VALUE: After Hours (S08 E24): The Entire History of Wall Street, Decade by Decade

[Tobias] All right, looks like we’re live. This is Value Hour for Hours. I’m Tobias Carlisle, joined as always by Jake Taylor.

Special guest today, needs no introduction, Meb Faber, CIO, founder, CEO of Cambry Funds. How are you, Meb? What’s up, guys?

You got a brand new book, Investing in America, The Rise of a 250-Year Bull Market. Very cool. A coffee table book.

Just what finance guys need.

[Meb] Oh, you got a real one in the live.

[Jake] Yeah, welcome, Meb.

[Meb] That thing weighs about six pounds. First of all, I assume no one’s listening to this because it’s summertime. It’s a bull market.

Everyone’s fat and happy. The beach this morning was packed. So I assume that everyone’s watching this on replay rather than in real life.

Otherwise, shame on you guys. Get out in the real world. Nobody works on a Tuesday in July in Wall Street.

Come on.

[Jake] That’s right.

[Tobias] Why a coffee table book? I think it’s a great idea.

I’m envious. I wish I’d come up with it first.

Why Meb Faber Wrote Investing in America: The Story of a 250-Year Bull Market

[Meb] So if you guys remember back, I was chatting with my son. He’s nine now. And I was like, Anton, my wife put out a book.

And she wrote a novel called The Department. And it’s a little spicy. You guys, you’re allowed to give it to your wives.

Don’t don’t read it yourself. You’ll think different of me. But my son, you know, we were chatting with him.

I was like, well, you know, Anton, your dad, your dad, he’s a writer, too. And he’s like, really? I was like, yeah, dude, I’ve written seven books.

[Jake] Yeah, what have you written, old man?

[Meb] Yeah. And he’s like, really? And I was like, all right, I, you know, I get a little little competition with the spouse.

No, but, you know, back during COVID, you guys remember? If it’s Toby, Toby may not because he’s on his little Garden of Eden up in Palos Verdes. And, you know, spying on everyone with his telescope.

Nothing changed there, by the way. But for the rest of us, peasants, you know, they closed the beaches, you couldn’t do anything. And sports stopped.

And so you’re like, what the hell are you gonna do all day? You know, I bought some weights off, you know, the internet, and they came in kilogrammes. And I was like, what the hell?

Like, I just like I, you know. And so Americans, if you know anything about us, we’re, you know, gamblers, risk takers, people love to wager, not just games of chance, but also on sports. And then you couldn’t bet on sports anymore.

So what could you do? Well, guess what, you know, what they didn’t close was the stock market. And so you had this old generation of young people gambling on meme stocks.

And, you know, in the ensuing years, it’s led to prediction markets, it’s led to zero day options. And, you know, I mean, the Koreans are making us look like pikers. But anyway, and so I was a little frustrated.

And I was like, you know, old man shaking his stick. And like, you, you kids, like, you don’t understand, like, you don’t have to do any of this. Like, I felt like I’m like, you know, turning into Jack Bogle.

You know, he’s like, his soul has possessed me. And I was like, why, you know, it was hard for me, because part of me was like, hey, it’s great. Young people are learning.

Look, this was me, probably you guys, late 90s, you know, E trade, instead of Robin Hood.com, instead of Yahoo message boards, instead of Reddit, rate Raging Bull, you know? Yeah. And so, you know, I wanted to write a book.

But as you guys know, authors, every time I write one, I’m like, I’m never gonna do that again. But, but I I’m a visual learner. I actually didn’t learn this late in life.

That, like 5% or 10% of the population has, I think it’s called aphasia, which is like, you don’t see things in your head. And so I’m a very visual learner. And so I said, I wanted to write like a picture book.

And so it kicked the idea around for a long time. And then there was a couple inspirations. One was our buddy, Jim O’Shaughnessy, who was talking about young people being time billionaires.

And I was like, oh, I love that phrase. And then Morgan Housel was talking about, you know, this long term, if you get any financial advisor listening to this, you go into their office, they got that, I don’t know if it’s DFA, or if it’s crisp, or it’s probably DFA, there’s a long term return of the stock market, you know, up into the right and all the crisis things going on. And I was like, you know what, I’m going to write that book.

But I’m going to do a global version back to 1600, when the party really got started in Amsterdam. And so I wrote that book. And that book is called Time Billionaires.

And it’s it’s a coffee table book. It’s gorgeous. And you guys are listening, like, what are you talking about?

The name of this book is Investing in America. And then I was like, well, shoot, we got a big anniversary coming up. Everyone’s gonna be excited, patriotic, feeling fat and happy markets all time highs, like we should probably just do a US version too.

So then I wrote two coffee table books. And I was like, this one’s a little more timely and important that it comes out first. So we, we put it together, and it came out.

And obviously, you know, it doesn’t go back to 1600 because the US didn’t exist for two centuries. But, but it was really fun, you know, and the goal was like, I want to make it as high quality as possible, gorgeous cover, gorgeous paper. And we could spend the entire hour now talking about the publishing industry, and, you know, how to publish a coffee table book, because we learned a lot of lessons there as well.

But hopefully, for those listening who bought it on Amazon, you should be getting it delivered this week, or next week, because they definitely the optimist me would say, Oh, yeah, it was such high demand, it sold out. And the realist in me was like, well, there’s some, there’s some clogs in the system, the plumbing. So finally, it’s getting shipped out.

The publication date was July 4. So anyway, that was the inspiration behind the book. And I think it, it came out great.

[Tobias] On the inspiration for the, the, the gambling in 2020, that gambling, it feels to me like it, maybe it’s, I feel like that’s a reasonably recent phenomenon. I realised that there’s been gambling in the stock market for a long period of time. But I feel like there’s been this rolling mania, since around like, was FANG, and then it was meme stocks, and it was crypto and the NFTs.

And then back to the meme stocks, AI stocks. Do you think that’s a fair characterisation? And if so, what’s causing that?

Meme Stocks, Gambling, and America’s Risk-Taking Culture

[Meb] Yeah, I have a slightly different take. So one, I agree, look, Americans, and we talked about this in the book, Americans are uniquely predisposed to risk taking. Now, whether it’s in the water, whether it’s part of the system, whether it’s like, totally acceptable to fail, like there’s nothing Americans love more than just cheering someone on their downfall.

