Welcome, everyone.
A "Forbes" article about Meb Faber's book
begins with the question, how does an investment manager
reconcile all of the various prognostications
he hears on a daily basis?
His curt and brief response was, ignore them.
Over 70 years ago, Ben Graham and David Dodd
proposed valuing stocks with earnings
smoothed across multiple years.
Robert Shiller later popularized this method
with his version of the cyclically adjusted price
to earnings, or the cape ratio, in the late 1990s
and correctly issued a timely warning of poor stock returns
to follow in the coming years.
Our speaker today Mr. Faber applies this valuation metric
across his global investments.
He's a co-founder and CIO of Cambria Investment Management
and has authored numerous white papers and three books--
"Shareholder Yield," "The Ivy Portfolio," and "Global Value."
A frequent speaker and writer on investment strategies
who has been featured in the "Barons,"
"The New York Times," and "The New Yorker,"
he is here today to speak about his investing philosophy.
So without further ado, friends, let's welcome Mebane Faber.
MEBANE FABER: It's great to be here today.
This is a nice, intimate audience.
So I usually fly through this pretty quick.
So if I'm going too fast, I say something
you don't understand, just raise your hand and wave at me.
This is interesting.
Because this is probably the first time in my entire life
I've been the most dressed up person in the room.
You know, suits for me, it's normally weddings, funerals.
I live down in So Cal.
So casual is kind of our normal entire anyway.
So it's a bit humorous.
Anyway, all right.
So we're going to get started real fast.
Since I don't see too many familiar
faces, quick introduction.
Again, my name is Mebane Faber, although I go by Meb.
Mebs lately have had a lot of great press.
This is the Meb who just won the Boston Marathon.
And as one of my friends' moms on social media
said when I posted a link to this,
said I didn't even know you ran, I said, well,
I know if you've seen any photos,
but he's in much better shape, much skinnier than I am.
I grew up in Colorado before spending some time
in North Carolina.
I went to college at University of Virginia.
So if anybody is watching the College World Series tonight,
go Hoos.
We're playing Vanderbilt.
So pretty excited about that.
May have to make a last minute trip to Omaha
here if we win one of the first two games.
Actually studied engineering in biology so.
I feel like I'm in good company today.
Probably a lot of engineers here.
My first job out of college was in Washington, DC.
Worked as a biotech analyst for biotech stocks
and was going to grad school at the time
before moving to San Fransisco.
So I lived in the Bay Area for about a year and a half
and then a brief-- and actually lived
with an early Google employee.
So I was gravitating more towards the quant side
of the business of the time.
So moved away from the bench, from the science--
I was always really terrible at it anyway--
but more towards quantitative investing.
A brief stop in Lake Tahoe, where I can get away
in most of the country saying that I actually
had gainful employment there.
But most to you can see through that and say,
you're probably a ski bum.
As you know, there's probably not a lot
of high investment companies going on in Tahoe.
But an interesting side story was that when I did live there,
I managed to sneak my way into a really, really great Google
party.
And if any of you all have been around long enough--
this is probably 2004-- anybody here
that used to go to the parties they had at Squaw-- wow, OK.
We got a couple.
So, I mean, we're talking six stages--
this is probably pre-IPO days.
You could still get away with this.
Six stages and ice sculptures and fire.
And they flew almost everybody in from around the world.
And of course, I wasn't working at Google
but had a number of friends did.
So I managed to sneak my way in.
And I remembered as I was walking today.
I'd completely forgotten about this.
But they gave every Google employee two drink tickets
and then I think you had to buy the rest or something.
But the good news is, most of my friends
worked in travel employment up there.
So I had it from friends working the hotel front desk
setting up the tents with the guys.
One of the guy says, here, you want some drink tickets?
You know, because we're all obviously
sneaking into the parties.
And he said, sure.
You know, you only get one or two.
He goes, here's 50.
Needless to say, I managed to get kicked out
of the party later that night, or the after party,
but really had a great time there.
It was really a lot of fun.
Moved down to LA.
I guess this should be a Kings photo now.
But I've been in Manhattan Beach for the past seven years.
When I started my company Cambria Investment Adviser,
spent a lot of time learning how to surf.
But I'm pretty terrible.
Look like this and this.
And if you've see the videos on YouTube lately,
one of the benefits of having technology,
of course, the go pros of the world,
is you get amazing footage, right?
But also, you learn some things you really probably
didn't want to know.
So being a surfer in Manhattan beach
and all of a sudden realizing that, yes,
underwater there's a lot of great white sharks.
So you've been seeing a lot of these videos coming out lately
where stand up paddleboarders are just
watching these great whites swim through the line up.
I would rather just not know, of course,
that our friends are there.
But they're harmless, right?
A bit about my company-- we started in 2006.
We manage about 430 million, maybe 440 million now.
We do individual accounts.
We manage public funds.
The goal-- and I feel like this try to include a Silicon Valley
term-- disrupt traditional high fee investing.
I have 100% of my net worth invested in our public fund.
So this isn't a theoretical exercise
we're going to talk about today.
But this is what I do with all my own money.
Now, before we start, this is a fun little quiz
we're going to pass around.
It's anonymous.
So don't worry.
Nobody's going to see what you wrote down.
But asked a simple question is for those of you
invest in stocks-- so ignore bonds.
Ignore real estate.
Ignore commodities or whatever else you
may trade-- currencies.
And you have to be US resident.
Otherwise, you'll bias the data.
How much do you put in the US?
So let's say you have 80% in the US, 20% in Japan.
Write down 80%.
So there's a little piece of paper
that's going to go around.
Just write down a number.
And then when it gets to the end, raise your hand.
And we'll get back to this a little bit later.
You can find a lot of information that we write about
and publish.
Again, I have a blog-- Mebfabor.com.
My company's website-- Cambria Funds.
There's a third site called The Idea Farm, but all of which
we publish.
Most of it is free.
There's 1,500 articles I've written
on the blog, about a dozen white papers, three books.
And as a benefit of sitting here during a lunch break
or taking the time out today or if you're watching the webcast,
I'm more than happy to send you a free book.
You can only pick one, though.
But the topic of this one today is a book
we put out a couple months ago called "Global Value."
But we've also published two others.
But I'll have more than happy to send you one.
Shoot me an email.
My personal email address-- mebane@gmail.
I tried to get meb@gmail in the early days,
but they said, no three letter Gmail addresses when it first
came out, sadly.
But anyway, shoot me one.
"Ivy Portfolio" is best in harder paperback.
It came out at a time when the Kindle software
wasn't that great yet.
So I would recommend reading that one in a hard cover
or paper back.
