In This Episode
Dan kicks off this episode with his thoughts on Apple and where it could go from its $1.4 trillion market cap.
The first thing he’s noticed about Apple this year is that its earnings didn’t double in 2019, while revenues and net income both fell. Yet the stock market chose to raise its valuation from 13x earnings to 16s earnings.
Dan then turns to a question posed to Stansberry editors –what’s cheap and unpopular with investors right now– before turning to this week’s podcast guest.
Meb Faber is a co-founder and chief investment officer of Cambria Investment Management, and host of The Meb Faber Show podcast. He has authored numerous white papers and leather-bound books, and graduated from UVA with a double major in Engineering Science and Biology.
We think you’ll appreciate his insights on trend-following and the strengths and dangers of diversification – not to mention his surprising insights on why investors focus almost exclusively on the U.S. at their own peril.
NOTES & LINKS
- To follow Dan’s most recent work at Extreme Value, click here.
- To check out Meb’s research and insights, click here.
- To Download Meb’s Book for FREE, click here.
1:55: Dan reviews why investors rewarded Apple with a higher valuation despite falling revenues and net income. “It beats the heck out of me, actually.”
5:58: Dan reviews some of the best answers to his question of the most valuable asset in the world right now, posed to his Stansberry colleagues. “There’s something devilishly clever, I think, about saying the most valuable thing in the world is cheap… since you’d give everything you have for it, it’s never too expensive, is it?”
15:38: Dan picks apart Ten Stock Trader’s Greg Diamond’s answer of volatility, and reads some tea leaves on what volatility could mean this year. “If the VIX hangs out at 12 for a good long time, or in that range, after a while you start feeling investors are way too optimistic.”
17:52: Dan teases a just-released Extreme Value recommendation tied to macro conditions. “If that part of our thesis is right, this steel company ought to do pretty well too.”
24:06: This week’s guest, Meb Faber, dials in. Meb is a co-founder and chief investment officer of Cambria Investment Management, and host of The Meb Faber Show podcast.
25:44: Meb explains how he cut his teeth in a “double bubble” of dot.com stocks and crazy biotech valuations that was, if anything, fiercer than the crypto mania we just saw.
29:41: Meb says the biggest compliment in investing, or business and startups is that they survive. “This current decade will be a good example as well… how many trades can we name that have been absolutely brilliant, only to go down in flames?”
33:11: Meb explains why trend following is hard for so many people. “It’s not you and I inventing the wheel – these strategies go back to the time of Benjamin Graham and Charles Dow, well over 100 years ago.”
43:23: Meb points to a Vanguard study noting that every single country has a higher volatility than the global market of stocks. “If you’re overweighting any one country, your portfolio’s going to be more volatile.” And 6x as many stocks yield 3% or more outside America than inside it.
1:09:12: Pete L. asks Dan about negative stockholder’s equity in Starbucks and Home Depot over the last 12 months, and whether share buybacks are the culprit.
Announcer: Broadcasting from Baltimore, Maryland and all around the world, you’re listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at InvestorHour.com. Here is your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I’m your host, Dan Ferris. I’m also the editor of Extreme Value, published by Stansberry Research. We’re going to talk to Meb Faber from Cambria Investments today. I bet a few of you recognize that name. I was on Meb’s podcast recently, and today we’re going to turn the tables on him and find out what makes him tick. I promise you, a lot of really cool stuff is going to come out of this conversation. Meb does a ton of research.
So before we do that, of course, I have a few thoughts to share. Let’s talk a little bit about Apple. You know Apple. Biggest market cap company in the world. Like a trillion four last time I looked in market cap. And then we’ll talk about some other opportunities in financial markets and elsewhere.
So the first thing that I noticed recently about Apple is that its earnings did not double last year. Its revenues and net income both fell. Revenues fell a little bit. Net income fell a little more. Yet the stock market chose to raise its valuation from around 13 times earnings to around 26 times earnings. Right, so the valuation doubled. But not for any obvious reasons that you could identify in the underlying fundamentals.
So why did it? If not for those reasons. It beats the heck out of me actually. Folks just decided they had to own Apple. They had to own it despite reports that you can just Google just about anywhere, that it’s losing share in the smartphone market. You’d think that would be a big deal. Roughly two-thirds of the revenues have come from selling phones. But, hey, iPhone is cool and there’s that whole ecosystem thing where you buy an iPhone and you’re stuck in the ecosystem forever. And it’s an ecosystem because just saying ecosystem three or four times means you’re really smart. Except you’re not. You can switch over to Android any time you want and the biggest thing you’re going to lose is your ability to say, I have an iPhone, man.
So I don’t know. Marketing guru Scott Galloway says the iPhone signals that you’re a better mate. A better mate than an Android user. I mean, I think he’s at least partially tongue in cheek here, I hope. Of course this is kind of ridiculous and not true. I feel like, I don’t know, Galloway’s a very smart guy. Don’t get me wrong. I love his book, The Four, which is about Apple, Amazon, Facebook, and Google. He’s got some really important insights about those businesses. Including the one that you really need to pay attention to all four of them because they’re changing our lives a whole lot.
But I feel like, you know he’s trying to be one of the cool kids. He’s always trying to say something controversial. But when I think about it, like Apple’s the biggest public company that’s ever existed. At 1.4 trillion in market cap. How the biggest corporation on Earth is cool I’m not really sure. Apple is the establishment. It’s the man. By whom nobody would like to be enslaved.
When I was young, nothing as popular as Apple or the iPhone could be considered cool. If your favorite band got too popular, you complained that they’d gone commercial and you said, oh, now they suck, man. And you said it good and loud where everyone can hear you. And then you spit on the ground and cussed and took a drag on your cigarette, all of which reasserted your coolness.
Anyway, thank you for indulging that little tiny trip down memory lane. But it makes me wonder what is not popular among investors if Apple is what is popular. And of course what’s not popular, what I really mean is what’s truly dirt cheap today.
So last week I asked my Stansberry colleagues and folks who follow me on Twitter, what’s cheap today? And I got some interesting answers. Some of which I’m sure you will absolutely – you’ve not heard before and that you would not guess. Or at least one of which.
Perhaps the cleverest response was by John Hussmann from HussmannFunds.com. we’re mentioned him before on the show. He’s an economist who has done some work on the valuation of the overall stock market. And Hussmann said, cash is super cheap if you’re using the S&P 500 to buy it. Which, of course, is a clever way of saying stocks are really expensive.
And Hussmann says, you know when stocks get as expensive as they are now, returns are negative for the next 12 years so ergo trading them for cash, you know cash is cheap relative, right?
Another clever one came from via Twitter also from former investment banker Paul Portasi or Portesi. I’m not sure. Paul’s a very smart guy. And he said one word. He said, time. Now Paul is a smart guy and knows nothing is more valuable than time. He apologized for being a smartass, but I told him it was a good answer. There’s something devilishly clever, I think, about saying the most valuable thing in the world is cheap. Since you’d probably give everything you had and more for it, its technically never too expensive, is it? So it’s a very clever answer.
Several folks pointed out that uranium is cheap. And yet its use is growing. The largest uranium producer, Cameco, saw its stock above $40 in early 2011. Today it’s below $9. And it’s been scraping bottom pretty much since late 2016.
