Meb Faber, Cambria

As far as my background, I come from an engineering bent, a little bit of biotech mixed in, and so very much a quantitative rules-based shop. And I'm happy to dig in more any of those alleyways.

And narrative driven business. The more modern era, we started out with academic papers. So I kind of made my first mark with an academic paper, then it became books, then it became blogs. And in the more modern age, it's podcasts and YouTube. And I'm told TikTok and who knows what's next, maybe some holograms in the internet VR world somewhere. I don't know. But it comes down to, do you have ideas in this internet age, it gives you a megaphone. It can be good or it can be bad. As we've seen, people, your ideas can circle around the globe pretty quick. So we'd like to put them all out there. A lot of non-consensus views, as I'm sure you know,

On the investing world.

Very much in demand. We don't do that. We talk a lot about it. And we spend a lot of time on the podcast talking about all the things that go into investing. That's not just the arithmetic of investing. But for the most part, our business is largely ETFs publicly available. We do a free research service called the idea farm that goes out to over 100,000 investors trying to curate all this investment noise we see out there into really a digestible weekly email. That's a lot of fun. And so really, it's the kind of dual mission of launching funds that anyone can buy. And then also, as ETFs eat the asset management industry, but also to educate people as well, which is a big passion for us. Because as we know, it's not taught in schools, or it's not taught in

Most schools. It's, it's getting better. It's up to, I think, about a quarter of all high schools have a course on money. We'd like to see that close to 100%.

From the get go, people are always like, Meb, why are you launching funds? There's 10,000 plus funds out there. Isn't everything already covered? And we actually only try to launch funds that don't exist. Meaning the methodology is something that either totally doesn't exist. It's a blue ocean opportunity, or we think we're implementing it sufficiently better quote, it's different enough or better than the status quo, or it's cheaper. So all of our funds are cheaper in the category average, a couple are the cheapest funds in the category. But it has to be something I want to put my own money into. The average mutual fund manager has $0 invested in their own fund, which is insane to me, we want to have skin in the game. But it has to be something that there's a lot

Of academic and practitioner research, meaning there has to be support. And usually we publish a white paper, a book to go along with these. But as far as the philosophy, we're a bit unique, we think there's a lot of ways to succeed in investing. And but there's maybe 100 times as many more to impale yourselves and ruin, your chance to success. So avoiding those equally is important. But, at our basic core, you have to be an investor. And that sounds pretty generic. And the concept we use is you got to be the owner. If you look at a lot of the top, not even a lot, I think, nearly all of the top celebrities, athletes, actors, singer songwriters, they all made some money from their career, but they made the big money, right? When the ones that

Got truly wealthy from business, business and investing. So Michael Jordan, Jay-Z, Dolly Parton, Ryan Reynolds, on and on, you see, yeah, they made they made a decent coin from their day job, but where they really got wealthy was investing. So you have to invest. And what does that mean? It could mean, people buying houses, it can mean investing in the stock market, it could mean all sorts of different things. But putting money to work by far, and as soon as possible, the decision to save and invest trumps every other decision. Now, we can then spend the rest of the time talking about, what you should invest in and why. But getting started, particularly for the younger cohort, it's by far the most impactful decision versus everything else.

For forever have distributed a company makes money, it decides to distribute that money to shareholders, right? They want some sort of income from the company. And you go back 100, 200 years ago, traditionally, they did it through what they call the cash dividend, they simply just paid you a check, right? Well, when you have publicly listed stocks and private to, you have the ability as an owner to, they could buy back shares of the company and or issue shares, say, hey, we need some money, so GameStop just do this recently, right? We're going to issue a bunch more shares. And as an owner, you obviously get diluted if you issue shares, and you own more of the company if the company buys them back. First of all, use the word buyback and automatically shuts down people's

Brains. I don't know why, but it's one of the most misunderstood phrases in all of investing in corporate finance, which is odd, because it's really a boring topic. It's never been illegal. It's been around forever. But in the 1980s, the government passed some rules that just gave companies a little more safe, gave them a little more comfort in buying back shares on the public markets. And so buybacks, at their definitional core, this is freshman level finance 101, buybacks, if the stock's trading intrinsic value is the exact same thing as paying out a cash dividend full stop. And most people already, that shuts their brain down. But it's true. Now, the difference comes when a buyback is executed if the stock is trading below intrinsic value, so it's cheap,

