Radio Show – Valuation Update…Bond Returns….Meb’s Startup Investing | #311

Episode Summary

Executive Summary: The episode revisits lessons from the pandemic market shock, argues that U.S. stocks are historically expensive while value and international markets look more attractive, and questions the traditional safety of bonds in real terms. It also explores how to evaluate startups and angel investments, emphasizing power laws, diversification, and tax advantages like QSBS, while highlighting “found money” opportunities such as unclaimed assets and business tax credits.

Main Topics: Pandemic market lessons and the importance of an investment plan: The hosts use COVID-era volatility as a case study for why investors need a written plan, rebalancing discipline, and preparedness for extreme outcomes rather than prediction. U.S. equity valuations and market sentiment: A major theme is that U.S. large-cap, market-cap-weighted stocks are exceptionally expensive by historical standards, with euphoric sentiment, high allocation to equities, and speculative activity reinforcing concern. Value vs. growth and the case for global investing: The discussion argues that value has suffered historically wide spreads but may be entering a regime change, while international markets—especially cheaper countries and regions—offer better prospective returns than the U.S. Bonds, inflation, and the limits of 60/40: The speakers challenge the idea that low bond yields justify expensive stocks and argue that bonds should be judged in real, after-inflation terms, where long-term outcomes can be much worse than investors assume. Angel investing process and startup selection: Meb outlines his angel-investing approach: many small bets, focus on existing traction, sector preferences, and the role of QSBS tax benefits and power-law outcomes in private investing. Found money and tax/credit optimization: The show highlights practical ways to recover value with little effort, including unclaimed property searches and MainStreet’s automated business tax credit/rebate discovery.

Key Arguments: Pandemic-era volatility validated the need for a prewritten investment plan, because investors cannot forecast all left-tail and right-tail events. Rebalancing and incremental “over-rebalancing” are better than binary all-in/all-out decisions when markets move to extremes. U.S. stock valuations, especially CAPE, are at levels that imply poor future real returns for broad market-cap-weighted indices. Market-cap-weighted indices are expensive, but not all U.S. stocks are: value, small cap value, and non-U.S. equities remain materially cheaper. Global investing is essential because U.S. outperformance has been driven largely by valuation expansion, which may not repeat. Bonds are often viewed too narrowly in nominal terms; inflation makes their real returns and drawdowns far worse than most investors realize. Low bond yields do not automatically justify expensive stocks; valuation matters independently. Angel investing works as a power-law portfolio: a small number of huge winners drive outcomes, so breadth and patience are critical. QSBS can make startup investing unusually tax-efficient, making it attractive even when gross returns only match public markets. The best startup bets often have real revenue traction, solve major friction points, and fit sectors the investor understands well.

Data Points: Cropland lost to urbanization: 4.8 acres per minute - Used in the sponsor segment describing farmland scarcity and long-term investment appeal. AcreTrader minimum investment: $15,000 - Passive farmland access for individual investors. Average company savings from MainStreet: $75,000 - Average savings from the company’s tax credit/rebate audit program. U.S. CAPE ratio: About 37-38 - Presented as historically very expensive for U.S. equities. Historical CAPE range in U.S.: As low as 5, as high as 45 - Used to frame current U.S. valuation extremes. Investor survey expectation for U.S. stock returns: 15% - Cited as the highest expected returns among global markets in a recent survey. Public sentiment on owning U.S. stocks at CAPE 50: About half would still own them - Twitter poll illustrating disconnect between fundamentals and investor behavior. Public sentiment on owning U.S. stocks at CAPE 100: About one-third would still own them - Further evidence of valuation indifference. Countries/markets with very low CAPEs: Russia around 8; U.K., Poland, Czech Republic also cheap - Examples of international markets appearing much cheaper than the U.S. Foreign developed CAPE: About 22-23 - Compared to the U.S. CAPE near 38. Foreign emerging CAPE: About 15 - Used to argue emerging markets are significantly cheaper than U.S. stocks. Cheapest bucket CAPE: About 12 - Refers to some of the cheapest countries in the world. Historical valuation spread performance: Price-to-sales multiples of 15+ led to average relative returns of -18% and -28% over the next 3 and 5 years - Cited from prior research discussed by Barry Ritholtz. Value performance in 2020: Worst year for value, including 1999 - Value reached historic relative underperformance. Value performance in Q1 2021: Strong rebound / “face ripper” - Evidence of potential regime shift, though relative chart barely moved. Best-performing stocks outside the U.S.: About 75% on average each year - Supports the case for global diversification. U.S. stock market outperformance periods: Mostly the 1990s and before that around 1910 - Used to show recent U.S. dominance is unusual historically. 10-year Treasury yield: Around 0.5% before the rate move; roughly 2% used for planning math - Illustrates how low starting yields constrain fixed-income returns. Bond drawdown after inflation: Over 50% peak-to-trough historically - Shows the real risk in bonds despite their reputation as safe assets. 10-year bond drawdown recently: About 10% nominal decline - Used to contextualize the recent bond selloff. Angel investments made: About 250 companies - Meb’s stated private-investing track record. Angel deal reviews: About 3,000 deals reviewed - Shows breadth of sourcing and diligence. AngelList activity comparison: About 200 syndicates followed vs. average of 3; about 200 deals reviewed per month vs. average of 5 - Used to illustrate unusually high activity. Angel portfolio exits: About 20 exits - Reported outcome history of the angel portfolio. Best cash-on-cash exit multiple: About 20x - Top realized return mentioned from private investments. QSBS threshold: Under $50 million gross assets - Eligibility criterion for favorable tax treatment. QSBS tax benefit: Gain exempt up to $10 million or 10x basis, whichever is greater - Key reason startup investing can be tax-efficient. Typical startup sweet spot: $5 million to $20 million market cap - Preferred size range for angel opportunities. Preferred traction threshold: Around $1 million in annual recurring revenue - Meb prefers companies with real product-market traction rather than pure pre-seed ideas. Typical startup valuation multiple: Around 10x revenue - Rule-of-thumb pricing used in his screening.

Pivotal Quotes: "Most investors are probably better off trying to emulate Rip Van Winkle than Nostradamus" — Matt Baber: Describing why a written plan and humility about forecasting are essential during crises. "I think the yellow flashing light. Red is when the trend turns, baby, but we’re in serious yellow flashing territory." — Matt Baber: His warning that U.S. equities are extremely expensive and sentiment is too euphoric. "You’re allowed to be expensive because bond yields are low ... is just not true." — Matt Baber: Rejecting the common argument that low rates justify high stock valuations.

Implications: Listeners should focus on process, valuation discipline, and global diversification rather than chasing recent winners. The episode suggests U.S. large-cap returns may be muted, while value, foreign equities, and selected startups may offer better risk-reward.