And then also cheering for them on the rebirth, the Phoenix, you know, we love a comeback story. Entrepreneurship, if you fail, like it’s a badge of honour here, you go around the world and a lot of places and the emotions of shame and embarrassment, particularly in Asia and other places, it’s totally different. And it shows up in ownership statistics.

So in the book, we talk about what percentage of Americans own stocks, versus, you know, UK, Japan, and Netherlands, like the other three countries that had the biggest stock market in the world. And it’s orders of magnitude bigger, if you ask people, like, it’s a good idea to start a business. So there’s something in the water, one.

Two, I think risk taking and gambling has always been around. I think that there’s two big differences today. So people are like, Oh, these, you know, these people are so much, you know, more degenerate today.

And like, bro, people like you study history, and you look at, you know, the bubble 1720s. In Europe, you look at, you know, 1873, on and on. The difference today is it’s so accessible.

Right? You can just take your phone out and be like, you’re the Dodgers game, next pitch is gonna be a ball $100. Right?

Like, you couldn’t do that before you had to go to your buddy and be like, Hey, I’ll wager you the Dodgers are going to beat the Yankees, whatever. That’s one, the one weird part about this cycle, I’ll give you speculation for all of history, like people wanted to win, right? Like you bet, because the thrill of gambling, but also like you wanted to make money.

There’s been this weird thing in this cycle. And there’s an entire name for the DJs, right? Like people who are just yoloing with expectations, they’re going to lose all their money, and then bragging about it.

It’s a very strange difference, I think, then throughout history, most of history, you know, your neighbours telling you about that hot stock, and that thing goes to zero, they’re so embarrassed, they don’t want to talk to you, right? Like, like, it’s, it’s, that’s been true throughout history. Now, people are like, Yo, bro, I put 100 grand into single day options on Friday, and I lost it all, I’m gonna go post it on Reddit.

Look how cool I am. You’re like, Wait, that’s really like what that’s really stupid. Like, what are you talking about?

There’s a great quote. And I’m gonna have to look it up while you guys talk about this. I’m gonna see if I can find it real quick.

You guys keep going.

[Jake] Well, while you’re do you think you can have the cathedral without the casino?

[Meb] Well, so here’s where I kind of get into a struggle. And I haven’t decided on this yet, where, look, it’s easy to look down on people that like are doing really dumb stuff, particularly when you’re young. I mean, but that was me, that was a lot of us in the early years.

And that’s how you learn in many ways. That’s how you get the scars, put your hand on the stove. You’re like, wow, that mean, dude, I lost.

I talked about this many times before. But for those who aren’t listening, you know, my most memorable investment early 2000s was in San Francisco. And, you know, I had placed all my money on a strangle.

I can’t remember if it was a straddle or strangle, same outcome on a biotech company that was having a drug that was going to get approved, not approved. I thought it wasn’t going to get approved. But I worked out the trade.

And this is literally all my money I placed on it. And it just worked out perfect. Like the volatility went up into you knew when the results were coming.

So I like doubled or tripled my money by the time the results were coming out. So easily, I could have taken money off the table been like, all right, I’m in the money. This is house money that, uh, but of course not, you know, I’m 24 or something.

And I’m like, I’m gonna let it ride. Because in either scenario, I’d make money. Drug gets approved.

I make money. And I’m like, I’m just gonna let it go for another day. You know, I don’t need to close it out yet.

This this could go up some more tomorrow. And you probably see where the story is going. And then for some unknown reason, they decide to pre announce earnings the next day.

And the stock comes back down to the strike price. And I lose all my money. And I, you know, mustard sandwiches for two years, right?

Like, basement in an apartment in San Francisco, but you learn that. And I’m thankful for that. Because dear God, doing that today would be a lot more painful with a family and a child and everything else.

So part of me is like, but I don’t know if people were like, I hope they’re learning the right lessons, as opposed to saying, Oh, the system’s rigged. I want to be a socialist. Like that seems to be the wrong take.

So anyway, part of the book, what we wanted to do is say, look, the story is better than any of this, you know, and you put money to work, you take a step back, you let it compound for 10, 20, 50 years, and it’s magic, you know, and so I’m very hopeful about things like the new Invest America accounts, things like that. But at the same time, you know, you definitely need some education alongside otherwise, this you only YOLO once sort of mentality is, you know, is leading down the wrong path.

[Jake] I think that’s a great phrase, though.

[Meb] Yeah, you know, in the cathedral.

[Jake] Well, that was Buffett, but no, sorry, too bad. Yeah, what’s really great as a public service of that, though, I think is like, you know, something Toby and I have talked about is, you know, there’s an understandable amount of maybe financial nihilism with young people, when you see the kind of income inequality, and just wealth is kind of concentrated near the top. And but like you said, the story is better than that.

And if you can actually get on the right side of compounding, it’s, it’s amazing. But you have to sort of believe that it will work because it looks so small at the beginning and feels like nothing.

[Meb] Yeah, I found my quote. It’s from the famous trend follower Ed Sakoda. And I think about this quote a lot, where he says, win or lose, everyone gets what they want out of the market.

Some people seem to like to lose. So they win by losing money. And I was like, Oh, that’s, that’s such like a deep quote to me, because there’s people out there, like they know better.

And they secretly like, Oh, you know, I shouldn’t be doing this, but I’m, you know, I’m going to. And, you know, they lose all their money, they don’t tell anyone, they make money money, they like, Oh, I made a bunch of money in fart coin, you know, whatever it is, but that’s the gamblers addiction, right?

[Tobias] That you, it’s not the outcome. It’s the, the moment before you get the result. Yeah, yeah.

And they’re just chasing that, chasing that high. Do you, do you think that there’s been a sort of lessening in the impact of factors over the last five, 10, 20 years?

[Meb] I don’t think so. You know, to me, one of the benefits of writing this book that was a lot of fun was that I probably read 20 other financial history books I’d never heard of. And it was such a fun experience to go through.

Like there’s these like William Getzman and it’s books about, you know, the 1720s and all this beautiful art that back in these periods where these paintings about the, you know, the evil speculators and how much of a scourge on society, these people trading the South seas or Mississippi, all these, you know, securities in the years and of course bonds and everything else. And you kind of flip through and it just feels like there’s been this long history of seasons that can last, you know. We often say you got to be part comedian and part historian, like historian to see what has happened, but comedian also to be like, it can be different and crazier in the future.

