Meb Faber, the contrarian money manager and witty popular blogger, has done it again: published a book of essays by some of the most successful investors and respected thought leaders in the financial arena. “The Best Investment Writing – Vol. 2” (Harriman House-August 13, 2018) is a strong, clear signal amid all the info-noise, Faber proclaims in an interview with ThinkAdvisor.
Co-founder and CEO of Cambria Investment Management, with AUM of more than $1 billion, Faber chose the pieces in the first quarter of 2018 after receiving hundreds of nominations of essays written in 2017. He chose 37 on a broad range of topics by authors including Rob Arnott, Barry Ritholtz and Larry Swedroe. Some viewpoints are 180 degrees from one another.
Faber himself doesn’t agree with every piece. In the interview, he comments on 11 of the articles.
“The Best Investment Writing”- Vol. 1” (2017) is composed of essays by Ben Carlson, Ken Fisher, Jason Zweig and 29 others.
Faber, a quant and former biotech analyst, uses a rules-based systematic approach to investing to provide low-cost alternatives to traditional buy-and-hold portfolios, which he labels “buy and hope.”
Cambria has 10 ETFs across tactical, core and value strategies. Its Digital Advisor accounts — partnered with Betterment — offer six Trinity Portfolios.
The astute Faber saw early signs of the financial crisis in January 2008, and his tactical computer models exited U.S. stocks; the following month he was out of foreign equities as well.
By 2016, he had come up with a radical strategy to reduce taxes and boost returns nearly 50% by removing the dividend in dividend investing and using a value approach instead.
ThinkAdvisor recently conducted a phone interview with the star of “The Meb Faber Show” podcast and co-author of “The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets” (March 2009), about risk management a.k.a. marketing timing. In releasing “The Best Investment Writing – Vol. 2,” the scholarly manager declares, from his El Segundo, California, office: “Hopefully, we’ll do more of these books every year, forever.”
Here are highlights of our conversation:
THINKADVISOR: When your partner Eric Richardson died suddenly in January, at age 50, your role expanded. Have you changed the company’s strategy?
MEB FABER: No. We set it up as a machine that kind of runs itself and could chug along without any one of us. Starting in September, we’ll turn our eyes back to the future, start launching new funds and keep coming up with more crazy ideas.
Your new book is packed with insightful essays. Let’s randomly discuss some. First: “How to Become a Professional Trader,” by Andreas Clenow, financier; CIO, ACIES Asset Management; author, “Following the Trend.” He and his colleagues wrote: “Clients will [often] invest with managers who have the highest return, but too-high return targets are a major warning signal for sophisticated investors.”
We’ve done a lot of writing on this and say, basically, that really high returns are impossible. If you return 20% a year, you quickly become one of the richest people in the world. So anything north of that is almost fantasy. A lot of marketing, of course, is about appealing to investors’ somewhat unrealistic expectations. People are attracted to shiny new objects, for sure.
“Buyback Derangement Syndrome” by Cliff Asness, managing principal, AQR Capital Management. He and colleagues wrote: Companies are using capital “raised externally versus cash on hand or liquidating potentially productive assets to fund buybacks…” [It’s a myth that] “the recent runup in prices is a result of share repurchases.”
There’s a lot of misunderstanding when it comes to buybacks. They’re simply another tool in the CEO’s toolbox, nothing more. Three of our funds are based on this theory; so we’re very positive about buybacks.
“Making Private Equity Great Again” by Dan Rasmussen, founder and portfolio manager, Verdad Capital: “Private equity has had a “lackluster track record” since 2010. But price discipline “will make private equity great again.” For example, invest in firms that “maintain strict price discipline.”
This is one of my favorite pieces in my book. There’s so much money flowing into private equity that it’s important to understand the return drivers. [Rasmussen] does a very good job of demonstrating that a lot of it is simply due to valuation.
“A Letter to Jamie Dimon” by Adam Ludwin, CEO, Chain cryptographic technology company: “Stop using the word currency” to describe crypto assets — they’re a new asset class. Most people buying crypto have checked their judgement at the door.”
We’ve been pretty consistent with our view on crypto, which is that it’s not an asset class that I’m particularly attracted to, though I’ve been somewhat of a sidelines cheerleader.
“The Bitcoin Boom: Asset, Currency, Commodity or Collectible?” by Aswath Damodaran, finance professor, NYU Stern School of Business: “Bitcoin is not an asset class. You don’t invest in Bitcoin; you trade it. Bitcoin is a young currency.”
Bitcoin has been interesting to watch. There was mania at the end of last year into January. Crypto is a cool concept but not a traditional investment that I’d be attracted to.