The other two, I would be happy to send you a free copy.
All right, so we're going to get started on the talk now.
And it's interesting.
Because a lot of people, when you talk about investing,
it's an interesting science.
And it's interesting because so many people
have such widely held beliefs, right?
And so, talking about it, in many ways,
to certain people, especially that aren't as open minded,
it's like talking about politics.
It's like talking about religion, right?
Trying to convince a buy and hold indexer
that you should be tactical is just
as difficult as trying to convince a Republican to be
a Democrat or someone to switch religions.
It's really difficult.
But we're going to talk about some interesting stuff
today that probably goes against a lot of conventional wisdom.
So keep an open mind.
You may agree with some of it, may not.
But it should be interesting.
I was going to name this chart or this topic
You Suck at Investing.
And when I say this, I don't mean any of you specifically.
I'm not pointing out any one of you, although most of you do.
But you're terrible at investing.
This is the broad investing public.
This is an example of a study that comes out
by Dow Bar that shows investor returns, dollar
weighted returns.
As you can see, typically, everything
did good except for the average investor.
Morningstar replicates this study for funds, right?
So the average investment fund-- when the money comes in,
when the money comes out.
And typically, what happens-- people are emotional.
They have a behavioral bias or they
rush into stocks or performance of a fund at the top
and then sell at the bottom.
And they do it over and over and over again.
That costs you roughly about 2% a year typically, right?
So all you that are getting really excited about stocks
again after the fifth year of this bull market
but weren't investing in 2008 or 2009,
you maybe want to take a little bit of pause, think about it.
But it's important to come up with a systematic investment
approach to avoid some of these genetic behavioral biases
we have.
A good visual representation of this
is, there's an American Association
of Individual Investors-- polls their readers and says,
simple question.
Are you bullish on the stock market, bearish, or neutral?
This goes back to late '80s.
So the red is kind of average values.
The green triangle is where we are now.
So kind of average.
What you can see, though, is a little bit of complacency.
The neutral is a little higher than normal, right?
And that kind of reflects what's going on the market.
There's low volatility.
A lot of people haven't really participated.
They got out in '08, '09, and have never really gotten back
in.
Don't really know what to do.
But we do see, when were people most bullish?
The absolute worst time in history
to be bullish-- January of 2000, for those
of you that were investing them.
When were people most bearish?
The absolute best time to be investing in my career,
March, 2009.
This goes to show, the whole point
is that your emotions could work against you, right?
And it's what has come down on our genetics
for many millions of years, right?
What was important when you're on the savanna
and a tiger is chasing is very different than what the skill
set and genetics needed to trade shares
of IBM or Google or short gold or whatever it may be, right?
But this isn't anything.
This is something that's been going on for hundreds of years.
This is an example that goes back to the early 18th century.
This is in a paper we wrote called Learning
to Love Investment Bubbles.
But this is an example of one of the most famous bubbles.
And there's some great books on this topic.
"Extraordinary Popular Delusions and the Madness of Crowds"
is a really wonderful one-- talks
about many historical bubbles.
What this shows is an example of a stock that went parabolic
in the early 18th century.
It was a [INAUDIBLE] stock.
We talk about it in this paper.
It's a really interesting story.
It involves a lot of the things that typically happen
in bubbles-- easy access to money, credit, people
borrowing.
But the most important one is people making a lot of money.
And a very great example is one of the most rational, brilliant
scientists of all times, Sir Isaac Newton,
was an investor in this company.
It goes to show his experience that will probably
mimic a lot of investors experiences
in stock that went parabolic and went in bubbles.
So an example-- I joke a lot on my blog and Twitter
that this probably looks like a chart of Bitcoin, to which I
get a lot of hate mail about, strangely.
I've been writing for seven years.
And all of a sudden, I start getting hate mail.
Anyway, so this example.
So Neuton buys in, doubles his money.
What is that?
Yeah, doubles his money.
Could not be happier.
What's the worst possible thing when
you've made money and gotten out?
Well, it's that your friends are making more money, right?
Someone just sold an app company.
Uber's valued at $18 billion.
Someone else did this Yo app that's getting
millions of downloads, right?
What's the worst possible thing that could happen?
It's your friend in the next cubicle
is making more money than you.
Or your friends are all getting rich but you're not.
So what happens, of course?
Well, then he decides to buy back in, OK?
Well, of course, he's buying near the top, at the peak.
What happens?
It crashes 90%.
Well, then he sells at the bottom, OK?
Well, this is something that happens over and over again
in investing.
And so I just want to show it's nothing new.
And think about this as we go forward.
So what can you do?
Is there anything you can do to remove this emotional decision
making to combat our behavioral biases?
Well, so there are these two good looking guys
you may recognize, may not.
On the left is Ben Graham, often known
as the father of security analysis.
He wrote a couple great books.
He's a professor early 20th century
called "Security Analysis-- An Intelligent Investor."
And what he proposed is, when looking at an investment
to value the company and often to smooth out the valuation
by using earnings over a number of years.
Not just looking at one year of earnings,
but his preferred metric was smoothing it out over five
to seven years.
There's a way to smooth out the business cycle, right?
As a way to have a fundamental anchor
to be able to compare companies to each other on a long term
basis.
Fast forward 80 years later-- so this is nothing new.
This has been around almost a century.
Robert Shiller, recent Nobel laureate,
just won with Eugene Fama, professor at Yale.
He put out a white paper in the late '90s
called "Irrational Exuberance."
Sorry, excuse me, a white paper, then a book
called "Irrational Exuberance."
Alan Greenspan later used the term in Congress,
promptly sent the stock market down quite a bit.
But he says, let's take a look at this.
But let's use it on the market-wide basis as a whole.
Let's look at 10 year average earnings across the entire US
stock market called the 10 year Cyclically Adjusted Price
Earnings ratio-- CAPE, right?
So this is an example of what that looks like back to 1881.
So that's a long time.
And the problem you have with efficient market people--
people that say, the market's efficient.
You can't predict bubbles-- or sorry, bubble don't exist.
First of all, they say, bubbles don't exist.
They do exist.
You can't predict them.
And that doesn't make much sense to me.
If you look at this chart, there's
an average value of around 16, 17 times earnings,
right, that the US stock market has been in.
There's times when it's been incredibly low,
in the low single digits-- think 1910s as well
as post depression.
But there's also times when things get incredibly bubbly.
If you look at the late '20s, you get to a value of over 30.
If you look at the biggest bubble in the US stock
market's ever seen in the late '90s, you have a value of 45.
