Beyond Market Cap: Endowment Investing Strategies with Meb Faber

The financial world stands at a crossroads where unprecedented US stock market valuations meet revolutionary portfolio strategies and tax solutions. Meb Faber, founder of Cambria Investment Management, cuts through market noise to deliver essential insights for investors navigating today's challenging landscape.

With US stocks experiencing one of their four major valuation peaks in history and the S&P 500 delivering a 10-bagger return since 2009, many investors find themselves trapped in concentrated positions they can't sell due to tax consequences. The warning signs are clear – market cap weighted indexes have become dangerously concentrated, with most investors significantly overweight in US equities compared to global alternatives.

Faber introduces Cambria's groundbreaking endowment-style ETF (E&DW) that reimagines David Swensen's Yale approach for everyday investors. This strategy employs modest leverage (130-150%) across a truly global asset allocation that emphasizes foreign markets, value investments, and real assets – areas consistently underrepresented in typical portfolios. Historical evidence suggests this approach can potentially deliver Yale-like returns (13% annually) compared to the 8-10% from traditional allocations, though with comparable equity-like volatility.

The presentation's most revolutionary concept comes through Faber's explanation of Section 351 ETF conversions – a tax strategy allowing investors to contribute appreciated stock positions to seed ETFs without triggering capital gains. This mechanism works like a 1031 exchange for stocks, enabling trapped investors to diversify concentrated positions while deferring taxes. The implications are transformative, potentially creating more impact than the entire crypto ETF phenomenon.

Whether you're concerned about market valuations, seeking portfolio diversification strategies, or exploring tax-efficient investment approaches, this presentation delivers actionable insights from one of investment management's most innovative thinkers. The combination of endowment-style investing with tax-efficient conversion strategies represents a genuine paradigm shift in how investors can approach wealth management in 2025 and beyond.

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Cambria Investment Management and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time withou

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Chapters

• 0:22 Introduction and Overview
• 11:59 Warning: Expensive US Stock Market
• 22:45 The Problem with Concentrated Positions
• 32:39 Introducing the Endowment ETF Strategy
• 53:47 The Yale Endowment Model Explained
• 1:23:49 Section 351: The Tax-Efficient Game Changer
• 1:43:30 Q&A and Closing Thoughts

Transcript

Speaker 1: 0:00

I certainly appreciate those that continue to attend these webinars, as I host them for various clients. This will be a great one, not to oversell it, but I'm a big fan of Meb Faber's and what he's doing. I think many of you will find it interesting. My name is Michael Guy, a publisher of the Lead Lag Report, and here is Mr Meb Faber talking about what Cambria is up to.

Speaker 2: 0:19

Meb. Go ahead. Thanks, man. Good morning everyone. It is a rainy day here in Los Angeles, so I'm glad y'all are joining me on early March.

Speaker 2: 0:31

A couple of things. One, y'all this is going to be casual and fun. We got a nice tight group here, so feel free to lob some questions in the Q&A. For those who know me, those who don't know me, let's make it fun. I'm going to run through a pretty brief presentation, but you guys, absolutely intermittently, put in the Q&A and I'll hit them up as we go. So I'm going to go ahead and share this little deck I have. That's not too long, so let's play this from the get-go. Let's start. So what are we talking about today? We're going to talk about two things One, this new ETF we're launching and two, the method at which we're launching it. And so, throughout this presentation I gave a similar talk recently down in Orange County I'm going to say you're going to get a warning in the presentation, you're going to get a solution, you're going to learn something totally new you've probably never heard of, and then, if we get time, we'll talk about the head scratcher as well. Well, for those who don't know me, just super, super, duper quick.

Speaker 2: 1:37

My day job is managing ETF company called Cambria. You can go to cambriafundscom to find info. Cambria Investments we have a free once a week research email called the Idea Farm goes out to over a hundred thousand people. You can watch me pick fights on Twitter, but we put out a lot of content. So MebFavorShow podcast over I think five 600 episodes. Blog MebFavorcom got like a thousand posts all sorts of good stuff everywhere. Let's get to that warning First of all. Where it's good stuff everywhere, let's get to that warning First of all.

