Radio Show: The 13F Guru Meb Would Follow Today | #70

Episode Summary

Executive Summary: The episode is a wide-ranging Q&A on capital allocation and portfolio construction. The hosts cover angel investing, personal net worth concentration, bonds and cash substitutes, leverage and risk parity, crypto speculation, hedge fund replication, and why trend following often feels more practical than buy-and-hold. The central message: investors should spend little time on plain-vanilla portfolios and focus risk-taking where they have an edge, while avoiding speculative manias and overpriced structures.

Main Topics: Angel investing and private markets (Priority: 5/5): They discuss the appeal of angel investing: less information efficiency, tax advantages, and behavioral benefits from illiquidity. The hosts stress starting small, using syndicates, and investing over many vintages rather than expecting quick wins. Personal capital allocation and concentration (Priority: 5/5): Meb explains that most of his net worth is tied to Cambria, with additional allocations to farmland, public equities, and tail-risk hedging. He frames wealth creation as requiring equity ownership or business creation rather than traditional asset allocation alone. Bonds, cash substitutes, and safe capital (Priority: 5/5): The conversation distinguishes among government, corporate, municipal, and foreign bonds, arguing that short-term government instruments and high-yielding savings accounts are reasonable cash substitutes, while low-yield foreign sovereign bonds are usually unattractive unless currency or deflation dynamics help. Leverage and risk parity (Priority: 4/5): They explain how institutions use leverage to target volatility and why leverage is not inherently bad, but often worsens investor behavior. Risk parity is presented as a diversified, leveraged implementation of low-volatility asset allocation, though vulnerable when correlations break down. Cryptocurrency speculation and mania (Priority: 5/5): A long segment warns against impulsive crypto investing, especially ICOs and high-premium Bitcoin vehicles. The hosts emphasize that buying is easy; the real challenge is having a disciplined exit or rebalancing plan. Hedge fund replication and 13F strategies (Priority: 4/5): They compare holdings-based, factor-based, and rules-based replication. The hosts prefer 13F-following when done carefully, but caution that many replication products simply repackage beta or crowded trades and may not justify their fees. Trend following vs. buy-and-hold (Priority: 4/5): Meb argues trend following is attractive because it includes an explicit exit rule, unlike risk parity or passive buy-and-hold, which can endure catastrophic drawdowns without a mechanism to respond.

Key Arguments: Angel investing can be attractive because private assets are less efficiently priced, can offer significant tax advantages after long holding periods, and are harder to overtrade because they are illiquid. For many investors, the best portfolio decision is to spend almost no time on the public market portfolio; the real value lies in earning more, saving more, or investing where an edge exists. Short-term government bonds and insured savings products are reasonable cash substitutes; the goal is not to maximize yield but to preserve purchasing power and limit drawdowns. Leverage is a tool, not a strategy. It can improve efficiency in a diversified portfolio, but it magnifies behavior problems and can fail when correlations rise during stress. Crypto and speculative assets can produce huge winners, but the buying decision is only half the problem; investors need a clear selling or rebalancing rule before entering. Closed-end funds often create structural opportunities and inefficiencies, but their fees and persistent premiums/discounts make them poor default vehicles for most investors. Trend following is favored over pure buy-and-hold because it at least attempts to exit when a market turns negative, even if it is not always superior in every environment. Many hedge fund replication strategies mostly capture beta or crowded trades; rules-based methods can work for certain strategies like managed futures, but should not be confused with true alpha.

Data Points: Angel investments made: about 25 - Meb says he has done roughly 25 angel investments over 3–4 years. Positive exits: 1 out of 25 - He reports only one positive exit so far, describing his batting average as 1,000 or 100% on that single winner. Net worth in Cambria: 70% to 99% - Meb estimates most of his net worth is in Cambria, emphasizing concentration risk and equity ownership. Tail-risk strategy allocation: 10% - He says he put 10% into the tail-risk strategy ETF as a cash/bond substitute. Global asset allocation real return: about 5% real per year - He argues that traditional asset allocation can compound wealth over decades but usually won’t create exponential wealth quickly. Typical portfolio drawdown: 25% to 30% - He says many diversified allocation portfolios historically experienced drawdowns in this range. Aggressive portfolio drawdown: 50%+ - He notes aggressive portfolios could have lost more than half in 2008. Long-term drawdown extreme: about two-thirds - He suggests very long-horizon histories show even deeper drawdowns in some cases. Risk parity fund exposure: 130% to 150% total exposure - He describes typical risk parity funds as levering diversified exposures above 100%. Stock market volatility: 17 - He references taking S&P-like volatility down from 17 to around 10 via cash or leverage adjustments. Bitcoin closed-end fund premium: 100% premium - He cites a closed-end Bitcoin fund trading at roughly double net asset value as an obvious short candidate. Closed-end fund load: about 8% - He says IPO buyers in closed-end funds are effectively hit with an 8% load. High-yield sovereign bond example: 50 bps - He argues that buying foreign sovereign bonds yielding around 0.5% often makes little sense versus cash alternatives. Savings account yield example: 1.5% - He mentions insured savings accounts yielding around 1.5% as a cash substitute. CAPE/portfolio time spent threshold: zero time or near-zero - He advises spending minimal time on public-market portfolios unless the process is enjoyable or the investor has very large assets. Bitcoin market cap comparison: Starbucks or Amex-sized - He compares Bitcoin’s market cap to a large public company to frame its growth and speculation.

Pivotal Quotes: "If you actually just care about the return on investment, you should basically spend zero time on your portfolio and go spend your time doing other stuff." — Meb: Advice on how retail investors should approach traditional public-market portfolios. "The buying is the easy part; you need to come up with either a system or a concept on how to sell it." — Meb: Warning about cryptocurrencies and speculative assets where investors often lack an exit plan. "There’s nothing inherently wrong with leverage. It simply is what it is." — Meb: Explanation of leverage in portfolio construction and why the key issue is behavior and implementation.

Implications: Listeners should focus on process, discipline, and capital allocation rather than constant tinkering. The episode favors simple, diversified portfolios for most people, with selective risk-taking only where edge, patience, and rules are strongest.