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

Episode Summary

Executive Summary: The podcast returns after a long break, reviewing the volatile last 12 months (COVID, market recovery, GameStop, SPACs). Meb Faber emphasizes the importance of having an investment plan, discusses global valuations (US expensive, international cheap), value vs growth, bonds near zero, and shares his angel investing process. He also promotes unclaimed property and Main Street's services.

Main Topics: Investment Planning and Market Volatility (Priority: 5/5): Discussion on the importance of having a written investment plan, using the COVID-19 market crash as a case study. Meb advocates for preparation and avoiding panic, comparing it to a quarterback studying tape. Global Valuations and CAPE Ratio (Priority: 5/5): Analysis of US stock valuations (CAPE ~37-38) vs international markets (foreign developed ~22-23, emerging ~15, cheapest like Russia at 8). Meb argues US is expensive and likely to have low future returns, while international offers better opportunities. Value vs Growth Investing (Priority: 4/5): Value has been beaten down but may be due for a comeback. Meb highlights historic spreads and the recent value rally, suggesting value has a long way to go. He notes that value stocks are cheap with high cash flow. Bond Market and 60/40 Portfolio (Priority: 4/5): Bonds are unattractive due to low yields (10-year ~2%). Meb explains that the 60/40 portfolio faces challenges, and investors are moving to riskier assets. He debunks the idea that low bond yields justify high stock valuations. Angel Investing and Startup Process (Priority: 4/5): Meb shares his methodology for angel investing: making many small bets (250 companies), focusing on power laws, using platforms like AngelList, and targeting companies with revenue. He emphasizes the tax benefits of QSBS. Unclaimed Assets and Tax Tips (Priority: 3/5): Promotion of unclaimed.org for finding forgotten money, and Main Street's service for companies to claim government rebates. Meb also mentions QSBS tax benefits for startup investors. Interest Rates and Intrinsic Value (Priority: 3/5): Discussion on how interest rates affect equity valuations. Meb argues inflation is a bigger driver than interest rates, and low rates don't automatically justify high stock multiples.

Key Arguments: US stocks are expensive (CAPE 37-38) and likely to deliver near-zero real returns over the next decade, based on historical data. International stocks, especially in emerging markets and cheap countries like Russia (CAPE 8), offer better value and potential for higher returns. Value investing has been underperforming but is due for a reversal; the spread between value and growth is at historic extremes. Bonds are unattractive due to low yields; the 60/40 portfolio is challenged, and investors should consider alternatives like farmland or startups. Angel investing requires a portfolio approach with many small bets to capture power law returns; tax benefits like QSBS enhance after-tax returns. Investors should have a written investment plan and avoid making emotional decisions during market volatility.

Data Points: US CAPE Ratio: 37-38 - Current valuation of US stocks, historically high. Foreign Developed CAPE: 22-23 - Valuation of developed international markets. Emerging Markets CAPE: 15 - Valuation of emerging markets. Russia CAPE: 8 - Cheapest country example, same 5-year performance as US. Cropland Loss: 4.8 acres per minute - Loss of farmland to urbanization from 1997 to 2022. Historical CAPE >35 Outcomes: 55 times, average real returns zero - When CAPE closed above 35, future 10-year real returns averaged zero. Best Performing Stocks Outside US: 75% - On average, 75% of the best performing stocks in any given year are outside the US. Angel Investments Made: 250 companies - Meb's total angel investments over 7 years. Angel Exits: 20 exits, highest 20x - Number of exits and best multiple achieved. Main Street Average Savings: $75,000 - Average savings for companies using Main Street's service.

Pivotal Quotes: "Most investors are probably better off trying to emulate Rip Van Winkle than Nostradamus, meaning predicting the future." — Meb Faber: Discussing the futility of market timing during the COVID-19 crisis. "The thing that's going to eventually kill this bull market is Econ 101 is so boring. It's just supply." — Meb Faber: Commenting on the flood of new IPOs and SPACs as a bearish signal. "If you look at any given year, on average, 75% of the best performing stocks are outside the U.S." — Meb Faber: Arguing for global diversification in equity portfolios.

Implications: Investors should diversify globally, tilt toward value, and have a written plan. The US market may deliver poor returns; consider alternatives like farmland, startups, and international equities. Avoid emotional reactions to volatility.