Speaker 2: 2:06

I don't care the stock market's down this year. It has been a ripper this past 15 years, one of the best periods in history. This chart is rolling 10-year real US stock returns after inflation and what you can see is these four mountaintops, dolomites, rocky Mountains, whatever you want to call these. There's been four periods where the US stock market's done 15% per year or said differently here you know closer to probably 12% a year real, and there's been three or four periods likewise where it's also been negative, and we all know those periods right, like they have names. The 20s was roaring. 20s, nifty 50 stocks of the 50s and 60s yeah, the internet bubble of the late 90s my favorite. And then whatever this COVID means stock mania. But then also look at those generational buying opportunities too 19, you know teens. Right before the roaring 20s you had the Great Depression period, then you had inflationary 70s, setting the stage for the early 80s bull market, and then GFC 2009, right, so this chart's a pretty good indicator on sort of these secular bull and bear markets.

Speaker 2: 3:13

And you know, some people will claim that it's just an interest rate phenomenon, which you know we're not at zero anymore. But you could do Sharpe ratio too. And so Sharpe ratio for US stocks. Again, these are different. If you kind of toggle back and forth, you can see that the mountains are different sort of size, but you can still see that there's four big ones in the same periods.

Speaker 2: 3:38

And so sharp ratio of one for the US stock market, ladies and gentlemen, that's usually around 0.2, 0.3. There's times where it's been negative, there's times where it's been above one. But above one is like a hedge fund two in Trinity, you're a billionaire. You got that sort of numbers. Anyway, pat yourself on the back. It's been good times. The stock market has been a 10 bagger since 2009. Nasdaq is closer to 20 bagger. So what does that mean? That means everyone should be fat and happy, we should be celebrating, we should be excited about these good times.

Speaker 2: 4:09

But where do bull markets usually lead? Well, they usually lead to expensive markets. Not always, but if you were to look at those overlay, those four charts, you could see that they were at kind of the four similar peaks in this chart in 1920s, got the nifty-fifty internet bubble and then this COVID meme, stock era, and then said differently look at the regional minimums, gfc, early 80s, great Depression, on and on, and I don't think that the stock market's in a bubble. To me, the 10-year P-U ratio really needs to be above 40 to just be totally crazy. And we've built these for all the other countries in the world. So you've seen a lot of other cases where countries have been 40, 50, 60. You've seen them even as high as 80 or 90. And said differently, you've also seen them in the low single digits. There's a handful of countries around the world that are single digit now, one of the reasons that the cheap countries are on a face ripper this year. They're beating the US stock market by 20 percentage points already out the gate in the first two months of two and a half months of this year, but that's been a long time coming right. Foreigns underperformed for probably 15 years. But the point of all this is that it's been a really good time and most people now have most of their money in US stocks they always did, but now they have even more. And second, they have probably most of their money in concentrated names.

Speaker 2: 5:33

This is a well-discussed topic. Right, media loves talking about MAG-7. They love talking about how concentrated the stock market is, on and on. But the reality is, when something goes up, a lot, you know, the P and the PE ratios tend to tends to go up more than the E does, and so you have this market. That's right around. I think it was 38 has come down a little bit as the market sort of plateaued gone down, but it's not 12, which is where it was in 2009. So you've had this huge multiple expansion.

Speaker 2: 6:02

But a lot of people are sitting on these big US stock gains and the problem with that is one, they're concentrated. Two, they say Meb, I can't sell these because the tax man will kill me. I got too much money in NVIDIA. I got too much money in XYZ. I can't sell it. Tax man's going to kill me. We'll have a solution for that later.

Speaker 2: 6:20

But so first up is the warning Warning. Is US stocks, market cap weighted or expensive? There's no question. You cannot find a stock market indicator that would say US stocks are cheap. You know I challenge you. If you do find some, email me I'd love to see it. But on average they're very expensive. But people can't sell them or don't want to because they don't want to pay the taxes.

Speaker 2: 6:40

But most people already, you know their portfolio is offside right. So if you started with a 60, 40 in 2009, you may today have a 80, 20 or even more. So you got, and in all the the evidence shows this. If you look at Ned Davis charts, they got household as a percentage net worth, how much they put in stocks is an all time high on and on. Even as a percentage of global stock market or acquiesce is knocking on two-thirds 70, and that's just the index. Most people I talk to in the us it's closer to 80 90. We should have done a poll and asked you guys, but um, again, we have uh, we're light on the question, so you guys send some in. If you have some, um, we'll move on, though usually cape ratio triggers someone that uh is? Is uh really wants to to lose their mind?

