Editors' Note: This is a transcript of the podcast we posted last week. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below, if you need any clarification. We hope you enjoy.
Jonathan Liss: Welcome to Let's Talk ETFs. I'm your host Jonathan Liss, and I've been closely tracking the ETF space for more than 13 years through a variety of roles here at seekingalpha.com. Each week, a different guest and I will take an in depth look at a particular aspect of the rapidly evolving exchange traded fund space with a focus on how investors can best utilize ETFs to reach their investing goals.
Recorded Message: Before we begin a brief disclaimer. This podcast is for entertainment and educational purposes only. Nothing said here should be taken as investment advice. All opinions expressed on this show are those of the individuals expressing them alone. A full set of disclosures will be included at the end of this show. You can subscribe to Let's Talk ETFs on Apple podcasts, Google podcasts, Spotify, through whichever podcast platform you prefer.
JL: Welcome back. I trust everybody's Easter and Passover holidays were great. We've got a special show for you today, hosted by Kirk Spano, one of my favorite analysts here at seekingalpha.com. He publishes the Margin of Safety Marketplace Service. Kirk has been syndicated as a guest on Morningstar, CNN Money, Motley Fool, various business journals, numerous rock radio, Cody Willard’s Underground Chatter, Fox Business and elsewhere.
He also hosts additions of the Marketplace Roundtable Podcast here at Seeking Alpha and as I said he runs the Margin of Safety Marketplace Service, and he's got one of my favorite guests of the show on is well, Matt Faber of Cambria. I'll be back next week with a full episode with Chris DeMuth analyzing the three SPAC ETFs currently available for U.S. investors. Hope you enjoy the show.
And now your host, Kirk Spano.
Kirk Spano: Everybody, this is Kirk Spano and I am joined by Meb Faber today on Investing 2020’s interviews, and I thought I would give him a call and check on the world of tail risk. I know that's been a discussion that we've been having recently. And I wanted to start with a shareholder yield because Meb is known for that. So, I like to introduce you Meb Faber, how are you doing today?
Meb Faber: Great to be here, Kirk, thanks for having me. It's a beautiful day here in Los Angeles, can't complain.
KS: It's good. We actually have sunny and 60 in Milwaukee, Wisconsin in March. So, I'm not complaining either. All right, so I get the fanboy stuff out of the way here first. I've been following Meb for about a decade, I think that's about when your first book came out, or the least the first book that I read about shareholder yield. And we're going to start off with shareholder yield before we get into the two ETFs that we're going to discuss.
Because I think that it's a concept that people should at least understand, have some grasp of the way that impacts your investing and your ability to parse out opportunities and risks. So Meb, if you could give us the 30,000 foot view. That would be awesome.
MF: Sure. If you think at the basic core of what's the whole point of investing, right? What are we trying to do at the very most basic, and that's invest in amazing companies? And so, that sounds of course, very simple. But the biggest lesson, particularly young investors come to realize is the difference between a company and the stock. So, you can have an amazing company, but the stock’s too expensive and vice versa.
You can have a company that's not that exciting, is probably declining in business, but the stock is so cheap, you'll probably make a good investment. And a way to think about that, of course, is something like, the houses in your neighborhood. A really expensive house. A really nice house could be too expensive, and a really kind of dilapidated Junker on the corner may be so cheap, you're going to make money on it.
And so, as you think about companies you want invest in for the long term, you want good companies, the companies that will survive companies that make money. That sounds weird in 2021, perhaps but you want companies that are generating lots and lots of cash flow. And then like a very simple Warren Buffett approach, you want to buy them when they're cheap relative to that cash flow. And in this particular strategy we're talking about, they're returning it to their shareholders.
So, treating shareholders fairly, which is something that you can screen out for. And so, the shareholder yield concept has been around for a very long time. We weren't the first to write about it. I mean, everyone's familiar with dividend investing. But the basic tenet is that dividend investing has a very long history of working extremely well versus the stock market. It's a value approach.
