Cambria CIO Meb Faber: Masters in Business (Audio)

Episode Summary

Executive Summary: Barry Ritholtz interviews Meb Faber about rules-based investing, ETFs, and asset allocation. Faber explains why value plus momentum can improve outcomes, how shareholder yield screens for quality, why endowments struggled in 2008, and how low-cost, globally diversified portfolios and trend-following can reduce drawdowns and behavior-driven mistakes.

Main Topics: Meb Faber's background and move into quant investing (Priority: 5/5): Faber describes his path from biotech analysis and engineering into quantitative finance, emphasizing self-teaching, early trading wins and losses, and the need for rules to counter his own behavioral biases. Value and momentum as the two core investing styles (Priority: 5/5): He argues that most successful quantitative approaches blend value (buying cheap assets) and momentum/trend (buying rising assets and avoiding falling ones), noting that the best setup is when both intersect. Shareholder yield and Cambria ETFs (Priority: 5/5): Faber explains his shareholder yield strategy, combining dividends and buybacks to identify companies returning cash to owners, and how this became an ETF with quarterly rebalancing and relatively low fees. Global asset allocation and endowment-style portfolios (Priority: 4/5): The discussion covers the Ivy portfolio, home-country bias, why Harvard/Yale-style endowment portfolios struggled in 2008-09, and why globally diversified asset allocation can be improved with trend-following and better liquidity management. Trend following, drawdown reduction, and survival (Priority: 5/5): Faber defends trend following as a risk-management tool that reduces volatility and drawdowns, helping investors survive major bear markets and avoid career- and capital-destroying mistakes. Valuation, bubbles, and international opportunities (Priority: 4/5): He argues U.S. equities are expensive but not yet a bubble, while many foreign markets are cheap; cheap countries and sectors can remain painful, but they offer higher expected returns if investors can tolerate the risk. ETFs, fees, and the democratization of investing (Priority: 4/5): Faber views ETFs and automated investing as major industry disruptors because they lower costs and improve access, though they can also encourage excessive trading if investors misuse them.

Key Arguments: Quant investing works best when it replaces emotion with simple, testable rules, especially for investors prone to overconfidence and panic. Value and momentum are the two historically proven return drivers; many successful quants use both, often across stocks, sectors, countries, bonds, and commodities. Shareholder yield is stronger than dividends alone because it captures both cash dividends and buybacks, and buybacks can reveal more about true shareholder returns than dividends alone. Endowment portfolios are vulnerable when they are equity-heavy, illiquid, and need near-term spending cash; 2008 exposed this mismatch. Trend following is less about maximizing upside and more about cutting losses and improving survival through large drawdowns. U.S. stocks are expensive relative to history, so future returns are likely lower, while many non-U.S. markets are cheaper and may offer better long-term value. Market-cap weighting tends to overweight the most expensive and largest names, so many alternative weighting schemes can outperform over time. Low fees matter enormously over long horizons, which is why ETFs and near-zero-cost structures are attractive to Faber. Behavioral errors cause investors to buy high and sell low, so process discipline matters more than prediction. If a market or sector is down sharply, it may be near a good entry point, but only when investors can tolerate volatility and long holding periods.

Data Points: 10-month moving average: Used as a tactical signal for risk reduction - Faber’s tactical asset allocation rule: when an asset class breaks its 10-month moving average, it signals a significant downtrend. Quarterly rebalancing: 4 times per year - The shareholder yield ETF is rebalanced quarterly, making it active but not hyperactive. Shareholder yield ETF holdings: 100 stocks - Typical number of holdings in the domestic and foreign shareholder yield ETFs. Domestic ETF expense ratio: 0.59% - Targeted average expense ratio for Cambria’s domestic shareholder yield ETF. Foreign ETF expense ratio: 0.69% - Higher due to holding costs in foreign markets. Global allocation ETF expense ratio: 0.29% - Described as the cheapest asset allocation ETF in the discussion. Net fee on global ETF: 0% management fee - Faber says the fund charges no internal management fee and earns indirectly by holding Cambria ETFs. Harvard endowment: $36.4 billion - Used to illustrate the scale of large university endowments. Yale endowment: $23.9 billion - Used alongside Harvard as an example of very large endowments. Stanford endowment: $1.4 billion - Mentioned in the same endowment discussion. U.S. equity ownership bias: ~70% of equity exposure in U.S. stocks - Faber notes that American investors heavily overweight domestic equities. Home-country bias example: 75%-80% - He says investors in many countries hold roughly this share in domestic assets. Median S&P 500 stock price-to-sales: 2.1 - He says this is the highest median P/S multiple on record back to 1960. Long-run average S&P 500 median price-to-sales: 0.9 - Historical average used to show current valuation richness. U.S. market valuation: 27x - Approximate valuation level cited for U.S. stocks compared with foreign markets. Developed/emerging market valuation: 15x - Approximate valuation level cited for non-U.S. markets. Global stock return assumption: 5% real annual return - Part of Faber’s '5-2-1 rule' for long-run real returns. Global bond return assumption: 2% real annual return - Part of the same rule of thumb. Cash/bills return assumption: 1% real annual return - Part of the same long-run framework. Biggest company concentration threshold: 4% of S&P 500 - Faber says companies reaching this size often become graveyards for future outperformance. U.S. market cap share: ~50% of global market cap - Used to argue that global portfolios should not be U.S.-only. World GDP outside U.S.: ~80% foreign - Supports his case for global diversification. Bond real return decline: 50% - He says U.S. bonds have declined by this much in real terms over time. U.K. bonds real return decline: 60% - Another example of long-term real losses in bonds. Largest asset class: Non-U.S. bonds - He notes that the world’s largest asset class is outside the United States. Managed futures allocation takeaway: One of the biggest missing pieces in portfolios - Faber argues trend-following/managed futures deserve a place in diversified portfolios. Renaissance Medallion fee structure: 4 and 40 - Used as an example of exceptional hedge fund performance overcoming very high fees.

Pivotal Quotes: "“Look, I need to make rules for myself. Otherwise, I'll do the dumbest possible things.”" — Meb Faber: On why he became a quant and relies on systematic investing to control his behavioral biases. "“The number one rule of investing or trading is to live to trade another day, to survive.”" — Meb Faber: On the purpose of trend following and drawdown control. "“Tell me where things look the most miserable.”" — Meb Faber: On finding value in the least popular markets and countries rather than the most beloved ones.

Implications: Listeners should expect lower U.S. returns, stronger diversification benefits abroad, and real value in rules-based strategies. The industry’s winners will likely be low-cost, globally diversified, and behavior-aware, not simply the most active.