Speaker 1: 7:26

can I get triggered on this? Can I, can we talk? Yeah, it's just like the. The criticism around the k-pratio is it's trolling, 10 years right, and there's some weird dynamics, you know, post bubble and qe and all this stuff. I mean, is there any any chance at all that it just isn't really a valid metric because of whatever cycles?

Speaker 2: 7:50

Sure, there's a lot of chances. You know, my thing is I often say I don't think the K ratio actually really matters, you know. And so at the Idea Farm we track four or five different 10-year metrics. We track 10-year price to book price, to cashflow price to dividends, on and on. They all say the same thing in extremes. You know, when you're in the kind of messy middle, the indicators usually diverge a bit. But if you're like March 2009 or today, or March 2000 or early 80s, almost always they'll end up on the same side of the seesaw. And it's not just 10-year, you could look at one year, you could look at forward.

Speaker 2: 8:24

But the key to me is never to just bet all your chips on one indicator, because you could be picking up something weird that's going on in the markets and so valuation and it's also like a. It's like a, a flock of a flock of starlings or swarm of bees where you look at it, and the composition kind of changes over time and moves and so the opportunity set is not always the same. You know, in the late 90s you had this mega cap, super expensive market cap, weight, which is usually what happens when things go up a ton, but at the same time, value stocks and small caps were totally reasonable. You know, in the early 80s everything looked pretty cheap on and on. And so what happened in the late 80s? You know Japan was expensive and you have these just sort of rotations and you know situations. And so you know again and here's the fun part about being a quant using indicators like valuation is like it's only giving you a spectrum of future probabilities and this isn't.

Speaker 2: 9:26

I can say this on the guy at show, I can't say it on CNBC and get into this. But if you look at I love the old John Bogle wrote about this in the 90s. He called it like Occam's razor of valuing stock markets and he's like look, it's a super simple formula. You start with dividend yield plus dividend growth and change in valuation and that's the 10 year return you're going to get. And he's like you can plug in dividend yield, that's known. You can come up with whatever dividend or earnings growth you think is going to happen. It's not known, but obviously we've had a great earnings growth the last 15 years. And then a big fat one that nobody knows is change in valuation. But you can see how much the change in valuation affects these, some, some of these secular and cyclical bull markets, you know, going from 12 to almost 40. In many cases that ends up being like a five, 6% tailwind per year, not just over the whole period, and so you can't count on that and that's. That's a hard thing to you know, guess when it's going to happen. But but, on average, buying something at 40 versus buying something at 12, like.

Speaker 2: 10:30

The struggle for me is everyone's always like well, is the K ratio 38 or 35 or 40? When in reality the question is not is it, you know, 38 or 40? Is it, is it 40 or 10? And, you know, valuation to me is always the best analogy I heard. It's like using, you know, the Hubble telescope you move it an inch and you're in a totally different galaxy. So I don't want to optimize on the right of the decimal point, I want to just be, broadly speaking, with valuation, and so that's why we like to couple it with trend as well. We're big trend followers for those who aren't familiar with us. So valuation and then valuation to me is like the yellow flashing light. So what is my expectation?

Speaker 2: 11:11

I tend to agree with Vanguard. Vanguard thinks US stock market, broadly speaking, is like low single digits, mid single digits, and you know that doesn't mean it has to be like minus 10 a year, but it just probably isn't going to be 15, which is what we've been doing. It's more about expectations. But Bogo himself there's a great video of him talking about the late 90s where you know he's everyone assumes Vanguard, like market timing is the worst thing in the world, and he talks about how he was selling stocks in the late 90s and buying bonds. Now he wouldn't say something like sell all your stocks but move something from like a 60-40 to a 50-50 or a 40-60 is totally reasonable, which I think would drive all the Bogle heads crazy. It'd be like here's my quote of Meb saying this They'll all lose their mind and I'll be like just kidding. That was John Bogle, you know, anyway.

Speaker 2: 11:59

So solution what can we do about it? Here's this new fund we're launching. By the way, we have 16 ETFs, almost 3 billion in assets, but this is a fund. That's interesting because this goes way back to the first book I wrote over 15 years ago I mean, it's almost 20 years ago at this point which is the Ivy Portfolio. It's my first book. If anybody's read it, you'd recognize this cover. That's what six, seven books ago, and I don't even know how many white papers.