We spoke with Kuppy, Harris Kupperman, last week. And he told us that he looks for situations with the potential to become multi-baggers. Uranium certainly fits that definition if you buy one of the uranium stocks. I mean even Cameco, you know below $9, in a good uranium boom it could be a triple I would assume. Double or triple at least.
You obviously need a substantial amount of patience with this because it’s already been three going on four years here. But it’s a decent setup. So I thought it was a good one.
Now the most off-the-beaten-track answer came from one of my Stansberry colleagues, a fellow named Vic Letterman. And Vic Letterman works for Steve Sjuggerud. And I know – if you’re a Stansberry subscriber or know anything at all about Stansberry, I know you know that name. So Vic said – he pointed me to this collectible card game called Magic, The Gathering. He also referred to it as Magic Alpha Series cards. I don’t know anything about it. The collectible cards where in a bubble that recently popped. These collectible cards from this game. According to a national public radio report.
I know diddly squat about all this. But I know some folks are into collectibles. And it was such a weird answer I had to pass it on. I personally don’t do collectibles at all. When it comes to anything, any art or art like thing, I only know what I like and I can’t get that out of my head long enough to care about what anybody else likes, which is really what you have to do if you want to assess collectability, right?
Also somewhat off the beaten track but definitely more on the traditional investment side was another Stansberry colleague, Drew McConnell of our DailyWealth Trader service. We interviewed Drew on the program you remember with Ben Morris and Greg Diamond. Not too long ago.
Drew says pre-1933 gold coins, you know this is also a collectible item, Are cheap right now. Drew said “the premiums for most of these coins are at or near their all-time lows. I see it as a no-brainer way to buy gold. If you like it, then you get the optionality of higher premiums if the coin market ever perks up.”
Collectibles aren’t my thing, like I said, but I love how he identifies the optionality in these coins. Right. No matter what else they might be looking for, every great investor I know of is constantly searching for this kind of optionality. In this case, optionality means besides just owning gold and getting whatever you get with owning gold, you also get additional upside potential should the collectible coins become more popular again. And with the premiums scraping all-time lows, you pay less than ever for that upside. And I think that’s – it’s a neat idea. I’m still not going to do it because I’m not into collectibles.
Stansberry’s Brian Beach, editor of our Venture Value letter, pointed me to an article in Grant’s Interest Rate Observer. We’ve interviewed Jim Grant before. On the podcast. And the Grant’s article was called, "Take My Wells, Please." After the old Henny Youngman joke. Take my wife, please. This is "Take My Wells, Please."
And the article was on how cheaply you can get U.S.-based producing oil wells these days. And Evan Lawrence from Grant’s, he said in the report, he said, “so acute is the distress that wells denoted proved, developed and producing are on the block for prices to yield unlevered internal rates of return of 15% to 20%.”
That’s big. That’s a huge yield, right?
So there’s an expert in the article who says most of the value of producing wells comes from the first five years of production. That’s just basic math. Basic discounted cash flow type math. Because you discount less on the early cash flows than you do in the later ones. And also with oil wells, you know you get more production in the near-term than you do, you know eventually they run out of oil, right?
So you can hedge your commodity price risk for the first five or six years. Right. The equity and debt markets are rough for oil because they just are right now. But the hedging markets are kind of open for business they point out in this article. So you can hedge out your commodity price risk for those first five or six years. You can’t, however, hedge out the expenses or the possibility that a well runs dry prematurely or something like that. If it does, it needs to be plugged. And that’s another 80 grand. So there’s risk. There’s risk for that 15 to 20%.
Another hurdle here, of course, is that this is a private investor deal. The public companies that own these produce, you know the proved, developed, and producing wells, they’re not trading as cheaply as the individual wells. So to get in on this opportunity you probably have to be an accredited investor and do a bunch of work or know somebody who will do the work for you. And you need to know the oil business probably better than if you’re just buying some equity that you can unload in a heartbeat.
So there’s that. Producing oil wells.
My personal favorite answer came from Greg Diamond. And before I move on, like right away you’re like, OKOK, collectible cards, collectible coins, oil wells I can’t buy because I need a million dollars. Yeah, it’s like that. Right. It’s like that. It’s a bunch of stuff that’s clunky and semi-desirable to own anyway. And that’s – when you ask what’s cheap today, these are the answers you get. Right. These are the kinds of answers. So if you’re a little disappointed with the fare so far, I get it.
But my personal favorite answer came from Greg Diamond. This is another clunky thing to try to buy. Greg Diamond, of course, editor of Stansberry’s Ten Stock Trader and we mentioned earlier that we had interviewed him with Drew and Ben a while ago. Greg said one word. Volatility.
Now volatility is widely monitored via the Chicago Board Options Exchange Volatility Index, the VIX, sometimes referred to as the Fear Index. Volatility rises when stocks fall. A bet on volatility rising then is a bet on stocks falling.
So lately the VIX is around 12. The all-time high was 80 during the financial crisis. The all-time low was just below 10 in late 2017. Couple years ago I downloaded all the VIX closing price data going back to the early 90s. And I discovered that the long term average is around 19 or 20. It might be one or two lower by now. The long-term modal value, M-O-D-A-L, modal, was 12. The modal value is the most common. There’s like the average,the mean, the median, and the mode. And the mean is the thing we all call the average. The median is like the middle number. Like if the list is one, two, three, the median is two. And the mode, if the list is one, two, two, two, three, the mode is two, right? because it’s the most commonly recurring value. Right.
So I thought, well, maybe there’s a little bit of force of gravity around the value of 12. So when it gets there, if you think volatility is going to spoke up that’s the time to go long. We’re there.
And I tried to use that information to trade the VIX futures and I’ve talked about VIX futures before. They stink. They don’t work. Don’t bother. They’re broken. It’s a broken instrument. And the ETFs are based on the futures. Also, a broken instrument. Don’t waste your time.
So in order to buy volatility you really, you need to be a pretty sophisticated dude like Greg, you know.
If you look, like I said, these things are broken. If you look at the, you know there’s this one ETN actually, an exchanged trade note. It's called the iPath Series B S&P 500 VIX Short-Term Futures ETN. And the chart, if you get a long-term chart it’s just a ski slope falling from left to right. Right. It's endless value destruction. So it’s like a legal scam to separate investors from their money. But you can, if you know how to do it, buy, you know like out of the money put options. Or I think the VIX is based on at the money or slightly out of the money options. Like 30 days out on average between 27 and 33 days out. Something like that. So you could try that.
I think it’s just a good way to gauge relative complacency. If the VIX hangs out at 12 for a good long time or just in that range, after a while you start feeling like investors are really way too optimistic. And I think we’re there in valuation alone. But with the VIX at 12, that’s just another data point to support that.
So yeah, so volatility’s cheap. And there were a couple stock picks that people responded with. Some of them – actually most of them, there were like three or four, and most of them were like teeny weeny micro caps or whatever. The only stock pick that stood out for me was Steel Dynamics. It’s a Midwest steel producer founded by some of the folks who came out of Nucor. And Nucor was the one that started out as a mini-mill, steel recycler. Right. They melt old Cadillacs and make steel. Sell steel beams and whatever kind of steel sheet that you can sell as a raw material.
I read an awesome book about this company years ago called American Steel by Richard Preston. Richard Preston wrote those books about the Ebola virus. I read one of them called The Hot Zone. Great book. And he wrote a couple others about Ebola. But he also wrote American Steel. Which is a great book. I definitely recommend it. It’s an exciting story. I mean there’s life and death stuff in that book. It’s really exciting.
