Doug welcomes Meb Faber, chief investment officer of Cambria Investment Management, to the show to discuss why people have a hard time finding the right investments. Listen as they explore common mistakes investors make when choosing their investments.
Meb reveals a good investment that is commonly overlooked: investing in a financial advisor. Meb expounds on why a money manager is a sound investment. There are many ups and downs in the investment world, and having a financial or advisor is a great way to navigate the market. He also gives helpful advice on how to introduce risk into your portfolio with international investing.
A personal story about investing in real estate
Doug discusses the challenges his family is facing now that his parents’ home is on the real estate market. Before you decide to buy an investment property, listen to Doug’s experiences and decide if owning real estate is right for you. This is a reality check worth hearing!Read the Transcript
Interview with Meb Faber
Having a financial advisor is a sound investment, says Meb Faber, co-founder and Chief Investment Officer of Cambria Investment Management. So is investing in foreign markets, as opposed to having a home country bias. Meb Faber also shares his insights on investing and money management.
Douglas Goldstein: I'm very excited to have on, The Goldstein on Gelt Show, Meb Faber, who is the Chief Investment Officer of Cambria Investment Management. He’s also the host of the Meb Faber Show.
He's written a number of books on investing. Meb, as an investment manager, I'm sure you've heard this question, which comes up a lot:
People say, "What do I need a manager to manage my funds for? I can just throw all the money into an ETF; some exchange traded fund or index fund.”
What do you say when someone says that?
Do You Really Need a Money Manager?
Meb Faber: Usually, I say that's great advice because we manage ETFs, but seriously, one of the reasons the entire investment management industry exists is the same reason that having a trainer exists.
It's because the formula and what the advice is for what you should do and the ways to invest is pretty simple, but the biggest challenge in investing is not the actual implementation. It's how we keep our human nature from locking things up and getting into the way.
Evolution over millions of years has not prepared humans for trading shares of IBM and Google, currencies, real estate, and everything else.
It's really prepared us for the savanna, and from the standpoint of no one ever runs towards the tiger it's the same thing with investing.
Having an advisor, as long as you don't pay too much for that type of advisor, can be a sound investment. It's even better if you can do it on your own, but many people can't.
Douglas Goldstein: You know what's funny about doing it on your own? I come across a lot of people who don't even know how to balance their checkbook.
They don't even know the very basics of investing, and then you come along and say, "Listen, why don't you design a portfolio that's diversified, and you can do it with ETFs."
For someone who's been in the field for a while, that's not the most complicated thing in the world, but I'm not really sure that people are prepared to handle the money by just reading a couple of articles.
Meb Faber: There's a big education gap, and it's a shame, because at least in the U.S., they don't teach personal finance and investing in high school or college, and so it really has to be self-taught for a lot of people.
What’s Needed to be a Good Student of the Markets?
The challenge then is that most people learn by experience, and many investing scenarios or regimes can go on for decades.
Think about the twenty-plus bull market in the U.S. in the 1980s and 90s, followed by two huge bear markets.
The people that grew up during those times had very different experiences, and so they took away very different lessons. If you talked to somebody during the Great Depression, they’d have very different takeaways.
You have to spend a lot of time with history to be a student of markets. You have to understand history and what's possible, not only the averages, but both the best and worst cases as well, and that's really hard.
We think on a time frame with the new cycle of weeks and months, maybe quarters, even years, whereas most of the investment time frame, you're really planning for five, ten, even multiple decades.
Douglas Goldstein: People don't even understand what long-term really means. Back to the education point. One of the things I find funny is when I was in high school, in college, I used to study calculus and advanced calculus and frankly, I don't really remember much of what I studied then.
But kids, instead of spending the time studying esoteric math - except for the engineers - the kids could have studied stocks and bonds, and calculating yields.
There's certainly plenty of math to learn by doing that, and then they'd walk out of school knowing something that will be applicable for almost everyone in his life, instead of the few people who need to have calculus.
One of the other issues that is challenging for a lot of people is risk tolerance. We advise people all the time to only buy what they are comfortable with, but you can't put a number on it.
How do people determine what their risk tolerance is in order to set up an intelligent portfolio?
Determining Your Risk Tolerance
Meb Faber: We call it the “sleep at night factor,” and so, once you get this base case level of understanding and history, here's a very simple overview.
Global stocks historically have done about 9% a year since 1900, bonds down around 5% and bills, short-term cash, around 4%, and that has inflation of about 3%.
However, like we mentioned, in the Great Depression, the U.S. went through an 80+% bear market, so you have to be prepared.