Speaker 2: 12:30

But the point of this book was really looking at David Swenson and others and how they manage portfolios and the endowments are a little different than you and I or most of us. The endowments historically have. They don't pay taxes, which awesome. Second is, they say they have a really long time horizon, right? So their goal is really to manage this endowment, beat inflation, but really to build it and grow it over time, not just for current students, but future students and alumni, but also employees, the university. Some of these contribute to a non-trivial amount of the budget, so they don't want to lose it all and nuke it, but so. So if you're given that mandate, what does that mean and what does that historically mean? Well, there were great examples really in the 20th century of Harvard, yale in the 21st century as well, less so recently.

Speaker 2: 13:15

But these groups, there's kind of two defining characteristics. The first is an equity-like focus. So if you go pull up Yale's annual report, like oh my God, yale only has 2% in US stocks, but the reality is they have a lot of equity-like exposure. So they have private equity venture capital, they have US stocks, they have foreign stocks, they have hedge funds, all of which gives them some equity beta. Second, they tilt towards active where they feel like they can add value. And we acknowledge in this book we say one of the best things they do is they were early to a lot of these investments in styles, way before it was cool, way before it was popular, way before the Yale model was even a phrase, right doing Timberland before anyone else, yale, pe and VC. Well, here we are in 2025 and everyone's doing that.

Speaker 2: 14:09

So we actually just wrote a recent paper that walks forward the last 15 years in the endowment models called Can we All Invest Like Yale, and we'll send it to you guys if you don't have to go find it right now, but it's really the basis for this fund and this fund. We've had something like this filed for I don't even know how long 10, 15 years. So we managed three asset allocation fund of funds. Already. There's GAA, which is like a buy and hold global market, so that's like a moderate portfolio, and then we have a trend following fund, gmom, and Trinity is sort of in the middle.

Speaker 2: 14:44

This one is meant to be like an aggressive asset allocation portfolio, so it's going to model what Swenson and others even recommended in his book Unconventional Success. We talked about it in this book. He said how can you model the Yale endowment without access to private equity, venture capital, all those good things right. And so we said there's a lot of papers and academic research in this white paper that says hey look, you can actually do a pretty good job of modeling what Harvard and Yale and others have done. And Yale historically beats sort of the Nakubo endowment average by about three percentage points per year. So they're much better than and so we're going to wrap this into a fund and we'll talk about the fund in a minute. Let me, let me kind of let me pull up this, this paper, because I think it'll be helpful to talk about a little bit real quick.

Speaker 2: 15:37

The golden age of endowments was really the early 2000s, mid 2000s and actually right around. I can't remember when this book actually published, but you know the endowments had some hard knocks too. You know 2008, 2009 was tough for a lot of them. You know they only mark their portfolios once a year, june 30th, so entry year. You don't see what's going on, but you can model out the portfolios and come up with a pretty good guess. So, despite the fact that since 1985, which is when Swinson took over Yale's endowment stunned over 13%, 60-40, not bad, did 10% and S&P again just an amazing period for US stocks almost 12%. But really the period post-GFC again has been all US stocks. So S&P 15%, 60, 40, around 10, which again is not bad. Right, the average endowment eight, yale 11.

Speaker 2: 16:34

We wrote a paper called the bear market and diversification and we were talking about this last 15 year period where, you know, s&p has creamed everything Like it has just been a just just I don't even know the right analogy, it's just been a haymaker, just crushed everything. And so this has arguably been the worst period in history for US stocks relative to a diversified portfolio. But diversified portfolios didn't do poorly, right. 10% for 60-40, amazing. You compound a 10%, you're going to beat everybody. But the problem is that's 10% when your neighbor, who's just dollar cost averaging into S&P, or God knows, fartcoin and Dogecoin, or you know Nvidia or whatever else you know, has done 15% plus. And so, in terms of absolute underperformance and number of years in a row, you've really never had a period like this, except with the exception of probably the 1940s, anyway. So the endowments haven't looked as spectacular, but over the full period they looked really amazing.