You know, just look at the last five years, y’all like oil futures trading negative, negative yielding sovereign bonds, all these weird things that have happened. And so a lot of the factors, but I even zoom out more to even like asset class level where countries and sectors and, you know, they just kind of, there’s like the cycles and regimes they go through. And I think the hardest part for us is, you know, when we started this, the three of us didn’t have any grey in our beards and hair, you know, and you want this to play out on the time horizon of days, weeks, months that we all check in on.

But in many cases, these things play out over, you know, 10 years plus. And for, to kind of withstand that, we did a post at the end of the year. I know you guys, big Omaha fans.

And we talked about looking at the historical track record of Buffett. And of course we were comparing ourselves to Buffett, but, you know, saying, like one of the top active managers ever, how often do they underperform and the expectations, right? And Vanguard’s got a great study on this too.

And, but basically, you know, chatting with our investors and financial advisors and saying, look, you know, what is your expectation on number, like the batting average of this strategy to beat the benchmark? And then guess what? Even let’s say it’s two thirds, one third of a coin flips.

I mean, you could have multiple years in a row and still be, you know, on the, on the straight and narrow path. So I think it’s, I don’t think I’ve seen anything that like totally, I joke with people a lot of time. Now I’m like, you guys remember the small cap premium when people used to use that phrase?

Like that was the thing. And I was like, where’d that go? Like now it’s like a small cap discount.

However, today guys, you know, we got the style box. You guys should have me on the show more often. I mean, this is as red and green as this gets.

I mean, that’s a three, almost a 4% spread between large growth and small value today. Well done. Meanwhile, we still got an hour or two left, so.

[Jake] I mean, that’s where, that’s where I would go next.

[Tobias] The natural question would be, if you look at the French data on the value stuff, like it’s broken down so badly. I’ve had people comment when I post those charts, people say like, this is, this looks like there’s something like fundamentally broken with this, with this system.

Is Value Investing Broken?

[Meb] Well, you know, it can’t be fundamentally broken because eventually then like nothing works. It somebody on the local strand was trying to charge, these kids were trying to charge like six bucks for lemonade. I’m like, what are you guys doing?

Like nobody’s paying six bucks for your lemonade. Come on. Yeah.

But I think that’s, I think that’s just cycles. The hard part for me, always on the valuation side, you know, there’s no ceiling to these manias and fun things. And I mean, look at SpaceX.

If you told me at the end of the year that SpaceX was gonna be the world’s largest company, like, I don’t think I’d be surprised. I mean, it has everything, a charismatic CEO talking about putting data centres in space, unlimited TAM, you guys.

[Jake] Infinite TAM.

[Meb] Infinite TAM. So it wouldn’t surprise me, but eventually it all comes home to cash flows, one of these days. And if you look at the broad international and emerging, we sent out a chart to the idea farm, maybe this week or last week, or might’ve been on Twitter.

And it showed, you know, how value generally has been doing. And there definitely was a kink where value ex-US, particularly in the last couple of years, has done really well. And, you know, value in the US, we’re getting some this year, particularly with the small caps, but, you know, the turn hasn’t really happened yet.

And part of that, it depends how you analyse it, if it’s long and short, is that the upper end has continued to kind of cruise along. So, but if you’re talking about the wealth inequality, going back to that, nothing solves that better than a big fat bear market, guys. There was a book that I thought was really thoughtful and I’m blanking on the name of it.

I’ll see if I can find it real quick, but it’s interesting because the framing of it, to me, it was always people were like, ah, you know, there’s wealth inequality. And then you look at the chart and a lot of that is simply because the middle class a lot has ascended into the upper class. And so in your head, you’re like, oh, great.

You know, that’s a good thing. You shouldn’t be complaining about that. But this book makes an argument that throughout history, it’s actually a supply demand situation.

When there’s too many super rich people, it’s like an optics issue. It’s like there’s too much supply. There’s too many billionaires.

And so you get, particularly in the social media age, you know, you did this optical window like, hey, this guy’s got a jet. I don’t have a jet. I’m miserable.

Which to me is one of the bigger questions you’re talking about the factors that’s strange to me has been the sentiment and the cycle. You know, if you look at the investor sentiment on AAII and stuff like it’s not euphoric. In fact, it’s downright sullen.

[Tobias] What do you make of that?

[Jake] Yeah, that doesn’t match with the actions, does it?

[Tobias] A lot of those, there are a lot of those studies that look at consumer sentiment. Like this is not even stock market related. This is just asking people how they feel generally.

And they’re all in like, they’re all in troughs. It’s like, yeah, the Michigan is like lowest, lowest it can get. It’s like in the tank.

I look at that for coincident economic indicators versus the leading economic indicators regularly. And that’s been like, it’s as if it’s a 2009 bottom.

[Meb] Which historically, you know, has been a great contraindicator.

[Tobias] That’s a good buy time.

[Meb] The AAII, you know, we’ve long studied that. And it’s nailed. It nailed 2000 and 2009, on and on.

And people are, like you mentioned, it’s like they’re way over allocated equities. It’s like super high, their actual allocation. And then the bullishness, we looked it up yesterday, is well below average.

So it’s kind of a curious situation going on. I think devices have a lot to do with it. Someone made an argument the other day that I thought was interesting.

They’re like, maybe AI is going to be our saviour because social media tends to reward the tails. You know, like here’s some crazy person doing this. Everyone go crazy.

But they’re like, AI actually tends to move it back to the middle because it’s kind of a summation of, you know, it’s not, it’s a kind of opposite effect. So the robot may save us. Yeah, yeah.

[Tobias] What do you make of the US’s outperformance over the rest of the world so consistently for so long? Is it part of that risk taking psychology that you talked about earlier? Or something about the constitutional setup?

What’s the reason?

[Meb] I think there’s a few things mixed in. One, if you look at kind of the long history, you know, there’s, you got to remember, 19th century, and then even if you go back 18th and 17th internationally, like what percentage of people bought stocks is like 1%, you know, and most people that were investing, when they looked at, they love fixed income and bonds, because it was income, the passive income bros of the 1700s. But when you had the stock situation, joint stocks, it’s with the exception of the manias, you know, where things went totally crazy.

A lot of people invested, they tried, they wanted to invest for income. You know, they wanted that. And so, you know, if you look at the dividends, and obviously all those things, S&P dividend yield all time low currently, which is kind of crazy.