But how excited are you to own a steel company right now? Probably not very. Right. You want to own Google and Facebook and everything. And whatever cloud technology company is up next. But that’s how stuff gets cheap. All this stuff is like, eh, who cares? And that’s how stuff gets cheap.
So Steel Dynamics’ operating income doubled the last three years. Free cash flow grew very nicely. It’s got about 2.4 billion in debt. About a billion cash and short term investments. And it’s like nine times trailing earnings. So it’s like really traditional value investor fare. I’m not recommending it. I’m just saying this is the sort of thing you find if you start out by asking what’s really cheap right now. And I will tell you that in the current issue of Extreme Value that just came out, the January issue, we recommended a company, it’s a manufacturer. And we included a macro data point in there that we thought was really important. And if that part of our thesis is right, the steel company ought to do pretty well too. I can’t say any more than that because people pay me a lot of money for Extreme Value. They might get ticked off if I go giving everything away all the time. And I’ve given a few things away. And they’re cool with it so far. As long as they have plenty of time to digest it. Which I don’t think they really have yet.
So maybe a better question than what’s cheap now, since that seems to produce all these things that are so weird, is does anybody even care what’s cheap? That’s the real question, isn’t it? That’s the 800 pound gorilla in the room.
Buying what’s cheap has gone out of style. In the stock market anyway. And Rob Arnott and his colleagues at Research Affiliates, who are fantastic financial research people, they recently said the current underperformance of value stocks, right? The cheapest stocks in the market. Relative to growth stocks has exceeded most and in emerging markets all previous drawdowns. In other words, they’re just about as cheap as they’ve ever been relative to growth. You know buying cheap stocks has rarely been a worse idea in most investors’ eyes than it’s been today and most of the last decade. And that’s true, even though as Research Affiliates points out elsewhere, “historically value stocks round the globe tend to win more often than they lose, beating growth over five year rolling intervals approximately 55% of the time, rising to 70% over rolling 10-year intervals. And I promise you for a hit rate 55% is statistically significant. And 75% is whoa, daddy. Hot stuff. You know over 10-year intervals.
Look, it's no stretch of the imagination to conclude that human beings love it when markets rise and they hate it when they fall so, you know these things have fallen relatively to gross so they hate it. And it’s not also a stretch of the imagination to recognize they get excited about stocks for all kinds of reasons. Like with Apple, who knows what reason, right? And they wind up making them a lot more expensive. And that leads to lousy returns. So these ideas are based on sound observations I believe about the human condition. And I can’t imagine human beings changing in any meaningful way. Not for my lifetime.
So owning the biggest, highest quality, fastest growing, most wonderful companies can’t remain a great idea forever as it’s been for the last decade or so. At some point, so many people will have thought of it and so many people will have done it that it can’t be a great idea anymore. So maybe once that’s happened, which, I don’t know, is that now? It kind of looks like it might be. Buying what’s cheap might start to look like a good idea again.
OK, in another Research Affiliates’ paper, I’m high on Research Affiliates this week. Arnott and his team noticed that “Since 2007, well over 100% of the shortfall of value relative to growth is due to value becoming relatively cheaper. In the most recent 12-year period the revaluation component appears to be the key to understanding why growth stocks outperform value stocks.”
So it is, in other words, it is according to Research Affiliates, the phenomenon that I’m describing in Apple. It’s just because people like this other stuff better. It’s not because they’ve outperformed so much more on earnings. Right? It’s not because the businesses are definitely worth such higher multiples of earnings. It’s just because they kind of like them a whole lot better right now. That’s why they’ve outperformed the cheaper stocks in the market.
So like Apple isn’t more expensive than a year ago because the business grew. It didn’t grow. It shrunk. People just got excited and wanted to pay more for it. No reason. Just because. Right. Same thing with the value stocks. They’re not cheaper because they earn less. They’re cheaper because folks just want to pay more for a dollar of growth stock earnings than for a dollar of value stock earnings. Right? It’s nothing deeper than this. It’s not like – you don’t need to go deeper. There’s nothing inherently better about either one.
I remember – this reminds me of something. It was one of my old college professors, I was a music major in college. And once I was criticizing like modern atonal classical music, which just sounds so noisy. And it’s like it's good for movie scores or whatever, but just sounds so noisy just to sit there and listen to it. And I asked, I said, who in the world thinks this is music? And he kind of lightened the mood and satisfied me. He said, you know well, Dan, there’s no accounting for bad taste. That’s a nice little joke. There’s no accounting for taste people. You’re supposed to say there’s no accounting for taste. It’s supposed to be, you know I’m not judging, I’m just saying, well, it’s a matter of taste. But this is a judgment. You know there’s no accounting for bad taste. And I laughed and I said, oh, OK.
And so there’s no accounting for value adverse investors. There’s no accounting for people who want to pay twice as much for Apple just because. Even though the business shrunk last year.
So maybe it’s all just a matter of fashion. It's fashionable to own Apple the way it’s fashionable to own an iPhone. And it’s just tacky to own uranium stocks and collectible gold coins and producing oil wells. And it’s tacky to buy put options and try to buy volatility. Right. It’s just not done. It's just not fashionable right now. It’s gauche. You don’t talk about it in the party.
I’d like to think that I’ve grown a lot since I was a teenager, but maybe I haven’t changed that much, you know since my high school days. Like I don’t smoke cigarettes or anything, but the unpopular cheap stuff is still cooler to me than the expensive popular stuff. And that’s all I’ll say about that for now. Let’s talk with our guest, Meb Faber.
Dan Ferris: All right. It’s time for our interview. Today’s guest is Meb Faber. Meb is a cofounder and the chief investment officer of Cambria Investment Management. Meb is the manager of Cambria’s ETFs and separate accounts. He is the host of the Meb Faber Show podcast and has authored numerous white papers and fine leather-bound books. He’s a frequent speaker and writer on investment strategies and has been featured in Barron’s, The New York Times and The New Yorker. Meb graduated from the University of Virginia with a double major in engineering science and biology. Yes, folks, he’s a smart dude. Meb, welcome to the program, sir.
Meb Faber: Great to be back, guys. I hope you’re having a wonderful start to the new decade.
Dan Ferris: Yes. I’m having a pretty good start. New decade. New year. Meb, one thing that I don’t know about you is – I didn’t know that you were like an engineering and biology guy. So it makes me curious, like how did you get from engineering and biology in college into finance?
Meb Faber: Well, serendipity, right? The – I cut my teeth during the great bubble of our lifetimes, I think. You know the late '90s internet bubble. I would have been in university. Graduated in 2000. So top tick that perfectly. I also had a double bubble. If you remember, biotech was romping and stomping just like the Internet stocks were. I was – I graduated and was working for a biotech mutual fund while getting to go sit in on the NIH meetings and everything else up in Bethesda, Maryland where they hold those. And the sequencing of the genome just happened with Celera. And the government project.
So I got to see it on both sides and was probably even more ensconced than all the crypto fantastic have been over the past few years. So I bit full line and sinker during the late 90s. The plan, of course, was to go back for grad school and get a Ph.D. So I did a little time at Hopkins in that neighborhood. But the world of investing certainly seduced me. And sort of gravitated more and more towards the quant side of the world and further and further away from pure biotech and fundamental research. So fast-forward 15, 20 years and here we are.
