Mebane Faber is a busy guy. As well as being the co-founder and Chief Investment Officer of Cambria Investment Management, based in California, he has also found the time to write five books on investing, not to mention hosting his own podcast, The Meb Faber Show (listen here)
In this discussion with Chat With Traders host Aaron Fifield in episode 120 of the hit podcast, Faber discusses some simple ways that traders can capitalize on the opportunity and compounding effect that (somewhat passive) longer-term investing has to offer.
Read below to discover what his thoughts are on where trader should start out, how they should set expectations, when they should enter the market, what to do during drawdown and what things new investors struggle with most...
The good news is that its a wonderful time to be an investor and you’ve never had better access to low cost projects.Meb Faber
On his role at Cambria...
I think a lot of professional investors listening to this will resonate a bit, [that] you learn pretty quickly the difference between managing money and the business of money management. And what I mean by that is, simply coming up with systems, ideas and research is completely different from running an investment business.
So there is a lot of people who are attracted to our world by, of course, the money and compensation, but also the really exciting complex puzzles that exist on the world economy and investing. But also on the flip side, spending all day chatting with lawyers, with the SCC, and managing public funds and talking to the reporters and all that good stuff goes into running a company and making sure people get paid on time.
What I enjoy doing is certainly the research, and something that’s a bit of a surprise if you’d asked me ten years ago when we started the firm, is writing. The first academic paper I ever wrote was an accident and was published, and then looking back at it, it’s kind of crazy as we’ve published a dozen white papers, five books, and I think the blog has gone on 2,000 articles. But the day-to-day is coming up with ideas or concepts to refine our process or to help implement or improve what we are doing.
On his investment style...
When we think of launching funds or any sort of money management that we offer to the public, there is a couple of criteria. Number one, does this concept of fund exist already? Because there’s plenty of fund companies like Vanguard, with multi-trillion in assets who provide a lot of products and they do it very very well. Two, is this something that we think we can improve upon, or doesn’t exist, or we can do cheaper? And we think there are still a lot of ideas out there that don’t exist in the format that we think that they should. And lastly for me, is it something I want to put my own money into?
So unlike the vast majority of mutual fund managers I think the number is something like ranges from 50-80% of mutual fund managers in the US have zero dollars invested in their own funds, and on the higher percentage its less than 100,000. So I have 100% of my net worth in our funds and strategies and most of the people here do. So is it something you believe in and want to invest in?
Once you’ve said that, the funds are very different, each strategy ranges from funds that are very niche. That may be a sovereign high yields bond fund to something very broad like an asset allocation fund that owns 30,000 securities around the world and is a super low fee. Now that being said thee, everything we do is rules based and quantitative, which we think is important, to remove the emotions out of the whole process.
On investing in your own funds…
Here’s the funny thing about it – I know Nassim Taleb has a new book coming out on this topic which I look forward to - it’s either really strange and surprising, or its incredibly unsurprising. The average fund manager charges 1.25%, the average ETF is like 0.55%, and many funds you can now get ETFs and mutual funds publicly for even like 10, 20 basis points.
So in many cases a lot of these mutual fund managers say, ‘look, I know this fund is tax inefficient, I know it’s expensive, why would I invest my own money in that?’ And that’s a totally rational decision. Now from the in-fund investor, that’s the last thing I want to see. I want to see that fund manager investing in their own fund.
This is one of the things that in the hedge fund space it at least has that going for it, traditionally fees tend to be higher but at least the managers have a lot more skin in the game, for better, for worse.
On how short-term traders can tap into the bigger picture...
It doesn’t matter if it’s investing, or relationships or work, one of the most important things people can do in life is understand expectations. I saw a recent survey ask a bunch of investors around the world, “what do you expect stocks return to be?”. The average answer was stocks will return 10.5% going forward. So the first thing we need to do is set our base case and understand what history look like, what are the best and worst case scenarios.