Or it's trading above intrinsic value, it's expensive, because then it comes a transfer of wealth from the seller to the buyer, vice versa, right? Nobody understands this more than Warren Buffett. He's been writing about buybacks in his annual letters all the way back. We use a quote of his from the 1980s. He's like, there's no better use of cash if companies trading far below intrinsic value and to buy back shares. So what happened 1980s, companies started buying back more shares. Now, why did they do that for two reasons? One, stock buybacks are flexible, right? You don't have to pay like if you put out a dividend, companies are loath to cut them. It's a signaling mechanism, right? They want to make sure they maintain that dividend. It's very important. They cut it,

All of a sudden, the stock tanks because all the investors say, what's wrong with the company? So they're flexible. Second is they're tax efficient. If you're an investor in a high tax state like I am in California, the last thing you want is a company you own, a great stock, paying you a ton of dividends because guess what? You have to pay tax on that. So buybacks are nice because it gives you the choice. I can sell or not. So what we looked at is you started to ramp up buybacks in the 80s and starting in the late 90s, buybacks outpace dividends in any given year, almost every year since the late 90s. Now, why is that significant? Because the vast majority of strategies, if you look at all these income funds that are based on dividends, totally ignore buybacks

And that's insane. So we wrote a book. It's free. We're doing a second edition this summer, hopefully, called Shareholder Yield, A Better Approach to Dividend Investing. And what that meant was, if you looked at the combination, the holistic measure of cash dividends plus net stock buybacks, and net is important because of companies issuing shares, and this is particularly true in this cycle with stock-based compensation to the C-suite, you get a much more holistic view of income. And if you look back in the academic literature for the past, we did it for, I think, 50 years. Other academics have done it for 100 years on Shareholder Yield. It outperforms any dividend strategy you can come up with. High dividend yield, dividend growth, you name it. And so we

Launched a fund. Now we've launched four, soon to be five funds by the time this podcast comes out on the Shareholder Yield concept. And it's one thing to do a backtest and to publish academic literature. It's another thing to do it with real money. And we're happy with the performance of all these funds. We have a foreign fund, an emerging market fund. But basically, it gives you what you're really looking for in Ben Graham-esque security analysis, which is a high-quality business that's generating a ton of cash flow, is keeping the C-suite honest by distributing that cash flow to shareholders, but is also trading at a cheap valuation, not doing it with a ton of debt.

You end up with a pretty nice portfolio. Sorry, that was a short-winded description of the topic.

To them. But overall, it's probably one of our most plain vanilla strategies in the lineup.

That company is issuing 5% in a market cap in shares, that stock actually has a negative yield. So let that sink in. Someone thinks they're buying a 4% yielder, but in reality, they're getting diluted. And that's the big risk, I think, for a lot of investors who ignore this metric. And part of the challenge is the buyback yield is a lot harder to dig into. If you go to Yahoo Finance, you go to Morningstar, they publish dividend yield. The front page of every quote, where do you find buyback yield? You got to dig around for the shares outstanding. That's changing. You're starting to see more and more people talk about it as the concept becomes more widespread. So we start with that. That eliminates 75%.

The companies, on average, coming into our portfolio, have a double-digit shareholder yield. So let that sink in. That is a very large number. In the US, that is majority buyback-driven. Culture in the United States is much more comfortable with the buybacks than foreign developed and emerging, although that's changing. We then next do a valuation composite. So it's screening for very traditional value metrics. I actually don't think it matters that much. The whole point is you want to be on this side of the universe versus this side of the universe. Mainly speaking, you want the companies, on average, companies buying back a bunch of shares trade cheap. And on average, the companies issuing shares are expensive, but we don't want to take the CEO's word for it.

