The Legacy of Jim Simons and Quant Investing with Meb Faber

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Overview:

Meb Faber is the co-founder and Chief Investment Officer of Cambria Investment Management, host of the Meb Faber Show podcast, and an accomplished author of numerous books and white papers on investing.

In this episode, Meb discusses the legacy of Jim Simons and the impact of Renaissance Technologies on quantitative investing. He dives into the value of trend following and global diversification in investment portfolios, and the importance of a scientific approach to the markets. Meb also shares insights on the current US industrial policy, the future of US vs. international investing, and highlights a lesser-known semiconductor stock that has outperformed Nvidia.

Please enjoy our conversation with Meb Faber.

Links:

The Investipal Podcast is produced by ⁠⁠www.investipal.co⁠⁠. Past guests include Peter Lazaroff, Douglas Boneparth, Jamie Hopkins, Tyrone Ross and many more.

Follow us on LinkedIn: www.linkedin.com/company/investipal⁠⁠ | ⁠⁠www.linkedin.com/in/cameronhowe/; Twitter: www.twitter.com/camhowe16 | www.twitter.com/investipal; Tiktok: www.tiktok.com/@camhowe16 | www.tiktok.com/@investipal; or Instagram: www.instagram.com/investipal/

Find Meb Faber at:

  1. https://mebfaber.com/
  2. https://twitter.com/mebfaber
  3. https://www.youtube.com/channel/UCKvWzzrVUA_DSCoKXL6GU2w
  4. https://www.cambriafunds.com/

Other Links Mentioned In the Episode:

https://www.amazon.com/Man-Who-Solved-Market-Revolution/dp/073521798X

https://www.acquired.fm/episodes/renaissance-technologies

https://mebfaber.com/wp-content/uploads/2016/04/GAA-Book-1.pdf

Hanmi Semiconductor Co Ltd (the little known stock that has outperformed Nvidia) https://finance.yahoo.com/quote/042700.KS/

Key Takeaways

  1. Jim Simons' Legacy: Jim Simons is considered one of the greatest investors, particularly in the quant space. His approach, combining scientific rigor with financial markets, led to extraordinary returns and has left a lasting impact on quantitative investing.
  2. Scientific Approach to Markets: Renaissance Technologies, founded by Simons, utilized a highly scientific approach to trading, involving high-frequency, short-term positions across various asset classes. This strategy, although not scalable beyond a certain size, delivered consistent and high returns.
  3. Trend Following and Diversification: Meb advocates for a significant allocation to trend following in investment portfolios, suggesting up to 50%. He believes this strategy, along with value investing, can enhance returns and diversify risk, especially during market downturns.
  4. Global Market Portfolio: Meb emphasizes the importance of a diversified global market portfolio, which includes a mix of global stocks, bonds, and real assets. He argues that such a portfolio provides a solid foundation for investors, regardless of short-term market fluctuations.
  5. US vs. International Investing: While the US stock market has outperformed globally in recent years, Meb points out that diversification into international markets has historically provided benefits. He notes that non-US markets often offer better opportunities due to lower valuations and different market conditions.
  6. US Industrial Policy and Future Outlook: Meb discussed the impact of recent US policies aimed at onshoring key industries, such as semiconductors. He sees these policies potentially continuing the US's economic uptrend, but he remains cautious about overreliance on US equities alone. Meb emphasizes the importance of maintaining a diversified approach to capture opportunities globally and hedge against potential domestic market fluctuations.

Timestamps

00:00 Introduction and Jim Simons' Legacy

08:24 The Benefits of Trend Following

12:48 Global Investing and Diversification

28:01 The Scientific Approach to Investing and Long-Term Perspective

Transcript

Cameron HoweWe're back with another episode of the Invest a Pal podcast. Meb Faber is joining us today. Meb is the host of Zone Podcast, the Meb Faber show, if you haven't seen it yet. He is also the co -founder and CIO of Cambria Investment Management and author of numerous books and white papers. He's a notable quant in the space, particularly with a focus on trend following. Meb, it's a complete pleasure to have you on the show today.