Does it seem even remotely reasonable
that it is a good a time to buy stocks when they're trading
at 45 times earnings in 1999 as it
was in the early 1980s at a value of five?
That does not pass a common sense sniff test for me.
So if you look at this, you say that OK, does it work?
Historically, being a scientist, an engineer, does this work?
Historically, it's worked great.
If you buy stock market when it's cheap at, say,
less than a CAPE ratio of 10, you get great future returns.
These are 10 returns going forward-- real returns.
So we're netting out inflation.
And it's a nice stair step down.
The more you pay for stocks, the lower your future returns are.
It is-- again, it's not rocket science.
It's simple.
But this works out over a long term time horizon.
If you look at where we are now, we're at a value of around 26.
So unfortunately, in the worst bucket
where the red line is right now where future returns should
be pretty muted, pretty low.
We don't think it's a bubble.
It's not crazy.
But I was talking about this at lunch today.
There's a spectrum of future returns, right?
And simply, the more the market goes up
in the meantime means the lower your future returns are
going to be.
The more the market goes down in the meantime,
the higher your future returns are going to be in general.
The best possible thing that could
happen, if you're a young person in this room, is the market
could crash by 50%.
Maybe the best possible thing, but the best possible thing
for your investing career.
Because you can then invest in the US for the next 10, 20,
30, 40 years at a much cheaper valuation.
That is not the opportunity set right now, unfortunately.
We're going to stop on this one real quick.
It's just a scatter plot for the nerds out there like me
that goes to show that valuation-- it looks almost
like a shotgun blast, right?
Doesn't explain everything.
We're in kind of the yellow area.
But in general, the more expensive you pay for stocks,
the worse the future returns are.
The less you pay for them, the better the future returns are.
I don't expect you to see this chart.
I don't expect you to really even appreciate what it is.
From just the colors, it looks like a bowl
of, like, Fruity Pebbles, right?
But what this is-- this is CAPE ratio buckets.
So the dark green, or the cheapest buckets, all the way
out to red, which are the most expensive.
And these five columns are future annualized
10-year returns.
And the only take away from what you
should see in this chart is that most of the green stuff
is on the right, meaning your starting points
when they're cheap-- great future returns.
And most of the red stuff is on the left.
When you pay too much, in general,
you get crappy returns going forward.
However, it's not guaranteed, right?
You see there's three great returning years
on the far right when you started out
with pretty rich valuations.
And on the left, there's even a few green, light greens,
when markets are cheap that you had kind of low returns.
So valuation is not-- it is what we like to call a blunt tool.
It is not an exact science, which makes it challenging
as well as fun.
But if you look at the 10 best times
to buy stocks in the past-- I think
this is 114 years-- awesome returns.
16% a year, net of inflation.
You can really compound massively at that level.
The starting valuation was around 11.
The 10 worst possible times to be
buying stocks over the past 114 years--
negative returns every year.
Starting valuation was an average of 23, all right?
So where do we find ourselves today?
A secular bull market starting point around 11 or a secular
bear market starting point around 23.
The bad news is we're on the more expensive side.
There's a caveat, of course.
This is the PE ratios versus inflation.
When inflation is low and contained--
let's call this 1% to 4% safe range which
goes to about here to here-- people
are willing to pay more for stocks, right?
Because the future is slightly more certain.
When inflation is really high-- think about Argentina,
think about these countries that have
consistent high inflation-- Venezuela--
when you're a business and you're
trying to plan for the future, it's really difficult.
On top of that, your future cash flows are worth less.
Because every month you're losing money
to this erosion of inflation.
So you'll see a warning sign.
This may never happen in the next 10, 20 years.
Who knows?
Maybe it will.
In the '70s, the US had double digit inflation.
It's hard for many of us to comprehend now.
But thinking about inflation going up
that much-- we live in a world of,
let's called it 1 and 1/2, 2% inflation
hopefully right now, not even that much.
But the takeaway is, that until inflation
gets above really that 3%, 4% kind of upper level,
people are willing to pay more for stocks for that certainty.
Again, they're not willing to pay
26, which is off this chart.
But they're willing to pay a little bit more.
There's a lot of criticisms of this valuation methodology.
What I want to impress on you, when you're valuing something,
most of the valuation indicators should agree.
So it doesn't even really matter if you're using CAPE
or you're using price to book or you're
using cash flows or Buffett's favorite market cap, the GDP,
in general they should say the same thing.
But, so a lot of people say the measurement period is too long.
In our book "Global Value," we show
that the best period is around five to seven years.
So Ben Graham was right.
Seven years, I think, was the best.
10 is just fine.
What's the worst?
One year earnings.
What do most analysts on Wall Street use?
One year earnings.
So we don't know why.
A lot of people say that ignores depressions or bubbles.
We're not going to get into that because we
don't have enough time today.
And we certainly aren't going to get into the accounting,
talking about reported and operating earnings.
But if you want to email me or you have questions,
I'm more than happy to talk about it.
This is a good chart from my good friend John Housman
that goes to show it doesn't even
matter what valuation metric you use.
These are a bunch of different models using
earnings, dividends, Schiller CAPE.
This is Buffett's favorite-- 10 year market cap GDP.
And then, how does it actually work
in the future 10-year returns?
And what you can see in general is
they all tend to move together, right?
Generally.
They're not going to be incredibly specific.
But what this shows is that this is projected future returns,
right?
So it's like the valuation chart flipped upside down.
But what it goes to show-- and it's
pretty good at this-- it says, look.
When were returns projected to be the worst?
Late '90s, right?
That's a terrible time to be buying stocks.
But as the market has gone down, stocks have gotten better.
And in 2008, stocks were supposed
to return double digits.
But no one wanted to be buying, even though they were cheap.
But certainly not a good buying opportunity
is the early '80s, which is the start of the biggest bull
market we've ever seen in the US, but getting better.
So again, people like to think in terms of,
stocks are expensive.
They're going to crash.
Sell.
When stocks are cheap, we've got to buy them.
They're going to go up to double digits.
But in reality, it's usually somewhere in the middle.
People don't like hearing something like,
the future expected returns are going to be about 4%,
which is what we think, which is what the model shows,
which isn't that exciting.
So as you think about this, and thinking about bubbles
and thinking about the efficient market
and not overpaying for something,
we think it's important to understand risk, right?
And the risk of loss and the very real risk
of losing a lot of money.
A Great Arthur Ashe quote-- either you understand the risk
or you don't play the game.
And we have a picture of the mouse who's
trying to get the cheese but being smart
about it-- wear a helmet.
And someone on Twitter the other day said, you know,
Meb, your CAPE measure, the Schiller CAPE measure
is kind of like the difference of chance of fatality
if you're driving a car at 200 miles an hour
versus five miles an hour, right?