But really, starting about four decades ago, companies started using other means of distributed cash, in particular, we're talking about buybacks. And buybacks have a somewhat loaded emotion impact right now. But at their core, they're pretty simple. They're basically the same as dividends if you ignore taxes and a lot more flexible.
Buffett loves him talks about, there is no better use of a company's cash, if it's trading below intrinsic value than to buy back its own shares. So, shareholder yield this concept in my mind was combining dividends and net share buybacks. And what I mean by net share buybacks is you also have to account for the shares a company is issuing. So, if a company is just giving their execs and founders a ton of stock options, then hey, that may not be that great of a company to invest in.
And by the way, ignoring the buyback side, if you have a high dividend company that yields 4%, but they're diluting the shareholders 5% a year? Well, and actuality, you don't want that sort of company. So, the very basic concept is sound. It's something that has beaten every dividend strategy, at least in historical testing. And we've been managing shareholder yield strategies since 2013.
And our public ETFs, we have a U.S., a foreign and emerging one. But to me, when you check the boxes of just a simple investing strategy that makes sense at its core, that's up there at one of the top for me.
KS: Right? One of the things that shareholder yield helps me with and I expand on this is determining how committed management is to returning money to the shareholders, and really how well they're doing with the business in general.
MF: It's funny, because if you look at sort of the rhetoric with politicians, they love to be politicians and buybacks have sort of a bad name right now. But if you went back 100 years ago, the politicians were angry at companies for hoarding too much cash. And if you look at a lot of the newspaper articles and common discussions is that these execs are keeping all the cash and spending it and paying themselves too much money and empire building. Right.
So, it's like the exact opposite discussion now, which is you want to incentivize, and there's a lot of, we could spend two hours on policy discussions around this. But the basic core is that we have a couple of papers on this. And the shareholder book you referenced is free to download online. At its core, buybacks and dividends are the same thing.
And so, once people can take that red pill and understand that very basic finance one-on-one concept, then it opens up a world of opportunity on looking at stocks in a more holistic way. And the challenge I have is always telling people is you can't unsee that information. Once you kind of understand how buybacks and dividends work, it's hard to go back. I mean, a great example over the past decade is Apple. Apple would never screen on many of the dividend screens because they distribute a bunch of their cash through dividends as well as buybacks. And it may not show up on the buyback screens, but holistically, it has a really high yield if you combine both of them.
KS: Right. When I screen for stocks, using the various screeners, I'll take a look at IBEC yield alongside the dividend yield, because there are a lot of stocks out there that especially with the newer technology stocks or newer last 20, 30 years, you have them just starting to pay dividend5s and whatever Apple is at now 1%, 1.5%.
But right, I think that's the perfect example is with their buybacks, what is their actual yield? And it's pretty high, I believe it's almost double-digits. So, you take a look at it, you go, Wow, that's quite of a return without even thinking about growth.
MF: Yeah, that's what the -- if you look at a lot of the dividend strategies, people get excited about like a 2% dividend yield, and you may find some crazy dividend yield, or is it 4% or 5%, 6%. But combining this holistic measure, you often end up as you mentioned, in high single digits, double digits. Now the buybacks are a little more challenging, because they're not necessarily viewed in the same way by management as they're more ephemeral people tend to view them as a little bit differently.
Dividends tend to be a little bit stickier. But if you see some of these, Charlie Munger says you want the cannibals that are slowly eating themselves as far as share count. So, you see these charts of share count going down year over year over year over year, and you end up in owning quite a bit more of the company, which is a great thing.
And Buffett himself loves to joke, he says, you know, they've only paid a dividend once. Now, as he says, it was when he was in the bathroom at the Board of Directors meeting in like the 1960s or something so, they get it.
KS: Right. Now, Berkshire’s a company that I follow my whole career obviously and I'm sure you have too and all the things that we learn from it. It's interesting to me that one; it seems like they may have changed their trading strategy just a little tiny bit. I mean, certainly still position traders, very long term. They're not doing anything super short term, but they're buying back more shares now. And I believe last year, they bought back a record number of shares.
