Radio Show: The Gates Are Going Up! PLUS: The Set Up For Value & Trend-Following in 2023 | #464

Episode Summary

Executive Summary: The episode covers market valuations, 2022’s bruising year for traditional portfolios, and why the hosts remain constructive on cheap foreign developed and emerging markets, value, and trend-following. They also critique private-market opacity, discuss macro opinion vs. process, and weigh the benefits and costs of venture/angel investing, all while emphasizing disciplined, rules-based investing over narrative chasing.

Main Topics: Global valuations and U.S. market expensiveness (Priority: 5/5): The hosts review global CAPE ratios and argue that U.S. stocks remain expensive relative to history, while foreign developed and emerging markets are much cheaper and more attractive on a valuation basis. 2022 portfolio pain and investor complacency (Priority: 5/5): They reflect on how 2022 was one of the worst years for traditional 60/40 portfolios, yet sentiment did not fully reflect the damage because investors had become complacent after a long bull market and heavy stimulus. Value investing still offers opportunity (Priority: 5/5): Despite value’s recent rebound, they argue cheap stocks remain compelling globally, especially when paired with shareholder yield and conservative balance sheets. The cheap-vs-expensive spread remains historically wide. Trend following and managed futures as diversifiers (Priority: 5/5): The conversation praises trend as a powerful crisis diversifier, noting its strong performance in 2022 and arguing that investors should consider diversified exposure to the CTA/trend universe rather than trying to pick one manager. Private markets, REITs, and 'volatility laundering' (Priority: 4/5): They criticize private equity and private real estate for stale marks, gating, and marketing claims that obscure real risk, emphasizing that infrequent pricing can make volatile assets appear artificially smooth. Macro narratives vs. investment process (Priority: 4/5): They acknowledge macro experts are smart and entertaining, but argue that opinions and narratives should not drive portfolios. Systems, rules, and price-based signals matter more than predictions. Venture/angel investing economics and tax structure (Priority: 3/5): They discuss high fees in venture investing, but frame them against access, education, and tax benefits such as QSBS, arguing after-tax net returns and deal access matter more than headline carry.

Key Arguments: U.S. market-cap-weighted stocks remain expensive even after the 2022 selloff, while foreign developed and emerging markets are far cheaper and therefore more attractive. The real risk in investing is often paying too much for assets; expensive stocks historically deliver poor long-term outcomes, sometimes worse than T-bills. Value investing did not become obsolete; recent performance does not eliminate the opportunity because valuation spreads remain wide across geographies and sectors. Trend following is one of the best diversifiers to a stock-bond portfolio and tends to shine during market stress, as shown in 2022. Private market returns are often misleading because infrequent marks and gating can hide true volatility and drawdowns. Macro commentary is interesting but should be treated as input, not as the foundation of an investment process; price and systematic rules are more reliable. Venture fees are high, but access to differentiated opportunities and tax advantages like QSBS can justify the structure when evaluated on net, after-tax outcomes.

Data Points: Global median CAPE: 16 - Used to characterize overall global equity valuation levels. Cheapest country quartile CAPE: 10 - Lowest 25% of countries by valuation in the global update. Most expensive country quartile CAPE: 25 - Highest 25% of countries by valuation in the global update. U.S. CAPE ratio: 28-29 - Approximate current valuation level for U.S. stocks after the 2022 decline. U.S. market peak CAPE: 40 - Recent cycle high, close to but below the internet bubble peak. Hypothetical U.S. CAPE in poll: 50 and 100 - Survey questions about whether investors would still own U.S. stocks at extreme valuations. Survey response at CAPE 50: 75% would still hold - Poll result indicating willingness to own U.S. stocks even at very high valuations. Survey response at CAPE 100: 50% would still hold - Poll result showing extreme valuation tolerance among respondents. 2022 60/40 return: Approximately -17% - Referenced as one of the worst years on record for traditional balanced portfolios. 2022 ETF performance: About 90% of ETFs down - Illustrates broad market pain across asset classes in 2022. Foreign developed and emerging market valuation ranking: Bottom deciles - Described as screaming cheap relative to history. Dividend yields in some foreign/emerging value markets: 5%-8% - Examples of income available in cheap markets. Private venture bid-ask spread: 20% - Noted in secondary transactions, highlighting illiquidity and stale pricing. Dunn trend-following return in 2022: 60% - Cited as an example of strong CTA/trend performance during a crisis year. Estimated Berkshire Hathaway drawdown tolerance vs. S&P since inception: Could fall over 99% and still outperform - Used as a compounding illustration from a podcast guest. Angel investing deal count: ~350 investments - Speaker’s long-term venture/angel experience. Angel investing exits: ~40 exits - Used to frame experience and context for fee discussions.

Pivotal Quotes: "The real risk has been and is. Will always be buying expensive investments." — Matt Faber: Argument that paying too much for assets is more dangerous than owning cheaper foreign or emerging equities. "Price is unique and that it's as an indicator and that it can't diverge from itself." — Matt Faber: Explaining why trend-following/price-based signals are more dependable than narratives or fundamentals that can remain wrong for long periods. "If you're going to do value, like you're going to do it last year or the year before, or you're just never going to do it." — Matt Faber: Statement that value opportunities were unusually compelling recently and may remain so despite the rebound.

Implications: Listeners should focus on valuation discipline, diversifying with trend strategies, and being skeptical of private-market marketing and macro storytelling. The episode argues that cheap global assets and systematic process matter more than narratives.