Dan Ferris: That’s pretty cool. So you were right in the middle of it kind of from both sides of it. That’s pretty neat. You don’t hear a lot of that except from people who are like, you know starting up companies at that time. That’s pretty cool. So what was the first – is there like a first – you know what was the moment for you? Was there a moment where you said, you know something, this is it. I’ve got to go down this path and I’m probably not coming back.
Meb Faber: I would say there’s a couple. I say like most traders, the biggest blessing you could ever have in portfolio managers that survive is to lose all your money when you’re young. And I certainly went down that road. Thinking I was the next George Soros trading biotech options and the like in the early 2000s. And that was also during the sort of internet winter Armageddon of the early 2000s. Decided to pack my bags and move to San Francisco because all my friends in the late '90s says, Meb, it’s the land of milk and honey. There’s jobs everywhere. Champagne flows just from taps, you know as everyone believed in the late '90s. And stocks like CMGI and Pets.com and everything else were soaring through the stratosphere.
So I got to experience that in full for the few years afterwards. And look, biotech has always been a keen interest of mine. I mean it’s playing out, you know a lot of the thesis of the late '90s, early 2000s is coming to fruition. But that’s how long it takes. In the health care world for a lot of these drugs to get through trials and start to really see the benefit.
So it’s definitely an interest. But for me, the struggle of discretionary fundamental analysis and learning the lessons that I learned sort of paved the way for a future quant in the making and all the, like many people, your philosophy is borne out of the experiences you had. So both good and particularly for traders, the bad ones.
Dan Ferris: It’s funny. I hear that from a lot of people. They say, well, you know I cut my teeth in the '90s and I got creamed but I was a addicted. And mostly when you have an extremely unpleasant experience you don’t look at it as a blessing. But I think people like you who do, it’s like if you think that’s a blessing then you’re in the right place.
Meb Faber: Well, you gotta remember, you know in our world the biggest compliment you can give anyone, and this applies to investing but also to entrepreneurs and startup founds is simply that they survive. And a lot of people, whether it’s _____ fooled by randomness or I think this current decade will be a good example as well, is that many people extrapolate the month, the quarter, the year, even a decade to the future. And how many traders can we name that have been absolutely just brilliant, made incredible amounts of money only to just go down in flames. This past decade’s a great example. It’s been an absolute graveyard for almost every large hedge fund on the planet. And so many people get used to one environment in making money and then realize that that doesn’t play out over various timeframes.
And so for me it became a, you know at this point a lifelong quest to study history and understand all the possible outcomes, what’s happened in markets. I talk a lot about my favorite investing book, Triumph of the Optimists. And there’s free versions of that that you can download on Credit Suisse’s website with the global investment returns yearbook. But it gives you that perspective to where you can say, hey, look, we just turned the page on a new decade. For example, you know this past month. And U.S. stocks creamed everything else on the planet. Is that normal? And you can take a step back and ask yourself that question. Otherwise, you end up extrapolating forever. And that’s where people get into trouble. And so not just individual investors but absolutely institutions.
So anyway, I think you’ve learned much more from your failures certainly. And hopefully, the blessing for the listeners is that that can happen when you’re young and don’t have a lot of money. And not make the mistake of doing it when you’re older and have a lot of responsibilities and children and lifestyle or whatnot. But certainly I think a lot of those formative experiences is what creates that drive in the first place.
Dan Ferris: Yeah. And your drive, as you pointed out, has been not to be the bottom up value guy, which is what I got into, but it’s been something different than that. You know you said it turned you – your experiences and your background and everything, you were a quant in the making. And I’ve seen you put out a lot of interesting stuff over the years. I assume that’s just an outgrowth of having been a science guy. Having been a data guy in college and after. Correct?
Meb Faber: Yeah. You know so I will correct you a little bit, Dan. Because if I say my two main philosophies are built on the same pillar, which is look back in history and what’s worked. And what passes the common sense sniff test. And for me those two big things have always been trend following and its many iterations, but also value. Very much. I mean I consider those sort of equal pillars to build an investment philosophy. And value checks the box of it makes sense. It’s a mean reversion sort of strategy. And it’s much more applicable to I feel like most people’s philosophy of day to day understanding businesses. Trend following I think is a lot harder for many people and emotionally make up. But also I think does a great job complementing that value.
So but looking back in history, both of those – you know it’s not you and I inventing the wheel. I mean these strategies go back to the time of Ben Graham and Charles Dow, well over 100 years ago, for both value and trend. And then, of course, historians would say they go back hundreds of years before that, of course. We write a lot about asset allocation strategy that goes back 2,000 years in one of our books. And so a lot of people, it’s a modern interpretation, but those are the two areas that I think have the most impact on a portfolio and make the most sense to implement. But that is born out of what you just talked about. It’s an appreciation of history, a study of markets, and understanding why both of those inputs can lead to success.
Dan Ferris: All right. Well, I stand corrected.
Meb Faber: So we’re closer in beliefs than you know.
Dan Ferris: Right. So I mean I sort of knew that already because I’ve read your stuff. And you’ve written, for example, you’ve written a lot of stuff about the CAPE ratio. And like when I want to know, you know what country is cheap, like Meb Faber is my – you’re my guy. Because I think you watch that pretty closely. And you wrote something, gosh, I guess it’s been a year ago already, called "The Biggest Valuation Spread in 40 years." On this very subject did you not?
Meb Faber: Yeah. I mean, look, I think it’s always a good thing. People love at the end of the year, and even decade is I think more important to be reflective and take a look back. And so as we look back at what the world’s been like over the past decade, you know U.S. stocks have crushed everything. You say, well, how does that look compared to history? And we’ll tie in valuation in a second. And so U.S. stocks did I think like 13% this past decade. Awesome. And if you say on a real basis, so take out inflation, which was mild, of about 2%, and you’re up in the 11 ½% range, somewhere. And that puts you out of the past I think 12 decades in the top five. You say, well, is that actually – does that matter? Is that instructive? And it turns out that the top three decades, which would have been the roaring '20s, nifty '50s and my favorite bubble, the late '90s, you know on average did about 16% per year real. So that’s after inflation. And the three worst, the highly inflationary '70s, the 1910s and then of course the 2000s, aftermath of the bubble, had negative returns on a real basis.
But if you just said what happens in the next decade, for example U.S. stocks after the three monster decades, future returns were pretty muted. About 1% a year real. And then after the three terrible decades, future returns were great. Well over 12% a year.
And so kinda we fall in the top five. It’s not crazy. It’s not the top three decades. But also if you look at valuations. So totally independent of the returns, after the three best decades, the valuation, the long-term PE ratio, which you talk about the CAPE ratio, which is nothing more than a 10-year PE. And you can substitute any valuation metric in you want. Dividend yield, sales, enterprise value – it doesn’t matter. They all say the same thing. But we like PE because most people understand it.
So the long-term CAPE after the best romping, stomping bulls was up around 28. And after the really terrible decades was down around 11. So you have this situation of multiple compression and contraction, as well as expansion. In this decade, we very much had an expansion. So at the end of the financial crisis the PE ratio was in the low teens. Whereas right now it's around 31.