Meb Faber

Great to be here.

Cameron Howe

As a fellow quant, you know, I think it was Thursday or Friday (last week), we had the passing of Jim Simons. I know you spoke a little bit about on Twitter, his legacy. I'm curious to pick your brain a little bit on it. What do you think Jim did for the quant space and the legacy he's leaving behind?

Meb Faber

Well, first of all, I made a whole boatload of money. I think it's art. I don't even know if it's arguable - I think he's definitely on the Mount Rushmore of investors, certainly quants and hedge fund managers. If he's not the goat, the greatest of all time, I mean, he printed something like gross returns of 60 % a year for 30 years with no down years and, you know, charge four and 40, which makes most hedge fund two and 20, fund managers blush. And, you know, he did it in his own way, right? He was a code breaker.

He was a mathematician first and foremost and a scientist at heart and started with financial markets. And listeners, if you want to get into a really deep dive, there's two great resources. One is a book by Greg Zuckerman on Simons. And then also there's a good acquired podcast on him and Renaissance is the name of his firm and Medallion is the name of his great fund.

So pretty spectacular, but he took a total scientific approach to the markets He also did a little trend following in the early days in private equity and angel investing and all sorts of other stuff discretionary investing But he he certainly I think been the big the best Pure returns of all time you could argue things like Buffett are better on magnitude and scale But he he certainly crushed it for sure.

Cameron HoweWhat do you think? I mean, I know it's a topic of big debate. What do you think Renaissance was all about? What do you think their signals were? Was it just, you know, building this robust AI model that could ingest every possible data point imaginable? Or do you think they were exploiting a few factors out there? Or do you think they were, you know, I know, let me dig into this in a second. I mean, I've had this debate with other people around like the efficient market hypothesis. I think that's an area that they were exploiting to some degree.

Do you think they were turning their attention away from the US market to more like emerging markets to general?

Meb Faber

I mean, I think they traded everything. So not just equities, but you got fixed income, commodities, currencies, a little bit of everything. It's certainly my belief, high frequency, short term positions. I mean, it doesn't have to be seconds. It could be hours or days, but a lot of more active trading. My guess, I mean, look, they've been doing it since the 80s.

So it's probably a mixture of market making with leaning into it. It reminds me of a, you know, like a sports book or Vegas casino where look, they're going to make the 10% of the vig every year consistently. But when you have retail or the consensus being huge in one direction, you can lean into that a little bit and make it even more. Renaissance also over the years, launched a number of, and that strategy is not scalable. You know, they kept it to like 10 billion in AUM and kicked everyone else out that wasn't personally invested within the firm. But most of their institutional products, you know, targeting institutional equities and other strategies have been a lot more pedestrian, you know, that look, you know, much, much more, you know, not superhuman, but rather, you know, like, like the rest of us. So, you know, I think what they've been doing is decades of experience, short term, and not scalable, but God bless them. You know, I'll take not scalable 30% net returns every year, anytime. Even under 10 billion still look like an impressive fund.

Cameron Howe

Wait, so do you think they were exploiting any sort of market inefficiencies?

Meb Faber

Certainly, you know, I think, arbitrage type of situations, you have short term movements that are somewhat predictable. But you know, I mean, again, it's very much a scientific approach to markets. And most of us as individuals and allocators, we have a unique but different ability to take advantage of inefficient markets. And that's to extend our time horizon. Now most people want to operate on the certainty and the time horizon of like assignments and Renaissance. They want, you know, weekly, monthly, quarterly type of certainty. But really in our world, it plays out not just quarterly or yearly, but multi -decade as well. But there's advantage to that. And one of them is certainly also scale too.

Cameron Howe

What's your thought on the momentum factor within the US market? And just to elaborate a little bit on that when I was doing this for a living, I would run quant factor back tests in, I'm in Canada, so I'd run it for the Canadian market and the US market. And we would always see a very notable difference in performance where essentially there was no real alpha to be gained in the US market, not just on momentum, but across like most factors, quality growth, value, momentum, low vol, what have you, versus the Canadian market.