You can almost see in the charts about where they're buying, and then you get the filings and you say, oh, yeah, that was -- those match up. And, for somebody who wants to be invested in a diversified company, a company that I almost think of as a just a different version of an S&P 500 index, right, it's a pared down version that they have screened for quality.
You say, Okay, well, if I could buy Berkshire Hathaway, or I can buy the S&P 500. And even though they've tracked pretty closely, which one would I rather own, I'm generally seeing Berkshire Hathaway, because they have that mountain of cash. And if their share price goes down too much, they're just going to buy back their own shares, or they're going to go out and buy other stocks or companies for pretty cheap.
So, I take a look at Berkshire and to me, they're essentially a shareholder yield company too, even though they don't pay any dividends at all. And I think a lot of dividend investors are missing the boat on that one, the huge margin of safety which I think a lot of people today are overlooking.
MF: Yeah, I wouldn't be surprised to see them screen and a lot of the shareholder yield sort of strategies. Now, like you mentioned, I had a tweet last year, I said, it's going to surprise a lot of people. But people always expect Buffett to buy these elephants when the market starts to roll over. And I said, given their sort of narrative and dialogue over the last few years, I wouldn't be surprised if they just buy back a ton of stock, which is what they've been doing right over the past year there.
And the whole point, by the way, is on the buybacks and the dividends. You have to be buying companies trading below intrinsic value. It's a horrible idea to be buying back stock if your company's super expensive. That's crazy. So, you need some sort of objective measure of what cheap means. And Buffett used to talk about, he'd say, we'd buy it when it's below a price to book of 1.2, or whatever he said, I think he's revised it up over the years.
But the worst thing you can do is buyback a ton of stock when the stock is really expensive. So, it's easy for shareholder, CEOs to always think their company is cheap. So being a quant like I am and wanting to have some objective metrics to at least give you an anchor as to the fundamentals, I think is really important.
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KS: Right. I see all the times that companies bought back shares when their PE was screaming to the moon. Like, well, they're buying their shares when they're expensive. Why are they doing that? And this is where I think the screening, and just paying attention over a long period of time pays off, as you learn a lot about what that management is thinking. Are they thinking about the shareholders long term? Are they thinking about their bonus at the end of this year?
So, I worry about that when I see companies borrowing money to buy back shares. And I know that in the last year and two years, three years, because interest rates have been almost zero, there's justification for borrowing to buy back shares. But I really do wonder, after the pandemic, and witnessing I hopefully take this into the tail risk argument and ideas is with the pandemic.
We saw a lot of companies that their shareholder yield got destroyed, right. They had to get rid of their buybacks. They had to get rid of their dividends. They had to borrow money from the Federal Reserve, essentially, I mean, not directly from the Federal Reserve, but Federal Reserve backstop the market to create the liquidity.
They borrowed this money in usually in durations of five to 10 years. And what if interest rates really do go up to halfway to normal, right? I mean, the U.S. Treasuries 10 years should be 5ish percent if it was normal times, right. And we haven't had normal and way over a decade now. Right. So, you take a look and say, well, what if as the demographics flatten out, for what if as some of these long term retirement system obligations start to weigh even more on the budgets, and I don't want to get totally wonkish here.
But what are these companies look like five to 10 years out, if they can't refinance their debt cheaper. And what if they go through a period like many of the fossil fuel companies, what if they never ever grow again? And they have these juiced up balance sheets that are just dripping with debt? Especially the fossil fuel industry, I look at it I'm like, wow, I really just can't see it for them five or 10 years out most of them.
MF: Yeah, I mean, the challenge if you talk about debt, it's the same for people relatable is getting a mortgage is it amplifies the outcomes both good and bad. And there's a certain amount of fragility when you have a lot of debt and the shock occurs much like 2020 did, then who knows in the future. And so, in general, we prefer companies that aren't super leveraged up, that that tends to reduce volatility.
