you have to take five bottles of Pepto because it's spicy.
1:18:03
five bottles of Pepto because it's spicy. Anyway, I mean, look, travel exposes you to so many different points of view and ideas, and I'm going to tell you one quick story and then give you my answer, but growing up, I got a little Colorado, little North Carolina background in me,
1:18:22
but loved the fish and fly fish, and had been fly fishing for my whole life, my brothers, all over the place and some of the most beautiful rivers in the world there, and I was chatting with our guide, Dorgie, if you're listening, Dorgie, who also loves classic lane cruisers
1:18:41
so connected immediately, but we were talking and I was talking about the beautiful rivers. I said, "Do you ever see many fishermen here?" He said, "Well, no, but it's something the tourism
1:18:46
I said, "Do you ever see many fishermen here?"
1:18:46
He said, "Well, no, but it's something the tourism is considering," but he paused and he says ...
1:18:53
He's always very curious.
1:18:53
My mom said, "No, no, no, no."
1:18:58
He's not out there keeping them and killing them because it's just this Buddhist concept of not killing all these poor fish.
1:19:06
She says, "No, no, he just catch and release."
1:19:13
He says, "That's curious to me." I said, "What?"
1:19:17
He said, "That's like walking up to one of your friends, slapping them, and then just walking away."
1:19:20
I said, "I've never really thought about it like that."
1:19:25
I can't argue that statement, but I think it's a really accurate concept.
1:19:32
So travel has a way of introducing ideas and thoughts that you get stuck in your everyday life you don't get exposure to, but there was a phrase, and this goes back to one of the old Dalai Lama books, and he was talking about a mantra or idea, and I am not there on this.
1:19:45
I would like to get to this place eventually.
1:19:54
I'm trying, I'm human like everyone else, so I know there's a lot of work to be done, but his phrase was, "Always think compassion," right?
1:20:06
You start to think about that phrase, and I get into my Twitter spats where someone's being a total dick.
1:20:13
You go to the airport and you watch someone losing their mind on a poor stewardess or steward and vice-versa, you watch, which is usually hard to defend, right?
1:20:20
We had someone on a plane about a year ago that just made my wife cry, just absolutely atrocious, horrible human being.
1:20:34
You have to defend that and call it out, of course, and not accept it as good behavior, but at the same time thinking, "What is that person struggling with?
1:20:41
What is going on in their life that ..."
1:20:47
because you start to realize, you talk to people and they reveal some information, "Man, I've been dealing with this health problem, and I haven't told anybody," "I've been dealing with someone in my company stole all the money," on and on and on, all these things that are going on in the background you don't know.
1:21:03
So to me, and when you're talking about money and all the emotions and everything that's involved with it, too, not being judgemental and trying to just understand a little bit and, look, my God, the last two years have been absolutely rough on everyone and every possible walk of life and experience.
1:21:21
Then you come in to '22, I'm like, "Finally, pandemic moving on," and then we have war in Europe. You're like, "My God!
1:21:33
Can we just have a quarter?
1:21:33
Can we just have three months where we can all just go listen to live music outside and chill out and be in the real world again?"
1:21:43
So to me, it's always think compassion.
1:21:43
I think it's hard to mutter that phrase and then do the opposite, right?
1:21:52
Again, I'm not there yet. I'm working on it. I got a five-year-old.
1:21:52
So this morning at 6:00 AM when he was smacking me in the face going to do some Ninjago, Ninjago Legos, I said, "Okay. He's excited. Let's go.
1:22:05
Let's go wake up early and watch CNBC." So that's it.
1:22:13
Number two, I don't have a good number two.
1:22:13
I'm going to leave it with that for one.
1:22:13
We'll see how the world behaves after that.
1:22:18
Jim O'Shaughnessy: I'll tell you, I could not agree with you more on both the travel and on the idea of trying to understand where other people, what they're dealing with.
1:22:29
At least in the last, I don't know, 15 years, I have become far more aware of the fragility of your average human, all of us, me and you, too, everybody.
1:22:45
So I think that's great advice because take a breath, think about the fact, think about your worst day.
1:22:53
Maybe they're having their worst day, right?
1:22:59
It's not excusable if they're making women cry on planes, but you got to take a deep breath and figure, "Okay.
1:23:07
That guy or person is in real pain, and that's what causes that crazy behavior."
1:23:16
Mebane Faber: The best part about Bhutan, going back to this, is they love to put giant penises art on all the buildings around the entire country- Jim O'Shaughnessy: Everywhere. Jim O'Shaughnessy: ...
1:23:24
for the fertility god, which is like, "How can you take life that seriously when there's just phallic symbols on all things.
1:23:26
For the audio listeners, I mean, Jim looks like he has a Bhutanese painting in the background.
1:23:36
I don't know if these are just giant penises on his wall, but it looks like naked people.
1:23:36
I don't know know what it is, but it gives you a rosy out view on life when you have that- Jim O'Shaughnessy: You know what?
1:23:47
I'm not going to even tell you.
1:23:50
I'm just going to let you guess.
1:23:50
Mebane Faber: The good news is you're going to have a lot more YouTube subscribers wanting to see what's on your background.
1:23:57
Jim O'Shaughnessy: I love it. I love it.
1:23:58
You know how to mark it. All right, my friend. Thank you.
1:24:02
Always great to talk to you.
1:24:02
Mebane Faber: It was a blessing getting and spending time with you, Jim.
1:24:03
Let's do it again soon, and hopefully, see you in the real world.
1:24:07
Jim O'Shaughnessy: All right. Cheers, Meb. All right. Hey, that was great. Mebane Faber: Whew, man.
1:24:12
We are just getting warmed up.