And my hypothesis all the time was that the Canadian market was more inefficient than the US There wasn't as much quant or algorithmic traders here as there are in the US. So I'm curious to pick your brain a little bit on that and how you approach your investment management process.

Meb Faber

Yeah, I mean, I think your broad statement is absolutely correct, where if you fish in areas where there's nobody else and/or the people that are fishing aren’t professional fishermen. They don't know what they're doing. Absolutely. There's going to be a opportunity to do a much better job than if you're entering a fishing tournament with the best bass fishermen in the world, right? On a lake where it's consistently fished every day. And that's true for almost any walks of life, whether it involves buying local real estate. You know, if you grew up in a little beach town and know every nook and cranny about every home versus someone who doesn't, I think that's always gonna be the case. The US being one of the most developed and deep markets in the world, if you're gonna be trading Brazilian small cap tech companies, certainly you would assume that the inefficiencies would persist in these less efficient markets. Again, you have this classic lever of them being less scalable. Now, most of us probably don't have the scale issues that Renaissance and others have, but certainly I think that is true, not just in markets and factor investing, but in true in almost every walk of life in free markets and capitalism as well.

Cameron Howe

So I know you are a big proponent of a, I mean, correct me if I'm wrong, but I believe it's like a 60% allocation to trend following in a portfolio.

Meb Faber

Okay, so if you're going to take the starting point for investors and think of, okay, what's the default? Where do I begin? And to me, the beginning is always what we call the global market portfolio, meaning you just go out and buy every public asset in the entire world. What does that look like? And that looks like roughly half stocks and bonds and half US and foreign. And I say half just because I'm rounding. Right now, it's closer to 60% US as a percentage of the world total. But if you look at, we wrote a book called Global Asset Allocation. It's free. Listeners, you want to download it online. And that book looked at a lot of the different asset allocation strategies of the most famous investors in history. So the endowment style, risk parity, 60-40, on and on and on, permanent portfolio. And you know all these allocations at hugely different. Percentage allocation so you had things like permanent portfolio that puts 25% in gold so I know you Canadians love that part you have others that have 0% in gold. Others that have a ton in stocks some others that have very little and you would expect these massively different pine hold allocations to have massively different results and they do. On the very short term you know meeting months and years but on the long term over decades. They really all sort of condensed to similar numbers and we run all sorts of fun little tests to talk to this about people. We did the one the other day, I don't think anyone believed, where we said, hey, look, what if you did the default portfolio in the US, 60% stocks, 40% bonds? I said, what if you just replace your entire bond portfolio with gold? You know, that would clearly do a much worse job. Well, it turns out last 100 years makes no difference. Last 50 years makes no difference.

And I think that surprised a lot of people but how many people have a 60-40 with the 40 in gold? Again, you guys might but no one does. No institution in the US can't go to CalPERS and them say, yeah, we got 40% in gold because it's the same return stream as bonds historically. So anyway, my point being is for the buy and hold investor, if you're just doing the broad big asset classes, it doesn't really matter so much what you invest in as long as you have some of the main ingredients and you end up, hey, I because it's the best time ever to be an investor right now, because you can get that portfolio for near free, that is your default starting line base case portfolio, which is pretty awesome. Now, you just made this like long jump into trend following. So, okay, well, after that is say, I got a high bar now, I got this awesome portfolio of global stocks, global bonds, global real assets. So when I say real assets, I mean things like real estate, TIPS, energy mining companies. What can I do to improve upon that portfolio? And it's easy to get seduced by everything. People love to, you know, chase what's hot, but there's two areas that we talk about that we think are particularly additive to that style portfolio. On one hand is value investing. Think Warren Buffett thinks just like, you know, those types of tilts. On the other hand is trend following and trend following is a, both those strategies have been around for a hundred years, right? So they're not anything that's particularly new the implementation of both. There's a lot of different types of ways people go about it, but trend following in particular is probably the single strategy active style that you can add to that traditional buy and hold portfolio that has the biggest impact on risk adjusted returns. So as both a return enhancer and as diversifier of any possible strategy. And once you accept that and accept that trend following is a worthwhile allocation, then the question is how much. And this is so already adding trend is an outlier. Most people don't do it. It's pretty non -consensus. Then the question for us of how much we're certainly probably the biggest outlier of anyone in the country, maybe the world on this, where we say the default allocation should be about half. Now, I don't know anyone that believes that most people, even if they love trend following may do 10%. 20% would probably be the most uncomfortable allocation, but for us, it's been half. And I actually think if you look at the historical data, it's actually pretty hard to argue objectively that you shouldn't do half. So sorry, that's a long-winded answer, but I thought we had to lay a little bit of groundwork first.