And so, when we do shareholder yield, we incorporate debt paid down, or just at least a reduction in overall debt, that tends to have a push to equity holders into a higher claim on assets than if a company is overloaded with data and gets into trouble. But I think the two first ones, I think, are the biggest levers, the dividends and net buybacks.
But I think the debt side of the equation is important too. As you mentioned, these almost fantasy like interest rates of 5% 6%, that wasn't that long ago, that we had those sort of interest rates here in this country. It feels like a lifetime ago, certainly with a lot of sovereigns trading at zero and negative. And you never know which way interest rates go, they very well could go down to zero or up to 4 in the U.S. or 5, you have to be prepared for both scenarios. But having a balance sheet that can survive those sorts of times I think is pretty important.
KS: Right. So, let's go on the assumption that there'll be another shock to the economy someday. Now I know that was hard to say for years and years and years, because everything was just great. Nobody really noticed the repo market in 2019. The retail side, sure didn't notice, because we printed a trillion dollars essentially.
We need a trillion dollars to smooth out the repo market. And I don't even know what the QE has been in the last year, read trillion, I'd have to look it up. At what point does the tail risk and that's what we really want to talk about today. So, you have a couple of ETFs that can provide, I think, some ballast in a portfolio.
If you're really truly long term, and you want some protection against the explosion, the implosion, the Black Swan, whatever it is. And I say Black Swan, because well, I can say I expect helicopter money someday to bail out the retirement system. And although when that'll be, I don't know if it's in four years, or six years, or 10 years or 12 years, I really just don't have any idea.
I know there's a paper out there that says 2026, I have no idea how you can be that precise. What tail risk, if you've already got a nice portfolio, this, I think, demands that you have some sort of insurance. So, talk me about tail risk, and why the ETFs and maybe how to use them in a portfolio?
MF: So, if you think about going back to the very beginning of conversation, like what's our goal? Our goal is to own a basket of great companies and stocks for the long term and allow those to compound over time, hopefully companies that have great cash flows that are trading below intrinsic value.
The challenge with that, of course, is quoted securities are volatile, and you regularly have periods where individual positions can go down 40%, 80%, a 100%. And the entire portfolio could easily go down by half or three quarters. And that piece fall under the category of quote normal. And, there's ways that people try to dampen that, one is diversification.
So, we tend to own companies, not just in the U.S. but globally. People tend to diversify across assets, like bonds, as well as real assets, like real estate and commodity companies or actual commodities. And then there's strategies like trend following. But the challenge with all this is that you're still for the most part in a portfolio of assets that is very highly correlated to the business cycle and recessions. And so, your human capital is correlated to your investments.
And so, when investments are going down, so like last year, the economy is in the tank, unemployment shooting up, we're entering a recession all across the board, everything's happening at once, right. And so, the problem with investments is, you often need that principle or cash just when it's going down by 20%, 30%, 40% 50%. And so, how do we try to figure out a way to make that path smoother or hopefully not correlate as much to what's going on?
And so, we wrote a paper over five years ago, and first I would direct people to a book we wrote, called Global Asset Allocation. Again, it's free online, either my blog Meb Faber Cambria Investments. We also wrote a paper called Worried about the market. And this was talking about what happens when stocks have a really bad month or really bad bear market? So, bad months being down 10% 20%, bear market down 50.
Over the past four decades, what did well, what helped? Well, the things you expected not to help didn't, of course. Real estate, foreign stocks, all did poorly. What did help bonds helped, but not a ton. Gold helped sometimes, sometimes it totally didn't help, it actually was worse. And then, one thing that's almost guaranteed to help, but you can't say guarantee in our world is buying puts on the stock market.
And so, the problem with puts like any insurance is it's a cost. Think about house insurance, think about car insurance. And so is there a way to combine those to help buffer what's going on. And so, we settled on an idea which was have a portfolio that owns 10-year treasuries, so to help fund the purchase of the puts, which, as you mentioned earlier, used to be 5% 6%. Now, it's down around 1 or 2. And then bilateral puts in the stock market.