I’m kind of cheering for it to go below one, just to say we did it.

[Jake] We did it.

[Meb] It’s like 105 right now, I think.

[Tobias] That’s somewhat rational, I think, because of the way the tax double taxation, so you’d be better off focussing on BODX.

[Meb] Yeah, that’s part of it.

[Jake] Wow. At what, what yield is that?

[Meb] Yeah, that’s part of it, for sure. Part of it is also just the broad markets expensive. You know, so if you’re, the question depends is like, on what timeframe are you looking at the outperformance?

Because, you know, there’s times for the 20th century where other countries were in line. Now, they’re obviously much smaller places like South Africa, even Australia, you know, candidate to be in line with US stock returns. And it certainly goes through phases.

And, you know, despite this being a very patriotic book, you know, you guys know my messaging, which is in those scenarios, should you not diversify globally, in every scenario, it’s been better to diversify globally in terms of risk and return on and on. And the US, I mean, my God is 10 times bigger than the number two stock market today, with the US GDP is only a quarter of the total. So there’s definitely a big, big gap.

Part of it has been fundamentals, you know, some of these companies have done great. Part of it is, you know, sector composition. So we certainly have a pretty big tech sector here, although emerging markets too, due to a lot of people don’t know that.

And part of it, it’s multiple expansion. You know, the one thing I noodle on quite a bit, and I don’t have a good answer to this is that if Americans are predisposed to being an owner and owning equities, like I go talk to my friends, you guys try it. I mean, Toby, you can talk about it.

Maybe Australia is a little different. And you say, you know, like, how do you invest? Most people, it’s like real estate and cash.

And you don’t have the culture of equity ownership. And adding on these new Trump accounts, now, it’s going to add even more. And so in my head, I wonder if that like, you have this one country that consistently owns things that are going to do 8% a year, versus citizens and countries around the world that own things that do zero, or two or three, like that gap only widens.

So I noodle on that quite a bit. But I don’t know. I think there’s a lot going on.

Now, by the way, there’s a couple other things. One, don’t lose the World War. That’s a big one.

You know, two, don’t have hyperinflation, another big one. You know, and don’t, don’t go full communist, you know, like, kill the golden goose, Russia in 1917, and China in 1941. They just said, Oh, thanks, markets closed.

Goodbye. So I think there’s a number, you know, surviving is simply a pretty, pretty big one, for sure, too. So there’s a lot wrapped in it.

There is something special, for sure about the culture, though it’s spreading. If you look at things like Y Combinator, and Silicon Valley concept, it’s definitely percolating around the world. But it’s still, you know, still the home here for sure.

[Tobias] Did you follow, do you follow individual investors like Terry Smith? Have you followed his recent sort of conversion from being more of a strict quality investor to, you know, he says he’s sort of become a little bit more momentum, he’s not going to buy things without momentum.

[Meb] I did see that. And I love to see kind of, I follow the sentiment indicators to me, where it’s something like that. You’re like, Hmm, that’s interesting.

Like, yeah, closing tiger and giving up in the late 90s, like these, these sort of things you kind of mark the magazine sort of cover indicator ideas have always been hard for me. Like, it’s not something I look and be like, Okay, that’s it. Boom, this is this is it.

This is the top. This is the, you know, the end of it. But I found that curious, but also, you know, that definitely was was something to keep an eye on for sure.

[Tobias] I just wondered if it indicated some nadir in the quality factor, because that had been what he I mean, quality value, something like that. Yeah, I don’t know. I have to watch.

Because quality struggle a little bit after being after being very strong for a very long period of time, it’s quality sort of without any valuation attached to it very strong for a long period of time, seems to have broken down over the last few years. Yeah. And he had, you know, people, people have been publishing for a long time, his the free cash flow yield in his portfolio had gone down, which was just an indicator of like, the equities are running up, everything’s getting increasingly expensive.

There’s not much you can do in that scenario, if that’s your universe, and everything’s getting more expensive. But with the free cash flow, you’ll start climbing again. And that’s, that’s underperformance, but it shows up as underperformance.

And at some point, he’s got just said too much and tapped out.

[Meb] You just stack stack T bills, like Warren B, you know, what’s he up to now? How many hundreds of billions has he got? Uncountable?

Might be getting up to 400.

[Jake] At some point, that’s real money.

[Tobias] Yeah. Has momentum been in the US and globally of the last?

[Meb] Yeah, so there’s, you know, there’s a couple ways to answer that question, right? There’s like your traditional relative strength momentum when you’re talking about things like equities. And not surprisingly, that’s done well.

And that’s just picking the horse or the race car that’s that’s doing the best. And traditionally, those strategies are by the ones that, you know, have the best 12 month momentum. That’s a very academic sort of approach to it.

Our buddy Wes Grey has one, there’s another giant on MTUM who runs that. But QMOM is Wes’s. And, you know, a market cap index is a momentum index.

People don’t really like to admit that. But at its core, the momentum signal is your position size goes up as the stock outperforms, right? So you got Nvidia and all these other companies that are going up.

So market cap by its default is momentum. You tell the, I was chatting with the Bogleheads, you tell the Bogleheads that they don’t love that. But it’s true.

Like it, you can’t argue that fact in my mind. So these have done really well. If you kind of move over to the concept of momentum as a trend following, right, trend following is like a first second cousin, where trend following is like, yes, we’re picking the things going up.

But also, if they start going down, we’ll either step aside and move to cash or we’ll short. And so that under traditionally in the CTA managed futures world is under the banner of trend following. And so that strategy, which I’m like the biggest outlier in the entire world on this strategy as a percentage of how much it can be in your portfolio, that strategy last year, we have 20 ETFs.

And the only one down was our managed futures fund. And it wasn’t down much. It was down like 2%.

This is the one run by Jerry Parker, who’s been doing this since 1988. And the Sock Gen Trend Index had arguably, I think, the worst 12 months in its history last year. Now, it wasn’t terrible.

But it was just like relative to the S&P doing 17. And so we wrote, you guys probably have seen this every couple years, we’ll write about our worst performing fund or strategy, just to be like, hey, you know, is this broken? Are we idiots?

Are we totally incompetent? Or is this something that just happens to be out of favour? And you guys feel free to steal this, because every time we do it, it’s like the marking point for it to just have a monster run.

