TIP 070 : Global Value Investing and Clone Investing w/ Meb Faber (Money Podcast)

Episode Summary

Executive Summary: Preston and Stig interview Meb Faber on global value investing, valuation metrics like CAPE, home-country bias, copying elite investors via public filings, and why trend following plus low fees matter. Faber argues U.S. stocks are expensive but not a bubble, while many foreign markets are cheap. He emphasizes process discipline, diversification, and avoiding performance chasing.

Main Topics: Global value investing and CAPE valuation (Priority: 5/5): Faber explains how cyclically adjusted earnings and CAPE ratios help compare markets across long cycles, arguing cheap markets tend to outperform over time and that this logic works globally, not just in the U.S. Home-country bias and market-cap weighting flaws (Priority: 5/5): The discussion highlights how investors overweight domestic stocks out of familiarity and how cap-weighted indexing can overexpose portfolios to expensive markets and large companies. Trend following as a risk filter (Priority: 5/5): Faber says valuation alone is not enough; combining cheapness with positive trend is the best environment, while expensive and falling markets are the worst and should trigger caution or exit rules. Copying elite investors through public filings (Priority: 4/5): Faber describes his approach of tracking 13F-style filings from top managers, using their disclosed holdings as a stock screen or even as a portfolio framework for long-term investors. Behavioral discipline and conviction (Priority: 4/5): The hosts and Faber discuss investor underperformance caused by chasing winners and selling losers, stressing the need for written rules, patience, and understanding drawdowns before investing. Asset allocation, fees, and performance chasing (Priority: 4/5): Faber argues that long-term portfolio success is often determined more by fees, taxes, and avoiding performance chasing than by attempting to perfectly time asset classes. Japan, currencies, and international opportunities (Priority: 3/5): The conversation covers Japan’s low valuations, currency uncertainty, and how FX can alter returns, while Faber notes that currencies can be traded with value, momentum, and carry factors.

Key Arguments: Valuation matters: cheaper markets tend to produce better future returns, both in the U.S. and globally. U.S. equities are expensive relative to history, but not necessarily in a bubble; expected returns are simply lower. Home-country bias leads investors to overweight their domestic market, often beyond what a neutral global allocation would imply. Market-cap weighting is not a value-aware strategy and can systematically overallocate to expensive markets and large stocks. Combining valuation with trend is superior to valuation alone because cheap assets can stay cheap and expensive assets can get much worse. Elite investors can be followed through public long-holdings disclosures, and doing so can remove fees while preserving skill exposure. Investor behavior is a major source of underperformance; rules and precommitment are essential. Fees, commissions, taxes, and performance chasing can overwhelm the benefits of even a strong allocation decision.

Data Points: CAPE ratio of the U.S.: about 24 - Used by Faber to describe U.S. market valuation after a recent correction. CAPE ratio of Russia: 4.6 - Highlighted as one of the cheapest major markets in the world. CAPE ratio of Denmark: 40 - Cited by the hosts as an example of a very expensive market. Typical U.S. home-country stock allocation: about 69%-70% - Audience polling example showing investors overweight U.S. stocks relative to global market cap. Global market-cap U.S. weight: roughly 50% - Presented as the agnostic starting point for a globally diversified investor. Foreign developed market CAPE: around 16 - Faber cites this as cheaper than the U.S. but not the cheapest bucket. Foreign emerging market CAPE: around 13 - Described as having become cheaper after a rough year. Cheapest 25% of countries CAPE: around 9 - Faber says this bucket is at its lowest level since 2008 and similar to 2003 and early 1980s. Buffett public holdings replication outperformance: about 5%-6% per year since 2000 - The hosts mention a strategy of tracking Buffett’s disclosed holdings. Buffett replication ranking: outperformed 98% of U.S. stock mutual funds - Used to illustrate the power of mimicking disclosed holdings. Investor behavioral drag: 1%-4% per year - Faber cites academic research on the cost of buying what has done well and selling what has done poorly. Average mutual fund cost used in study: 1.25% - Applied to the best asset-allocation portfolio in Faber’s study, reducing its relative attractiveness. Average advisor fee assumption: 1% - Added on top of mutual fund fees in the asset allocation example. Performance cost of chasing the prior decade’s best allocation: about 1.5% per year - Shown in Faber’s study on updating portfolios based on recent winners. U.S. high-valuation indicators: 11 bearish charts and 1 bullish chart - Faber references his blog post arguing valuation and sentiment are bearish, but trend remains the critical bullish factor.

Pivotal Quotes: "The U.S. is expensive, but it's not a bubble." — Meb Faber: Faber’s summary of current U.S. market valuation and forward return expectations. "The best quadrant is cheap and going up." — Meb Faber: He explains why valuation plus positive trend is the ideal investing environment. "Investing is the only business when things go on sale, people run out of the store." — Meb Faber: Used to describe the emotional difficulty of buying assets during stress and drawdowns.

Implications: Listeners should favor disciplined global diversification, watch valuations and trends together, control fees and taxes, and resist home bias and performance chasing. Foreign markets may offer better expected returns, but only with patience and a rules-based process.