And we modeled out how that would have done for the past four decades. And it turns out, it does a great job of hedging the really bad events and doesn't lose too much in the good times. And so, we launched a fund based on this tail risk fund a few years ago and out of sample 2017, ’18, ’19, ’20, it's done kind of what we've expected it to do, which is have really strong returns during the market downdrafts like 2020 and then hopefully lose less in the good times when stocks are up.
So, the whole challenge is how do we get to the finish line? How do we make it through a year like 2020, not panic and sell everything and there's a number of boxes that checks. It's not just the portfolio optimization box, or this sort of concept of human capital diversification. But there's a very real behavioral element, which is, does it keep me from doing really dumb things?
It act as an insurance that gives me cash or good returns when stocks and other investments are highly correlated and it feels so long ago, but it was only a year ago, we were watching the futures every night, right, where markets were going to limit down and having something in those periods that helps to buffer and tamp down the emotions, I think is pretty important.
KS: Right. Right. I saw your interview a month or two ago with Jeremy Grantham and reading GMOs letter, most of my career, I think, all the way back in the 1990s. And he has been so good at forecasting things. And he's generally ahead right so, there's this old saying in Wall Street that if you're early, you're wrong.
Well, you know, what, understanding what's going on and then letting the calendar be the calendar, I think is generally at least a good starting point. And Grantham has talked about, we really could have a monster bear market here soon. And you say, Okay, how do I take the whole big picture? What do I put in there?
And in today's day and age, ETFs for people who are going to be trading futures really don't want to trade options and manage that basket themselves and realize that correlation, probably due to liquidity is very high. So, it used to be that you could do the boxes with the correlations of different assets. And, there is a huge difference between corporate bonds and then government bonds and gold and gold stocks.
And you took a look at all the different correlations, and you notice that maybe you've done the study, the correlations have gotten tighter, right. So it is usually not many assets that are uncorrelated to a market correction anymore. Or if they're less correlated, they're not as much less correlated as they used to be. So, I was lucky enough to be trained in options by a guy that helped break the securities portion of the exam in the 1970s.
So, I understand options, right, I get options. And I like to take a look at options strategies and the thing about buying options is what works against you. The calendar works against you, and plus you have the expenses so if you can find a way to pay for your option using another part of the portfolio, I think that that's a pretty good trick.
And your ETFs, which are the symbols are tail and fail. Tail is domestic and fail is global, I take a look at these and I'm like, wow, you're crazy honest, because the last sentence of the description is we expect produced negative returns in most years with rising markets and declining volatility. Okay, so you've just had this straight up market, and volatility just keeps going down, although the floor seems to be higher than it used to be.
Seems to me that somebody who's sitting on 20% 30% 40% cash in addition to value hunting for companies for long term, or using ETFs for a little trading or for the core of their portfolio, healing into tail risk protection, so with tail and fail how would you describe those a little bit better than I have? I know we've just kind of glossed over them. And really, how do you get them into a portfolio as protection?
MF: Sure, I think you illustrated a couple really important points, the first of which is that most of the time, you don't necessarily need tail. And that's weird coming from the portfolio manager of the product. But I, we try to be honest about all of our investments. And we manage 12 different funds, and often, you have an opportunity set. That's great.
And the problem right now is you have arguably in America the worst, the single worst opportunity set in 120 years for your investments, because U.S. stocks are expensive, broadly. Right back to the Grantham discussion, we have a pin tweet that list kind of a dozen or two dozen charts of signs that things are pretty bubbly, and we'd love to talk about the Shiller cape ratio, or a 10 year PE ratio, that's the second most expensive in history.
But that's not even the most extreme. There's plenty of other metrics and charts that are already at the 100 percentile. And so, stocks, we forecast to do low single digits for the next decade. And the challenge is that other times this has happened, think late 90s, the most expensive U.S. stocks have ever been. Well, the good news, then was that bonds were reasonable, I think they yielded 4% maybe.
So, you had somewhere to hide. Well, right now in the U.S. you don't. So, we say that this tail risk and the way that people implement it, is they either do a sort of all the time allocation, just like you would buy a car insurance, house insurance. They do it where they're a little more tactical. So, as the market starts to rollover, go below a certain long-term moving average, like the 200 day or 10 month, they'll add some more sort of a yellow light as valuation, red light would be the trend is a good example.
