The Meb Faber Show - Better Investing

Latest Episodes:

Phil Nadel - “If You Try to Pick Winners, and You Only Invest in a Handful of Companies, Odds Are You're Going to Lose Your Money" | #97 Mar 14, 2018

Show notes

In Episode 97, we welcome one of the most successful syndicate leads in angel investing, Phil Nadel (he also happens to be Meb’s favorite syndicate lead on Angel List).

After Phil runs us through his background, Meb asks about Phil’s group, Forefront Venture Partners and its connection to Angel List. Phil gives us the run-through, noting how when Angel List announced its syndicate feature, he felt it was a great way for smaller angels to get involved, so he signed up. Today, he’s one of the largest/most active leads on Angel List.

Meb asks how the syndicate process works. Phil tells us that accredited investors can register and sign up with syndicate leads like Forefront. This enables them to see the deal-flow of the lead, and invest on same terms. There’s no management fee, instead, investors pay a 20% carry on the backend if there’s a profit. You can invest small amounts – sometimes as little as $1K, yet you get all the same due diligence and legal review as a big investor.

Meb notes how syndicates have removed so much of the hassle and made the entire process simpler – which is both good and bad.

Next, Meb asks about Phil’s syndicate and the average investor. Phil tells us the average investment in a company is roughly $300K. And they’ve invested in about 44 deals since inception. The average investment per person is around $4-5K. This dovetails into a conversation about how to approach angel investments. Phil tells us a “portfolio” approach is important. He’s against picking only a few companies, as most will go out of business. He tells us “if you try to pick winners, and you only invest in a handful of companies, odds are you’re going to lose your money.” Phil recommends picking companies diversified by industry and stage.

The conversation then drifts into timing. Do you invest all at once, or drip in over time? Phil gives us his thoughts. Then it’s Phil’s rule of thumb about success rates. He tells us that out of 100 investments, 70 will go out of business. About 20-30 will stagnate, or exit as a single to a triple. Maybe one or two will turn out to be home runs.

Meb asks how Phil finds his deals. Turns out, lots of referrals. The guys then dive into what Phil looks for in a company – it includes post-revenues and capital efficiency. But he’s industry and geography-agnostic. His sweet spot is a valuation in the $5-12M range.

Next up, the guys discuss KPIs, or “Key Performance Indicators.” Phil discusses burn and runway, then customer acquisition cost and lifetime value. Phil wants to see that the company knows how to acquire and monetize customers in an efficient and scalable way. He then also looks at margins.

There’s plenty more in this angel-themed episode: the extent of Phil’s involvement in a startup after funding… the critical role that updates from founders play in the startup process… some “bad investor behavior” which Phil has seen over the years… what Phil learned from Barbara Corcoran of the show, Sharktank… and of course, Phil’s most memorable trade.

What are the details? Find out in Episode 97.

Craig Leupold & Jim Sullivan - “From a Commercial Property Standpoint, We See Values Drifting Sideways Over the Next 12 Months" | #96 Mar 07, 2018

Show notes

In Episode 96, we welcome two of the brightest guys in real estate, Craig Leupold and Jim Sullivan of Green Street.

After touching on Craig’s and Jim’s backgrounds, the guys jump into real estate, with Meb asking about Green Street’s approach to the real estate markets (public and private) and how they think about valuation.

Craig gives us an overview, referencing Green Street’s REIT research (focusing on the public markets), their real estate analytics (focusing on private markets), and their advisory consulting group. Craig touches upon lots of ideas – understanding the value of the properties owned by the various companies… identifying the associated premiums or discounts at which the companies might be trading… a deeper dive into their real estate analytics lineup… looking at how to allocate capital…

Meb asks how the real estate world looks today, and what’s the outlook for 2018. Craig tells us that with the exception of retail real estate, most sectors are seeing increases in rents and occupancies. But fundamentals have moved from “great,” to “good,” to now, “okay.” He goes on to give us his growth forecast over the next four years, as well as what he expects for commercial pricing over the next 12 months.

When Meb brings up “returns,” the guys make the distinction between public and private markets and how there’s a divergence. Private real estate is generally fairly valued today, yet in the public market, REITs are trading at an 11% discount to their unleveraged asset value.

Jim dives into greater detail on this topic, telling us how the average REIT should trade at a modest premium to NAV. The reason for this is that an investor should be willing to pay the fair market value for the property owned by the REIT, but then there’s the added benefit of the management team and the liquidity of the REIT structure; both deserve a premium. But again, today, we’re not seeing this premium today – quite the opposite, in fact.