Speaker 2: 17:35

But the big question often is okay, so in the paper we walked through and said, well, what does Swenson's recommendation look like? And if you go back to 1985, it's similar. It does about 10% a year, reasonable volatility, but kind of looks like 60-40. But again, this has been a great period because of the S&P in the 60-40, the 60. But if you start to do stuff like tilt away from market cap weight and so what is the allocation? What did Swinson actually recommend In his book? He said 20% US stocks, 20% foreign stocks, 10% emerging markets. So already, by the way, listeners listen to that 20% US, 30% foreign and emerging. So he was already saying put more in foreign and emerging than US, which is a huge outlier. 20% REITs, which technically are US stocks, 15% US bonds and 15% TIPS. So for the real asset bucket. So if you then tilt away, add things like value and momentum and trend, you know that adds another percent to your per year performance for no real pickup and volatility and drawdown. But the big one is we're still not there, right? So you still don't get quite.

Speaker 2: 18:41

Get to the Yale endowments 13%. You're up around 11. But the thing is for private equity, for venture capital, for a lot of the hedge fund investments, those are already levered investments. I mean US stocks are levered too, right. The average stock has debt on the balance sheet, so they're all leveraged. So the question is, how do you kind of get to that 13% and will leverage help or kill you, help or kill you? And so we look at it in the paper and we show that if you add, you know 150% total, so 50% leverage. In fact you can get up to the 13, even 14% numbers. Now you get a tick up in volatility, right.

Speaker 2: 19:19

So if you look at kind of a lot of these allocation strategies, they're around 10 or low teens For this portfolio. You know US stocks tend to be 15 to 20%, so so this ends up being in that sort of stock like volatility. So not nothing Right. But you got to remember Yale Endowment Average Endowment worst year they printed was about down 25 in 2009. But if you do the investable version of that, that was probably entry year down 50. Right, which is about the same as almost any other portfolio, diversified portfolio like 2008, 2009,. You probably were down half at one point, which is painful right.

Speaker 2: 19:55

For a lot of people it's um, but you know, for the person who says, look, I don't care, I'm, I'm thinking about the next 10, 20, 40, 50, 90 years, it's an interesting way to think about leverage. Interestingly enough, ray Dalio's Bridgewater just launched a new ETF, I think, this past week, that's leveraged almost two times the all-weather ETF and charges more than this one, by the way. Anyway, I'm going to answer a couple of these questions because they're coming in and they may be. Yeah, I can get you on that man.

Speaker 1: 20:25

So let's see yeah no worries. You said to expect vol to be near the same as stocks, but can you outline some scenarios where E&DW would really struggle and maybe down 30% or more? Ah, the always fun question of max drawdown risk, yeah, so let's see where the diversification of assets would all be down.

Speaker 2: 21:17

That much you know. So let me get to. Let me fast forward this slide one. And, by the way, this fund will be less than 49 basis points. It says 59, but that's an outdated expense ratio so we don't charge a management fee. It's the underlying ETFs. They'll probably be around 15, 20 ETFs in this portfolio. Again, we have three other asset allocation ETFs you guys can look at this. One will be 49 or below. I need to update the prospectus, trying to be conservative, but let's see. If you look at.

Speaker 2: 21:47

So the allocation, you know what we're targeting here on the low end is that 130 to 150%. So 60% equities, 30% fixed income and another 20 each in real assets and alternatives. And what do those mean? You know real assets is stuff like tips, real estate, investment trusts, commodities, commodity equities, gold, gold's up near 3000, y'all Also gold. Do you know that this century gold has outperformed US stocks? And I believe I don't know. Reits have kind of struggled lately, but REITs had also outperformed US stocks too. Alternatives you know alternatives can mean anything. Where we tend to be a trend following crew, so that majority would be trend following, is that the premier diversifier to apply and hold long only asset allocation, so that notional exposure gets you up to around 140 percent. You know it may drift a little bit. We're targeting around that 130 to 150. We're targeting around that 130 to 150. But again, this is a global allocation. This isn't just US stocks, which, hey, after this year people may be interested again. We may finally have the US stock versus foreign turn. Who knows, we've got a few head fakes, but anyway.