So very much like as you celebrate the end of this past decade romping and stomping, we’re in a scenario where yes, the trend is still up and all-time highs are nothing to be afraid of. But on the flip side of the coin is valuations certainly are stretched. And the rest of the world the good news is reasonably priced so the foreign developed is around 20, low 20s, 22. Foreign emerging is down around 15. And the cheapest bucket is down around 12.
But talking, again, back to what we were saying over and over again about being a student of history, most of the listeners, this is the biggest problem we have is we said, on Twitter the other day we said, you know which of these asset classes has the best returns over the past 20 years. So not just the past 10. Everyone knows stocks has done the best. And we did stocks, REITs, gold and maybe bonds. I can’t remember. And the correct answer was stocks were, U.S. stocks were the worst. But that’s because it incorporates the 2000 period too. But everyone’s forgotten that
Dan Ferris: Right.
Meb Faber: They just extrapolate the past few years. The last year we did 30% into infinity. And so if you look at it, there’s a great Bridgewater piece. We did a really long post outlining our top six favorite reads of the past year on international investing. On the blog. And one of them was from Bridgewater. And Bridgewater said, look, if you compare the U.S. to just equal weight, let’s say the top I think it was 15 or 20 countries, all the way back to the 1900s, how would that have done? And it turns out that it's pretty rare for the U.S. stock market to just beat the equal weight. In fact, it happened this decade. But prior to that it happened in the '90s. Prior to that, it hadn’t happened since like 1920.
So the vast majority of the time you’re better off on an outperformance level just buying the global stock market, not just the U.S. And any one country can wax and wane on returns. But this, as we reflect, you know take a step back and say, was I really this brilliant this past decade putting all my money into only U.S. stocks? Or was there a massive tailwind? And maybe you were brilliant listeners. But the chances are you had a pretty big tailwind. And that’s not normal. Meaning that’s not what has traditionally happened over the past 120-plus years.
So just having that sort of fundamental anchor of valuations, of what’s happened in the past to give you perspective the same way that you would at the roulette table or anything else, I think is helpful.
Dan Ferris: It is so hard, isn’t it, Meb, for a lot of U.S. investors to think about any stocks outside the U.S. Let alone emerging markets or something like that. We have enormous, what I know another thing you’ve written about is home country bias. It’s like why don’t we – we don’t seem to care. I mean what you just told me I feel like, wow, I never want to be overweight the U.S. again over a 10-year period. But you know, you know that a lot of people are and will remain that way. They just can’t get comfortable with it.
Meb Faber: Can I walk you through a couple just points about that that I think, you know we get this question over the last five years, we’ve been talking a lot about this topic and valuations. And there’s some common responses. And I’ll just touch on a few of them.
And the first is, there’s a couple reasons to think global. First, if you go back to 1900, U.S. was only about 15% of the global market cap. So the U.K. was almost double the market cap size. But over the past 120 years, the U.S. went from 15 to 55%. U.K. went from 25 to five. So a lot of people when they look at the U.S. example they’re extrapolating the single best performing market that emerged in history. And even then it only did 6 ½% real. So close to 10 on a nominal basis. Wasn’t the best performing market. I think South Africa did better. There were plenty that were worse, including China and Russia that went to zero. And then many countries that essentially went to zero when they had 90%-plus drawdowns like Germany. And even the U.S. lost almost 90% in the Great Depression.
So this concept of breadth, meaning diversifying your bets all the way around the world, makes a lot of sense. And a good example that’s a little more Warren Buffett-y, although he would never suggest this, is if you’re going to go fishing, why would you ever only fish in 10% of the pond or the lake? If you’re in a tournament and say, OK, I’m going to go fishing but I’m going to only focus on this small part of the lake. That just doesn’t make any sense. And so the opportunity to go global is much more reasonable. And it’s even more reasonable today because we often say that sectors and boarders are becoming increasingly meaningless.
And there was a good piece in this blog that we did where they talked about – they’re like, look, GlaxoSmithKline. That’s a U.K. company. Has almost no U.K. revenue. There’s one of the biggest companies in the S&P 500, Phillip Morris International, doesn’t have any U.S. revenue. So there’s the examples where the U.S. gets about 40% of its revenue from abroad and people say, well, that’s a good reason that you would be diversified. But that’s the least amount of foreign revenue than any developed market country. Most other countries have revenue anywhere.
And so you talk about this home country bias. And so in the U.S. most people put about 80% in U.S. stocks of their stock allocation. And the global index is 50%. Which is still way more than any other country. But the funny thing is everyone does it. You know the Japanese do it. Our Australian friends do it. Our U.K. buddies. Everyone puts the vast majority of their money in their own market. And history has shown that to be a pretty poor idea.
So Vanguard actually did a study that said that every single country has a higher volatility than the global market portfolio of stocks. So if you’re overweighting any one country it’s like to be more volatile. The Bridgewater study I referenced showed that all the countries have a bigger drawdown. So your losses will be bigger.
And then in particular right now, the valuations around the rest of the world tend to be much more interesting. I think if you’re looking at dividends, I know a lot of listeners here love dividends. There’s six times as many stocks outside the U.S. that yield over 3% than there are in the U.S. And so if you’re saying I’m only going to focus on one market, to me that seems – I wouldn’t go as far as to say it’s foolish, but I think it seems very suboptimal. And you can certainly give lots of other examples. Japan is everyone’s favorite. But many other examples of markets that zig and zag.
And so to tie this back to the very beginning of this long rant, you know it wasn’t that long ago that the U.S. had a terrible decade. It was literally only 10 years ago when we were finishing the early 2000s that the massive bubble we had in the U.S. had horrible returns for a decade. And emerging markets, for example, destroyed the U.S. But of course, the script flips and over time, if we learn anything about markets, whether it’s gold, whether it’s stocks, bonds, real estate, commodities, is that every asset has its time in the sun but also can be absolutely horrible at other times.
And so this concept of diversifying your bets, staying in the game, not going broke by putting all your money into one market, I think is instructive.
And I’ll end this long rant with just two more comments because things we hear very often. The first is which they say, 'Meb, the U.S. stock market deserves the premium multiple. It’s a rule of law. Companies aren’t fraudulent.' Yada, yada. Whatever. And I always respond and say, if that were to be true, I accept your hypothesis and if it were to be true, then it should have a higher valuation premium historically. And in reality it doesn’t. Historically the valuation on average in the U.S. is the same as almost every other country in the world. So there is no premium in the U.S.
And people say, well, 'Meb, no, look, over the past 70 years the U.S. stock market’s returned over 1% better than the rest of the world. And while that doesn’t sound like much, in reality if you compound it 1% more than the rest of the world it’s a massive, massive difference over time.'
And then I say, that’s true. How much of that has come since 2009? And the answer is all of it. So we’re obviously picking two points in time. But this past 10 years has been such an awesome run. And could it go higher? Sure. The trend _____ _____, you know again, we just did this study showing that all time highs are actually pretty bullish. It’s when the tide changes and the trend rolls over that I think people should be really cautious and batten down the hatches. But that’s not early 2020. Maybe it’s late 2020. Maybe it’s 2025. Who knows when that is. But certainly I think there’s a lot more opportunities elsewhere in the world.
Dan Ferris: So, Meb, I’m going to go back to your comment on Warren Buffett. You made a good analogy with Buffett by the way. I’m buying the analogy. But I guess as we both know, what he really said was, you know if you can’t get a decent return here in the United States you’re probably not going to do so much better by going to another country.