We want to, like Warren Buffett says, he'll buy back Berkshire at 1.3 times a book. So we want a similar methodology. We want them to be cheap on average. Again, we mentioned quality, so we don't want these companies to be over-leveraged, just loading up their book with a ton of debt just to buy back shares. That was less of a concern when interest rates were zero. Now we're at 5%. I think that's becoming a very real consideration for companies. And the last thing we do, which is a bit unique, is you mentioned in the intro, we're a trend-following momentum shop. And on this final buy decision, so let's say we have a portfolio, 100 stocks already, and there's two reasons companies get kicked out. Either their shareholder yield goes down a lot,

Or the valuation goes up too much. Good example, we owned Apple from 2013 to 2020. And Apple eventually just went up too much and got too expensive, right? The valuation metrics kick it out. But let's say there's 10 names coming out of the portfolio. All right, well, we have our list, we've whittled down. And let's say there's 50 names that qualify. There's a final sort we do on intermediate term momentum to pick the 10 best on momentum, just like a classic French FOMO momentum measure. And the goal there is to try to avoid the value traps, meaning companies that are cheap, but just getting cheaper and cheaper on their way to the cemetery. And so that's it. That's the basics for the fund. For the foreign ones, we cap the countries too. We don't want a third of the fund

In any country. Right now in the US, there's very little tech exposure. So I think the biggest sectors are energy and materials and financials and industrials. Part of the problem with tech stocks in the US is they tend to be on average expensive, but also they're serial share issuers. So they love to make it rain with the C-suite on stock based compensation. That's actually not true in the foreign funds. The emerging market fund tech is the number one sector, which I think is really interesting. Most people think value is an old, stodgy, fuddy-duddy category. But really, it's time dependent and market dependent, where sometimes, and part of this is because emerging markets have done so poorly for the past 15 years. These stocks on average are much cheaper there than they are

It's a monster performer. I go, how many times have you guys mentioned Hanmi? And they said, what? Did you sneeze? Like, what are you talking about? I go, well, it's a stock that's outperformed NVIDIA over the past one and two years. It just happens to be located in South Korea. But nobody cares about South Korea investing because foreign stocks have underperformed the U.S. for so long. But this sort of leads into this huge opportunity right now where it's just twofold. If you look at market cap weighting in the U.S., so the big stock, everyone's talking about this, the S&P, but really dominated by these giant names. People call them the MAG-7 or whatever. But the S&P is expensive. Like, there's no real way to, mince words here.

That doesn't mean it can't get more expensive, but on average, it's expensive. If you look at the shareholder yield basket and you can go to any quote site, type in an ETF. We use Morningstar. And it'll give you an X-ray of the underlying holdings. And you look at the valuation and across the board, it's cheaper. But in most cases, it's cheaper by half. And you have an environment that's setting up very similar to other periods. The two that I would cite would be late 90s and then the nifty 50s, where you had this high concentration in a certain amount of names and then value type of strategies outperformed by a massive amount over the coming years. We did a tweet on Twitter where we said 2024 is shaping up to be one of the worst years ever for both an equal weight or small cap weight versus the S&P 500.

And last year wasn't good either. It was one of the worst years. You had to go back to the late 90s to have even a competing year. And the other one was 1929. Not a good sample size, right? But in the aftermath of that, guess what? I think it was like 12 in the next 15 years, small caps outperformed the large caps. So there's a massive opportunity for this kind of overlapping Venn diagram circle of both small versus large and value versus expensive that's setting up right now and could last, hopefully, not just a year or two, but for many years to come.

Investors were coming to really appreciate, love the specific exposure. So we think that we tried, we're really excited to get the small cap fund out because we said this is an opportunity in time that may not last forever. So we want to get this fund out and that launched in January. And that's NYLD. And that focuses on the smaller names in the universe.

But why are people attracted to them? It's a lottery mentality. Right? Because you see the one that eventually makes it. Oh, man, look at that. 10, 100 bagger. But on average, it's a terrible investing strategy. And if you look at things like market cap weight versus equal weight, on average, the equal weight and then value strategies like shareholder yield outperform. There's a great study by Robico that looks at what they call conservative investing, but it's basically shareholder yield. They take it back to the 1800s. and they find that usually these type of strategies don't really keep up in the romping, stomping bulls. Now, this fund has kept up, which is great.

But, we've had four times in history where the S&P has done 15% per year for over a decade. And we're in one of those periods now. And the other three are the Internet bubble, the nifty 50s and roaring 20s. So it's not totally unique, but it's rare for stocks to have just crushed it for this long. But the good news is this type of strategy, historically speaking, has done well during the sideways periods and the bad periods for the broad market. Because what do people flock to in bear markets? Well, they want quality. They want high cash flowing type of companies. They don't want the lottery tickets that may pay off. And often, as we've seen in prior bear markets, those can have pretty nasty declines from top to bottom.

