Meb Faber, Cambria Investment Management Chief Investment Officer joins the On the Move panel to discuss impact of COVID-19 on the economy.
ADAM SHAPIRO: In this environment, whether you are a bull, whether you are a bear, a lot of people are looking for protection. Even if you think the market's going up, you still want to protect the assets which have gained in value. Let's bring in Meb Faber, Cambria Investment Management Chief Investment Officer, joining us from Los Angeles to help some of us who are not incredibly skilled investors make heads or tails of how we might be able to use ETFs or other ways to protect that which we might have gained in the past couple of months. Welcome to the program.
MEB FABER: Great to be here.
ADAM SHAPIRO: So what advice do you have to protect a portfolio? I'm going to say right now, if I'm optimistic because we heard in the last hour we expect to go higher in these markets, how do I protect what I've already gained? What would you advise?
MEB FABER: Well, the best advice would have just been taking a nap or a sabbatical and just missed all of 2020. You know, I think it's a great reminder that normal market returns are extreme. I think most people assume with stocks you're going to have this steady 8% return every year. But then reality, vast majority of the time it's up 30 or down 30, or in 2020, both, right? So the path is quite volatile.
We wrote this back in March, but I think it applies for really any market environment. It was called "Investing in the Time of Corona," and it was right in the middle where everyone was going crazy. And we said, look, markets are uncertain. You hear that everyday on TV. That is well known. So as you think to the future, you could easily make a bull and bear case for US stocks. And I walk through the impact and monetary and fiscal policy, all that good stuff.
So there's one case where you could go down 50% from here. Well, there's one case where by the end of the year, everything is handled well. We're hitting all time highs in stocks. And most people, I think, thought that's crazy. There's no chance of that happening. Here we are. A lot of people, I think, still feel this real disconnect between Main Street and Wall Street. Now, if you're going to do the possibilities, the outcomes, you have your asset allocation. We say, look, I'm going to prepare for the bull case. I don't think the right way to think about that is I want to allocate to US stocks.
The problem is US stocks are expensive. There's no question they're expensive. Any evaluation metric you look at, they're expense. Now, they're not crazy. It's not like late '99. It's not an insane bubble, they're on the expensive side. Longtime P/E ratio around 30, so that's a headwind. And traditionally, looking at markets historically, high valuations don't really protect you if a big bad bear comes.
Think Japan in the '80s. Booming stock markets around the world, the '80s and '90s, Japan had the biggest bubble we've ever seen. It's had no returns for 30 years. So the advice on the right tail, if things go really right, is the rest of the world. So in the other 44 out of 45 developed market countries, most are cheap. Foreign developed, totally reasonable valuation about around 20. Foreign emerging is in the teens, and the cheapest stuff is down around P/E ratio of 10. Nobody wants those.
The US stock markets crushed it the past decade, but that's not normal. You know, normally it's a coin flip on who does better. So the first piece of advice is tilt towards value, and that should protect you if things do well. And you also have to, of course, think about if things do poorly, too.
JULIE HYMAN: What if you don't want a view, right? What if, I mean, is it is it more important to have a view on whether stocks are going to go up or down at a time like this or at a time like two years ago when it seemed like they were going to do nothing but go up? I mean, is it possible to be, and is it beneficial to be, agnostic?
MEB FABER: My best advice, we wrote a book called "Global Asset Allocation" years ago, looked at all the different house allocations of the gurus. From Swenson to Robert Knott to Buffett, all the recommended allocations for public market investors. The surprising takeaway was didn't really matter. And you know, it's like making-- my mom's here. You guys can see the mess in the background. She's a southern cook. She makes cookies. Doesn't use a recipe. You know, does it by hand. As long as you have the main ingredients, chocolate chips, butter, flour, all that good stuff, doesn't matter exactly how much you have, it's going to turn out OK. Same thing applies to asset allocation.
You look at like the Talmud Portfolio in the books, 2000 years old, a third in business stocks, a third in bonds, a third in real assets like commodities and real estate. Doesn't really matter, and the research shows that what does matter is how much you pay for it and avoiding taxes and not doing stupid stuff. So any allocations should do fine, just forget about it. That having been said, the hardest part the people have with these buying whole portfolios is compliance, is not selling at all at the bottom of the financial crisis and never buying again.
We talk to so many people that have done that. Not selling in March and saying the world is turning into a zombie apocalypse and never getting back in. So this concept we talk about of tail risk as an insurance, you know, same thing, house insurance, car insurance. It's a cost. But if it allows you to sustain and behave and get to the finish line with the rest of your portfolio, it's a positive benefit. So the main stuff have on automated autopilot, forget it, leave it, but consider all the possible outcomes behaviorally to at least let you survive.
ADAM SHAPIRO: Help someone who is not, and I want to be clear about this, as skilled an investor as perhaps someone like you, when you are trying-- because most of us go into this looking at an individual stock and just the rudimentary metrics of those stocks, even if we're doing mutual funds or our 401(k)s. But then you get the ETFs, and you can protect yourself with puts or calls, and you don't have to necessarily enter those contracts. You can do it through the ETFs. Is this a danger zone for those of us who aren't doing it on a daily basis?
MEB FABER: Yep, but to be clear, it's all a danger zone. So my starting point that I tell everyone, global market portfolio. If you bought all the assets in the world, that's about half stocks, half bonds, and of that, half US, half foreign. That's starting point, and that is the only passive portfolio. You buy that with a basket of ETFs, it's almost zero cost, no commissions, amazing.
Now, are there things you should do from there? Tilt towards value, sure. Buy tail risk. So we have a fund that does this, puts 90% in government bonds, right, so that used to give you some income, but now gives you a lot less, but gives you the benefit when things hit the fan, bonds usually one of the only assets that help.
This year is a great example. Bonds are up double digits. A lot of people, that's surprising, given where rates are. I don't think they move negative, but it's possible. Rest of the world, a lot of sovereigns are negative. And then with the remainder of the fund, this is entail, it buys puts, a ladder of puts.
And so the whole point of this fund and all our funds is it makes it easy to buy it with one click. I don't want to muck around with this on my own, so we designed a fund that's simple. It's the lowest cost fund in the entire category and something that people can understand and then not be some crazy quadruple leverage daily rebalancing mess that it just gets complicated. So if people want to do it on their own, God bless them, but I think it's a lot easier, tax efficient in the ETF structure.
ADAM SHAPIRO: All right, we want to say thank you right now to Meb, excuse me, Meb Faber from Cambria Investment Management, the Chief Investment Officer. Good to have you here, and we're going to put in a plug with Room Rater not to give you grief, because as the Talmud said, when your mom's visiting, you have any mess you want. All the best to you.
MEB FABER: And importantly, go Broncos.
ADAM SHAPIRO: Ugh, well, we can talk about that later.