So the analogy works, but the specific comment that he made is actually – it’s basically the opposite. He was basically stumping for home country bias.
Meb Faber: Well, and to make a comment. So we wrote this book on asset allocation and we looked at the profiles of say the top 20 guru recommended asset allocations. And arguably I think Buffett probably has the worst asset allocation advice, which is to put – and you can probably correct me, but it’s like 90% on the S&P and 10% in bonds or T-bills or whatnot. Which is like the ultimately home country bias.
But the irony is that portfolio’s done just fine. And so I’m of the belief, and we’ll channel Bogo here and say, look are there better portfolios? Yes. But there’s infinite worse. And so if you implement that low-cost portfolio and hold it long enough you’ll do just fine. But if you were to ask me, Meb, is that a reasonable or optimal portfolio I’d say, absolutely not. I think that’s an absolutely terrible idea. Largely because of this concentration risk, which you just do not get compensated for throughout history.
And you can walk around the country and go to almost any other country in the world over the past 10 years. I was over in U.K., in London having some pints with some buddies talking about their stock market. And they would guarantee you they would not say you should put all your money in U.K. stocks. You go to anyone in Japan, they did the same thing last year. Sat down with some friends. Buy and hold isn’t even a concept. Right? I mean people, their stock market’s gone nowhere for three decades. And that’s not some backwater economy. So these are two of the largest stock markets in the world. God forbid we start talking about Russia and Greece and most of Europe or anywhere else.
And so at the same time, you got to remember that U.S. versus foreign markets is a coin flip over time. I mean it's 50-50 any given year or timeframe which does better. And there’s been plenty of decades, as I mentioned that Bridgewater piece, with the exception of the 90s, you have to go back to the 1920s when the U.S. beat just a broad simple average of the other countries.
So anyway, I love Uncle Warren. I think he’s fantastic. I think that advice to focus on just one country, back to my analogy of the pond, just doesn’t make any sense.
Dan Ferris: Yeah. I hear you. I wasn’t saying that I agree with Buffett, by the way. Because I like the case that you make. And frankly, if you just look at what he does versus what you’re advocating for, it’s a hell of a lot easier to implement what you’re saying than it is to be the next Warren Buffett, you know, and go bottom up on a handful of names and make huge returns for 50 years or something. So yeah, I hear you all day long.
Let me ask you something, Meb. What is the safest asset? You sent me some links to read of stuff you’ve done over the past year. And I did not read, I read a couple of them. The Case for Global Investing and the Biggest Valuation Spread that we talked about. But you sent me one that says the safest asset, most people think it's cash or bonds. But it’s not. So I’m intrigued. What is the safest asset?
Meb Faber: So we like to question commonly-held beliefs. And there’s a lot of things that are commonly held that I agree with. There’s some that I’m not opinioned on. I don’t really care. If you ask me about Tesla or Bitcoin, I’ll just kinda shrug my shoulders and say I don’t really have an opinion. I can gossip and chat with you about them, but I don’t feel like I need to have an opinion on everything. But there’s other things where I think it’s constructive because almost 80, 90% of people I think have an opinion that’s not grounded in reality and in fact is wrong.
So let me give you an example. If you were to ask everyone, you know hey, you got safe money, what are you going to do with it? So there’s really usually two answers. One is I’m going to literally put it under the bed. I don’t know anyone that actually does that. You know my grandfather used to do that. But I think the modern equivalent is just leaving it in the bank. So put it in Bank of America. At which point currently today you earn 0%. Right. I’m a preferred rewards customer I think and my yield is 0.05%.
Second would be that you put it in bonds or T-bills. Which let’s call it 2, 2 ½%. Sorry, excuse me, 1 ½, 2%. Somewhere in there. Just a round number. We’ll say 2% just to round. And by the way, a quick aside is if you have a bank account and you’re not earning 2%, you’re just being lazy and that’s on you. You can get that almost, or 1.8. But meaning the vast majority of banks pay you nothing when you could be earning more. Not the point of this.
Point of this is I ask people, what would you do with your safe money? And they would say, put it in the bank. And it turns out if you put it in the bank and you earn 0% that means over time you lose about 3% a year, right? We all know that. That’s just inflation. And then let’s say you say we’re going to put it in T-bills. OK. Well, in that case at least you for the most part, keep up with inflation. Over time. Right. You about break even. So most people say, look, that’s my safe money. It has very little volatility. But that is not what history says.
So if you go back in time, the biggest risk to, again, bonds and lower term bills, is inflation. Which is pretty moderate now. But even over the past 20 years we’ve had plenty of times when inflation has been higher than bond yields. Look at the rest of the world of negative yielding sovereigns.
So in reality we did a Twitter question and we said, how much do you think that you would have – the biggest loss you would have had in safe U.S. T-bills over the past 100 years? And the vast majority of people said zero or zero to 15, 15 to 30, 30 to 45. So I think that was like 80% of people. And they were all wrong. Had you had T-bills at one point you would have lost half. Including the worst 12 months you would have lost a third.
So my thought experiment was, can we match the historical drawdown and return of T-bills but have a higher return? It turns out if you just invest in what we call the global market portfolio, so that’s if you just buy every asset in the world and that’s roughly half stocks and half bonds, half U.S., and half foreign – and by the way, in the post we looked at every asset individually. We looked at gold. Max draw out on that was 85%. And this is real. Again, after inflation. We looked at bonds. We looked at stocks. We looked at U.S. stocks. About everything has lost like 70, 80% at some point real. Again, cash was half. Ten-year bonds was 60%, by the way.
And so we said, OK, is there something you can come up with. And simply, if you invest two-thirds of the portfolio in global market portfolio and a third in cash, this is just an example, you basically have a better drawdown. So the worst-case drawdown was 37% instead of half. And the worst 12 months was basically the same . Right around 17%. But you have a 2 ½% higher yield.
So for the same drawdown and loss characteristics, you increased the return on that portfolio. So it actually preserves your purchasing power better than cash.
So the takeaway was that most people that feels scary. And then it’s actually changed my thinking a bit to where for the vast majority of my even short-term cash and safe money, I invest most of it. And the reason being is that over time, in order to keep up with inflation and in order to not just tread water but actually to make money, you want to be investing in businesses. And the three things to make it a little more real, it’s sort of be the bank, hold the keys, which would be real estate for a lot of people. That tends to be one. Or own the business. And so own great businesses, whether that’s the S&P 500, whether it’s global. It doesn’t really matter. But just this thought experiment of you actually have to invest to do better than just cash I think is uncomfortable for most. But on a test, if you had to say if you looked at just the numbers, it’s actually a safer portfolio.
Dan Ferris: All right. So, Meb, I’ve got one more topic that I want to address with you. All of this work that you do, it makes an assumption, doesn’t it? It makes an assumption that, at least like long term over decade or more or whatever, that history will sort of repeat itself enough. In other words, we look back at these things and we say, well, this is what has happened, therefore, this is what we expect to happen over the next whatever timeframe makes you comfortable. Is there an insight or a method or something that you sort of gauge how much to lean on history? If that makes sense.