Cameron Howe

No, I think, yeah, thank you for that. So with that being said, so what sort of time horizon are you considering? Because that must be over multi decades to get rid of some of the noise in the in the trends.

Meb Faber

You know, because the future is unknowable, certainly looking at any allocation. I mean, you know, we just had Ken French on the podcast and he has a quote where he says, you know, anyone who's trying to tease out any information from one, three, five, or even 10 years of an asset class or strategy is crazy.

Like 10 years is such a short time. So if people are trying to say, man, should I invest in gold or stocks or bonds or all these things? Well, 10 years, who knows? Like it's noise. And so I think that's a struggle for any decision. Now, I think that it's a smart decision, even if you're going to do it for a year or five years, because the future is uncertain. You don't know, you never, there's a great quote we just found recently, which I hadn't seen before from the late great Peter Bernstein and said something along the lines of he's like, look, I think a diversified allocation; most people do it, it's a great idea because you know, it's a defensive strategy where you never know what's going to hit the fan and do really bad where the next big black swan bear markets coming from. But it's also an offensive strategy because you never know where something is going to do great. I mean, look at this year, like who would have predicted that cocoa is going to go totally nuts or recording this on a day when GameStop’s up a hundred percent. So you never know what, where it's going to come from. And I think part of being a good investor is diversifying globally on long only assets, but also across strategies too. I mean, value and trend to us both make a ton of sense. You just never know when it's going to come.

Cameron Howe

I get, you know, I witnessed this firsthand when we were running a trend following ETF and we had to convince allocators to bring AUM over into our fund and it became quite difficult to convince people of essentially to give you a little bit of background on the strategy. It was a, I'll call it a midterm frequency momentum portfolio for the most part looking primarily for like, you know, SMAs overlapping over one another, a little bit of stochastics, RSI not being too overbought, nothing too complicated. But we had a lot of issues convincing managers to end up allocating to it because of almost its simplicity. And then on the flip side, when we did get assets behind it, you know, the period of 2018 to 2021 saw a lot of rotation in our portfolio. A lot of rotation and momentum in general, where essentially the names one quarter ago were not the names that we were investing in today. And it provided, I'd say a lot of discomfort for people. I'm curious to pick your brain a little bit on how to balance the time frequency, the time horizon of a strategy where, you know, momentum can end up crashing significantly over short periods of time, but in a long enough time horizon, you do have consistent winners that you can pick up.

