As Good As It Gets? | Meb Faber on U.S. Stock Valuations, Trend Following, and Endowment Allocations To Private Markets

Episode Summary

Executive Summary: Meb Faber argues that U.S. stocks are unusually expensive after a 15-year run and that investors should stop extrapolating recent returns. He recommends widening exposure to cheaper foreign, emerging, value, and trend-following strategies, warns that private credit may be the least attractive area, and highlights tax-efficient ETF structures as a way to diversify concentrated holdings without immediate capital gains.

Main Topics: U.S. stock market expensiveness and regime risk (Priority: 5/5): Faber says the U.S. has enjoyed one of the best stretches in market history and that current valuations imply muted future returns. He emphasizes mean reversion and the danger of assuming recent 15% annual gains continue indefinitely. Why cheap stocks and foreign markets matter now (Priority: 5/5): He argues that valuation still matters, that foreign and emerging markets remain much cheaper than U.S. equities, and that multiple expansion has driven much of U.S. outperformance since 2009. AI boom, capex, and bubble dynamics (Priority: 4/5): The discussion compares AI/data-center spending to historical infrastructure booms and notes that bubbles can persist longer than expected. Faber is agnostic on whether AI is a bubble but says trends and valuations should guide positioning. Value plus trend-following as a portfolio framework (Priority: 5/5): Faber advocates combining valuation with trend-following so investors can participate in uptrends while avoiding catastrophic drawdowns. He says trend never catches the exact top, but it can protect against the worst losses. Private equity, private credit, and endowment-style portfolios (Priority: 4/5): He contends that many endowments could be replicated with cheaper public-market ETFs and that private credit is especially unattractive today. He also argues public-market exposures can mimic many private-market return patterns. Tax-efficient ETF innovation via 351 exchanges (Priority: 4/5): Faber explains how 351 ETF structures can help investors transfer appreciated concentrated holdings into diversified ETFs without immediate tax realization, potentially making diversification easier for taxable investors.

Key Arguments: The U.S. stock market has delivered an unusually strong 15-year stretch, so investors should not expect 15% annual returns to persist indefinitely. Periods of exceptional returns often create their own hangover through overvaluation, excessive optimism, and future mean reversion. Foreign, emerging, and value stocks remain materially cheaper than U.S. equities and may offer better forward returns. Much of U.S. equity outperformance since 2009 has come from valuation multiple expansion, not just superior earnings growth. A combined value + trend framework is superior because value identifies cheap assets while trend helps avoid major drawdowns. AI spending may resemble past capex booms; it can be productive, but the market may already be pricing in a great deal of success. Private equity and venture capital outcomes are often replicable with public equities plus tilts, while fees and opacity are major drawbacks. Private credit is unattractive because spreads versus T-bills are too thin relative to risk, making it one of the least appealing asset classes today. Taxable investors can use 351 ETF structures to diversify out of concentrated winners without immediately triggering capital gains taxes. Asset-class agnosticism is essential; investors should avoid emotional attachment to any one market, style, or political view.

Data Points: U.S. stock market valuation (Shiller CAPE): ~40 - Faber says the U.S. CAPE is near all-time highs and far above the 2009 level of about 12. U.S. dividend yield: 1.15% - Described as an all-time low for the U.S. market. Duration of U.S. outperformance: 15 years - He says U.S. stocks have had one of the best 15-year periods in history. Historic U.S. return rate referenced: ~15% per year - Used to illustrate how rare the recent U.S. equity run has been over a decade-plus. Foreign and emerging value performance this year: ~50% - Faber says the cheapest bucket of non-U.S. value stocks is up roughly 50% this year. Foreign/emerging market outperformance this year: ~25% to 30% - He notes foreign and emerging stocks are outperforming U.S. equities in the current year. AI capex as share of global GDP: ~1% - UBS chart referenced by Faber compares AI spending to prior infrastructure booms that reached 2%-5% of global GDP. Historical boom size compared: 2%-5% of global GDP - Railroad and telecom booms in prior eras reached these levels, according to the UBS comparison. Largest stock underperformance edge: ~3 percentage points per year - He claims the largest stock in a market underperforms the index by about 3% annually over the next decade on average. Endowment ETF fee level: <50 bps - He says Cambria’s endowment-style ETF wrapper is low cost, with the underlying fund fees keeping total costs below 50 basis points. ETFs vs mutual fund tax/fee benefit: >1% per year - He cites Bank of America analysis that moving from mutual funds to ETFs can improve returns by more than 1% annually via fees and tax efficiency. 35/1 exchange position cap: 25% max per single position; top five positions max 50% - Rules for seeding the ETF under the 351 structure. Global stock fund fee: 25 bps all-in - He cites the GEW global equity ETF launch terms. Cambria ETF leverage level: ~140% - He says the endowment-style portfolio is leveraged to around 140%. Investable countries: 45 - He mentions roughly 45 investable countries around the world. Private investing experience: 400+ companies - Faber says he has personally invested in more than 400 companies over 12+ years.

Pivotal Quotes: "This is as good as it gets." — Meb Faber: His warning that the recent U.S. stock-market boom is unlikely to repeat at the same pace. "After the party comes the hangover." — Meb Faber: His analogy for how prolonged bull markets often lead to unpleasant future returns and investor regret. "I don't know. I got nothing to add here, really, of really interesting to the listeners." — Meb Faber: His response to whether AI/data-center spending is definitively in a bubble, reflecting his refusal to force a precise bubble call.

Implications: Investors should diversify beyond expensive U.S. mega-cap stocks, consider valuation plus trend discipline, and think seriously about tax-efficient reallocation. The podcast suggests foreign, value, and managed-futures exposures may matter more over the next decade than recent winners do.