Listener Q&A Episode | #10

Episode Summary

Executive Summary: In this Q&A episode, Meb Faber and Jeff Rimsberg cover practical investing topics ranging from ETF liquidity and global diversification to sizing concentrated bets, judging active managers, using media for idea generation, and building a personal portfolio. The central message is to stay realistic about expected returns, diversify across assets and managers, use process-based rules for allocation and rebalancing, and resist emotional or narrative-driven investing.

Main Topics: ETF Liquidity and Trading Practicalities (Priority: 5/5): Explains that ETF liquidity depends primarily on the liquidity of the underlying basket of securities and the arbitrage mechanism, not just displayed trading volume. Large orders can often be executed near NAV through institutional desks, while smaller investors should use limit orders. Global Asset Allocation vs. 'Invest in What You Know' (Priority: 5/5): Argues that 'knowing' a company is often an illusion unless an investor has done deep fundamental work. Global diversification reduces concentration risk, improves expected outcomes, and protects against home-country bias, while also acknowledging psychological comfort matters. Return Expectations, Starting Early, and Rebalancing (Priority: 5/5): Warns investors to have muted return expectations, especially for U.S. assets, and emphasizes automatic dollar-cost averaging over market timing. Rebalancing annually or on cash flows is presented as a practical way to manage risk and capture rebalancing benefits. Position Sizing and Concentration Risk (Priority: 4/5): Discusses how much to allocate to a best idea, stressing that sizing depends on expected value, correlation, and psychological tolerance. While concentrated bets can outperform, the speaker personally prefers limiting any single bet to around 5%. Assessing Active Managers and Exceptional Track Records (Priority: 5/5): Questions the plausibility and scalability of extraordinary long-term returns, noting that small niche strategies may work at tiny AUM but not at scale. Evaluating active managers requires understanding process, fees, style, and reasons to sell, not just recent performance. Sources of Investment Ideas and the Limits of Financial Media (Priority: 3/5): Suggests that financial TV is too noisy for deep idea generation, while better sources include 13F analysis, idea clubs, conferences, newsletters, and research platforms. The emphasis is on longer-form, process-oriented research over soundbite media. Personal Portfolio Construction and Private Investments (Priority: 4/5): Describes the speaker's own portfolio as a mix of buy-and-hold tilts and trend-following, with most wealth tied to controlled businesses and a smaller exploratory allocation to private investments. Private markets are seen as interesting but illiquid and research-light, needing better information infrastructure.

Key Arguments: ETF liquidity is mostly a function of underlying holdings and market makers; low displayed volume does not necessarily imply poor execution liquidity. A great company is not the same as a great stock; understanding a product is not equivalent to understanding valuation, competitive dynamics, or risk. Global diversification helps reduce concentration risk and compensates for uncertain U.S. forward returns. Age alone is a poor proxy for risk tolerance; behavior under stress and actual cash-flow needs matter more. Investors should start early, automate contributions, and keep expectations realistic rather than trying to time valuations. Rebalancing is useful mainly as a discipline and a systematic value tilt, not because precise timing matters greatly. Concentrated bets can work but must be sized based on expected value, correlation, and personal ability to withstand drawdowns. Claims of 30-year annualized returns near 40% are likely either niche, tiny, non-scalable, or overstated; scale usually compresses returns. Active manager evaluation should focus on process, fees, active share, ownership structure, and pre-defined sell rules. Financial television is useful for awareness but poor for deep investment decision-making; longer-form research sources are more valuable. Private investing is attractive for its illiquidity and potential upside, but the space lacks good data, transparency, and research coverage.

Data Points: Podcast downloads: over 50,000 - Mentioned while asking listeners to leave reviews Podcast reviews: about 20 - Contrasted with the download count to encourage feedback Low-AUM ETF example: 5 million in AUM - Used to explain that quoted liquidity may look worse even if true liquidity is adequate Large order example: 50 million to 100 million - Illustrated that institutional ETF orders can still execute efficiently through liquidity providers U.S. stock expected return: 4% to 5% - Speaker’s estimate for future U.S. equity returns Bond expected yield: 1.5% - Cited as a low expected return environment for bonds Institutional return survey: 10.9% average expected return - Referenced as unrealistically optimistic expectations among institutions Tolerance for underperformance: 1 to 2 years - Majority of institutions said they would only tolerate this much underperformance from active or smart beta managers Manager underperformance example: 7 of the last 9 years - Used to describe Berkshire/Buffett-style tracking underperformance in a clone portfolio context Long-run active manager benchmark: 5 percentage points a year - Claimed outperformance for a Buffett clone portfolio since 2000 despite lean years Concentrated-bet personal limit: about 5% - Speaker’s stated maximum preference for a single position size Blackjack bankroll guideline: no higher than 5% of bankroll - Used as an analogy for prudent bet sizing Gold bet example: 2% to 4% - A friend's 'huge bet' was framed as doubling a small allocation

Pivotal Quotes: "A great company is not the same thing as a great stock." — Jeff Rimsberg: On the misconception that liking a product or brand means the stock is attractive "Age is a bit of a false benchmark to start from." — Jeff Rimsberg: On why risk tolerance should not be determined solely by age "There is no chance those funds are going to print 11% a year." — Meb Faber: Reacting to institutional expected-return surveys

Implications: Listeners should favor process, diversification, and realistic expectations over story-driven investing. The episode reinforces that sizing, rebalancing, and manager selection should be rules-based, and that better research sources exist than financial TV or simple familiarity with a company.