Here’s the gospel according to cerebral quant Mebane T. Faber: Risk management equals market timing. Buy-and-hold? To this 31-year-old contrarian, it’s nothing more than “buy and hope.”
Agree — or be prepared to lose big in a bear market, says the Chartered Alternative Investment Analyst and Chartered Market Technician.
Faber, managing director and portfolio manager of Cambria Investment Management, is serving up those and other provocative notions on his witty three-year-old World Beta blog (www.mebanefaber.com). The website has become early-morning must-see for financial advisors, fund managers and savvy active individual investors.
Mebane T. Faber, Managing Director-Portfolio Manager, Cambria Investment Management and Cambria Global Tactical Funds; El Segundo, Calif.; AUM: $55 million; Co-founder AlphaClone (www.alphaclone.com).
How he rates buy-and-hold: “We don’t have any problem with it — as long as you’re willing to experience 40 percent declines. Most people aren’t.”
Faber uses a strategy aimed at preventing asset classes from declining in Cambria clients’ separately managed accounts and Cambria Global Tactical Funds, two recently launched hedge funds.
The logical Faber calls his a simple route to investor protection. “As long as you stay out of the really big losses, the gains will take care of themselves. Diversification is no longer enough: You can’t expect it to make you immune from market declines,” says the manager, from his El Segundo, Calif., offices.
Nonetheless, investors, he stresses, must have a plan. “They just can’t wake up and say, ‘Man, I heard in the locker room that it’s time to buy!’ The nice thing about this approach is that it’s quantitative — it’s systematic and gives you a framework on how to make decisions.”
In 2007, Faber presented his tactical, trend-following process in a paper published in the Journal of Wealth Management. Now he’s expanded that in The Ivy Portfolio: How to Invest like the Top Endowments and Avoid Bear Markets (John Wiley & Sons-March 2009), co-authored by Eric W. Richardson, Cambria’s founder-president. The focus is on market timing. Faber uses the term interchangeably with “risk management.”
In the book, he shows readers a way of trying to emulate the outstanding, long-term investment success of Yale and Harvard universities’ endowment funds.
Originally, Faber titled his journal paper, “A Quantitative Approach to Market Timing.” But “nobody would read it because ‘market timing’ is a very emotional phrase. So I changed it to ‘A Quantitative Approach to Tactical Asset Allocation,’ and everybody loves it,” Faber says.
The whole idea is to use his trend-following strategy to “stay out of the market when it’s declining and therefore much more volatile.” Once a month, compare prices relative to the moving average. “If the price is above,” he says, “the market is up, and you’re in that asset class. If it’s below, you’re out: sell and go to cash.”