Speaker 2: 22:54

So we wrote an old book called Global Asset Allocation I hope to update it this summer and it looked at all the famous portfolios permanent portfolio, risk, parity, 60-40, endowment, everything and you really can't find an asset allocation that doesn't lose a quarter at some point. Right, like they're going to lose a quarter or a third. There's nothing that doesn't lose a quarter and on a real basis it's worse, and hopefully in this new updated book. So we only took it back to the 1970s in the first version. I like to take everything back to 1920s. Then it's a whole different bag of chips, right. 1920s, 1930s. You add on a much bigger drawdown US stocks were down over 80. And so really any portfolio, the longer you go back, the more, only the bigger the drawdowns can get.

Speaker 2: 23:45

So you know, we wrote another paper sorry, we've written a lot of papers getting old called what is the safest investment asset? That's a really fun paper, because most people assume that means T-bills. But the thought experiment we did is we said look, what about on a real basis? So the only thing that matters in all investing is what are your real returns after inflation? And said what is the safest asset? So let's say you got $100 million, $10 million, $1 million, whatever your definition of rich is Say I don't care about making returns, I don't want to lose it. What's the safest thing? And I think most people would assume T-bills, but T-bills on a real basis have declined by half. Think about that for a second 50%. You don't see it on the nominal, but after inflation, and we just had a period where bond yields were below inflation for an extended period. So in reality, there's only one other person I know in the entire world that thinks this way and that's Michael Saylor, though he comes to a different conclusion, which is if you look at your safe money, your cash we do this for my company too the safest investment is not T-bills.

Speaker 2: 24:52

It's a diversified global portfolio and you can look at this in terms of drawdown, one year max loss, volatility, all these various metrics right, and come to the conclusion that T-bills is actually riskier than a diversified portfolio. Anyway, what do I expect for this portfolio? Look, I think it could lose a quarter or third. I think there's a scenario, but I would apply this to any asset allocation. I think I could come up in my head with a scenario where it loses half. Right, but that's everything. Like I come up with any portfolio that loses half at some point. So long-winded answer to your question, but I think it's important to put this into context and the good news is, in all these papers and books, we model this out. So in the Can we Invest Like Yale, we look at this portfolio and how would it have done relative to everything else? The answer is yeah, like you're going to, you're going to go through this period at some point.

Speaker 1: 25:47

Yeah, I would add, on a long enough timeframe. You will have at some point an anomaly, right? You can already have to have the worst parity in 2022. And we're history right For, and that's supposed to be as diversified as it gets, right, yes, right. So yeah, these things will happen. If there were something that does not have a big drawdown, it will be made off. I think it's sort of the main point. Let's get a little longer questions here from an anonymous attendee. The market has been high for a long time. Just keep going up. What are your thoughts on the direction of the market in 2025, especially with tariffs and the government's supposed plan to not intervene in markets? I think this should answered also, maybe from the perspective of the broader suite that you have.

Speaker 2: 26:26

Yeah, because I think that's interesting.

Speaker 2: 26:28

Yeah. So the funny thing, y'all, is, my biggest fund is a US long-only stock fund. It's over a billion. So I'm not just preaching my book here. You know my warning was broad market cap is expensive. So what If you look back in history, the past 100 years, and you put stocks into a quadrant box of uptrend, downtrend, expensive and cheap? The best market is a cheap uptrend. The second best is an expensive uptrend and that's where we are now right, like we've been going up and getting more and more expensive. But the bad part is the worst market is an expensive downtrend and more expensive. But the bad part is the worst market is an expensive downtrend. So when we flip from that expensive uptrend to expensive downtrend, that's really where it goes from yellow to red flashing light. We're starting to see some indicators flip on that. You know most of our trend and momentum type of strategies are kind of rolling over from US stocks. We have one fund called Vamo which it can be anywhere from 100% long only to 100% hedged. It's currently 75% hedged. So it's definitely signaling some caution.