Meb brings up valuation, asking about how to distinguish between buying opportunities and value traps. Jim tells us it’s situational, and depends on the property type. This dovetails into a discussion about pessimism in the mall sector.

Soon, the conversation turns toward rising rates. The common opinion is that rising rates are bad for real estate, but Jim tells us it’s more complicated than that. If rates are rising due to our economy accelerating, then that could be positive for commercial real estate, leading to higher occupancies and rising rents.

There’s far more in this episode: activism in the real estate space… how the real estate market looks around the world… the challenge of figuring out what risk-adjusted returns should be in different global locations… which geographies look particularly attractive today… farmland REITs… and Craig’s and Jim’s one piece of advice to investors looking to allocate to the REIT space.

All this, as well and Craig’s and Jim’s most memorable trades, in Episode 96.

Radio Show: The Short-Vol Trade Blows Up... Meb's Rare Coin Purchases... and Listener Q&A | #95 Feb 28, 2018

Show notes

Episode 95 is a radio show format. We start with a recap of Meb’s recent travels to Nicaragua and San Francisco, but then dive into a discussion about volatility. With the VIX spiking at the beginning of the month, some short-vol funds suffered massive losses. We discuss the short-vol trade, then the long-vol trade.

Next up, Meb gives us a quick (overdue) update on his trip to see Van Simmons, including which coins he purchased. But we quickly dive into a different topic – a recent offering from Wealthfront that’s raising some questions for Meb. The conversation touches upon a risk parity market approach, robo fees, and general transparency.

We then jump into listener Q&A. Some of the questions you’ll hear answered include:

I've heard Meb say it may be appropriate to allocate up to 20% of your portfolio in a hedging strategy. I've also heard him say you need an exit plan. What is his exit strategy regarding this play?
How/when should an investor use leverage?
What’s Meb’s take on a vanilla Vanguard Target Date fund vs Trinity over 15-20 years?
With fee compression and product commoditization, how do you see large, active-focused publicly traded asset managers faring in the next 5-10 years?
How would you think about asset allocation for a millennial (sub-30) with retirement accounts? The typical 60/40 doesn’t seem great.
With rising rates, I am in short-term notes to limit duration; with hints of higher inflation do TIPS make sense?

All this and more in Episode 95.

Michelle Leder - “There Are Some Companies That We Know Are Sort of Bad Eggs" | #94 Feb 21, 2018

Show notes

In Episode 94, we welcome entrepreneur, author, and SEC filings expert, Michelle Leder.

We start with Michelle’s background. She was a business journalist – a self-professed “document geek.” She wrote the book Financial Fine Print: Uncovering a Company's True Value and decided to launch a website as an accompaniment to the book. Here we are, 15 years later.

Meb asks Michelle to give an overview of what she’s looking for in the various filings. She tells us that changes are important. She doesn’t necessarily look closely at the numbers because it’s more about the language. Also, the forward-looking statements can be big. Michelle mentions an example of one that used a significant amount of extra language.

This dovetails into a discussion about the process – is it a keyword search or is there software? Michelle uses both, as keywords alone don’t always work. She gives the example of when Goldman Sachs was subpoenaed, the language used to describe it in the filings was something like “an invitation to respond to the DOJ.”

Meb asks for examples of red flag behavior in the filings. Michelle looks for unusual compensation or stock grant amounts. Also, lots of extra language used to describe earnings or adjusted EBITDA. She mentions a company called GT Advanced Technology, which used to be an Apple supplier. In one particular filing, they added new disclosure language, identifying their dependence on Apple, and their vulnerability if that relationship soured. Some time thereafter, Apple ended the relationship.

Next, Meb and Michelle discuss the “Friday Night Dump.” This is the 90 minutes after market close on Friday, when there’s no major trading. Companies tend to dump all their bad info here. Michelle mentions recent examples using Tesla and Wynn. But her most memorable disclosure dump was Chesapeake Energy, revealing it had paid over $12M for a map collection.

Meb asks if Michelle has ever been contacted by a company she’s profiled, trying to defend or explain itself. She mentions Dell. Apparently, the company once purchased a company from Dell’s own brother and something seemed a tad off. After Michelle covered it, Dell reached out to tell her she had gotten it all wrong.

This is a fun episode with plenty more in it – what sort of time commitment this would take the average investor… the atmospheric changes Michelle has seen in the last 10-15 years… the story of Meb stealing someone else’s disclosure language for his own blog but forgetting to remove the other company’s name…

There’s even a discussion of something Twitter did recently that grabbed Michelle’s interest. If you’re a Twitter investor, you might want to listen.