So everyone in my firm is always like, man, let’s write about this one. Because I’m like, you know, like, we can’t do this every month. Let’s write about it when it’s really bad and everyone hates us.

And so we did it for our global value fund, deep value fund. We did it for our value and momentum ETF that hedges with futures. And then we did it for our managed futures fund at the end of last year.

And sure enough, this year, it’s up like 20 or something. But they’re different, right? So traditional long only equity momentum, you know, that in a romping stomping bull that tends to do great.

It gets in trouble often at the inflexion points. The trend following totally different and depending on how you do it. We have a weird take in this where I’m like, you should probably own three or four of these managed futures funds because they trade different markets.

They have different indicators. And really, in my opinion, you want the beta of managed futures, which is weird to say. But, you know, those funds, the interesting part about it is twofold.

Everyone talks about managed futures and trend because of that crisis alpha, meaning the 08, the 2022, 2000, 2003. And that is true. On average, managed futures does great during those periods.

But there’s also the right tail and meaning the traditional advisor in the U.S. that only owns U.S. stocks and bonds. When things are going up, you managed futures can and will own things that you probably wouldn’t own, whether it’s gold and silver, whether it’s foreign stocks, whether it’s oil or sugar or cotton. You know, it can give you exposure to these, particularly inflation exposed.

One of the best trades it’s held this year, as well as in 2022, is simply being short fixed income. Like there’s nothing else in your portfolio on average that’s going to be short fixed income ever. And so it’s an interesting hedge.

And so, you know, they’re doing well. Managed futures in particular had a stinky year last year, but has shown up so far this year.

[Tobias] Let’s come back to bonds in a bit, but let me just do a quick shout out around the horn and then we’ll do some veggies from JT here. Petitikva, Israel, what’s up? Limerick Island, Gothenburg, Sweden, Groves, Texas, Tallahassee, Port-A-Demos, Portugal, Snohomish, Bendigo, Australia, what’s up?

At The Beach, good call, Bangalore, India, Lausanne, Switzerland, Tonning, Germany, didgeridoo, good on you Les in Australia, Philly, Tampa, Glasgow, Austin, Texas, Mayfair, Hartford, Alabama, Good Spread, Lawrence, Mountain View.

[Meb] Is this just a bunch of people that are in California that are hiding their location and they’re like, you know, I’m watching the After Hours show and, you know, other illicit activities on my browser. So I’m going to pretend like I’m in Perth right now.

[Tobias] San Sebastian, Spain.

[Meb] Yes, you don’t have to be telling the truth. I want to go wander around San Sebastian right now. That sounds great.

All right, JT, hit us with the learnings.

What the East India Company Can Teach Investors About AI and SpaceX Valuations

[Jake] So this is, you know, I didn’t realise that Meb had been working on a broad world history book like that. So this is even, hopefully, even more on point. I knew that he liked history, so I picked this topic for today.

But so investors right now are underwriting, I think, a lot of blue sky, especially in two particular fields, frontier AI and space and open AI anthropic, you know, maybe north of trillion dollar IPOs at some point this year. I don’t know. We’ll find out.

And of course, there are all these plans for the hyperscalers of putting to work, you know, several trillion dollars next few years. SpaceX is still at, I don’t know, was at 1.5 market cap trillion at this point, maybe a little under that. But that’s quite something.

And a number of these valuations, they require enormous terminal value and market shares at some point and durable margins, decades of reinvestment runway. That’s you really need to kind of pencil this out. And that got me thinking, like, what are some of the best blue sky cases that have ever played out before?

And one that came to mind that I read about recently, actually, was it played out 274 years ago, and it took 274 years to do it, sorry, played out over 274 years start to finish. And this is the the British institution that was the East India Company. And this the investable company history that I’m going to talk about begins in 1709, and ends with the final redemption in 1874.

So call it 165 years of investment results for this one. And first, a little bit of a history lesson on this really stupefying level of dominance and what that looked like. And like nothing today even really comes close to this.

So let’s rewind the clock all the way back to 1600. Elizabeth I grants a monopoly on trade east of the Cape of Good Hope. And that created this, you know, addressable market of India alone, which is roughly a quarter of the world economy at that time.

And the problem was that the crown lacked the fiscal capacity and really the administrative machinery to conduct Asian trade directly. So they chartered it to a private company and let private investors bear the risk. So that gave them then 150 years of a trade monopoly.

And of course, trade was all good. But like any real sovereign, they wanted to do some local conquering as well. So this guy, Robert Clive, unruly kid from Shorpshire, I guess I think that’s how it said, he ships out as a clerk to India.

And eventually somehow he took Bengal at the age of 31 with a 3000 man army. And they floated Bengals treasure basically down the Calcutta in 100 boats. The company took home two and a half million pounds, which was a lot of money back then.

And Clive personally pocketed 234,000 of that. And he gets hauled before parliament. And on the stand, he replies with just an absolute all time banger.

And he says, I quote, by God, Mr. Chairman, at this moment, I must I stand astonished at my own moderation.

[Meb] That’s great.

[Jake] So I’m going to steal that line next time Toby’s asking me about some, you know, imprudent position sizing or sounds like sounds like Chamath.

[Meb] What did he say? His returns are sporadic and gargantuan. You know, so we covered this a little more in Time Billionaire’s book.

And to me, one of the really interesting parts about reading all these financial history books that I actually didn’t really know. I mean, you always hear about VOC and you always hear about these companies. And usually it’s like the ne’er-do-wells, these companies like really questionable ethics and dominance and monopolies.

But when you start to unearth and in particular with regards to America, but the 1600s and this age of exploration, right, really was the beginnings of this sort of stock and venture capital mindset. And there’s companies that go back, you know, you can trace this back to Roman times where, you know, the citizens, they would allow them to buy up debts of some areas. And then you had these windmills in France that kind of, you know, became like a co-op.

And this concept of spreading risk really set in when it came to the age of exploration with ships, because my God, man, you fund a ship and that sucker sinks or pirates capital there. Right. And so they actually called them adventure merchants, which became venture capitalists later.

But all of a sudden, if you had a company and you could spread your risk across 5, 10, 20, 30 voyages, and some of them had monster returns, and some of them were government funded. Some of them like paid off the entire debt of some of the monarchies when they would go, you know, do some of these explorations. Some of them obviously total failures.