Meb Faber

Here's the struggle. So if you were to ask someone what is the most universally held belief in all of investing, I would say it's the concept of stocks for the long run. Stocks are really the marquee asset. Stocks outperform bonds. You really want to own stocks. They're the foundation for every portfolio. They're the biggest asset in every portfolio. I don't know a single person that doesn't think stocks outperform bonds over time. Right? Like I don't, I've never met someone who's like, no, I think actually stocks don't outperform bonds. But if you ask people say, how long do you think you need to measure that over what timeframe? Most people say, I don't know, three years, five. They say, how long do you think stocks have gone underperforming bonds before? No one, no one says 20, 30, 40 years. I mean, there was a point in 2020 during the pandemic in the US where the long bond had the same performance as stocks for 40 years. That wasn't that long ago. That was a couple of years ago. So you had 40 years of no outperformance. And yet everyone still says, no, no, but I still believe US stocks outperform bonds over long periods. But here was 40 years. There was a period in the 1800s where it was like 68 years or something. That's a lot. That's a couple investing lifetimes. That's not just one investing lifetime. That's a couple. So it always amuses me when you talk to people. I mean, it wasn't that long ago in financial markets. Let's go back to like, the first decade in the new century. US stocks have, by the way, beaten everything for the past 15 years since the GFC. I mean, they've just been 15% a year, just mowing down everything left and right. So we have a new piece coming out listeners called the bear market and diversification. So if this feels a little painful or gives you PTSD, I apologize, but you know, they've crushed everything over the past 15 years. But the prior decade, it was the exact opposite. You know, everything beat US stocks, REITs, emerging markets, bonds, small cap value, on and on and on. And so, you know, I think the trend that wasn't that long ago, right? That was the prior decade. And so I think the struggle for any strategy, any asset as well, once you put it in those terms and say, hey, look, you know, you don't know what's going to be passed in the next decade. So let's think about long only strategies that diversify, but also active strategies. And here's the problem with long-only is it does its worst when everything's hitting the fan. So think global financial crisis, think COVID you ideally don't want your investment capital to be highly correlated to your human capital, right? So when the market's down 50%, ideally you wouldn't want your portfolio to be, you know, sorry, when the portfolio is down 50%, ideally you wouldn't want the economy to be in the tank and unemployment skyrocketing and Lehman going under and all these other terrible things happening, right? Because you actually probably need money when you're getting fired from your job or your business is getting pounded in the recession. So, you know, trend following and other types of strategies do well on average when things are hitting the fan, which to me, you know, I want something to diversify my human capital, not in the opposite. And so, you know, the time horizons at which people want certainty is not the time horizons at which markets deliver certainty, certainly on, you know, most traditional ways that 99.9 % of investment professionals as well as individual investors invest.

Cameron Howe

Do you think like current state, let's say you get your way, every fund manager allocator out there listens to you and ends up putting 50% of their portfolio into a trend following sort of portfolio. What do you think that does to the market? Do you think it ends up follow in-line with like the, all of the commentary around index investing and the hurting that causes around overconcentration in mega cap stocks? Do you think that ends up happening with trend following portfolios as well?

Meb Faber

Let's kind of define what you're talking about specifically when we talk about trend following, which is something like either a long flat or long short approach to like 100 markets around the world. So you're trading the Japanese yen, you're trading S&P, you're trading cocoa, you're trading gasoline, et cetera, et cetera. I think that the reality and possibility of that happening is like 0 .00001%. The vast majority of investors we talk to use no trend following and the vast majority of those that do, it's like 5%. That having been said. If you want to get a little bit philosophical, the entire equity space indexed market cap weight, which is the true definition of indexing, which goes back to the 1970s, John Bogle and others. Market cap investing is absolutely by definition a trend following strategy where all your weighting, your algorithm, and most people know this, I think intuitively, but listeners maybe extrapolate this to your spouse or niece or nephew or clients, if you said, okay, you know, you invest in the market cap weight, S&P 500 or something similar, S&P is not a good example, but the traditional market cap weight index, what does that mean? You know, and most people think about what that means and they think it's big companies and earnings and revenues and the algorithm is only the price of the stock times shares outstanding. So the market cap, so as market cap goes up, as Nvidia stock price goes up and up, you own more and more Nvidia, ditto for Apple, Walmart, et cetera. As the price of a stock goes down, Enron, Pets.com, whatever it might be, you own less and less and less until it's essentially zero. That's absolutely a trend following algorithm. The position sizing is simply as a pyramid's up, as it gets bigger, and as it goes down, you own less and less and eventually zero. And so, you know, to me, it has been adopted already by almost every investor around the world. It's just marketed slightly different. Like there's a different narrative around people just calling, no, no, this is the buy and hold index. Well, it's, it's a trend following methodology. Absolutely. It just has a slightly different trend following algorithm, which, which is, you know, everything we do is driven by narrative and stories, and so I think if you think about it that way, it's sort of an unlock red pill moment where you say, okay, well, if I'm running a trading algorithm here on trend following, why wouldn't I do it elsewhere in a way that's thoughtful and diversified? But usually that type of concept and idea only really starts to come to fruition when you have a big crisis. And for US stocks in particular, the last 15 years, there hasn't been any big ones. There's been a couple of these 20% jiggles, but usually it's been a dip and rip sort of scenario, right back to all time, all time highs.