Speaker 2: 27:32

But we think value is just fine. You know, if you look at most of the big quant shops GMO research, affiliates, aqr you know, this value spread between cheap and expensive has been some of the highest levels it's ever been over the last few years, so earlier, when I said the warning, that's market cap weighted stocks. But the alternative is value stocks and foreign and emerging. Look just fine, you know, we have one fund that focuses on the cheapest countries in the world through CAPE ratios and that fund is, I think, is, up 15% this year, so beating the U S stock market by 20. Now it's been a massive laggard for the majority of its existence since 2014. So it's 2013. Um, but uh, but it's way cheaper. I mean, in most of these, even within the U S right, the value portfolios and you guys don't have to believe me to morningstar type in syld versus um, you know, spy or something you know give you a snapshot of the underlying holdings in that portfolio. And we have small cap and large cap, all these different type of funds, and it'll show you that the valuations are like half or a third of the broad us stock market. Again, I don't think it matters till it does. And hey, guess what? We even have have a tail risk fund. So the tail risk fund is something that you can buy if you're really bearish and you don't want to sell your stocks, you can buy the tail risk fund to partially hedge, you know, some outlier down markets. It had a really good day yesterday, not surprisingly, but on average. That fund is kind of designed to lose money and having a good day today too, anyway.

Speaker 2: 29:04

So you know, and so someone, adam, asked where, where does this fit in, since it's levered? You know, could it, could it be used in a portfolio? You know one of the nice things about markets and I said this in our Yale paper I said there's a great quote and it says I'm going to, I'm going to try to recall it by memory, but it's from William Feather and he's like the nice thing about markets is that every time there's someone buying, that means there's someone selling and they both think they're astute and so you can come away. You could read this paper I wrote and say, oh, I'm just like why I'm just going to 60, 40. Like what's, why would I waste all this time and effort? Others will read it and be like, oh, I get Swenson what he's saying. I definitely need foreign, I definitely need some emerging and real assets, otherwise this portfolio is not, you know, well-balanced and others will be like. I even like what Meb's saying Give me some juice. I'm going to add some leverage and tilts to things like value and momentum. Let's do it the two main ways we see people use this portfolio.

Speaker 2: 30:05

So let's say you're an individual, theoretically this could be your entire portfolio because it's going to own underlying 10 or 20 ETFs which are going to underlying own thousands of stocks. So theoretically, you own probably 10,000 plus positions. That's a pretty diversified portfolio. It's diversified globally. It's diversified foreign. It's diversified real assets. Most financial advisors, however, are not going to just buy one ETF and call it a day right, because then the clients call you up and say what am I paying you for? So most people would use this, as well as our Trinity ETF, as a diversifier. They put it in the risk bucket because traditionally they own US stocks and bonds only, and this fund will give you foreign. It gives you emerging, gives you tips, gives you commodities, gives you all these other things and some leverage. So, theoretically, this is going to be a I don't want to call it very aggressive, but it will be an aggressive allocation strategy that gives you this equity-like focus plus leverage. So it's an interesting combination that I don't know really exists in a way that you know others have.

Speaker 1: 31:39

By the way, I think it's worth mentioning. What is not theoretical is that the volume on an ETF like this is irrelevant, right? I mean when it comes out, because it's got ETFs in it themselves. You know significant assets.

Speaker 2: 31:51

Yeah, yeah, volume, remember, listeners. You always use a limit order, but if you go through a debt like you got a million, 10 million, 100 million, chances are you can pretty much always get in right around net out, net asset value on any ETF and I can't say guaranteed, but really it doesn't matter if it trades one share a day, it's really what does it own. And so if you own a large cap US stock fund super liquid even if it trades one share a day, if you own a small cap Brazilian tech fund, a little bit different, right. And so most of these desks can do their own custom creation redemption orders. This doesn't apply just to this fund, really any any etf in the world anyway. So let's do one or two more of these questions while we're kind of on this topic and then we're going to get into a really cool new idea that none of you have heard of well, I'm one of us has.

Speaker 1: 32:47

I mean, yeah, uh, I have one from Boris here, the one about the S&P creaming everything. So it's got a good memory. You saw it back in 2013, 2014. You mentioned they speak of the cap-weighted nature of the S&P, which clearly were spot on. You didn't say that, which I think you did. When they serve as indirect evidence that we're indeed in a bubble, I will say, for whatever tour, it's not my show, obviously on this webinar, I've called this the concentration bubble. Yeah, I like it. I think that's sort of accurate, maybe starting to pop, but go ahead.