And a lot of people sub it out is like a bond substitute where you're – because you're getting the bonds back, you're just getting the put overlay in the portfolio. Now, the one caveat I like to say is that, we do think that foreign stocks are quite a bit cheaper. So foreign developed, if the U.S. is trading in a long-term PE ratio of about 35, the average historically is around 17.
During the past 20 years, let's call it 22, but it's a 35 now. Highest it's ever been was 45 in 1999. But it's been as low as 5 as well. Foreign is down around that 22 average, so normal. Foreign emerging is down around 15, so cheap. And the cheapest bucket is down around 12. So, if you look at the 45 investable countries, you have a bucket of countries that are really cheap. I mean, it doesn't have to be countries like Turkey, Brazil, or Russia, which are in there, but it's also countries like UK.
UK has had the same valuation as the U.S. has historically. But it's trading at a massive discount, largely due to a lot of Brexit and everything going on there. So, we say a couple things. One is, yes, the tail risk makes a lot of sense. There's a lot of different ways to implement it. But two, certainly think beyond our borders, the U.S. as a percentage world market cap is only half and most investors here put about 80% into U.S. stocks.
So, they're putting most of the money into the most expensive stock market. We have it coming into this year as the second most expensive stock market in the world. After this quarter, it may be the number one, which is not a good USA number one thing to cheer for, but we're almost there. And with this Sugar Rush high of a global Spring Break, it feels like a few weeks away from happening.
We could even romp higher too, but that's – by the way, that's the best possible scenario. People talk about having the tail risk insurance is that you don't need it. You want stocks to go up and over time they will. And so, if you lose money on tail risk, that's gravy. Same way as if you're happy that you lost money on your house insurance and your house didn't burn down.
KS: Right, right. Right. I didn't crack up my car either. So that's good.
MF: Yeah.
KS: Okay. It's an interesting discussion. And, I'm generally bullish on a lot of things, because it's paid off. And over long periods of time, being bullish pays off. The permabears, I think that they probably find ways to make money somehow on their trading. But I do think the pragmatic approach to asset allocation and I actually just downloaded your book on that The Global Asset Allocation book. And by the way, we'll have all these links on both the webcast and the podcast.
I think that for the person in particular who's got a relatively mature portfolio. I don't know that, I'm much of a hedger for somebody who's still in that high growth phase, because presumably they're so putting in cash and their inflow of cash on a regular basis is kind of their hedge, right. But I think for the retired person who may or may not have any experience with hedging, right, or any experience with options, this can be, I think, something to consider with your advisor or whoever you're working with.
He’ll say, okay, I've got a million bucks, 2 million bucks or 4 million bucks. And I hate the idea of sitting in cash for a long period of time. And I understand that the market can be irrational for a very long time, how do I stay invested, but have something that's going to go up, if we get clobbered? And how do I be a little bit tactical about it, because I sure would want to buy this right after the last mark.
And I don't know that I wouldn't want to say, Oh, I'm going to start buying this now in April, because everything just got crushed. But now that we've gotten this big run up, and maybe the S&P goes to 5000 before anything bad happen. Maybe equals to 3000 [ph] hertz, I don't know that. I take a look at the technical charts and I have an idea about kind of how it's going to work.
And, I take a look at this wave theory and that idea and everybody's technical ideas and I just say to myself, you know, what, if you're 100% sure something's going to happen, you're probably not thinking about it hard enough. I think that probably scaling into a little bit of insurance based on a personal portfolio how much insurance do I need? Should I have 3% of insurance or 5% insurance or 6%, or maybe even 10%? I don't know person to person, right? This isn't personal advice.
But instead of sitting on this mountain of cash that I think a lot of people aren't, and that I was. I did not get as aggressive as I should have last April and May and June. I was lucky to buy I was on air with Forex analytics, and I bought the gold stocks on the day, March 16, when they crash straight through the floor, on all those margin calls, and I got GDX at like 16 to 95, or something. Doubled my money on and it was my biggest holding.
