Michael Batnick & Ben Carlson – What’s Your Favorite Diversifier? PLUS: Future Proof! | #493

Episode Summary

Executive Summary: Meb Faber, Michael Batnick, and Ben Carlson preview Future Proof Festival and then debate portfolio construction in today’s higher-rate environment. They argue macro forecasting is unreliable, valuations matter but don’t determine outcomes alone, trend following is the strongest add-on strategy, and behavioral fit often matters more than theoretical purity. They also assess dividends, buybacks, real assets, and product design for investor certainty.

Main Topics: Future Proof Festival preview (Priority: 3/5): The guests discuss logistics, sponsor ideas, and attendee experience at Future Proof, including the return to Huntington Beach and creative event activations like planes, drones, burgers, and Miami Vice drinks. Macro forecasts vs. realized equity returns (Priority: 5/5): Batnick revisits the 'new normal' era and decade-by-decade return analysis, arguing that reasonable macro and valuation calls often fail because they miss the role of mega-cap winners and compounding fundamentals. Rates, 60/40, and portfolio construction (Priority: 5/5): The group argues that higher bond yields improve the attractiveness of balanced portfolios and reduce the need for extreme equity returns, making traditional 60/40 allocations more viable again. Behavioral demand for certainty and structured products (Priority: 4/5): They discuss hedged, capped-upside products and annuities as ways to help investors tolerate risk, while warning that complexity, cost, and opportunity cost can make them poor choices if misused. Trend following and managed futures (Priority: 5/5): Trend following is presented as the best diversifying strategy to add to a long-only portfolio, especially because the short component helps in dislocations like 2022’s bond selloff. Diversification beyond U.S. stocks (Priority: 4/5): They push back on the idea that owning only the S&P 500 is 'boring' rather than risky, emphasizing the importance of global equities, real assets, and avoiding concentration risk. Dividends, buybacks, and valuation discipline (Priority: 4/5): The guests criticize dividend-chasing and income products that ignore valuation and share issuance, arguing that dividend strategies only make sense when combined with buybacks and price awareness.

Key Arguments: Macro and valuation arguments can be directionally correct yet still fail to predict actual market returns because a small number of dominant companies can drive index performance. Higher bond yields make balanced portfolios more sustainable because stocks no longer need to produce extreme returns to deliver acceptable 60/40 outcomes. Behavioral fit is central: many investors will accept capped upside or dividend strategies because certainty feels better than abstract return potential. Trend following works best as a portfolio diversifier because it can profit from both long and short exposures; long-flat versions miss a major source of protection. Trend rules should remain simple and price-based; adding economic overlays, valuation timing, or 'smart' sell rules often weakens robustness. Market-cap weighting itself behaves like a trend-following mechanism because rising stocks get bigger weights and falling stocks get smaller weights. Global diversification remains important because long periods of U.S. underperformance can happen, and investors tend to abandon concentrated positions during lost decades. Dividend strategies become dangerous when investors focus only on yield and ignore valuation, buybacks, and share issuance. Real assets such as real estate, farmland, REITs, and commodities can offer inflation and behavioral benefits, especially for wealthy investors seeking illiquid anchors.

Data Points: Cropland lost to urbanization: 4.8 acres per minute - Used in the AcreTrader ad read to highlight farmland scarcity over time. Future Proof ticket deadline: August 15 - Mentioned as the final date to secure tickets. Advisor Circle travel voucher: $750 - Offered to attendees who sign up for the Breakthrough sessions at Future Proof. Breakthrough meetings: 8 meetings of 15 minutes each - Described as one-on-one sessions with platform companies, asset managers, or RIAs. U.S. stock returns in the 2010s: Almost 14% per year - Referenced as an example of how valuation-based return forecasts were too bearish. U.S. stock returns in the 2020s so far: Almost 12% per year - Used to show continued strong equity performance despite volatility. CAPE ratio at the GFC bottom: As low as 12 intra-month; about 13 at month-end - Cited as evidence that U.S. equities were very cheap in 2009. CAPE ratio at the end of 2010: Sub-20 - Used to argue the market was still reasonably valued after the crisis. Global stock real return benchmark: About 5% real - Referenced when discussing below-average returns above certain valuation thresholds. Rolling high-return regime: Four peaks in history - Roaring 20s, Nifty 50s, internet bubble, and COVID meme-stock era were cited as major peaks. Average fixed income yield: Over 4% for 80% of fixed income - Michael cited BlackRock/earnest call data to argue bonds are now much more attractive. Baby boomer wealth share: About 55% of U.S. wealth - Used to discuss how allocation shifts by boomers could affect markets. Trend-following lookback: 10-month moving average - Referenced as the published rule in their trend research. Alternative trend lookback: 12-month lookback / breakout - Discussed as a simple and robust variation on trend following. Worst stretch for global diversified portfolios vs. S&P 500: About 12 years in a row underperforming - Illustrated how hard it has been for non-U.S. portfolios to keep up recently. Berkshire Hathaway drawdown thought experiment: 99% decline - Used in a quote about how extreme drawdowns can still outperform the S&P over inception if the starting point is right. Snap stock-based compensation transferred to insiders: $8 billion since IPO - Cited as an example of why buybacks and share issuance must be analyzed together.

Pivotal Quotes: "Macro is impossible." — Michael Batnick: Summarizing the limits of forecasting long-term equity returns from macro and valuation alone. "Trend following to me, if you blind out all the asset classes and strategies, this is an asset class strategy. To me, it's the best one you can add to a traditional diversified portfolio." — Meb Faber: Explaining why trend following is his preferred diversifier despite its rough periods. "You know, I hear a lot of people describe how they invest. They say, you know, I just put all my money in the SP. It's boring. ... And to me, that's a very strange phrase because ... putting all your money in U.S. stocks to me is not ... extremely risky to me." — Meb Faber: Arguing that index concentration in U.S. equities is a risk, not a boring default.

Implications: Investors should prioritize diversification, valuation discipline, and behaviorally sustainable strategies over narrative-driven forecasting. Higher yields make balanced portfolios better, while trend following and real assets can improve resilience when markets regime-shift.