My favourite investing book is called Triumph of the Optimist. It takes a look at the history of markets since the 1900’s. The real returns, so net of inflation, is that stocks did 6.5%, Bonds did around 2%, and Bills did around 1%. That’s the base case scenario. US stocks, they’ve also declined by 50% multiple times, but they also declined over 80% in the Great Depression. And Charlie Munger and Warren Buffett often say if you’re not willing to invest in stocks and experience a 50% decline, then you shouldn’t be in stocks in the first place.
Most investors, if you tell them, here’s your basic moderate 60/40 portfolio but you’re going to lose 60% at some point, that’s way too much risk for them. And it’s really hard, and that’s why you see so much bad behaviour by investors when markets do poorly. There’s a lot of research that comes out that shows this, people over and over again based on their emotions will sell at market bottoms and buy at market tops, rinse, and repeat.
And part of that is because we’re human, we’re not built to trade shares of IBM and future, but really the flight response and the greed take over and it’s part of knowing the history at least of what’s capable of happening in the past can at least help you take a step back and say “OK let me implement some sort of rules based policy or process to avoid me acting like an idiot going forward.”
On passive long-term investing...
It’s probably the best time to be an investor in the history of investing as far as access to low cost portfolios. What I mean by that is any investor can go out and buy a handful of Vanguard funds, ETFs, there are even brokers that don’t charge commission at this point, there’s the advent of all these digital advisors that do it for you.
So it’s very simple and you could go sign up to any of these digital advisors, or go buy an ‘all in one fund’, meaning you get all of these things at a super low cost, at a very tax efficient vehicle. And that’s awesome. Go back 20/30years and these brokerages would charge 3%.
We try to be honest and agnostic and say obviously we (Cambria) think we have some great solutions, but there’ plenty of great shops, Schwab, Vanguard, Blackrock, that you can invest in a couple of these funds and not look at them again for 10-30 years and be just fine.
The beauty of the digital advisors, is you take a questionnaire, they give you a portfolio of say a dozen funds, they rebalance them for you, they tax manage them for you, you do literally nothing. So to the person who wants a good solution and needs to spend 10 minutes a year, if at all, it’s never been a better time.
On have an investment plan...
If you don’t have a written investment approach, then you’re simple flying blind. It could also be as simple as, I’m going to buy this diversified portfolio ETF and rebalance it every 5 years. And that’s it, that’s a policy statement. But in your head you have to have the ability to say, is this going to stay consistent if Gold goes to 5,000 or if Gold goes to 200.
If you’re a buy and hold investor, and that’s your portfolio, you do nothing and you accept that drawdowns are a natural part of life. Because here’s the problem with drawdowns, markets spend the majority of time in drawdowns, they only spend about 20% of the time at new highs. It’s either all time high or drawdown, there’s nothing in the middle. The problem with drawdowns is it gets exponentially worse the more they go down.
People often talk about compounding as the eighth wonder of the world, well unfortunately the opposite is true for the downside. You lose 10%, you only need 12% to get back to even, lose 20%, it takes 25% to get back to even. You lose 50%, it requires 100% to get back to even and if you lose 75% it requires 300%. It’s much harder to come out of these drawdowns and the problem is, you never know how bad it’s going to be. So theoretically, if you knew that stocks are only going down 50% from the global financial crisis, you should load the boat with stock, but the challenge is that 50 could become 80.
On when to get in...
We deal with this question a lot with individual investors: ”When do I get in? Shall I jump all in or spread out? Should I wait?” And my first response is, a global portfolio, you’re not just investing in one asset class. You’re investing in US stocks, foreign stocks, bonds, real estate, commodities and everything in between. So there’s a huge portfolio of different assets.
However even if you are investing in one asset class, such as US stocks, the correct mathematical choice is to invest all of it now. That may not be the correct emotional choice, a lot of people have a big problem with regret and hindsight bias, even if its irrational. We’re totally fine with people spreading out, dollar-cost averaging into their investments into as long a timeframe as they feel comfortable. They can invest every month for the next 5 – 10 years if they want to. And that traditional dollar cost averaging is a great way to go about it…