But if you look at the history, the Mayflower, Virginia Company, Hudson Bay, on and on in the U.S., these were funded by joint stock companies. And so this narrative that I learned, you know, in elementary school, religious persecution, freedom, on and on, while probably true, also, there was very much a profit motive. And it’s go talk to your AI and say, tell me about all this period.

And it’s really fascinating to read about. And so again, going back to the full circle, the beginning of the conversation, probably something, you know, that certainly got started in the early days of our country, 100, 200 years before the founding, was that all these people came over, A, risk takers, but B, there very much was this sort of profit, you know, mentality and idea that was ingrained from the get go. And so to me, that was one of the most interesting learnings of this entire story was, hey, you know, this got started really in Amsterdam and in London, hundreds of years before the start of the U.S., but actually the U.S. was founded by this exploration and for profit ventures, which to me was super interesting. Did not know that.

[Jake] Nice. All right. So after taking Bengal, the real blue sky emerges, and the Mughal emperor, more or less at gunpoint, signs over the rights to tax 20 million people to this company.

And at its peak, the East India Company had a private army of 200,000 people, which is twice the size of the British army. It was run from a London head office of about 35 people. They’re minting coins, they’re running courts, they’re collecting taxes.

And this is kind of what the real ceiling of like blue sky dominance looks like. No company in history has a footprint relative to its world that it existed in.

[Meb] And so private army is definitely a sign. If you’ve got your own army, you know, that’s a sign of something.

[Jake] Right. So surely this is like the best investment ever made. Right.

Well, I researched the numbers and, you know, this is kind of what this show has done to me. I’m spending the weekend building dividend series from companies that have been dead for 200 years. But so here are the full cycle results, the best that I can tell.

If buying it par, call it a hundred pounds, you hold the whole ride, collect all the dividends and you get bought out by the state in 1874, that generated about an eight percent return per year, maybe seven and change, depending on how you count the early dividends. Not bad. Right.

But really all it was was guilt plus a few points, obviously for a very long time, which we know compounds into something amazing. But I’m pretty sure that there’s nobody’s buying SpaceX today or maybe the soon to be Anthropic or Open AI IPOs with the expectation of earning a scant eight percent per year. That’s not I don’t think that’s what anyone’s underwriting.

I don’t know if you guys agree or not, but. Interestingly, to go back to what you’re talking about with like dividend yield of the S&P being so low, almost none of that return came from the price. It was almost all entirely a compounded price at a half a percent a year.

The return was all in the dividends. So now let’s imagine another scenario in this this ownership’s life cycle. Imagine if you bought during the euphoria instead, which was, say, March of 1769, which that was the news of that Bengal tax grab that hit London and the coffee houses are all buzzing with hot tips and expanding price targets for everything.

The stock hits about 280 there, and historians actually call this the Bengal bubble. But if you bought then and held for a century, collected every single dividend and you ride it out till that 1874 buyout, any guesses what the return was then? Flat.

Mab, you got a guess?

[Meb] No.

[Jake] Okay, well, it’s three and a half. No, no, it’s three and a half percent a year. It was still it was basically consoles paid about the same at that point.

So but you had to take on like famine risk, war risk, corporate army on your cap table for bond like returns, basically. One more analysis. Let’s say you bought in 18 or 1784 after the crash.

It was down fifty five percent. Everyone hated it. By the way, down fifty five percent.

No catalyst management under parliamentary investigation. Toby, I think that’s what you call a max long position, right? All right.

That that gets you back up to a seven and a half percent a year return. So same company, same dominance, same eventual ending, just different starting prices dictating your your future returns, which is hopefully everyone remembers that one. Now, next next question, you might be wondering, why was there a ceiling on the East India Company?

I told you all this dominance, like how come you didn’t earn even more? Why? Why was the almost how come the greatest monopoly maybe ever chartered was almost out earned by bonds effectively?

The answer is that the state was setting the dividend literally every rescue, every renewal. Parliament would take a slice of it. They charge them like four hundred thousand pounds a year fee just to keep bangle a bailout always came with like a dividend cap and an oversight board.

So by eighteen thirteen, the Indian monopoly was gone. What was left was a fixed rate paid from India taxes. And then the state bought you out eventually.

And this fixed coupon, the fixed coupon can’t compound. That’s another part of the problem, right? That’s why it kind of went nowhere.

I remember this was a good outcome. Like I’ll make the maybe there’s like a little bit of a counter argument to this, that, you know, standard oil holders got richer from the 1911 breakup. And then, you know, AT&T, as its constituent parts, has done better than than the original there from the early 80s.

But so breaking the structure can create value, but because you still all know the pieces. The problem is that when you get your cash flow capped, which is what happens in that government intervention, you just own the coupon at that point. And really, I would make the argument that that capping instinct hasn’t gone anywhere.

And we still have it today. In the last 12 months, Nvidia and AMD are paying Washington 15 percent basically a royalty on or for export licences to ship chips to China. We have Washington sits on Intel’s cap table, golden share in U.S. steel. These are not outright nationalisations, but they’re certainly they’re changing your economics as the owner of the business. So, you know, when when you’re underwriting blue sky for AI or space or whatever is next, maybe don’t forget about the East India Company. You won the market.

You took sovereign powers. You had an entire army. You captured this vast revenue base like this.

Tam is off the charts. Right. But but the shareholders still kind of only get what they can get based on what the government will allow at that point.

Insiders are skimming. Wars can burn you. Creditors get first claims on you.

So I would say, you know, and this is the best case for corporate power ever. And you got eight percent, basically. So to wrap this all up with a hopefully a bit of a pithy take, blue skies can be very real, but so are the ceilings.

And the difference is your actual Kager price is what you pay and the state decides what you get.

[Tobias] The most interesting thing was about running with the running the whole thing with thirty five people in the head office.

[Jake] Yeah, that’s impressive, right?

[Meb] The I’m looking forward to your article on the Bengal bubble. That’s a great, a great title. Well, the funny thing about these new IPOs coming, you got SpaceX, if OpenAI and Anthropic all happen at roughly their valuations today, they’re bigger than all the IPOs from the 90s combined, which is an astonishing number.

And that’s inflation adjusted. Just it’s hard to comprehend how large these companies are. And so I’ve been kind of saying for years, if you like check off all the boxes of like what causes this bull market to end, you know, and it’s like or what are the signs of euphoria and bubble and all this, like you could check most of them.