You're much more likely to get into a big wreck fatality
at 200 miles an hour then you are at five.
So that leaves us with the problem.
Every pension fund in the country
expect 8% returns per year.
We wrote a paper called, "What if 8% is 0%?"
Pension funds investing with eyes closed, fingers crossed.
What do you do?
US bonds yield 2 and 1/2%.
Stocks should return around 5%.
That's not that exciting, right?
Your 4% yield or 4% roughly return.
The math doesn't work out.
It doesn't work out for a lot of institutions
that are going have really big troubles with their pension
funds that will likely eventually go broke
in the next 10 to 20, 30 years.
So what do you do?
If you're looking at return, what do you do?
This is a chart.
We've never seen anyone do this.
So we had to go create this.
We said, all right.
We live in a global world.
Let's look at 45 developed and emerging economies, countries,
and come up a CAPE ratio for all of these, right?
And so we took this back to the early '80s.
And in general, the takeaway of this chart
is that most things move together, right?
And generally, stocks are correlated, right?
It's a globalized world, right?
What happens in the US is going to affect
what happens in China and India and Japan and vice versa.
So in general, they move together.
However, you can see some pretty wide dispersion
at certain times and over the years.
And then you also see a few things.
This massive, massive outlier over here, this bubble.
There's a lot of young faces in the crowds,
so you probably don't remember this.
But Japan in the late '80s was widely
expected to take over the world, right?
Their companies were better.
Their cars were better.
There were more efficient companies.
The valuation of their stock market
is the biggest bubble we've ever seen.
And it's not even close.
They hit a valuation ratio CAPE of like 95 or maybe it's 99.
I can't see.
95, it looks like.
And so it's funny.
Because you hear commentators talk about the lost
decades in Japan and how terrible the stock market
returns have been in the '90s and 2000s, right?
No, it's because they had one of the biggest
bubbles you've ever seen.
And it's taken them that long to work that off, right?
When did Japan finally get back to a reasonable valuation?
Only in the last few years.
What happened?
Japan is the best performing stock market
in the world last year.
But the efficient market person will
say that it was just a good a time to buy Japan in late 1989
when the real estate under the Imperial palace
was worth more than the entire state
of the real estate of California.
Things that just don't make sense.
But to us, coming up with this objective measure
of a fundamental metric, fundamental anchor,
can that help you?
So we said, we reran the same test.
Does starting valuation impact future returns?
And the answer is, it does in the same exact way
that the US did, right?
The less you pay for something, the better it is.
I don't care if it's baseball cards, a Tesla, whatever
you think.
The less you pay for it, the better it's going to be.
The more you pay for it, the worse your returns
are going to be.
Where are we right now?
With foreign developed markets and foreign emerging,
they're both right around 15.
So the two red bars here emerging
was a little bit cheaper.
So this bar developed is a little higher than 15.
But much better returns than in the far right bucket,
which is the US.
So, much more opportunity.
What happens if you went back and said, you know what?
We're going to only investing in the cheapest countries.
Instead of this global portfolio, what if we just
invested in the cheapest 25% of countries each year?
Takes five minutes a year, rebalance.
Well, that would have done fantastic.
So this is what the global portfolio
would have looked like.
The top CAPE, which is the cheapest countries,
did a much better job than the bottom CAPE,
the expensive countries, OK?
Again, not complicated.
But buying value works.
It has worked over time.
Enormous amount of literature that
shows this investing in stocks worked great.
This is what the equity curve looks like, right?
This is a logarithmic chart to equalize returns over time.
But again, yellow line, that's investing in what's expensive.
Not a bright idea.
Black line, buy and hold of all the countries.
The blue and red lines are two different variations
of buying the cheapest.
One is you said, you know what?
It probably makes sense to invest in the cheapest.
But only invest in the cheapest when they are the cheapest.
What if everything is expensive?
So like, in the late '90s, for example, right?
You don't want to be investing in stocks
when everything is expensive.
So we use the absolute metric caps of around,
I think it was 18 in the book-- maybe it was 20-- to say,
you know what?
If things get that much, we'll start to move the cash, right?
And so you'll come with a little bit less volatile portfolio.
Same returns over time, but avoid
some of the big draw downs and losses of buy and hold.
But what's really interesting-- and this
happens a lot in various fields-- is I have a buddy,
John Bollinger says, you know, all
the information is in the tails, right?
So the ends of the distribution.
That's when things get really interesting.
And so, what we call is-- there's a famous investing
phrase that says, investing when there's blood on the streets.
Hopefully not literally, but when
things are really, really bad.
So we call this at a CAPE ratio below seven,
which doesn't happen that much.
It's only happened in the US a couple times.
Future returns are fantastic.
One, three, five years, you're compounding your money
at 20% percent a year.
What's the opposite?
Bubble, right?
Where the markets are really expensive-- over 45.
So that's the peak of the US, right?
But anyone remembers back to 2006, 2007,
if you were investing then, the BRICs, right?
This expression-- Brazil, Russia, India, and China.
That's where you want to invest.
That's where the world's going.
What they didn't mention was that China and India
were both trading at CAPEs above 40.
I think China hit 65, right?
And so China has had horrific stock market
returns since then.
Is anyone talking about China that much anymore?
No.
But China is at a great valuation now.
But this is what happens over and over.
People are much more interested in investing here-- they're
excited because returns have been great-- then there.
It's really hard to invest in the low markets.
Part of that is simply behavioral, right?
All the news is bad, right?
The news is usually terrible.
So let's give you some common examples.
Where are we now?
I just updated this at the end of last month.
You look at the left.
The cheapest markets in the world-- Greece
had the lowest valuation we've ever seen at a value of 2
in the summer of 2012.
Greece is now up 200%.
Their stock market off the bottom.
Russia hit a value around five, maybe got down to four
a couple months ago.
Ireland, Hungary, Austria, Italy, most of Europe, right?
But where the returns are best is
when things go from truly horrific to merely less bad.
Russia is a perfect example.
We've been on TV the last few months
pounding the table for Russia, saying
Russia is cheap on every valuation metric we can find,
to which all the TV anchors say, well, what about Crimea?
What about Putin?
What about all these things that are happening?
But that's when you want to be investing.
Sir [INAUDIBLE] famous quote.
He says, don't ask me where things are best.
That's the wrong question.
Ask me where things are the worst.
The challenge with why this strategy works and will
continue to work-- imagine going home
to your wife, your husband, sister, brother, neighbor,
and say, you know what?
I heard this great presentation today.
I'm putting my money into Greece and in Russia.