Meb Faber: Yeah, no, I think it's a great question. I alluded to this earlier in this asset allocation book we did, which is, by the way, free to download on our website at Cambria. But one of my favorite examples is the Talmud says the way that – this is 2,000 years old. The people should allocate their assets, it doesn’t quite say it this way, but I think the quote was, I’ll paraphrase, was keep a third in reserve, a third in land and a third in business. Which I equate to invest a third in stocks, real assets and in bonds and bills. Is the modern equivalent. And that portfolio, which theoretically is 2,000 years old, I think it beats a probably 80% of all institutions, including Calpers and in places like that over time. It’s a really, really hard portfolio to beat. Assuming you’re doing it global. Assume you do it with low-cost investing.
That having been said, you cannot find me an asset allocation portfolio, and I challenge the listeners, after inflation, that doesn’t lose at least a quarter or a third at some point. And that’s just normal markets.
And so looking back at history, the good news is we have 120-plus years of capital markets. The bad news is that’s not that much. And so if you look at the modern era of even our modern currency world, that’s only 50 years. And so I 100% agree with you that it’s useful to look at history, but the future will always be different. I’ve always wanted to write a shareholder letter. You always see these managers. And I understand why. I’m a quant and we do the same thing. When something weird happens in the world they’ll say, it’s OK, this has happened before and this is, for example, this is why value has done so poorly the past decade. It’s not out of the question. We expect it to revert in the future.
But on the flip side, I’ve always wanted to write a letter to say, it’s OK, clients. This has never happened before. And there’s plenty of things that have never happened before. After the last election we had the first year in history where the stock market went up every single month. And I would laugh to hear commentators go on TV and say, during these volatile uncertain times. I’d say, what are you talking about? This has been the least volatile market we’ve ever had. It literally went up every single month. And it was a string of I think 15 or 16, 18 up months. Which was up there with the record. And it was the first decade in history we’d never had a recession.
And so the future will always be different and things will change. I think as humans we have to do our best to invest in a way that diversifies our bets, going back to our earlier discussion of me losing all my money trading biotech options, you know in a way to simply survive and continue to be in the game. And to me, that’s having as many assets and strategies that zig and zag. You know we talk a lot about this. I invest all of my money into our public funds and ETFs. We have 11 of them. And the vast majority in just one. And it’s a philosophy that, again, going back is half, what I call this global market buy and hold portfolio will tilts towards value and momentum. So it gives you stocks and bonds and real assets like real estate and gold. Everything all around the world. Because I want a fundamental anchor to what’s going on in the world.
But the biggest problem with the buy and hold portfolio historically has been the bear markets and the drawdowns. And the problem with that is it coincides almost always with things going bad in the world, with poor economies and recessions and depressions. So if you look at buy and hold, when did it do really poorly? Well, the financial crisis. It got absolutely smoked. And depending on how you did buy and hold in the late '90s, 2000s, it could have done great or terrible. In general it’s been a wonderful portfolio. But it coincides in times when people are losing their jobs, economy’s doing poor, and unemployment goes up.
And so the flip side, the other half of the portfolio for me is trend following. Which is equally as difficult and hard of a portfolio to follow behaviorally, psychologically. But usually it’s not because of the 2008, it’s rather the opposite. It’s when things like the S&P are romping and stomping. So having been a professional money manager for a while now, the biggest takeaway from all of this is not what happens in history. It’s not the actual portfolios. Most portfolios we see are probably just fine. It’s the emotions and the psychology that investors have that creep in and fractures their process. And almost universally.
And so having a process where you understand what’s at least possible in history, so you’re not going to get surprised by a 25% loss in your asset allocation. You’re not going to get surprised by if stocks go down 20% in a month. You’re not going to be surprised if inflation goes up to 8%. All these things that have happened in the past and could be worse. But rather that you understand that and then you build something that philosophically works for you.
So if it’s the Warren Buffett you buy the S&P 500 and put it away, God bless you. If it’s I buy 10 dividend stocks and reinvest those dividends. Whatever it may be. By far the hardest part is compliance. And finding something that works. I think most investors really, really struggle with that.
So history certainly is a guide, but we also got to be almost like comedians. Being money managers, right? Because you got to laugh at the possibilities of what could happen in the future. I always say what could cause the U.S. stock market valuation could increase up to 45. Which is what we saw in the late '90s. It could increase to 100. Which is what we saw Japan in 1989. And hey, it could even go higher in Japan. There’s nothing stopping that. Elon Musk finds pre-energy on Mars, I don’t know.
But also you have to bet on what’s the most likely scenarios. Just like if you’re sitting down at the blackjack table. All right. That was a long enough rant to your question. Sorry. You know history’s useful but you can’t bet the house on it for sure.
Dan Ferris: So, Meb, we’ve come to the end of our time. I usually ask people, you know if you could leave the listener with one thought what would it be? That last one was pretty good. I don’t know. If you can do better, by all means.
Meb Faber: Yeah. I mean I think the simplest, and we didn’t even talk about all the boring block and tackling of fees and taxes and everything else. But I think it's really easy to tell people to have a long horizon. And I’ll give you an example.
People used to ask me, Meb, how long should I give X-Y-Z strategy of yours to see if it works? And I used to say, a decade. And they would laugh. And I would say, no, I’d actually think the reasonable amount of time now is 20 years. And they laugh some more. And I say, the most important thing and takeaway that particularly, it’s not just actually early investors, it’s almost all institutions too, you know is they confuse process with outcome. And you can make a really bad bet at the roulette table in Vegas. You can make a really bad bet in the markets and it work out and you get rewarded for it and think it was a brilliant move. And vice versa. You can make a very sensible bet and it not work out.
I think the biggest one for most people is their timeframe is far, far, far too short. They think in times of months and quarters and years even. Most institutions, the academic literature shows, base their decisions on the last three years when it shows that they would have done much better doing the opposite of the decisions they would make on hiring and firing managers.
So my point is think in timeframes of decades. Which is hard for most people. And as you reflect on the past decade, just take a step back and say, you know is this something that is normal and expected throughout history or is this something that maybe is a little bit stretched? So the summary of that is to look beyond your shores and go global with your perspective.
Dan Ferris: All right. Good answer. Yeah. Great answer. Listen, thanks a lot, Meb. I love talking with you. And I hope we get to do it again soon.
Meb Faber: Any time, bud.
Dan Ferris: All right thanks and, you know bye-bye for now and we’ll see you soon.
Wow. Lot of stuff there. I love Meb. He’s a great guy. And you know you can go to his website, MebFaber.com and you click on the books tab and you can download all four of his books for free. Including he mentioned Global Asset Allocation as one of his four books. I also like Global Value, of course. And the subtitle of that is, How to Spot Bubbles, Avoid Market Crashes and Earn Big Returns in the Stock Market. And then he’s got a couple others on various topics.
So yeah, great talk. Love Meb to death. Download his books. And he’s got white papers. It’s a pretty cool website. MebFaber.com.
Dan Ferris: All right. Time for the mailbag. This is where you and I get to have an honest conversation about investing. You write in to [email protected] with comments, questions, and politely worded criticisms and I read them on the show and respond with my comments. Right. We get to interact. We get to talk to each other. And maybe I’ll offer a question or a politely worded criticism or two.
I read every email we get. I respond to as many as possible. Not all of them, but as many as possible. Just write in to [email protected].
First one this week is from Angelo C. And Angelo C. says, whatever happened to the prediction one of your guests made about Tesla being under $100by the end of 2019? Now it’s over 500. Things seem to be super out of whack at the moment. Cheers, Angelo C.
