- Meb Faber is CEO and Chief Investment Officer of Cambria Investment Management.
- He manages more than $ 1 billion for the company, including a $ 335 million ETF that has returned 52% year-to-date.
- He explains why the outperformance is expected to continue and how he plays in an overvalued market.
Meb Faber is well known in the investment community for interviewing some of the biggest names in the industry, from Jason Calacanis to Tom Barton on his podcast, which has a relentless schedule of around three episodes per week.
But that’s not even his day job.
Faber also manages $ 1 billion in assets as Chief Investment Officer and Managing Director of Cambria Investment Management overseeing the company’s 12 exchange traded funds.
The main objective through the funds is the merger of two opposing polar worlds,
and trend monitoring.
“It’s really our favorite investment, it’s when you have something cheap it goes up too,” Faber said.
The ETF’s performance is impressive, but the strategy is straightforward, Faber said.
The fund invests in companies that return cash to shareholders in the form of dividends and net share buybacks. In this way, investors are exposed to companies that are cheap, high quality and have strong momentum.
The strategy was reinforced by the return of value stocks this year.
“I think it’s like one in nine rounds for the re-valuation of value stocks, “Faber said.” It has huge potential to last the better part of this decade, similar to the late 90s, early 1990s. 2000s in the United States. “
A number of leading market strategists have advised investors to look to dividend-paying stocks, as US bond yields are still not far from their all-time lows and stock valuations have peaked. historical.
Bank of America analyst Savita Subramanian recently said dividends may be the best reason to own the S&P 500.
“~ 40% of the S&P 500’s total returns have come from dividends since the 1930s,” Subramanian said in a November 8 note. has about 80% explanatory power on subsequent 10-year S&P price returns) is nearly correct. “
The challenge is to find the right dividend paying stocks in an expensive market. Based on Faber’s research, he found that most people are rating agnostic in today’s environment. In a Twitter poll of 1,282 investors, he found 55% were willing to hold US stocks even if they hit a 10-year PE ratio of 50.
“They’ll just buy stocks at any price, which is crazy,” Faber said.
The current 10-year PE ratio is 40. The highest ever was 44 in December 1999, which was the peak of the dot-com bubble. From a 10-year PE ratio of 40, the actual future returns have historically been 0%, said Faber.
He is therefore looking more to foreign markets, where emerging assets and the UK seem cheap.
“Russia is one of the cheapest, a lot of people don’t know it, Russia has a P / E ratio of around 8, ”Faber said. “And yet, she is outclassed. It has outperformed the US stock market over the past five years. So it’s a P / E ratio of 8 to 40. “
Right now, that’s one of the biggest chances for investors to walk away from expensive large-cap US stocks, Faber said. But most investors are unprepared for a decade of 0% real rates of return.
According to a July 21 survey of 23,000 people around the world, the Americas region is the most optimistic about investment return expectations for the next five years, with an annual total return expectation of 12.5%
There is a huge gap in expectations, Faber said.
This becomes an even bigger problem when you take into account a number of other current market factors Along with that expectation, according to Faber – ultra-high valuations, investor complacency and optimism, tons of IPOs and short-term interest rates at historic lows, allocations to US stocks at record highs and retail continues to trade options and risky assets.
Right now, it’s the value part of the equation that is flashing yellow for Faber. What will cause it to turn red is when the trend, such as the 200-day moving average, reverses.
“And that’s always positive,” Faber said. “If and when it turns, I think of myself, it’s the really red blinking light.”
This is why Faber believes that it is essential that following trends be part of a value strategy, in order to be ready to face change.
While the United States is near its highest 10-year PE ratio in history, other markets have reached even higher highs, such as India, China and Japan.
“It’s just hard to know when the turn is happening, that’s why we [have] value on the one hand, so we think we’re protected by having that margin of safety, ”Faber said. “And then trend, on the other hand that hopefully we won’t be the last to come out of the party and we can hopefully get out of cash security.” if the market ever turns. “
Faber extreme risk ETF strategies are well positioned for this change, as they aim to be a hedge against rapid market declines and
. The strategy invests in a portfolio of “out of the money” put options as well as inflation-linked and nominal treasury bills.
“For a lot of people it goes down 20%, 40%, 60%, 80%, it’s really hard to get out of it, and so things like tail risk can really help weather this storm,” he said. Faber said.
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