Cameron Howe

Yeah, I guess, you know, like I've always applied this only to stocks, so I'm limited in my thinking away from, I guess what you end up focusing in on, on commodities and the futures side of things. Do you find there to be more opportunities away from US equities into other asset classes to apply this?

Meb Faber

You know, I mean, I think the cocoa is a good example where if you had applied traditional trend following algorithms to cocoa for the past few decades, it hasn't worked well. And then all of a sudden it works amazing. You know, there's other markets. I mean, look at Japan as an equity market. You know, Japan has gone nowhere for 30 years when it peaked in the 1980s, and all of a sudden it's breaking out to all-time highs now and getting interesting again. You know, I think you can kind of describe this for many many different types of markets I mean how many of the the long bond, bond investments in the US have, are in big drawdowns still? China is in like a 60% drawdown. So you never know where the trends are gonna come from you never know necessarily when they're gonna come from. So trying to come up with as many different assets across the world that sort of zig and zag makes a lot of sense because you start to get the diversification benefits of cocoa versus the yen versus wheat. You know, a lot of these investments don't really correlate to each other and have different inputs. Whereas most people when they do portfolios, if you're only doing things like, hey, well, I'm diversifying because I'm doing large cap growth, large cap value, mid cap growth, mid cap value, small cap growth, small cap value. And it sounds like you got eight different investments and really you just have one, which is stocks. And usually for my world, it's US stocks, so not even global stocks, which is, you know, it's, it's a false sense of security for sure.

Cameron Howe

I know you raised this point on one of your other podcasts on how, you chat with any investor outside of the US and they are big proponents of trend following because they, a US investor has been quite numb to the need to diversify because of how US equities have led the charge over the past 15 years. Do you think there's a day of reckoning and investors do need to start taking more of a global or more of a diversified approach to…?

Meb Faber

Well, you know, it's funny because if you say, I hear every day we talk about international investing, someone in the US says international investing hasn't worked, and I say, hold on a second: of the 45 odd countries and foreign developed and emerging indices, international investing for the past 15 years has worked great in 44 of them, right? So if you lived in Greece or Russia or China or the UK or Canada or Brazil, et cetera, diversifying globally was absolutely the correct decision and it's done better. And 44 out of 45, I say that's a fantastic hit rate.

There's only one country that in this cycle diversifying globally didn't work and that was the US, you know, because, and it probably even did, you know, I'd have to run the numbers on the volatility and drawdowns. It probably, probably helped. But if you look at the full stretch of history, so we're talking about going back to 1900, my favorite investing book, Triumph of The Optimists, you know, they look at the return stream of stocks and bonds and bills and other assets and styles and how all the various countries performed. And by the way, the US wasn't the best performer, listeners. You have to go buy the book to find out which two countries outperform the US, but these things go through cycles, you know, again, from 2000, the 2000 decade, US is one of the worst. Again, it was good in the 90s, but then you have to go all the way back to the 1920s for the US to have beaten a global GDP or equal weight portfolio of other countries. And that's what 60, 80, 70 years. That's a long time.