The simple arithmetic would be put all your money in stocks, and get 9% a year, because that's the winner, but you have these times where you go through these bear markets, where you lose half or even more.
You have a couple of other examples where entire countries' stock markets went away - China, Russia, both through the communist regimes, as well as other countries like Argentina and Egypt, where essentially, you lost all your assets in the stock markets.
What do people typically do? They diversify into bonds and diversify into cash as well. What we recommend is also diversifying into some real assets as well.
Think about real estate or commodities, and then once you have this blended portfolio it's really only putting as much at risk as you're willing to sleep at night.
We often tell people, the best way to minimize risk is to not take it in the first place until you really feel comfortable, and we have a great book on this called Global Asset Allocation that shows how these diversified portfolios would have done over the past 40 years.
For many people, they learn the lesson the wrong way, where they invest too much and then lose too much, and then they're forever scarred.
What we often tell people is to think about it and look at history. Find out what you're comfortable with, and then certainly err on the side of caution, rather than being aggressive.
Douglas Goldstein: Meb, you've been talking to us about different types of investments. You've listed a number of different asset classes, stocks and bonds, real assets. What would you say is the biggest risk that an investor should prepare for?
What’s the Biggest Risk That an Investor Should Prepare for?
Meb Faber: Each asset class has the time where it shines and where it does terribly. The biggest advice I give is not becoming too wedded to one asset or investment. There's a lot of people out there to say, "I'm a dividend guy," or, "I'm a fixed income investor," or, "I put all my money in real estate," and that's fine if you're an expert in those areas.
In general, though, when people become too wedded to an asset, they usually start chasing performance. We're having one of the longest bull markets we've ever had in the U.S. right now, and this is a great example because historically, investing in the U.S. stock market versus the global markets, it's a coin clip. 50-50 performance, one outperforms the other.
The U.S. has one of the biggest outperformances you've ever seen in history, over the past eight years, and a lot of the foreign markets have really underperformed.
How to Diversify Sensibly
Meb Faber: The sensible thing to do is to diversify into foreign markets, as part of the entire global picture, and the U.S. Being the biggest economy, the U.S. is only about half the world's stock market, so most people should have half in foreign markets that are domestically located here in the U.S., but no one does.
Most of the Americans put 70% in their own market, which is called “home country bias.” This also happens, though, in every country around the world. Most of the Italians put most of their money in their own stock market.
Most of the Aussies do the same thing and I'm sure in Israel, people do the same thing too. That's a really bad thing to do, because you end up with this massive concentration and you can ask anybody that's been in Greece, or Cyprus, or Russia over the past few years, that have had these huge losses; it's a really sub-optimal way to invest.
Douglas Goldstein: What about currency risk, because if you live in the United States for example, it kind of makes sense that you should be a dollar-denominated investor, no?
What About Currency Risk?
Meb Faber: Yeah. Most people in the U.S. don't think that much about currencies. When I travel around the world, I find that most of my friends in other countries think a lot more about currencies, and part of that has to do with the reserved nature.
It is our belief that real currency returns over time are fairly stable, and that means they adjust for inflation over time, the keyword being “over time.”
Any given year, currency could go up, down, 10%, 20%, or 30%, and so my advice has always been either you hedge the currency investments or you don't, but you don't switch back and forth.
That's really where people get into trouble; trying to time the currency investments. You just pick one and stick with it and in general, it balances out over time.
One of the biggest benefits of investing internationally for everyone is that you get the global market average rather than an outlier, for either better or worse.
Douglas Goldstein: One of the things that I tell people who live in Israel, for example, and where they're dealing a lot in shekels is I'll say, "You really have two currencies that you deal with. One of them is your reference currency and the other one is your living currency.”
When I sit down with a client, in my day job as a financial advisor, I say, "How much is your net worth?" More often than not, I'll hear it's worth a million dollars, as opposed to “I'm worth a million shekels”, because that's the reference currency.
Even though they may have been living in Israel for decades, and everything they buy in the grocery store is in shekels, it doesn't necessarily mean that they should put all of their money in shekels or keep it all in dollars just because they think that way.
Meb, this is very interesting. I know you cover a lot more on your podcast, as well as in your books. Unfortunately, we are just about out of time now. In the last few seconds, could you tell people how they can follow you and follow your work?
Meb Faber: Sure. I've written over a thousand investment articles in my blog at mebfaber.com. You can see any of our five books I've written as well as white papers on Amazon, as well as the blog.
Douglas Goldstein: All right. Meb Faber, thanks so much for your time.
Meb Faber: I had a blast. Thank you.