Now, the next four-- the next-- you'll get slapped or divorced
or what not.
In my industry, you'll get fired, right,
as a money manager.
And it's funny because the European names--
the European names don't elicit as much hatred right now,
right?
Most people say Hungary, Austria, Italy, OK.
Interesting.
You go back a couple years when the euro was disintegrating--
no one wanted to be investing in those countries.
Italy-- second best stock market in the world this year.
It's up, I think, almost 20%.
So when things-- as the news flow recedes,
Russia from the bottom-- here's the dumb things you
here at the bottom, right?
US government press secretary goes to Twitter and says,
someone asked him about Russia.
And he says, you know what?
I would be selling Russian stocks if I were you.
In fact, I would be shorting them.
This is the press secretary giving this advice
to the general public of not only selling Russian stocks,
but shorting them, OK?
He's suggesting, first of all, telling the investment
public, short anything-- horrific advice.
You can lose your entire account.
Talking about shorting a market that goes up and down 5% a day,
the volatility is off the charts.
And oh, by the way, it's the second cheapest market
in the world.
What's happened since then?
I like to-- not patting myself on the back,
Russia is up, what 25% from the bottom.
Press secretary no longer has a job.
I'm not saying that's why-- related.
But if you look at the right side,
these are the most expensive.
I was really unpopular in the last year.
I give talks in Colombia, in Bogota, and in Mexico.
And I said, look.
I love your country.
I love the food.
I love the people.
But your stock market is one of the most expense in the world.
And Columbia at the time was in the mid to high 30s.
And their market has got pounded since then.
Again, I'm only going to start traveling to countries
where they're really cheap now so they'll
enjoy my message, say that's great.
Bring us good news.
US is one of the most expensive in the world, OK?
The US is not in a bubble.
It's nowhere close.
But returns?
Maybe 5% a year going forward.
But what's important is even if you invest in the indexes,
right-- the broad foreign developed--
there's huge dispersion within those indexes, right?
So what we talk about is buying a basket of these countries.
And here's why you need to buy a basket instead of just one.
This is Greece stock market.
And the black numbers are the CAPE ratios over time.
Late '90s-- reasonable CAPE ratio, awesome return.
Market doubled.
150% returns.
Hits a value of 40.
That's bubble territory.
Massive bear market around with the rest
of world-- 2000, 2001, 2002.
Hits a low single digit value.
Great time to be buying.
Massive run up again.
Hits a value where the US is right now.
Not terrible, but then the Euro crisis 2008 happens.
The challenge here is what they call
catching a falling knife, right?
Where the market is falling.
It's getting cheaper and cheaper.
But then it proceeds to get cheaper still, right?
Once this got to 10, you would say, that's cheap.
And then you bought it.
And it goes to eight.
Then it goes to six.
Then it goes to four.
Then it goes to two, right?
So you watched it continue to get cheaper.
There's a famous investing joke that says,
what do you call market that's down 90%?
That's a market that was down 80%,
and then proceeded to go down 50% more, right?
The way the math works out.
And we talked about this at lunch.
The compounding that people talk about-- eighth
wonder the world is compounding, right?
Where if you just invest long enough,
it works out in your favor.
Well, what they don't talk about is the opposite.
The bigger hole you get in, the compounding works against you.
So the kink doesn't really happen
until you lose about 10% to 15% of your money.
You lose 10%, it takes, what 11 to get back to even?
You lose 20, it takes 25.
You lose 50, it takes 100% to get back to even.
You lose 75%, it takes 300% to get back to even.
You think 75% is unrealistic?
US had a 90% drawdown in the '30s.
US has had multiple 50% draw downs.
Every G10 country in the world has lost at least 2/3
of its stock market value at one point.
So go ask someone in Cyprus what they think about buy and hold
investing.
You'll get a very different perspective than someone
in the US.
We've been publishing these values for a while.
This is a good example of 2013 and where
the values stood at the time.
I don't expect you all to see this.
But again, Columbia was up at 34, Peru at 34.
Greece, Ireland-- I don't include the frontier markets
usually.
But we use Argentina because they're too small to liquid.
But a lot of those names.
And then what happened?
Well, had you bought a basket of the bottom five countries
or 10 20% returns in 2013.
If you bought the most expensive, minus 5%
to minus 18%, right?
So buying expensive stuff-- not a great idea was.
There's two outliers here.
One, cheap country Russia, which went from seven down to five,
had negative returns last year?
And what's the outlier on the opposite side?
Expensive country that got more expensive-- the US had
a monster year last year.
There's nothing that can stop-- so this
is one of the challenges of being
an investor with a long term time horizon.
You have to mentally prepare yourself for the possibility,
however small it may be, that the US market can decline 80%
or increase in value 100%, right?
Those valuations have existed in the past-- so,
from where we are today.
What's the only difference?
What people are willing to pay, right?
That's it.
How much are you willing to pay for one share of the S&P 500?
And so both of those happen in the past.
And most people set up their investing program
or how they invest ignoring both of those possibilities.
Say, you know what?
If I just have a long enough time horizon,
things are going to be OK.
Can you sit through a 50% bear market?
Can you sit through an 80%?
Going back to the statistics earlier, remember.
People can't.
They buy things here, they sell things
there over and over again.
The good news-- I don't want this to be too depressing.
This is the average of global valuations.
Generational lows, single digit CAPE ratios.
Early '80s-- again, best time to buy in everyone's career.
But expensive things got expensive.
Late '90s, a special bubble.
Market got hammered, went back up. '07, right?
Bubble-- bubble territory again.
Huge bear market.
But most of the world has lagged the US over the past five
years.
So we're down in this cheap territory.
Most of the world's pretty cheap.
And going back to this chart, many countries
are really cheap, all right?
So moving towards the left side of this chart
away from the right side the chart is important.
Why this matters to you-- where's that piece of paper?
Did you pass it up to me?
Oh jeeze, you guys are even worse than normal.
OK, there's another bias called over confidence.
And I'm sure this room has it in spades.
This is why I became a quant is I read a lot of literature
on my suggest behavioral-- there's
a lot of great behavioral books.
James Montier writes some of the best there are.
But to take a little time to read those books.
Because you'll see a lot of behavioral bias--
overconfidence, right?
More than half this room thinks they're smarter than
the other half, better looking, better drivers, right?
Statistically, that's impossible.
And the same thing with the population.
I asked this question.
I've asked it in my last eight speeches.
I've gotten the same answer more or less at every speech.
The average amount people invest--
and I'm sure you circled it here.
This is, right?
78% in the US.
That's called home country bias.
That happens in every country around the world.