And so I think we love to extrapolate the recent past into the indefinite future. And I say, look, everyone who's heard this so far is like, man, that must be bearish on US stocks. All he's done is talk about how much he hates US stocks. I'm like, hold on a second. First of all, we manage about two and a half billion in assets, 14 funds. Our largest fund is a long-only US stock fund. Now it's a value fund. We call it shareholder yield, but that represents half of our assets. And so nothing would benefit me more than US stocks continuing to go to the moon. Second of all, we often joke, I'm so bullish on US stocks, the default recommendation is to put 10 times as much in the US stock market as any other country in the world. Not double, not triple, 10 times as much. Well, it turns out that's the global market cap weight, so 60% in the US, 40% in foreign, you're going to have about 6% in Japan. So that's just the index weight.

But no one does that. And Canadians do the same problem just differently. And it's probably worse for you guys because you're a smaller percent of the world market cap. But this home country bias where everyone puts most of their money in their own country, I think is a really, really dumb idea. So diversifying globally makes a lot of sense, whether it's market cap weight, even GDP weight or value weight, something else. Either way, just putting all the eggs in one country's basket seems crazy to me.

Cameron Howe

It's funny. I, we definitely do have a home country bias here. And you know, the Canadian economy is a little, I am of the view it's fake. It's, it's not a real economy. It's natural resources and then the oligopolies. So I actually used to run an oligopoly index that was like the Canadian banks, grocers, railways. That actually outperforms the S&P. I think it was over the past 30 or 40 years, because essentially that's most of the economy. Every dollar from a consumer is usually being allocated to either one of those major banks, grocers or telecoms versus what everyone likes to talk about, which would be like natural resources, including gold and oil. So it was always a fun experiment to run on basically like, if you, there's a TSX and there's a TSX 60, which is like the top 60 names. If you do like the TSX 20 and you just pick out those oligopolistic names, it's essentially like a quality basket, but like a long-term outperformance versus both the TSX and funny enough, the S&P.

Meb Faber

I would always joke Canada’s barbell was cannabis and a junior miners, but, cannabis is a sell now…

Cameron Howe

Now it’s psychedelics.

Meb Faber

Yeah. Okay. I need to update it.

Cameron Howe

Maybe you can do a little experiment on the oligopolies as well. And when you allocate to Canada, you stay away from the junior miners.

Meb Faber

It's always good advice.

Cameron Howe

With that, I don't know if it was super evident, are you moving away from more US equities or are you saying just keep the global allocation on the -

Meb Faber

If you look at the opportunity set right now, there's two huge opportunities in equities. The first being within the US, these big companies, heavy market cap weighted, they call them the Mag-7.

The broad market cap weighted index like S&P is expensive. There's no question in our mind. It's not crazy bubble like it was in ‘99 or in 2021, but it's up there. And so we see opportunity moving away from the big market cap weight to things like value and quality. So again, we prefer a shareholder yield approach, which is companies that are cheap and high quality, but paying out a lot through cash dividends and net stock buybacks.

So we think you'll do just fine hanging out in those companies in the US. But foreign, developed and emerging, no question the broad indices are cheaper than the US. They've really gone nowhere since 2009 relative to the US's dominance. The same thing, underlying the surface of those broad market cap indexes, the shareholder yield companies there look great too. So you have these cheap companies that are high quality and paying out a lot in cash dividends and buybacks. All three areas, you can find single digit PE ratios, the sector and country differences, you know, the opportunity set presents itself at different times. So for example, on our funds, SYLD in the US has almost no tech exposure and EYLD in emerging markets, it's the number one sector. So, you know, you see, you know, different presentations of when things look good and bad. You know, we didn't own much China for a long time because China was expensive. And then China has gone down, you know, when something gets cut in half, usually it gets a lot cheaper. And so, you know, we've been allocating, upping the allocation in China over the past year quite a bit, but it's all systematic, quantitative, you know, it's not me waking up in the morning deciding that we need to make these moves. It's the algorithms putting us, putting us rebalancing into the various positions once a quarter, once a year, depending.