“Forecasting Factor and Smart Beta Returns” by Rob Arnott, founder-chair, Research Affiliates. He and colleagues wrote: “Smart beta [strategy] can go horribly wrong if investors anchor performance expectations on recent returns.”
His point is important: There are certain factors or investment approaches that are good sometimes and not as good other times. So, with a factor like low volatility, there are times when that factor is priced really cheaply; other times it’s really expensive. A good example is dividend stocks, which I think are very expensive right now. [Arnott’s] point has been debated, and I don’t know if there’s a clear answer on how to implement this.
“Why Selling a Big Position of Puts the Day Before the Crash of ’87 Was a Great Trade,” by Jim O’Shaugnessy, chair-CEO, O’Shaugnessy Asset Management. Right before Black Monday, he sold stocks emotionally and “barely broke even.” Had he held them, he would have made “a not-so-small fortune,” he wrote. It was a lesson learned about investing emotionally.
A lot of the best investors in history have had one of the best teachers: losses. So, as investors, one of the biggest [qualities] we should have is humility. It’s hard to invest. We’ve all made mistakes in our early days.
“The Evolution of the Four Pillars for Retirement Income Portfolios,” by Michael Kitces, partner, director of wealth management , Pinnacle Advisory Group; co-founder, XY Planning Network; blogger, Nerd’s Eye View (www.Kitces.com): Interest, dividends, capital gains and principal — retirees should have multiple ways to generate income, some taxable, some nontaxable, Kitces wrote.
Most people look at the sexy part of investing: returns. But they often neglect the basic taxes and fees, two of the biggest determinants of real wealth over longer periods. Being aware of that is one of the most important things in the entire investment landscape that a lot of people don’t focus on. Good financial advisors do.
“Skis and Bikes: The Untold Story of Diversification” by Adam Butler, co-founder-CIO, ReSolve Asset Management. He and colleagues wrote: “Most investors seek diversification in the wrong places; for example, holding many different stocks and mutual funds.” [But] “all stocks are influenced by the same force: economic growth expectations … Primary advantage of diversification is it allows an investor to hold many risky assets with much less risk than … holding a single asset on its own.”
We fully believe that diversification is important, but [you need] true diversification across many assets around the globe. Most investors aren’t really diversified. They have far too much in U.S. stocks, for example. We’re big fans of diversification but done properly with assets all over the world.
Why don’t most investors diversify globally?
Home-country bias. People in the U.S. allocate about 70% of their equity exposure to U.S. assets, but the U.S. as a percentage of the world is only about half. The same thing happens in every country. People like to invest in what they know. It gives them a false sense of security and comfort.
Here’s a piece you wrote: “The Best Way to Add Yield to Your Portfolio”: You say, “Implement a low-cost, tax-efficient, rules-based portfolio. Pay low or no commissions.”
This is a wonderful time to be an investor. You can basically get a global portfolio for nearly free [of management fees], like 5 basis points, and pay no commission.
“An Expert’s Guide to Calling a Market Top,” by Barry Ritholtz, co-founder and CIO, Ritholtz Wealth Management; Bloomberg Opinion columnist: He wrote, in part: “Don’t manage money [for clients]. Pick a bogeyman. Pick a favored asset class. Pay attention to non-financial events.”
In general, my take is that every investor should have a written investment plan. Many don’t. If you don’t have a written plan, it’s hard to stick [it out] when times are tough and emotional, and geopolitical news is bad. So, a written plan is really important.
“The Great Financial Forecasting Hoax” by Todd Tresidder, www.FinancialMentor.com; entrepreneur; former hedge fund investment manager. He wrote: “Predicting the future is unknowable. Financial advice is really financial fiction. Forecasters will eventually be 100% dead wrong.” Investing has zero to do with picking hot stocks or predicting the future. It’s about “following a disciplined, methodical investment strategy based on a known, positive mathematical expectancy,” he said.
I largely agree with him. We often make the argument that personal finance and savings are more important for many people than investing. We say that for many, it doesn’t really matter what your exact asset allocation is because frequently what’s more important is what they pay in fees and their [investing] behavior. People shouldn’t be spending time on their investments. They should automate, use low-cost investments and move on with their lives.
By “automate,” do you mean invest using robo-advisors?
Perhaps. But what that really means is that investing should be rules-based — that you have rules for buying and selling. In 2008-2009, investors [who didn’t have those] panicked. People sell at the bottom and chase returns at the top. It happens over and over again.
— Related on ThinkAdvisor:
- Meb Faber’s Cambria Rolls Out Robo-Advisor for Investors
- 15 Best Investing Quotes of All Time
- Here Are Some of the Most Epic Mistakes by Famous Investors: Michael Batnick