All this and more in Episode 94.

John Reese - “There Is No Strategy That Outperformed the Stock Market Every Single Year" | #93 Feb 14, 2018

Show notes

In Episode 93, we welcome entrepreneur, author, and quant investor, John Reese.

We start with John’s background. When John was a child, his father was a subscriber to Value Line, and John related to the charts and numbers. Later, this love of numbers took him to MIT, where he researched how to take the wisdom from books and turn it into computer programs. Years later, when he sold his company to GE Capital, John needed to learn how to invest the proceeds. Yet, he wasn’t sure which investment guru to follow in doing this. He decided to study a handful of gurus, and was disappointed to find that there was no repeatability and sustainability of outperformance over multiple time periods.

However, John then came across Peter Lynch’s One Up On Wall Street. In the book, Lynch had provided enough detail about his strategy that John was able to translate it into a computer program designed to pick the stocks that Lynch might have chosen. The results were solid. John then moved on to Ben Graham, eventually codifying 12 different guru strategies. He then put his research up on a website, which eventually morphed into Validea.

Meb asks about the challenges of this – namely, many managers have a qualitative component to their stock selection as well quantitative. How did John account for this?

John tells us this was very challenging. He had to re-read the various books multiple times, determining whether the printed word actually matched what the guru did in the market, versus his actions revealing more information or biases. Meb asks about filtering the incredibly long list of potential gurus to follow, and John tells us the list actually wasn’t too long. Most gurus didn’t have a sufficiently-long track record of performance, or they didn’t describe their strategies in sufficient details as to be able to be codified.

Meb then asks how John determines when a period of underperformance reveals a manager has lost his touch, versus the manager’s style is simply out of favor.

John tells us that he first looks at the length of time in which the strategy worked. If it was long enough, he tends to believe that, at some point, the strategy will come back into favor. He goes on to tell us that in all of his research, he found that there was not one strategy that outperformed the market every single year. They were these periods of going-out-of-favor that paved the way for the outperformance that occurred when the style came back into favor.

The guys then jump into an actual example of how John’s guru quant strategies work, using Buffett. Be sure to listen to this part for all the details.

Moving on from Buffett, Meb asks if there are any common attributes to the models that tend to do the best – any broad takeaways.

John tells us that, over time, the more successful strategies tend to have a value orientation, some kind of debt criteria, and they’re all profitable.

Meb asks – “Okay, gun to your head, which strategy has outperformed?” I’m going to make you listen to find out John’s answer, but odds are you’ll be surprised.

Next, the guys turn to factors, with Meb asking if there are any combination of factors that John tends to prefer. John says he likes momentum and mean reversion. This leads into a conversation on timing factors.

As usual, there’s far more in this episode: practical guidelines for listeners looking to follow along… portfolio construction in today’s challenging environment… what John would have done differently if he could start over again on Day 1… a roboadvisor for income investors… and of course, John’s most memorable trade.

This one happened the day after Black Monday. What are the details? Find out in Episode 93.

Andrew Tobias - “There Are Just A Few Things You Really Need to Know About Investing, and They Don't Ever Change" | #92 Feb 07, 2018

Show notes

In Episode 92, we welcome investor, author, and activist, Andrew Tobias.

Meb starts by asking Andy about his background and introduction to investing. Andy gives us his origin story, with highlights including collecting stamps, an early introduction to the stock market, a trip behind the Iron Curtain which led to a brief dalliance with Communism, then his becoming a paper millionaire due to some creative accounting (then those monies disappearing). It’s a fascinating look back.

Next, Meb recalls a survey we conducted some quarters ago, soliciting readers’ favorite investing books of all time. Andy’s book from 1978, The Only Investment Guide You’ll Ever Need, turned out to be high on that list. Meb asks Andy to explain the thesis of the original book, and whether there have been any significant changes in subsequent editions.

Andy tells us “There are just a few things you really need to know about investing, and they don’t ever change. The problem is it’s hard to get people to really grab onto them.” He goes on to say that investing isn’t like cooking or chess, where the more you read/learn, the better. Instead, with investing, the more you read, the more you can get yourself into trouble. He gives us an example using commodity speculating. Given that so much about investing remains constant, Andy’s revisions in subsequent editions haven’t been too substantial.

Meb pushes a bit more, asking if there’s any subject about which Andy has changed his mind since the original publication.

Andy tells us he’s become a bigger fan of special opportunity investing. Most people aren’t looking for this type of thing. So, Andy discusses putting 80% of your portfolio into inexpensive index funds, but spreading the remaining 20% over 5-6 really interesting, exciting speculations. Most will go to $0, but maybe you hit with one or two, and those proceeds offset the losses and more. Plus, this satisfies the need to have something more exciting to do with your money.