And we'll get the dates wrong now. But I said over the past 70 years, U.S. stocks have beaten foreign by a percent or two a year, creating this much wealth in the end. How much of this outperformance has come since 2009? And the answer is all of it. So if you look at the valuations, our buddy Cliff Asnis at AQR did a comment where he said over the past 30 years, it's like 80% of the performance difference in U.S. versus foreign has been in multiple expansion, meaning U.S. stocks getting more expensive and foreign stocks not. So you have these giant alligator jaws since 2009 where the U.S. has gone from a long term, we like to use the 10-year PE ratio, from a PE of 12 to 35 today.

Now it's not as high as 41 a couple years ago, and it's not as high as 45 in 1999, but it's not cheap. But foreign developed and emerging on average, largely due to the performance, have not. So they're foreign developed as sort of high teens, foreign emerging as sort of mid-teens. But underneath the surface, the cheap high quality, we're definitely talking single-digit PE ratios. Now the companies in foreign developed and emerging tend to have that history of dividends more, right? So they're paying out closer to half in dividends. So you'll see these funds yielding 5%, 6%, even 7% at times. But these funds, I think they turned the corner in 2021, really at the peak of that craziness.

And if you look at the foreign and emerging strategies, really having a great year this year. Now in the U.S., it's crazy. U.S. market cap weighted is doing awesome. Everything else, I think small caps are down a handful of percent on the year. Mid-cap's not doing much. But however, foreign developed and emerging very quietly. I think it's kind of getting hidden by the S&P still creaming everything. They're having a great year. And I think they're certainly set up for some really exciting returns going forward.

And I think we're probably the most non-consensus registered investment advisor in the country where we run three allocation funds. Our default allocation, which we detail in the paper called the Trinity Portfolio, is half in trend type of strategies. And I don't know an RA in the country that does more than like 10 or 20%. And already, if you allocate 10 or 20, you're in the 1% of investors. Most people do buy and hold, globally diversified allocation. That's it. But trend following to us is really the premier diversifier to a traditional portfolio, particularly during the bad times. So it shows its stripes done well in 2022, in COVID, and certainly in 2009.

And then the internet bubble burst. And it's actually having a great year this year. there's an old Peter Bernstein quote I keep repeating recently that I love. He's like, asset allocation is a defensive strategy, but it's also an offensive one because you never know where the next big gains are coming from. And so the trend followers this year, they got a big position in cocoa or things like that. But in 2022, they were short bonds. It's really the only thing that helped protect those portfolios because everyone owns bonds and everyone owns U.S. stocks. And when both did poorly, there was nowhere to hide. So trend following is certainly a big component. we launch funds that we want to use.

And in some cases, like we have a tail risk ETF. We look around and we use tons and tons of ETFs from other companies. So we look around and we say, hey, is there a good inverse fund out there? And the problem was most of them were either too complicated or too expensive. I said, well, let's go build one. We did that with a global REIT ETF. I said, I don't want just a U.S. REIT. I don't want a foreign one. I certainly don't want market cap weighted because these funds don't yield anything. So when they get killed and go down 50%, 70%, I want to have the high quality value exposure and I want it to be global. Well, that didn't exist.

And so, most of our launches are under this banner. Look, man, you go back, it's now over 11 years for shareholder yield. And you say this has been one of the best performing. I think it's the number one performing fund in its category since inception. One of the best things all our friends in the ETF world are good at is copying what's been working. how many AI funds we've seen in the past year? What's popular? The world has yet to embrace shareholder yield. And half the time I'm like, all right, that's a good thing because, we're the only people doing it. The other half time I think, am I crazy? Why isn't the world coming around to this? And part of that is just, once you have a built-in narrative and you have hundreds of dividend funds, it's hard to shift and say, okay, just kidding.

We need to start incorporating buybacks because there comes a shift in narrative. And people say, well, why didn't you do this 10, 20 years ago? That's right. So we'll see. I'm sure Vanguard or BlackRock or State Street will launch a shareholder yield ETF in the next year. So we got our wage run.