Cameron Howe

Like you said though, everyone likes a story and no matter how quantitative you are, you always end up getting brought into that a little bit. And I guess as a final thought, what role do you, you know, if we talk a little bit of macro here, do you think the US economic policy of starting to onshore some of these key industries like semis and whatnot will end up continuing that US uptrend at the detriment of emerging markets.

Meb Faber

You never know when the shifts are going to occur. JP Morgan has this great chart book guide to the markets and they go back 100 years and they show these little mountaintop outperformance periods of US versus foreign investing. And you know, the eighties was a giant one for foreign ex-US investing. But really this, this last period has been dominant for the US, but they've, they've crowned it, whereas ex -US is doing better.

But I joke and I laugh because it's so minuscule, the outperformance of foreign ex-US versus US that it's actually negative. So it's like, my joke is that it's outperforming so much it's negative six. You know, you never know, I mean, I think this is one of the biggest valuation gaps we've ever seen US versus foreign. The other big one was in the eighties, but it was in the opposite direction. So foreign developed, you know, largely dominated by Japan, which was the most expensive country in the world. And the US was cheap, but these things play out over pretty long periods. You know, I heard our friend Cliff Asness say something like 80% of the outperformance of US versus the rest of the world over the past 30 years is because of multiple expansion, meaning the US has just gone from cheap to expensive and the rest of the world hasn't. And in many cases gone down. And so, you know, those long tailwinds of valuation play out over very long periods. But, you know, when we do this show again in 2034, it'll be fun to look back. But, you know, certainly I would believe that most of these really cheap countries around the world would have put in some probably pretty impressive performance. You got to remember things like the US, there's only 25% of world GDP. And so that's pretty widespread towards the global market cap of 60%. So who knows on when that might occur? Has it already occurred? I think the turn in value happened in 2021, but as far as the turn in US versus the rest of the world, maybe it's happened, maybe it hasn't already. We'll only know with the fullness of time looking back on it.

Cameron Howe

Yeah. Yeah. Very interesting to revisit that in the future. I remember in 2021 doing some studies to kind of pinpoint, we think this is a rotation back into value now, but you never know until you look back.

Meb Faber

It's funny. You mentioned the semiconductor example because we said this on TV the other day. You know, everyone all day long is talking about Nvidia, Nvidia, Nvidia, but our emerging market fund actually its largest position is a semiconductor stock that's been a better performer over Nvidia over the past year, year and a half. And no one ever talks about it, right? Like it's, it's like, no one's ever heard of this stock. And so I think it would surprise people to say, hey, look, we're a value company, but we're investing in semiconductors. They say, what? That doesn't sound right. I said, well, they happen to be located in South Korea, but you know, they're a lot cheaper than they are in the US. And so the tech sector is unloved in some of these places, whereas here it's like an only child. It's just, it's got nothing but love.

Cameron Howe

What was the stock?

Meb Faber

It's called Hanmi (Financial Corp), depending on your pronunciation.

Cameron Howe

We'll leave a link in the show notes to that one if anyone wants to check out the chart.

Meb, unfortunately, we do have to park her there for now. I'd love to have you back on dive a little bit more deeper into the air.

Meb Faber

It's been a blast. Let's do it again sometime.

Cameron Howe

Well, so if anyone hasn't checked out the Meb Faber show, it's a must listen to. You're also quite active on X. Is there anywhere else that if people want to learn more, they can find more about you?

Meb Faber

You know, there's not too many Mebs in the world. So if you just type in my name, you'll end up on one of the various places with, you know, we got Cambria Funds and Cambria Investments is my day job. Mebfaber is an old blog. That thing goes back to the pre GFC. And I'm sure it will be on YouTube and TikTok and whatever comes next. The next hologram portal that will be invented in a few years.

Cameron Howe

Okay, wonderful. Yeah, we'll link those out in the show notes for anyone who wants to learn more. Meb, thanks again.

Meb Faber

Great to be here. Thanks.

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