Meb’s take on Investment Plans, Building and Maintaining Wealth, How Meb Invests, and Investing in the time of Corona | #206

Episode Summary

Executive Summary: The episode argues that investors should stop reacting emotionally to the 2020 crash and instead follow a long-term plan. It frames wealth building as a choice among getting rich slowly through saving/investing, faster through concentration/leverage/entrepreneurship/private deals, and staying rich via diversified, automated, tax-aware portfolios that can withstand inflation and drawdowns.

Main Topics: Getting rich slowly through saving and compounding: Explains that disciplined saving plus low-cost investing over time is the simplest reliable path to wealth, illustrated by Ronald Read and the power of compounding. Getting rich faster via concentration, leverage, and entrepreneurship: Covers higher-return paths such as concentrated public portfolios, leverage, starting a business, and angel investing, while stressing the psychological and drawdown risks. Preserving wealth and the limits of ‘safe’ assets: Argues that cash, T-bills, and even diversified portfolios can suffer large real losses; true preservation requires diversified, real-return-focused allocation. The speaker’s own portfolio framework: Details the author’s personal split between ‘get-rich’ and ‘stay-rich’ assets: businesses, farmland, private investments, public systematic portfolios, and hedges. Investing during the coronavirus crash: Provides crisis guidance: do not panic, continue systematic investing, rebalance, buy dislocations carefully, and avoid binary all-in/all-out decisions. Behavioral discipline over market timing: Repeatedly emphasizes that investor behavior, not just asset selection, determines success; the key is sticking to a plan through underperformance and volatility.

Key Arguments: Most wealth is self-made: the route to riches is usually not inheritance, but saving, investing, entrepreneurship, or ownership. High-income professional careers often produce financial security more than true opulence because income is capped and the path is long. Compounding is extraordinarily powerful: modest savings invested for decades can become life-changing wealth. Fast wealth requires accepting concentration, leverage, illiquidity, and major drawdowns; there is no fast and safe path to riches. Private investing can outperform public markets partly because forced illiquidity helps investors avoid selling winners too early. The safest-seeming assets are not truly safe in real terms; inflation can destroy purchasing power even when nominal volatility is low. A diversified portfolio plus cash can preserve wealth better than cash alone, and can deliver materially higher long-term returns with similar drawdown risk. The speaker’s own portfolio blends entrepreneurial equity, farmland, private deals, and systematic public strategies because no single approach fits all goals. During market panics, investors should mainly stand still, keep dollar-cost averaging, and use only modest tactical moves like over-rebalancing or staged buying. Money is a tool, not the goal; investments should serve life objectives such as family, charity, and freedom.

Data Points: Self-made millionaires: 88% - Fidelity research cited to show most millionaires create their own wealth. Self-made millionaires: 80% - A similar figure from Thomas Stanley’s The Millionaire Next Door. Global wealth threshold: $100,000 net worth - Noted as placing someone in the global top 10%. Global wealth threshold: $1,000,000 net worth - Described as putting someone into the global top 1%. Doctor path to millionaire status: 12–20 years - Estimate for a doctor to reach millionaire net worth if frugal and burdened by typical loans/expenses. Compound return example: 10% annual return - Used to show 100k becomes 1M in 25 years and 10M in 50 years. Ronald Read fortune: $8 million - Janitor who amassed wealth through saving and investing. Ronald Read savings habit: $40 of every $50 earned - Friend quoted as saying he invested most of what he earned. Theoretical 10% compounding: 25 years = 10x; 50 years = 100x - Illustrates long-term power of compounding. Perfect stock/bond timing return: 17% annualized - World’s best market timer with perfect foresight still underperforms a 20% target. Worst market timer return: -0.9% annualized - Annual choosing the worse of stocks and bonds. Concentrated small-cap value + momentum strategy: ~16% annual return - Example of a strong historical strategy that still falls short of 20% and suffers huge drawdowns. Great Depression drawdown example: -85% - Worst peak-to-trough loss in the concentrated strategy example. Multiple drawdowns: -60% - Referenced as recurring drawdowns experienced by the concentrated public-market strategy. Buffett underperformance example: 17 years / 11 losing years - Used to show even great investors can underperform for long stretches. Tax-free QSBS exclusion: 100% capital gains exclusion up to $10 million or 10x basis - Described as a major tax advantage for qualifying small business investments. Angel investing outcome sample: ~125% average total return / ~42% CAGR - Speaker’s current realized results across about 150 private deals, excluding unrealized positions. Private investments entered: 150+ deals - Speaker’s own angel investing track record and current portfolio size. Exits realized: About 10 exits - Breakdown of the speaker’s private investments so far. Zero outcomes: 2 bankrupt zeros - Part of the realized private-investment results. Banking/cash erosion: ~97% loss over time - Illustrates erosion from holding cash under the mattress with ~3% inflation. T-bills real max drawdown: -50% - After-inflation loss for short-term Treasury bills in the 20th century. U.S. stocks real max drawdown: -79% - Historical maximum real drawdown cited for U.S. stocks. Foreign stocks real max drawdown: -78% - Historical maximum real drawdown cited for non-U.S. stocks. 10-year U.S. government bonds real max drawdown: -61% - Historical maximum real drawdown cited for intermediate government bonds. Gold real max drawdown: -85% - Historical maximum real drawdown cited for gold. 60/40 portfolio real max drawdown: -54% - Used to show even balanced portfolios can suffer severe losses. Global 60/40 drawdown: -46% - Diversified global 60/40 slightly reduces drawdown versus U.S.-centric 60/40. Global market portfolio drawdown: -39% - A broader global asset mix lowers drawdown further. Cash + global market blend: ~3.2% real return vs ~0.5% for T-bills - A portfolio of two-thirds global market portfolio and one-third T-bills aims for similar risk with better return. Cash + global market blend worst 12-month real return: -19% - Compared with about -17% for T-bills alone. Cash + global market blend positive months: ~61% - Shows similar frequency of positive months to T-bills. Estimated net worth allocation: Half to 99% in founder-led businesses - Speaker says most of his net worth is in Cambria and the Idea Farm. Private holdings allocation: About one-third each - Excluding operating businesses, holdings are roughly split among farmland, private companies, and public portfolio. Private company count: 150+ private companies - Speaker’s private angel investment exposure. Crypto allocation: 0.05% of global assets - Speaker’s tiny allocation intended to mirror global market capitalization and minimize regret.

Pivotal Quotes: "When these crises come along, the best rule you can possibly follow is not don't stand there, do something, but rather, don't do something, stand there." — Meb Faber: Advice for investors during the coronavirus panic; emphasizes inaction over emotional trading. "When most people say they want to be a millionaire, what they really mean is: I want to spend a million dollars, which is literally the opposite of being a millionaire." — Morgan Housel: Used to explain the tradeoff between consumption and wealth accumulation. "There are only three ways to go broke: liquor, ladies, and leverage." — Charlie Munger: Cited to warn against leverage in pursuit of higher returns.

Implications: Listeners should prioritize a written plan, automate investing, and avoid panic selling. The episode argues that lasting success comes from discipline, diversification, and matching strategy to temperament—not from chasing quick wins.