So, you get lucky like that once in a while. And so, I take a look at the just the pie chart, right that everybody has and I've really been grappling with this for, since around September, I was one of those unfortunate people who got COVID. So, I had a lot of time to sit around and think, and I was thinking to myself, as this market goes up, and as people start to believe again, and this is a psychological aspect that I'm sure you've seen, as the market goes up, people start to feel infallible, and they decide that they're great traders.
And I just am reminded very much of 1999 right now. And maybe it's more like 1998, which means there's more upside, end of 2007. I was given – I was buying steak dinners and Italian dinners for wounds of people, telling them in 2006 and ’07 to sell their second properties and peer down on stocks. And I got fired more than I got hired, it blew my mind. So I take a look at,
MF: No fun to be the party pooper. The interesting starting point, we always tell people, if you go to that book, The Asset Allocation book is that, the big key of this is you want to own assets. And so, the global market portfolio in my mind is such a good starting point, because that's if you bought every public asset in the entire world, what do you end up with, and it's roughly a portfolio of half stocks, half bonds, half U.S. and half foreign.
And that's been an incredibly robust portfolio for the last 100 years. And I always say, that's a good starting point. And then you rebalance. I mean, that was actually Bogle’s portfolio. Granted, he was a little more U.S. bias, but he used to say, I got spend half my time worrying, I have too much in stocks, and half my time worrying, I have too much in bonds. So, you rebalance that basic portfolio.
I'm even more old school than that. My portfolio is based on an idea that's 2000 years old. It's the Talmud portfolio, which is a third each, and they said, let each man invest a third in business, a third in land and a third keep in reserve. And so, in my mind, that's stocks, bonds and real assets. And so, but both of those if implemented thoughtfully, so low cost, tax efficient strategies and rebounds is a great starting point.
And then moving on from there, doing things like tilting towards value, if that's your thing, tilting towards trend or momentum, adding tail risk, I think are all thoughtful approaches. And no matter what it is at its core, it's what helps you sleep at night. And you have to envision and think about the times in history. My favorite investing book Triumph of the Optimist shows times in history when stock markets went down.
I mean, in the U.S. we've had a market decline over 80% before in the Great Depression and NASDAQ was down over 80 in 2000. Plenty of markets have bad days. I mean, there's a stock market today that's down 20% alone, today, not this year today. But, to the upside too. So, being prepared for anything, whether that's gold at 5000 or 500, whether it's interest rates at zero or 10%, stock market up or down, you have to figure out a way to survive all those.
And that's the key for all of this is, if you lose all your chips at the poker table, and you go to Vegas, like you can't play anymore. That's the whole point is you need to have a portfolio that is robust, that allows you to stay in the game.
KS: I can verify that Vegas also, I
MF: That’s not a theoretical analogy. That's an accurate real world.
KS: You can only double down so many times in blackjack until you're out of money. All right. Is there anything else that we should really know about tail and fail the ETF side? I think that in my mind, as an RIA, as a registered investment advisor fiduciary, I'm thinking that at these market valuations, this would be something that I would probably scale into over a period of time as appropriate for client probably to use up some of the cash that we have.
Because again, what I own I would like to own for years. And, while I may try braid that a little bit around the edges, when we buy something, that's because we think three to five years, it's going to double or triple or we get lucky and you get a Peter Lynch stock on accident. I'm thinking scale into tail, which is more domestic at this point. Because I have been finding more opportunities overseas.
Recently, we have what we call the very short list, that's our 200 stocks around the world that we follow, and has to meet pretty strict criteria to get in there. And right now, actually a month ago, we had too many, we’re up to 250 stocks. There's really stocks that we don't own over time, and I just had to take them off the list.
So, I did a screening at your shareholder yield part of it, it was pretty easy to neck 20% of our universe out. And that had to do with payments and businesses. There are a lot of businesses who have more debt and less growth opportunities now, because of the pandemic. Now, a lot of these things are permanent, the work from home thing, not going away. And we're both working from home.