Meb agrees with this idea, and asks about Andy’s speculative process – is it rooted in quant or is there a discretionary component? Andy answers by giving us an example with Support.com.

Next, the guys discuss valuations, comparing where we are now to where we were back in the early ‘80s. It seems we’re flip-flopped a bit in terms of interest rates and equity valuations.

This segues into private investing, with Andy telling us about how came to own farmland. Turned out to be a great investment, buying at $500 an acre and selling years later at $3K an acre. Meb agrees farmland is a great asset class, but it’s hard to allocate toward.

This dovetails into a few other private investments in which Andy has participated, most notably “Honest Tea,” which was purchased by Coca Cola, as well as a small, musical comedy, which went on to play on multiple continents over many years.

The guys bounce around a bit here, discussing the need to spread your bets in private market investing… lockups… the benefit of illiquidity… binary thinking… Andy’s firsthand experience with selling way too early…

There’s plenty more in this episode, including Andy’s concerns for our existential future, his most memorable trade, and finally, a product he endorses which might help tackle dementia and improve reflexes. Apparently, Tom Brady swears by it.

What are the details? Find out in Episode 92.

ER Tribute Jan 31, 2018

Show notes

ER Tribute

Radio Show: Meb's Most Popular Tweet of All Time... Signs of the Top... Listener Q&A | #91 Jan 24, 2018

Show notes

Episode 91 is a radio show format.

We bounce around a bit in this one, starting with Meb’s most popular Tweet of all time. It involves a market record that people decided to politicize.

Next are some “signs of the top.” We discuss various indicators that support the general takeaway that (to no one’s surprise) we’re in a frothy market: US investor stock allocations are approaching the highest levels since 2000… Stocks as a percentage of household assets adjust for pensions funds are now the 2nd highest ever… The average expected return of state and local pension funds is 7.5%... The number of days the VIX has spent below “10” in 2017 was 52 (the combined amount for all years dating back to 1999? Less than “10”)…

We then discuss Meb’s upcoming personal portfolio rebalance. He publishes this each year, and he gives us the preview. Then there’s a discussion of Bitcoin, and Meb’s thoughts on how an investor might reasonably participate if so desired.

Then we hop into some listener/Twitter questions:

Is there a broad asset class that appears especially attractive right now? Emerging Markets seems to have gone to a case-by-case situation. Is there an entire asset class you like?
Why does value investing works?
If you had to buy one country and hold it for 10 years, which one would it be?
Have you ever done a back-test combining a simple moving average timing strategy overlaid with a value approach? For instance, going long an asset class when it’s above its SMA, but below a historical multiple?
What changed in your investing philosophy in the last year?
Value factors been out of favor for a decade or however long. At what point can we say they've been arbed out and not coming back…ever?
What is the long term mean or hurdle for real US Treasury rates?

Plus, Meb is about to do some traveling overseas. Where’s he headed this time? Find out in Episode 91.

Dan Rasmussen - “The Crown Jewel of the Alternative Universe is Private Equity" | #90 Jan 17, 2018

Show notes

In Episode 90, we welcome Founder and Portfolio Manager of Verdad, Dan Rasmussen.

We start with a brief walk-through of Dan’s background. It involves a Harvard education, a New York Times best-selling book, a stint at Bridgewater, consulting work with Bain, then his own foray into private equity.

Turning to investments, Meb lays the groundwork by saying how many people misunderstand the private equity market in general (often confusing it for venture capital). He asks Dan for an overview, then some specifics on the state of the industry today.

Dan clarifies that when he references “private equity” (PE), he’s talking about the leveraged buyout industry – think “Barbarians at the Gate.” He tells us that PE has been considered the crown jewel of the alternative world, then provides a wonderful recap of its evolution – how this market outperformed for many years (think Mitt Romney in the 80s, when he was buying businesses for 4-6 times EBIT), yet its outsized returns led to endowments flooding the market with capital ($200 - $300 billion per year, which was close to triple the pre-Global Financial Crisis average), driving up valuations. Today, deals are getting done at valuations that are nowhere near as low as in the early days. And so, the outsized returns simply haven’t existed. Yet that hasn’t stopped institutional investors from believing they will. Dan tells us about a study highlighting by just how much institutional managers believe PE will outperform in coming years…yet according to Dan’s research, their number is way off.