Americans invest all their money in the US.
Italians invest all their money in Italian stocks.
People in Greece do the same thing.
People in Japan.
That's a terrible idea.
And I'll tell you why.
It can be a good year.
But in gen-- It can be a good idea.
In general, it's a terrible idea.
The US-- this is global market capitalization.
What percentage of all these countries
are they say of the entire world?
US is half.
If you're a vanguard John Vogel devote, index
through and through, buy and hold,
you should only have half your portfolio in US stocks.
No one does.
You go to a financial advisor, any advisor almost
on the planet and say, what do you think?
How much should I put in the US?
It's almost always 70%, which is the broad average
for the country-- not just retail, but professional
as well.
Same thing happens in every other country, right?
And it's more insidious in other countries.
Because often, they're a tiny part of market cap.
So, Canada, you're 4%.
But you're putting 70% in Canada?
You're getting no exposure to the global world.
Think back to the Japan example and why this is so bad.
And this lines up the two bubbles just
to show you how bad the Japanese just
dwafted our cute '90s internet bubble, right?
This is kind of months to the peak. we just lined them up.
But this goes to show that this massive bubble-- look
how long it took Japan to work that off, right?
It only got cheap in the 2010, 2011, 2012.
Japan in the late '80s was half of world market cap.
Same as we are today, right?
That's hard to think.
Those negative return for the next 20 years
were a massive drag on your portfolio,
right, on a global portfolio, which
is what market cap weighting does.
Market cap weighting means you're
investing based on the broad portfolio.
You invest the most in the biggest companies.
Right now, that's what Exxon, Apple-- certainly up there.
But usually, the only metric they're using is price.
They're not using valuation.
They're just, what's biggest?
Well, that's a terrible thing.
This is a chart of the S&P 500.
This is the blue line.
This asks a simple question.
What if you invest in the biggest stock, biggest company
in the US when each one held the Crown?
So, familiar names-- Apple, Cisco, Exxon, GE, IBM,
Microsoft, Walmart.
It's a horrific thing to do.
Look at how much worse the returns are.
Let's think about why.
It's simple capitalism, OK?
When you're big, when you're Google,
you have a huge target on your back.
Why?
Well, everyone else would like to make money too.
And they see how successful you are.
So it's simple competition.
There's a study that came out-- some friends down
in So Cal-- research affiliates that said,
what happens when you invest in the largest
company in the market?
One of your future speakers actually did a study on this
as well-- Munish [? Perbri. ?] He'll be talking, I think,
next month.
He said, what happens if you invest
in the largest company in the market?
That company underperforms the market
by 3% a year for the next 10 years, all right?
Big time out-performance.
Happens in every sector.
The largest stock in every sector
underperforms the market in the next 10 years by 3% a year.
So getting-- and the reason being, again,
going back to Japan, market cap weighting over weights expense
countries and companies, all right?
So because the reason they're expensive,
there's only one variable, which is size.
Typically, the biggest is most expense.
So it's not always the case.
Right now, for example, small caps.
I would not touch them with a 10 foot pole in US.
They're the most expensive they've ever
been relative to large cap stocks.
So I would highly avoid.
But again, the US isn't always one of the most expensive.
This shows us right now.
Black line is the US.
Red line is average CAPE valuations.
Yellow is cheapest and blue is most expensive.
So there was times when the US was
one of the cheapest countries, right?
In the early '80s-- best time to be buying.
And there's times when it's been relatively
cheap to the rest of world.
This, you could kind of use this is a guide saying,
are we cheap relative to the world or are we not?
And we're right now.
We're one of the most expensive.
So not-- a great time to be getting away from the US.
Some other questions I think I'm going
to zoom through in the next five minutes.
Does this work with sectors in the US?
It does.
Robert Shiller has published extensively on this.
Does it make sense to add some other things like trend?
We talked at lunch about my favorite section
is value and trend.
So when something is cheap, it's starting to go up, right?
Italy is a great example now.
Brazil maybe turning the corner here.
But we're going to shift here real quick
and talk about something because this is a engineer focused
crowd, because you have an appreciation for data,
this is interesting topic and probably
an area for study for those of you
who are thus interested in stocks.
Going back to what we were talking about earlier,
than most people stink at stock picking.
They're horrific at it.
They're really, really bad for a lot of emotional reasons.
But it's a tough game you're playing because you're up
against the smartest investors in the world.
So these hedge funds that have staff
of 50 people that are out there paying them
the top money in the world, that's
who you're competing against.
It's not the guys on the internet chat rooms, right?
But the math of it is difficult.
There's a paper called "The Capitalism Distribution"
published by some friends of mine that show just how
difficult is the average stock.
It's 2/3 of stocks.
If you just picked it out of a hat, 2/3 of stocks
underperform the index.
Because when you own an index, you
are guaranteed to own the winners.
The losers simply go down to value
and they go out of business.
One of the reasons why stock investing works is you're
just investing in capitalism.
You're investing in business, right?
But 2/3, if you're just picking out of a hat,
if you pick the company out of the "Wall Street Journal,"
chances are, you're going to underperform the index.
So the math is is already working against you.
Half of stocks are losers over their lifetime, right?
But it's the tails, right?
Going back to earlier, it's the tails that matter.
It's the few Googles, Apples, Walmarts
of the world that account for the vast majority
of your gains.
So a question I asked-- when I was in college,
I said I meet all these-- there's all these hedge fund
managers, tehse interesting guys that I said, well,
why wouldn't I just outsource this to Warren Buffett?
He's clearly much better at this than I am.
He's been managing money forever incredibly successfully,
one of the richest people in the world.
Why wouldn't I just outsource my stock picking to him?
And what most people don't know is that you can.
The SEC requires that any institution over $100 million
has to publish their holdings.
It's every quarter.
There's a 45 day delay.
But they are available online, all right?
So I said, why wouldn't I just invest what Buffet buys?
And being an engineering, being a quant-- this is late
'90s-- I said, I can't do this until I work with the data.
And what we found largely is you can.
If you bought Buffett's top 10 stock picks, updated every
quarter when the values are public--
and there's now an academic paper that validates this--
you would have beaten the market by-- well,
this goes back to '99-- 7% a year.
That is a monster number.
That would outperform every possible mutual fund out there.
The paper takes it back to the '70s, finds
similar outperformance.
This is a local company I helped co-found many years ago called
Alpha Clone that does a lot of the analytics
with these hedge fund.
Now, it's important when you're focusing on these funds--
and this requires a little bit of demand expertise
to at least kind of know what's some
of these funds do-- you want funds that
are stock pickers, that are not shorting,
that don't have too much turnover.