But the one that’s always been missing has been supply. They’re just you know, there has the market. In many cases, there’s been a lot of buybacks, the big tech companies, everyone’s.

And all of a sudden now that cash flow has massively shifted upside down to supply issuance, no more buybacks and companies going public.

[Jake] So I saw those three, if you they might increase the US public equity float by 20 percent of GDP in like a year. Yeah, it’s a huge number.

[Tobias] Do you think the SpaceX performance has spoiled the party a little bit?

[Meb] Well, you can look on the prediction markets, you know, I think Polly Market’s got a list of the percent chance of all these companies going public. And, you know, the 2026 list is dwindling. You know, it’s now looking out to 2027.

But it, you know, you got a few. It’s Anthropx is 71 percent before year end. And Shein are the two.

Everything else is under a third. So there’s a giant long tail of supply. But it looks like maybe next year.

[Tobias] Let’s go back to bonds. What’s the story with bonds? We’ve got rates going up.

That’s bad for bonds. They’ve been going down. But is that over?

Rates going back down again? Bonds going back up?

Are T-Bills Better Than Bonds Right Now?

[Meb] I have a lot of non-consensus views, a lot of consensus views. I think everyone knows, everyone feels at their core that US stocks are expensive. Who cares?

Right. I can pick when the party is going to end. But you go on TV, you talk to people like everyone kind of knows it.

Right. Like it’s not like a secret. Fixed income is different.

And we wrote a paper on this a few years ago. And I feel very much an outsider and alone in the wilderness here. I take some comfort that Buffett’s stacking T-bills, my local Angelino gunlock, I feel like is talking about this.

But from a fixed income outsider, you know, we looked around a few years ago and you’re looking at this inverted deal curve and looking at this very strange period. And we asked a very simple question, which was like, there’s all these risky bonds. Can we simulate what would it look like if you just invested in them when the spread to T-bills, the risk-free rate was wide or compensating you for the extra risk or if it was narrow or inverted?

And to me, this comes very much from a place of value stocks, right? Like are you buying something with no margin of safety or a tonne of margin of safety? And we did this with no look forward bias.

So we were doing a point in time study and we looked at all the various bond markets and across all of them, it turned out it was a horrible idea to buy them when you weren’t getting any yield or below average. And it was a great idea to buy them when you were. And so then we said, well, you can put together a portfolio.

[Jake] And what was the threshold that you triggered it? Yeah.

[Meb] And so the way we did it, I think, and so we wrote a paper called T-bills and chill most of the time. And I think the way we did it, I can’t remember, it was, it simply sat in T-bills because everyone forgets the thing that trend followers, that, you know, people, the time markets, they always forget is that if you exit a position, often people assume that the return you’re going to get is zero while you’re waiting. But that’s not true.

You can sit in T-bills and earn three, four, five percent, whatever it is. And so we ran the study and it was simply, hey, up to that point in time, did the 10 year, the 30 year corporate junk, emerging tips, REITs, we even included stuff all, did it have an above average spread or below? Because if it was below, you just sit in T-bills.

And what did it look like when you were below? If you invested when you’re below, like you underperform T-bills, it’s terrible. So we launched a fund called TYLD.

And all it does is it sits there in T-bills and it looks at 10 different sleeves of the risky bond market and it’ll move into those sleeves if and when the spread is compensating you. And so that fund launched like, I don’t know, two years ago or something. It has been a hundred percent in T-bills the entire time.

It is a hundred percent in T-bills today. Now people, like you’ll see people call on CNBC and be like, wow, corporate bonds are some of the lowest spreads ever. Junk bonds, some of the lowest spreads ever on and on, like, like one percentile, right?

Not like bottom third. The thing that is causing this is that for a number of years, you had these institutions that got no yield. So you’re a pension plan.

You want to, you know, neutralise these liabilities. Hey, I got to hit my six, seven percent target and, you know, bonds, corporate T-bills, whatever, yield zero or one percent, like you’re hosed, right? And all of a sudden they’re like, wow, these yield five now?

Hallelujah. They don’t care that they have a competing asset that you can take no risk. And so if we know anything about bonds, particularly corporate and junk, when the VIX goes up to 40 or 60 or 80 in the next crisis, those spreads blow out, right?

Like they go not from five to six, they go from like five to 10. And so this is kind of like almost like a distressed Howard Marks idea. Like it’ll systematically move into these if and when that happens.

And one last comment, and I’ll stop, is that what’s interesting about the equity investors, if we’re on Twitter and you saw the stock market go down 10, 20, 30, 40, 50, people lose their minds, right? They lose their mind. It goes down like two percent.

[Jake] It goes down like three. Yeah. They’re like ready to storm the gate.

[Meb] The long bond and fixed income in general, like many of these are down 50, you know, like, but like, everyone’s like, oh, yeah, but I’ll hold it to maturity and I’ll get my money back. Like, that’s not how this works. That’s not how this has ever worked.

Right. Like after inflation, you’re even getting hosed more. So we track the spreads and we’ll publish it on occasion.

We updated every quarter. The 30 years getting close to a normal average spread. But the rest of the curve, it’s moved up, but it’s still not there.

So we’ll say on Twitter every once in a while people be freaking out like, oh, my God, the 10 years, five percent. I was like, well, it was average. It should already be at five and a quarter, you know.

And so it’s a it’s a strange setup. And it would not surprise me in the least to see whether that’s through growth, which, you know, you’ve heard the rumblings this week. Hey, the Fed may raise rates.

Part of that’s a good there’s growth, but also if inflation is, you know, staying too high.

[Tobias] Maybe you follow that inversion at all, that 10-3 inversion, 10-2 inversion. You think that, do you follow that inversion that, you know, we were inverted, deepest inversion for a long period of time, longest inversion, uninverted. We’ve gone back to like close to kind of long run averages now.

No, no impact anyway.

[Meb] We did an old study. This has got to be like 15 years old at this point. And I wish I’d launched an ETF on this because it would have done great.

2009, guys, blog posts. It was called Tactical Asset Allocation Based on the Yield Curve. And we kind of examined the yield curve.

And this makes total like financial theory sense. Say what assets do well when the yield curve is steep? And not surprisingly, it’s the the long duration sort of assets like REITs, long bonds, right?

Like you have these when the yield curve is super steep. And then when it’s negative, what does great? Gold and commodities.

[Jake] 0% bond.