We've got all these things that are changing and separates winners from losers. And I just think that the financial situation in the world and the demographic situation that the major economies have, Japan, China, Europe, us, we all have demographic issues. At some point, there will be a shock, and you can't know exactly when the shock is coming in most cases. You can just say, it's somewhere over the horizon somewhere.
How do I insure for that, once valuations get to a point where I'm not so sure about them? So that's what I'm thinking I would use tail for and,
MF: And you mentioned, one more thing, as you mentioned a great point earlier that is worth reiterating is you don't want to buy it after the fact, my biggest fear was when we launched this product the long history of investors is not just individuals in retail, this is institutions as well. Love to chase what's been working, right.
They buy what they wish they had bought. And so, you see people chase into a fund or strategy, after it's had one, three, five great years of performance and my nervousness on the tail side was the people would buy it after the event already happened. So, March of last year, after the house already burned down, and the VIX is at 80. And thankfully, at least evidence was they didn't.
Most people have started adding last summer, this fall, I think as the market continues to go up, it's a thoughtful way of rebalancing up to targets on that idea. So, we've neglected to mention this, but I think the expectation for us, broadly speaking is that the tail risk strategies will approximate a roughly 1 to negative 1 return in the bad time. So, if the stock market goes down 20% tomorrow, next week, next month, this strategy would go up roughly the same.
And then, kind of have a slower bleed on the on the upside. Historically, when we modeled the strategy actually had a positive carry, which is surprising. But again, that was during much higher interest rates than today. So yeah, I think, for me at least, if you get to the appendix of the paper, this worried about the market paper we talk about there's even certain people like myself who your average financial advisor who's working for a company is actually two, three, four times leverage the stock market and doesn't really know it.
And you can make the argument that they could either own no stocks or should hedge them because they own stocks in their personal account, their client’s revenue, so their livelihood, their job is directly related to what the stock market does. So, when the market goes down 50% their earnings revenue just went down 50%.
Clients panic and hit the bottom and often withdraw when markets go down. And on top of that, if you don't own your own company, you're subject to the winds of getting laid off, or the company doing poorly. So, many companies hedge their risks like a cereal company, airline hedges, fuel costs. And so, we've talked about the idea of people in our industry should consider hedging as well and as well as the corporate balance sheet.
You've seen a lot of people do that this year, although their conclusion was somewhat different is they're doing it with crypto rather than stock market tail risk, but for some like us, it makes a lot of sense.
KS: Yeah. All right. Well, I appreciate that you came on today, just can't go into too much. Do you have a real definitive opinion about cryptocurrencies? Because my Macro Monday article today, which is going to be out lately, is about the crypto dollar that's coming and what impact that might have on Bitcoin?
MF: So, I've been a long-term crypto cheerleader. But I love to poke fun at all my crypto friends as well, because they in many ways embrace, like, so many investor groups, you could be a gold bug, you could be a dividend guy, you could be a holder, a trend bar, everyone tends to be a little religious with whatever their approach is and it's hard to be agnostic when it comes to markets.
Like we always say, you want to be asset class or approach agnostic, and that's hard for people to do. So, the advice I always tell people, I say, look, you want to invest in crypto, good. Do it as a percentage of the global market portfolio, which I think is like 0.1%. And I was like, if crypto Bitcoin goes from 50,000 to 500,000, congrats! You just 10x your investment and you own more.
And if it goes up 100 times to 5 million, congrats! You now own a 10% of your portfolio. And so, most people don't want to hear that. They want to hear I wish I put 100% of my money into something or nothing. But it's hard. We say people should never think in binary terms when it comes to markets. You want to think in terms of scaling in scaling out, those sort of ideas rather than all in all out.
KS: Yeah. So, that was once again Meb Faber with Cambria Investments, the tail and fail ETFs for hedging tail risk. Thank you again for listening to Investing 2020s with Kirk Spano. And we will be back next week.
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