They're not active traders.
They're not doing anything weird like arbitrage.
They're not doing futures or derivatives.
But in general, stock pickers long term time horizon,
this works great.
You have a lot of benefits.
You can control the holdings yourself.
There's no fraud.
You don't have to lock up your money.
And the biggest one-- there's no two in 20 fees.
There's a number of examples where
these what we call clone portfolios just by investing
in what's available online-- you can go to SEC.
There's lot of websites that attract this-- Guru
Investor, Insider Monkey-- these underlying clones will end up
beating the manager.
Because the manager is charging 2%
management fee, 20% in performance.
So you actually can do better than they can.
Why any institution in the world doesn't do this
rather than investing in managers, I don't know.
My fourth book will probably be on this topic coming out
in the next few months.
So stay tuned.
But another one of my favorites to watch--
Seth [? Carmen, ?] Baupost.
Any time you could watch him, beats the market.
What is that, 9%?
10% a year?
And one of the nice thing that the views are often
truly variant.
Some of these names they're picking, even if you don't
follow them blindly but use them as what we call an idea farm--
so a place to go look for new ideas
for stocks-- this is much better than going and asking
your broker for ideas or your next door neighbor.
Appaloosa-- another one of our favorites
has absolutely just destroyed the market by,
what, 18% a year?
David Tepper-- that's one of the reasons
he now owns part of the Steelers.
And then, of course, a local shop, ValueAct,
was in the "Wall Street Journal" last weekend.
Beats the market by 14% a year.
And it's something like six of the last seven years.
So these are all great places to look for research.
One last slide and then I'm going to one this down.
We talked about this at lunch a little bit.
And this is one of the biggest challenges
of investing is that, going back to the religion
and thinking about politics, is that people often
have their approach, right?
How many investors do you know say, you know what?
I'm investing for income.
I'm a dividend person.
This is how so many retirees say,
I'm buying high dividend stocks because I
get these checks I can cash, right?
Dividend payments.
Can't fake that.
Can't fraud that.
Well, dividend stocks, what this shows
is that the blue line is dividend high yield-- if you
bought a basket of high yielding dividend stocks--
and it goes back to the '60s-- the reason
investing in dividend stocks historically works
is because you're buying value companies that
are cheaper than the overall market.
There's reasons often because they're more leverage
and they're usually in a little more trouble.
But in general, they're cheap stocks, right?
So historically, high divident stocks
have traded about a 30% discount to the overall market.
So by buying dividend stocks, you're getting value, right?
But it changes over time.
This is what people call waiting for the fat pitch in baseball,
right?
Not swing it when things are balls but right
down the middle.
Well, what happened?
Dividend stocks were the cheapest
they've ever been in the late '90s relative
to the overall market.
Why?
Well, everyone wanted Pets.com.
They want all these internet companies,
these huge market cap Ciscos of the world.
They got incredibly, incredibly expensive, right?
So that was the best possible time
to be buying dividend stocks.
No one's talking about dividend stocks in the late '90s.
Massive returns.
Dividend stocks didn't even have a 2000, 2003 bear market.
Sailed right through it.
But what happens when you're in an environment where bonds
yield 2 and 1/2, US stocks are going to do maybe 4%,
people are looking for yield?
Massive amounts of money flows into these high yielding
stocks.
What does that do?
Well, it totally changes their composition.
High yielding dividends stocks now
for the first time in history traded a premium
to the overall market.
They're more expensive than the overall market.
You don't have to believe me.
You can go to Morningstar, type in your favorite dividend fund,
look at all the valuation metrics.
And they're more expensive buying the overall market.
So there's an entire group of people
that will be buying these stock the last few years
and wondering why in the world their portfolio is
underperforming the market so much.
And it's because they're buying something expensive, which
is an example of investor behavior totally distorting
something that historically has worked great.
The new fad is low volatility investing.
People investing in low volatile stocks
historically have beaten the market.
What's happened?
Massive amount of money's gone into those.
Those are also more expensive now.
If I had to do anything, I would avoid high dividend stocks,
small cap stocks as well.
So I'm going to wind this down.
Again, this wasn't theoretical.
We manage public funds.
I have 100% of my net worth invested
in-- Global Value is the one that goes and buys
these 10 countries.
But we'll be launching lots of new ideas as well.
So you have some good ideas, please,
please let me know afterwards.
Here's my contact information-- phone number, work.
That's not cellphone.
Blog, email address-- feel free to email me for a book.
And I think we got time.
I'm opening it up for questions now.
AUDIENCE: Hi.
So it seems to me that the global CAPE ratio
is kind of correlated over time.
So as a strategy, should you buy low CAPE ratio countries
and also short-sell high CAPE ratio countries?
MEBANE FABER: Good. question.
The question is, if you didn't hear it,
if it's a good idea to buy the cheapest,
why not also short what's most expensive?
It's really hard to do.
If there is-- that is what's essentially
called long shorter market neutral strategy, right?
Where you want to essentially arbitrage
the expensive stuff and the cheap stuff.
The problem is, over time, that works.
It works great.
But there's almost always large draw downs,
large losses in the meantime.
And let me give you examples why.
2008, if you're doing a market neutral
approach, the expense of stocks just
get hammered all the way down, right?
And what happens at the bottom?
When you have it when the rally comes, what rallies the most?
It's the junk, right?
It's the junkie companies that are now trading at $1.80 or $4.
And all of a sudden, you're short those.
And then you lose 80% on the upside
even though your longs only did 30%.
So it's really, really hard.
There's some things you can do-- and this
is getting a little more complicated-- such as,
if you're shorting, you short less
the more the market goes down.
So you take chips off the table.
So you say, it doesn't make sense
to be shorting something if its already down 50%.
It can't go that much farther.
A country's not going to go to zero for the most part, right?
So you could have a short exposure like right now.
But as those countries go down, reduce the short exposure
over time.
But it's tough to do.
And again, two other caviar to what we talked about today.
One, you only need to update this about once a year.
A deep value approach needs time to work.
The more you update it, the worse it's going to do,
all right?
In two, going along the lines of what you're saying,
what's important about this strategy
is not just that you're buying the cheapest.
You're also avoiding the most expensive.
So avoidance, I think, is just fine.
Shorting, unlike the press secretary,
I wouldn't recommend it.
OK the question is, US has exposure to a globalize world,
right?
Roughly what, half of the US revenues come from abroad?
But vice versa-- as the world gets more globalized,
much of the countries abroad-- China, Mexico, Canada-- all
have exposure to the US too, right?
So our opinion is that we just assume correlations
of one-- very high correlation of stock markets, right?