Dan then delves into leverage and the value premium, telling us how important this interaction is. He gives us great details on the subject based on a study he was a part of while at Bain Consulting. The takeaway was that roughly 50% of deals done at multiples greater than 10x EBITDA posted 0% returns to investors, net of fees.

Meb asks about the response to this from the private equity powers that be… What is their perspective on adding value improvements, enabling a higher price? Dan gives us his thoughts, but the general take is that doing deals at 10x EBITDA is nuts.

Next, the guys delve into Dan’s strategy at Verdad. In essence, he’s taking the strategy that made PE so successful in the 80s and applying it to public markets. Specifically, he’s looking for microcap stocks, trading at sub-7 EBITDAs, that are 50%-60% levered. With this composition, this mirrors PE deals.

The guys then get neck-deep in all things private equity… control premiums, fees, and illiquidity… the real engine behind PE alpha… sector bets… portfolio weights…

Meb and Dan land on “debt” for a while. Dan tell us how value investors tend to have an aversion to debt. But if you’re buying cheap companies that are cash-flow generating, then having debt and paying it off is a good thing. Debt paydown is a better form of capital allocation than dividends or buybacks because it improves the health of the biz, leading to multiple expansion.

The guys cover so much ground in this episode, it’s hard to capture it all here: They discuss how to balance quantitative rules with a human element… The Japanese market today, and why it’s a great set-up for Dan’s PE strategy… Rules that should work across geography, asset classes, markets, and time… Currency hedging… And far more.

For the moment, we’re still ending shows with “your most memorable trade.” Dan’s involves a Japanese company that had been blemished by a corporate scandal. Did it turn out for or against him? Find out in Episode 90.

Blair Hull - “Emotions Will Kill You in This Game" | #89 Jan 10, 2018

Show notes

In Episode 89, we welcome legendary market veteran, Blair Hull.

We start per usual, with our guest’s background. In this case, long-time Meb Faber Show listeners may think they’ve heard it before. That’s because Blair’s background shares an interesting similarity with that of Ed Thorp – the card game, Blackjack.

It turns out Blair made a considerable sum of money playing Blackjack after reading Ed’s writings on the game. Blair tells us you needed an advantage, and then you need to stay in the game. That’s why he played with a team. More hands played according to their system tilted the odds in his favor. This is a fun part of the podcast you’ll want to listen to for all the details, including Meb’s foray into card counting with a partner that botched the system after drinking too many Bloody Mary’s.

Eventually, Blair took his winnings and used them to get a seat on the Pacific Exchange, where he became a market maker and began trading options. Blair tells us he was intrigued with market timing, resulting in a paper he wrote which concluded that you can time the market.

Meb asks about the genesis of Blair’s market timing strategies.

Blair points back to Blackjack – each different card provides an idea about the future. In a similar way, various indicators provide an idea about a market’s future. So, part of the challenge is which indicators do you consider and what weights do you put on them?

Next, Meb digs deeper, asking for more specifics of Blair’s strategy, inquiring about the indicators.

Blair mentions one indicator that piqued his interest – the Federal Reserve Bank Loan Officer Survey. They found the correlations with 6-month returns was about 30%, which is a fairly high correlation for an indicator. He then took this indicator and combined it with a few others and ran a regression with no forward-looking bias to see if they could exceed the returns of the S&P. What were the results? You’ll have to listen.

The conversation bounces around a bit before Blair mentions how valuation is one of their key variables. He tells us his valuation method combines three different aspects: CAPE, cyclically adjusted dividend yield including buybacks, and book-to-price.

The guys spend a while discussing the various inputs in Blair’s model before discussing sentiment (which Meb calls “squishy). Both guys like sentiment, with Blair even having invested in two different firms that are using Twitter feeds so he can get a better handle on sentiment.

Next, Meb asks about AI, and how machines may affect investing going forward. Blair has a proprietary trading firm that operates on a high frequency basis, so he gives us his thoughts, noting that a key to maximizing wealth is to use an optimal-sized bet.

Meb changes direction, asking what Blair is excited about today.

It turns out Blair is focusing on the stigma of market timing. He believes it will be irresponsible not to be involved in market timing over the next 30 years. That’s because when we have correlations that really go to “1” when we have a disaster, getting an edge in the market is critical.

There are a couple quick questions – Blair’s favorite indicator, and Blair’s advice to young quants looking to get into quant finance today, but then we turn to Blair’s most memorable trade.

This is a great one involving the crash in ’87, when Blair was a market maker. Don’t miss it.

There’s plenty more in this great episode featuring a true market legend, including why Blair tells us “Emotions will kill you in this game.”

That and far more in Episode 89.

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