Radio Show - 34 of 40 Countries Have Negative 52 Week Momentum...Big Tax Bills for Mutual Fund Investors...and Listener Q&A | #141

Episode Summary

Executive Summary: Meb and Justin Bosch discuss 2019 market conditions, honoring Jack Bogle, and several investing themes: global diversification, valuation spreads, trend following, buybacks, dollar-cost averaging, and tax efficiency. The conversation repeatedly argues for systematic, valuation-aware, globally diversified portfolios and against behavioral shortcuts, tax-inefficient funds, and home-country bias.

Main Topics: Jack Bogle’s legacy and investing discipline (Priority: 5/5): The hosts reflect on Bogle’s impact on lowering fees, promoting fiduciary standards, and simplifying portfolios. They frame the best tribute as replacing expensive, tax-inefficient holdings with low-cost alternatives. Global valuation spreads and home-country bias (Priority: 5/5): Meb argues that U.S. equities are expensive relative to foreign markets and that investors are making a large implicit bet by concentrating heavily in U.S. assets. He recommends starting with global market weights and tilting toward cheaper markets. Trend following and market regime shifts (Priority: 4/5): They discuss how 2018 created a strong divergence between buy-and-hold and trend-following strategies, with many markets entering downtrends. Trend systems are presented as a diversifier that can reduce drawdowns and provide protection in stressed markets. Shareholder yield, buybacks, and dividends (Priority: 4/5): The show strongly defends buybacks as economically equivalent to dividends and argues that investors should focus on total shareholder yield, including net buybacks, dividends, and valuation, rather than dividend yield alone. Dollar-cost averaging versus lump-sum investing (Priority: 3/5): The hosts note that the mathematically optimal approach for positive expected returns is lump-sum investing, but dollar-cost averaging is often better behaviorally because it reduces regret and helps people stay invested. ETF versus mutual fund tax efficiency (Priority: 5/5): A major practical point is that ETFs tend to be more tax-efficient and lower-cost than mutual funds, which often distribute capital gains unexpectedly. The hosts argue that taxes can matter more than fees over time. Career and mentorship advice for aspiring quants (Priority: 3/5): In listener Q&A, they advise students to learn through podcasts, books, real-world investing, networking events, and by creating value for others rather than focusing narrowly on credentials or pedigree.

Key Arguments: Bogle’s greatest contribution was forcing the industry toward lower fees, better fiduciary behavior, and simpler portfolios. U.S. equities have outperformed for years, but that recent outperformance is not a reason to expect it to continue; valuations matter more than backward-looking returns. The U.S. is expensive versus much of the world, while many foreign markets remain materially cheaper on CAPE and other valuation measures. Home-country bias is widespread and usually unjustified; global portfolios should start from world market weights, not local preference. Trend following can reduce drawdowns and help during major market declines, though it comes with whipsaws and periods of underperformance. Buybacks are not inherently bad; dividends and buybacks are both ways to return capital, and shareholder yield is a stronger factor than dividends alone. Mutual funds often create hidden tax drag through capital gains distributions, making ETFs structurally more efficient for long-term investors. The mathematically optimal move is to invest immediately, but dollar-cost averaging is a legitimate behavioral tool if it helps an investor stick with the plan. Aspiring finance professionals should focus on learning, networking, and providing value, not just degrees or elite credentials.

Data Points: U.S. equity return over past 11 years: 135% - Charlie Bilello chart cited during valuation discussion Japan equity return over past 11 years: 17% - Used to show how far U.S. returns have diverged from other markets Italy equity return over past 11 years: 47% - Part of cross-country return comparison Russia equity return over past 11 years: 48% - Part of cross-country return comparison U.S. outperformance vs foreign stocks since 1950: 1% per year - Long-run performance gap discussed in relation to valuation and home-country bias Hypothetical $10,000 growth since 1950: $14 million in U.S. stocks vs $8 million in foreign stocks - Illustrates the long-term effect of sustained outperformance U.S. valuation premium history: 0 average premium since 1980 (CAPE) - Meb argues U.S. and non-U.S. markets have historically traded at similar valuations on average U.S. valuation level: High 20s / previously low 30s - Described as one of the most expensive markets globally Valuation at 2009 bottom: Around 12 CAPE for both U.S. and foreign stocks - Shows that both were cheap at the financial crisis bottom Cheapest stocks basket CAPE: Around 11 - Used to contrast cheap global value opportunities with expensive U.S. equities Portfolio split in Twitter poll: 33% less than 15% foreign; 30% at 15-30%; 21% at 30-45%; 16% over 45% - Shows strong U.S.-home bias among respondents Vanguard target allocation to equities outside the U.S.: 40% - Mentioned as close to global market weight, though still below full global neutrality Countries in global market portfolio: 45 countries - Described as the starting point for a globally diversified portfolio Countries with negative 52-week momentum: 34 of 40 - Norbert Keimling chart update illustrating broad weakness in global markets Dividend vs shareholder yield alpha: Over 300 basis points per year - Top quintile shareholder yield outperformance over dividends alone in cited study Bottom quintile shareholder yield underperformance: 342 basis points below market - Shows penalty for low shareholder yield / dilution Average mutual fund fee: 1.25% - Used to contrast with lower-cost ETF structure Average ETF fee: 0.6% - Compared with mutual funds on cost Mutual funds paying capital gains distributions: 60%+ annually - Highlighted as a hidden tax burden ETFs paying capital gains distributions: 5-6% - Shows relative tax efficiency of ETF structure Estimated net-return advantage of ETFs from tax efficiency: ~80 basis points - Referenced from Rob Arnott-style math discussion on structural tax savings Trading cost for ETFs: ~20 basis points average bid-ask spread - Acknowledged as a real but generally smaller cost for frequent traders Big negative month threshold in study: 8% or worse down month - Used in discussion of strong rebound tendencies after severe declines

Pivotal Quotes: "There was probably no better way to honor him than to look up your portfolio, pick out a bunch of crappy, super expensive, tax-inefficient funds, sell them, buy some cheap funds, and then probably forget about it for the next decade." — Meb: On Jack Bogle’s legacy and what investors should do in response to his passing "The correct answer is you should put all of it in today, lump sum." — Meb: On dollar-cost averaging versus immediate investing when expected returns are positive "I think 80% in one country, I think, is very foolish." — Meb: On U.S. home-country bias and the need for global diversification

Implications: Listeners are urged to think globally, use systematic rules, minimize fees/taxes, and avoid emotional concentration in fashionable assets. The episode reinforces a long-term, process-driven approach over narrative-driven investing.