So in that world, it comes to a more simple question.
It's not where revenues come from,
but where is it just cheapest?
So you're getting foreign exposure--
so you can get foreign exposure in the US at half.
Or you can get foreign exposure elsewhere for much cheaper.
So it's more important to us in a globalized world
just to buy what's cheapest.
If the opportunity set is similar
and they're highly correlated, which they are-- I mean,
it's not one.
But global stocks in general are up around 70%, 80%.
That's great.
Because then the valuation means even more.
AUDIENCE: When you're looking at returns of global stocks,
are you taking into account currency fluctuations?
MEBANE FABER: Oh, I knew that question-- the question always
comes up.
Good question.
Question is, what about currencies?
And this is quite a simple sounding
question but a much longer answer.
When you're think about currencies,
there's a quote that says, currencies aren't-- currencies
aren't difficult.
They're just confusing.
And Americans are the worst at it, right?
Most people, when they think of currencies,
they think of, all right.
The peso is going down.
It's now cheaper to go buy steaks in Argentina.
Or maybe it's getting expensive to go skiing in Europe.
And that's it.
They don't think about them in terms of investing.
They do have a very real impact.
Over time, currency real returns--
because currencies adjust for inflation-- over time,
currency real returns are stable,
keyword being over time.
In any given year, you could have a currency
like Japan last year move 20%, 30%, which is a lot.
So I'm actually, if you have no value added way
to predict currencies, which I would argue most don't, I
would argue you have to choose one side or the other year.
You're either agnostic and you say, you know what?
I'm going to do it from US dollar base.
Or you hedge all your currency exposure.
But you pick one and stick with it.
And over time, they'll have the same performance.
And then a follow up is, can you do things
in currencies the same way you do
in stocks and bonds that have outsized returns?
So yes, you can actually index currencies with basic value
trend, momentum carry strategies that
perform great and don't correlate to stocks.
But that's the point of a whole other two hour talk.
So you guys have me back in 2015.
We'll talk about currency.
So I'm agnostic.
But it makes a big difference in the short term.
AUDIENCE: In terms of the current valuation,
it seems to me that Warren Buffett, Joe Greenblad and also
Howard [INAUDIBLE] post-- I think all of them
said it's [INAUDIBLE] right now?
And only one of note that is kind
of bearish in the long term is [INAUDIBLE].
So can you reconcile with them?
Because if Warren Buffett and Joe
Greenblad those said that it's [INAUDIBLE] it's hard for me
to think that it's expensive.
MEBANE FABER: Well, if you use Buffett's
own favorite valuation metric, which is market cap to GNP,
stocks are very expensive.
You also always have to ask why people
have the opinion they do.
If you're a money manager and have all your money invested
long stocks in the US, are you going to say they're expensive?
Probably not.
So it's challenging.
And going back to the intro of the speech,
I think you should ignore all of them, right?
Everyone's going to have an opinion.
Just like, you know.
A guy or girl walks by.
10 people are going to have different opinions
and say, well, I like him, I don't like him.
He's attractive, he's not.
Whatever it may be.
But that's what makes a market, right?
There's someone who's bullish on US stocks
in 1999 the same as someone who is bearish.
So that's why it's important to me
to have an objective measure.
I don't care what it is.
You can use price, sales price, book price, cash flow, GDP,
enterprise, EBITDA.
By the way, all of those say US stocks are expensive.
There's not one that doesn't.
But you have to have an objective metric.
Otherwise, you're just-- what we have found in the literature,
and this applies to almost every field,
is experts are horrific at forecasting, including our US
government, the Federal Reserve, right?
They are horrific at forecasting the future.
But if you have an objective metric and say,
all right, stocks very well could go up 50% from here.
But all that's doing is mortgaging the future.
So it's unexciting to say, I think
stocks are going to do 4% a year.
That's not terrible.
It's better than 2 and 1/2% bond.
But is it worth taking the risk?
I would much rather invest in the really cheap stuff,
most of which happens to be in Europe right now.
So as I said on Twitter, cheer for the US on Sunday,
but buy Portuguese stocks.
AUDIENCE: So how do you avoid the value trap?
For example, if Greece had defaulted an exited
from the euro, even buying at two might have been expensive.
MEBANE FABER: How do you avoid the value trap?
Well, question is, how do you avoid
buying a falling knife and something
it's cheap getting cheaper?
And there's a couple ways to lessen
the impact of it, the first being,
diversify and buy a basket of 10 countries, right?
So, we own Czechoslovakia, lot of those countries
we talked about-- Brazil, Russia.
One may be doing poorly, another one's-- hopefully,
that's-- same thing as you buy a basket of stocks.
Helps diversify the risk.
Doesn't totally diversify it.
Because right now, for example, most of those countries
are in Europe, in emerging Europe.
So you're getting exposure that very well may do poorly.
Another way to do it is having a long enough horizon.
Give it a number of years to be able to recover.
And that's a big key with buying the really cheap stuff.
It's hard to watch something go down.
The last way is to-- for those who
have followed my research for a long time,
know that we write a lot about global maccarone trends.
And so another way is use trend following metrics, right,
which would help you say, all right, I'm
going to buy this something cheap,
but only once it starts going back up and has a nice trend.
And then you still have an objective buy and sell rule.
You buy when it's above the long term trend.
You sell when it's below.
Historically, that doesn't add to returns.
But it vastly reduces the drawdown and volatility.
So my favorite intersection would be value and momentum.
So buying what's cheap, but also going up.
So there's a number of ways to try
to minimize the damage it can do.
But it's part of buying what's cheap
is you're not ever missing all the risk.
AUDIENCE: So say you've decided to invest in certain countries.
How do you determine what to buy in that country?
MEBANE FABER: So the simplest would
be to buy the market cap weighted index.
Highly liquid companies.
We go a step further, which we actually
didn't publish in our book.
And out of the 30 biggest companies in that country,
we buy the 10 cheapest.
Use a bunch of just different valuation metrics.
So it's almost like a dogs of the Dow approach.
So our [? ETF, ?] for example, will
own about 100 stocks in those countries.
That adds about another percent return
on top of just buying the market cap.
Because you're getting away from market cap in general.
You're buying the worst of the worst.
But as the individual investor, it's
really challenging to buy individual foreign stocks
in general for a big enough portfolio
to diversify 100 stocks in all these countries
around the world.
And it's a huge pain with taxes, too.
So one way is to buy country funds like ETFs.
Even if you don't buy ours, you can buy-- just
moving away from the US in general
I think is a great first step.
Thanks for having me.
I'll stick around for a few minutes.