[Meb] Yeah. And then the rest of the time, like stocks tend to do just fine. And, you know, for when the yield curve was negative inverted, there was like a year or two, I’m like, what the hell is gold doing?

Why isn’t gold going up? And then all of a sudden you saw gold just explode, right? You just have this face ripper, gold and silver.

And then as the yield curve normalised, guess what? Gold sold off, right? Like and all of a sudden it’s a more of a normal yield curve now.

And so I think that makes total financial sense. And I think that’s the way it’s probably should and is. But it seems to have normalised for the most most point today, at least back to kind of sanity.

But, man, I wish we could transport back a few years and be like one of the most obvious trades that I didn’t really make. I mean, you made it through managed futures, but not deliberate or discretionary. It was just a short the hell out of bonds.

What were you thinking, man?

[Tobias] That was a layup. God, come on. Does it surprise you that there was no recession?

Like Cam Harvey, that predictor had been pretty good up until this one.

[Meb] My guess, and I don’t know that I don’t put much weight on this, would be that, you know, this massive AI spin. Stimulus. Stimulus.

Like, my God, the amount that it’s just raining, the numbers. I was recently in the Midwest and I was joking with a financial advisor and he’s like, bro, my client just sold some farmland for $300,000 an acre. And I was like, what?

That’s not what mine sold for. Like, what the hell? I was like, didn’t Bill Gates get divorced?

Like, who’s buying this farmland? And he’s like, data centre. I was like, oh, I knew it.

I knew it. Why don’t they put some more data centres in West Kansas? Come on, guys.

Yeah. They just like the money, the numbers are hard to fathom.

[Jake] Has private credit got big enough, do you think, to change the maybe like apples to oranges comparison of that spread? So, you know, if you’re looking at public bonds versus now, it’s all kind of a lot of the stuff’s gone off private. Maybe something’s different about that looking forward.

[Meb] I don’t know what to say about private credit, honestly. I really don’t. Private equity, I could talk about all day.

Venture capital, private credit to me. I don’t know. I don’t think I have anything particularly really interesting to say about it.

It’s kind of this weird thing over here. And if you told me in a year there was giant blowups everywhere and they’re all upside down and it was really stupid to put private credit in ETFs, I’d say that makes total sense. I don’t have any exposure to it.

It feels unnecessary to me. Like, I don’t know why. I don’t get the attractiveness of it.

But, you know, if you figured it out, God bless you. I don’t know.

[Jake] I think some of it is the banks have been forced to pull in their horns quite a bit from regulation. And so someone stepped into the breach.

[Meb] Feels like a very Charlie Munger answer. I just don’t know. I got nothing to add.

[Tobias] 250 years of history in the book. Given where we are now, cast your eye forward over the next five or 10, what do you think? What’s the play now?

Where Are The Best Opportunities Today?

[Meb] I really wanted to add a postscript and just be like, well, just so you know, I’m writing this and the market’s at an all time high. We’ve had arguably the best run in history relative to a diversified portfolio with the exception of World War II. So, hey, maybe don’t expect 15, 17% returns.

[Jake] That’s my birthright as a US citizen.

[Meb] We say that a lot in particular when it comes to real estate too, where everyone’s like, I can’t afford a house. And I was like, bro, I had someone live in my closet when I was in my 20s. It’s not just because you want to live in this really cool, fun city.

There’s no birthright here. Go look for housing in Kansas. It’s a lot cheaper.

[Jake] Eat your Buster’s sandwiches.

[Meb] Yeah. And enjoy it. Get a little Dijon on there.

I mean, look, there’s Grand Canyon wide spreads on value within the United States. There’s no question the broad market is expensive in my view across any metric. Lots of other things look much better.

The paper that we wrote called The Bear Market Diversification, I think it flipped. Like when we wrote it a couple of years ago, you kind of started to see the kink happen. You’ve seen other assets perform, gold, silver.

You’ve seen foreign stocks absolutely have monster years last year, this year. You’ve finally seen the long troubled forgotten small caps in value start to pick up this year, even REITs on and on. I don’t think the world’s noticing yet because the S&P did 17 last year and it’s up 10 this year.

So as long as people are fat and happy, like they got the horse blinders on, they don’t really notice. All of a sudden, you know, if you see that kind of rollover or go sideways or down like a 2000-2003 period, you could see some pretty gigantic rotations. All that having been said, there’s no ceiling on valuation.

And, you know, if this engine just chugs along, there’s no reason the Shiller CAPE ratio can’t hit 50 or 60, right? If we went full Japan, that’s a double from here. So that would be a lot of fun, but also, you know, set the stage for some tough times ahead.

So my expectation would be something, you know, I hate trying to do historical analogues because I feel like it’s just, it’s too tempting. But 2000-2003 feels very similar. I mean, you can go back and look at John Bogle’s got videos about this, people talking about it.

The big difference now between a few years ago, the big one is you have the competing asset of fixed income, which is pretty good yield now as opposed to prior years. So I think what causes that, what’s the catalyst? Who knows?

But my expectation would be S&P pretty meagre next 1-5-7. But overall, there’s a lot of good stuff out there elsewhere, value, quality, ex-US, on and on.

[Tobias] You’re welcome back anytime you come close with that.

[Meb] I mean, I might set a record on the style box today. Like, you know, I feel like 4% almost on the style box. Come on, guys.

Yeah, it’s a good day.

[Tobias] Let’s get it back.

[Meb] Good day.

[Tobias] The book is Investing in America. Beautiful coffee table book by Meb. Meb, if folks want to follow along with what you’re doing, get in touch, what’s the best way to do that?

[Meb] Well, the book’s on Amazon, and despite what it says, it should show up in a week or two. You can buy a signed copy if you Google Pages Bookstore in Manhattan Beach. They have signed copies.

You can also come by my office and say hi, grab a pint at some point in Los Angeles. You can get Toby to come down from his perch on the hill and he’ll join us for lunch or something. Yeah, and then all the, you know, Canberra ETFs, anywhere you Google Meb Faber, blog, podcast, all that good stuff to come find us.

Good stuff.

[Tobias] JT, any final words?

[Jake] Nah, just always fun to catch up with Meb.

[Tobias] Yeah, thanks, Meb. We’ll be back next week, same time, same channel. See you, folks.

VALUE: After Hours (S08 E24): The Entire History of Wall Street, Decade by Decade | Meb Faber

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