The Meb Faber Show - Better Investing Folgen

In Episode 134, we welcome Chris Cole. Meb kicks off the show by asking Chris to describe his nontraditional background. Chris studied cinematography in film school at USC, while trading options in his spare time. He eventually made a career switch and began in Merrill Lynch’s analyst program in New York, while trading in his spare time. With his trading, he eventually created $1 Million to start his firm. Next, the conversation transitions to Chris’s work, including his take that “Volatility is the only asset class.” Chris follows by discussing how returns can be deconstructed to represent either “short-vol” or “long-vol” strategies. He mentions that the average institutional portfolio is a 98% short-volatility portfolio that will not perform all that well during a period of regime change. Meb then brings up some recent events that have transpired to lead into a chat about short vs. long volatility, and some dangers when thinking about the strategies. Chris discusses how volatility can be expressed in both tails, for example, the right tail being high volatility and high asset returns, and provides an example that volatility was averaging around 25 in the late 90s when the market was going up 30% per year. He follows with a stat that at-the-money vol moved more in January of this year than it did in the February move most might be familiar with. Chris then provides his thoughts about regime changes, what is possible, and what he sees in the market. He starts with his recent paper, Volatility and the Alchemy of Risk. In that paper, he uses the example of the Ouroboros, or “Tail devourer” as a metaphor for the current short-volatility trade. What he sees as a worry are the explicit short-vol traders, $1.4 Trillion of implicit short-vol strategies that are re-creating a portfolio of short options by financial engineering, and corporations using leverage to buy back shares, suppressing volatility. All together these scenarios represent a snake eating its tail. Meb then asks Chris to talk about market pressures that have resulted in liquidity changes. Chris explains that this is the only bull market in history with less and less volume, and less and less volatility. He mentions that what was scary about February’s volatility was that liquidity vanished. He follows with a discussion of passive vs. active investing, and the role active investors play in the market. Meb then asks about catalysts for stress in the market. He talks about the passive strategy not being understood by investors as something that could lead to de-stabilizing conditions, and that over 50% of the investment grade debt is in the lowest rated tranches, and over $2 Trillion of debt that needs to be rolled in 2019 and 2020. He mentions that what could potentially cause an issue is inflation leading to higher rates, a minor turn of the business cycle given the amount of leverage and gearing on corporate balance sheets, as well as the reliance of stocks and bonds being un-correlated if the markets enter a period where stock and bond correlations are in fact positively correlated.  Next, through an example of rental car insurance, Chris gives some background on implementing long-vol strategies by using quantitative analytics to help identify points in time where you are paid to own “insurance” against market declines, in addition to predictive analytics that provide an informational edge to help understand whether or not it might be productive to own protection against market volatility risk. Meb follows with a question on the Japanese Vol Monster. Chris describes the short-vol trade that has been going on in Japan for a long time. He then describes philosophically that volatility is the instrument that makes us face truth. This and more in episode 134. Learn more about your ad choices. Visit megaphone.fm/adchoices

In Episode 133, we welcome Todd Harrison. Meb begins the conversation asking Todd about what got him into the cannabis space. Todd discusses his intellectual curiosity of the space, and what he has learned about the history of cannabis, from the 30,000 year relationship we have had with it as humans, to the US weaponizing marijuana. Meb then leads into the topic of governments and states changing their attitudes. Todd talks about it being a confluence of things, but gets into a personal story of how he discovered the efficacious ability of cannabis by working with Dr. Julie Holland after struggling with a decade long treatment of PTSD with a Western medicine protocol. The conversation then turns to the marketplace. Todd relays that there is quite a bit ahead for the consumer space. In hearing what scientists have to say, it has painted a much different picture for the breadth of wellness that is going to be disrupted going forward. Next, Meb and Todd discuss a little background on cannabinoids in general. Todd describes that there are over 200 different cannabinoid strains that exist. CBD and THC are two that have been popularized, but when you drill down, there are far more, including CBN, that aids sleep. The conversation shifts to the broad marketplace for investors. Todd describes the four primary arbitrage opportunities he sees that present opportunity: 1) Time Vs. Policy, 2) Price vs. Institutional Flow, 3) Perception, and 4) Liquidity. Meb follows by asking Todd about the firm’s investment approach. Todd talks about taking the long view. He mentions that the space has had two 50% drawdowns this year, and they count on disciplined position sizing and light use of puts to layer on with the long view but are using the current volatility to their advantage right now. Meb then asks Todd about the leading countries in the global landscape right now. Todd talks about Canada being the most mature, Australia looking compelling, and sees the U.S. as having the best opportunity set. Meb asks how Todd diversifies across industry groups and various verticals. Todd talks about there being about 500 listed stocks right now, and that there are probably 50 to 55 companies that his firm wants to invest in, and probably up to half of them at any given time. He thinks in 10 years’ time the survivors can offer a significant market cap. He and his team are focused on sticking with the companies they think are positioned to win.  Meb then asks what Todd’s favorite vertical is if he had to pick one to be invested in for 5 years. Todd mentions it would be biotech, even though it may take longer for those investments to pan out because they still have to go through the traditional biotech process. Todd then gets into his approach for analyzing stocks. Todd discusses the importance of understanding the management teams, and “betting on jockeys as much as the horse,” as well as taking the fundamental perspective by getting a read on the company through a DCF analysis.  All this and more, including a few names in Todd’s portfolio, and some suggestions for resources investors can tap for research on the industry in Episode 133.   Learn more about your ad choices. Visit megaphone.fm/adchoices

Episode 132 has a radio show format. In this one, we cover numerous Tweets of the Week from Meb as well as listener Q&A. For our Tweets of the Week, a few we cover include: A chart from Longboard about returns. Since 1989, the worst performing 11,513 stocks – which is 80% of all stocks, collectively had a total return of 0%. The best performing 2,942 stocks (20% of all) accounted for all the gains. A tweet about another option selling fund blow-up. A Jason Zweig post about how many investors should question the dogma of “stocks for the long” run since history shows that a portfolio of bonds has outperformed stocks surprisingly often and for long periods. The statistic “According to Goldman, its indicator at 73% marks the highest bear-market reading since the late 1960s and early 1970s, which (with a few exceptions) is consistent with returns of zero over the following 12 months.” We then jump into listener Q&A. Some you’ll hear include: In your book, Global Asset Allocation, you compare the results of well-known asset allocations and find that the returns are quite close. Over a long period of time, would you also expect the results of a momentum / value strategy to be similar? Is the main advantage that it allows for better behavior (lower drawdowns, etc) or would you also expect the performance to differ (net of fees)? Would you rather own a stock with a high free cash flow yield or high dividend yield? I was wondering if you could touch on the process of launching an ETF. What are the startup costs, how much AUM and at what fee would the ETF breakeven? I've heard you (and others) extol the benefits of a diversified global allocation but I rarely (if ever) hear the counter argument: that the US deserves a premium to the rest of the world because it has the largest and deepest capital markets, has comparatively lower regulation and fosters innovation and creative destruction. Do those factors warrant an over-allocation to US equities? How much should the average investor be willing to spend (as a percentage of portfolio value) in order to carry some protection in the form of puts? What beats the 60/40 portfolio over the next 5 and 10 year periods? As usual, there are plenty of rabbit holes. You’ll find them all in Episode 132. Learn more about your ad choices. Visit megaphone.fm/adchoices