Angelo, this was Whitney Tilson. I did mention this. And you know Whitney has written a lot about Tesla. He puts out an email about Tesla every week. I mean he really keeps up with the story. And he said in December , you know I’m wrong about this and be careful, this thing is serious danger of melting up. Which of course it has. It was below 400 then. Now it’s 500, right? So that’s the answer to that question.
Next one is from Jason W. And he says, I have not yet red Annie Duke’s book, Thinking in Bets, or Ed Thorpe’s book, A Man for All Markets. But I read Howard Mark’s latest January 13, 2020 memo where he talks about investing as it relates to odds in betting, card games like poker, chance, uncertainty about the future, etc. And I know Charlie Munger has talked a lot about this. Seems a lot of great investors are good poker or other card game players. I wondered if you have a suggestion for any one book or additional books to the ones I mentioned that would really sum up everything an investor needs to know about position sizing, working with chance, odds, uncertainties, and the math and logic around it as it relates to investing. It would also be great to hear you do a segment of your show on your thoughts on these topics. Thanks and keep up the fantastic work on your podcast, Jason W. Thank you, Jason.
You can hardly do better than Howard Marks unless you read Nassim Taleb. Just read – just start with Fooled by Randomness and go from there. Fooled by Randomness and probably The Black Swan are his two books that you want to read in that vein. And you can hardly do better – I don’t think you can do better. Great question.
Pete L. writes in and says, Dan, huge fan. I’m a subscriber to Stansberry Research and have listened to many of your Investor Hour podcasts on YouTube. Have also read Porter’s Debt Jubilee book. So I recently reviewed Home Depot and Starbucks’ balance sheets. They both went negative on their stockholder’s equity in the last 12 months. I own some Phillip Morris and it makes sense to me that PM would need to go negative on their shareholder’s equity to pay a fat dividend in order to encourage investors since cigarettes kill people. That said, why do Home Depot and Starbucks have negative shareholder’s equity? Does this seem reasonable to you? Is it share buybacks? Thanks, keep up the great work.
- So Pete L. Thank you, Pete. So share buybacks have something to do with it because that reduces equity. Sure. But really, they have negative shareholder’s equity because they can. Not everybody can do this because some businesses have huge up-front capital requirements so they wind up with a gigantic pile of assets on which they get a relatively low and they’re probably highly cyclical, so sometimes negative return. And those tend to be really crappy businesses. It’s hard to do just – it’s hard to look at shareholder’s equity and glean a whole lot without really digging in.
So these two are businesses that don’t require tons and tons of capital. They’re not building steel mills. And they’re not building copper mines. They don’t require these huge upfront amounts of capital. So they buy back their shares. Eventually the equity shrinks small enough that it gets negative in relation to their liabilities. It’s not a huge concern. It’s just an accounting phenomenon. It’s really not meaningful. Good question though.
All right. Next up is Shawn Q. Just have two more of these. Shawn Q. Hi, Dan, longtime fan, first-time writer. I may be naïve here, but it seems like the market may not be factoring in the potential outcome in the upcoming election of the U.S. corporate tax being restored to 35% from the current 21%. Which is a 67% increase. Would you please expand on this scenario and potential market outcomes if it were to occur? At the end of 2018, the Fed telegraphed an expectation of four or more 25 basis point increases over the next year offsetting the last big selloff in the market and the start of QE. Isn’t a 67% increase in corporate taxes far more impactful than 100 basis point increase in the Fed rate? Keep up the good work. The guests are outstanding. Please get Porter on your show as a guest. God bless. Shawn Q.
We’ll work on that one, Shawn. But I don’t think either one of these things is going to happen. As long as the economy stays the way it is, I think Trump’s going to be reelected no problem. And so he won’t screw around with the corporate tax rate. He’s the one that lowered it. And as far as the 25 basis point increases, I think they’re actually going to wind up cutting this year. If I had to guess. Which I don’t really need to. But if I had to guess I’d think they would wind up cutting because the 25% basis point increase, that was off the table. As soon as the market fell almost 20% from September through December 24, 2018 – the increases were off the table and have been. They were in 2019 and they’re off the table now. So that’s ancient history. Forget about it. It’s not going to happen. But good question. And we should be asking those things I think.
One more. This is Dante R. Hi, Dan. Love the show and wanted to ask you some questions since you are a big fan of gold. I love the business model of the streaming companies and am a big fan of Franco Nevada Wheat and Sandstorm, etc. I was wondering what your thoughts are on this type of business model as I think it allows great exposure to the metal with limited risk. I love how Nolan Watson has set up his organization and I believe this model will be very profitable and safe going forward. Nolan Watson is the guy who runs Sandstorm, just so we’re all on the same page there. And then he says, thanks, Dante R.
OK, Dante R. You know Nolan has been through the wringer along with the folks in the gold business. He’s come out the other side of it. I think the stock bottomed around two bucks and I think he’s up around six or seven now. Technically speaking, I prefer royalties to streams. A stream is a contract. A royalty is an interest in the real estate underlying the producing mine. So if you have a royalty on a gold mine and the gold company goes bankrupt, your royalty is intact and will pay as long as the gold mine continues to produce. It could conceivably continue producing in bankruptcy.
So it’s a superior instrument to streams. Having said that, we’ve talked about Altese minerals on the program, and they have a really nice copper stream and a gold mine in South America, in Brazil. And they’ve structured it really well so it’s a long-term thing. It contains upside the way you get with a good royalty agreement. And so there’s lots of optionality in it just like with a good royalty.
So I would just say you need to look at these agreements and make sure that they are going to treat you well over time. But you know having said that, sure, yeah, this is the best way to pull the cash off the top of the revenue stream coming out of a mine is royalties and streams aren’t bad either.
So I agree and good luck to you. I’m not recommending Franco Nevada Wheat or Sandstorm by saying all this. But your basic idea I believe is sound. In fact, I ‘d go farther. I’d say the only two places I want to be in gold or mining in general are at the beginning of the process and the end. So the beginning is prospect generation. Original prospect generation. Where you pay a small amount of money to stake out a mineral prospect. Then you get a partner to spend all the capital necessary to drill holes in the ground and figure out if there’s something there. And get them to take the risk. And earn their way into a bigger, usually majority, stake in the thing. And you do a bunch of those. And if one of them hits you can turn literally, like a few hundred grand, into a couple hundred million. I’ve seen it happen. Altese minerals has done it. So that’s really great. That’s a low risk way to go at this.
And then at the other end is the royalties. After the mine is producing, if you have a royalty on it that you’ve created, especially if it’s one that you’ve created in that prospect generation process, oh, man. Then you’re turning a small amount of capital not just into a one-time tens of millions or hundreds of millions of dollar hit, but you’re turning it into something with a huge present value of tens or hundreds of millions that produces cash flow for many years. Which is really cool.
So yeah, I’m with you and I think it’s a good question and I’m glad you brought it up.
All right, everybody. That’s it. That’s another episode of the Stansberry Investor Hour. It’s my privilege to come to you this week and every week. And look, just go to our website, InvestorHour.com. You can see every single episode we’ve ever done. You can listen to every single episode we’ve ever done. You can read a transcript of every single episode we’ve ever done. And you can enter your email at InvestorHour.com to get an update on every single episode that we will ever do in the future. Pretty cool.
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