Speaker 2: 33:15

So we just we just hit a little bit of rabbit hole, but it's good Cause we got 30 minutes left. You know, some of y'all all know this, but I think it's a really interesting topic of discussion. Go grab one of your friends who's maybe kind of tangential to markets, or your spouse or niece or nephew or kids, someone who knows about markets and you know, ask them you know, hey, what do you invest in? They say, well, I index or I buy the S&P, you know, and so it's okay. Well, you know, how is that? How are the weightings determined? And they'll say, oh well, it's like it's the biggest companies in the stock market. And you say, correct, but biggest by what measure? And usually 99% of people don't know the answer to this. They'll say, well, it's like Apple and Microsoft are like the big, like their sales and revenue and earnings. And you say no, no, no, no, no, no. Big like their sales and revenue and earnings. And you say no, no, no, no, no, no.

Speaker 2: 34:10

The only factor that goes into a market cap weighting is price of the stock times, the number of shares there are. That's it. That is the definition of passive investing, and most people don't know that. And when you think about that, you're like, huh, that's sort of a weird way to invest. So you're saying I just invest more if the price of the stock goes up and less if it goes down, and that's it. And you say yes, like well, that's weird, right? Like what a strange way to invest. If you think about it, I mean it's the ultimate trend following methodology, when we've done a lot of fun podcasts with Hank Bessenbinder and others talking about you know why does that work? And it works because a small percentage of stocks generate all the returns. So take five 10% of US stocks generate all the returns Apple, microsoft, costco, on and on Nvidia and the average stock doesn't even beat T-bills. And you know most stocks don't beat the broad market index. But it's a curious way to invest. It works most of the time and it works well. When does it not work?

Speaker 2: 35:15

The Achilles heel of a market cap weight that Boris mentioned I probably said in 2013, is when things go loony to the upside, because usually you're putting most of the weight and things that have gone up the most at the worst possible time. So think back to 99. You're putting most of your money and one of my favorite tables is by decade, looking at the top stocks in the S&P or global, and often it's just the things that have gone up, you know, and are now in the top echelons, but usually they're the most overvalued because the P and the PE goes up right. So you become very vulnerable at these kind of bubble peak levels. Japan in the 80s is the classic example. Japanese stocks had almost PE of 100 and then went nowhere for multiple decades.

Speaker 2: 36:07

But again, you look at these periods and so market cap weighting. One of my favorite charts ever is and I think this was in this book, if not, it's definitely on Twitter but it's the chart of what if you invested in the largest stock in the stock market. At the time it was the biggest. So currently I think NVIDIA, I'm not sure Apple Anyway, it's a horrible idea Underperforms the S&P by multiple percentage points per year. This also applies to the top 10 stocks in the index. The top 10 stocks in any sector, the top 10 stocks in any industry Underperforms by about three percentage points per year. So you say, what's the easiest way to beat market cap weighting? You just take out the top 10 market cap right or equal weight is fine, or weight. Any other method usually beats by a percent or two.

Speaker 2: 36:52

However, you know giant asterisk is you have these periods, and GMO has a chart of this, I think it's like the top 10 versus the bottom 490. And you know it's a terrible way to invest. But every once in a while you have this two, five, 10 year period where the face ripper up right, where the top stocks just go nuclear to the upside and then it goes back down and starts underperforming again. It's just gravity and valuation, anyway. So market cap we always say market cap weighting is fine. It's just not ideal, particularly in periods where things are really off sides, like today, you know, or like 2007 with the, the bricks, brazil, uh, russia, india, china, india and china were in p ratios of like, I think, 50, and then they struggled for what? 15, 20 years. So anyway, uh, we'll, we'll carry on what we'll do? One or two more of these questions, then we'll get to the new topic on the 351.

Speaker 1: 37:51

I think it's from Notes with Pogetor 130, 150%, how do you think about where to be within those bounds?

Speaker 2: 37:57

That's just sort of the day-to-day gyrations. We don't like to say 140% or 150%, because sure enough there's going to be a reader and be like, I see you at 148%, what are you doing? And say, look, just, you know these things.

Speaker 1: 38:15

we give it a little tolerance to move, but but in reality it's sort of that one, that one 40 ish range. And this is also a question around benchmarks. Hard to find a benchmark for something like this, but how do you benchmark the strategy?

Speaker 2: 38:24

You know there's a couple. I mean, everyone always loves the S&P because it's the only one they know. You know, 60-40 for the people who are focused just on the US, but really the NACUBO average and that's like the body that looks at all the asset allocation big endowments, small endowments. They do an amazing job. They put out a yearly piece. That just came out. You guys should go read. That's a great index, but it, you know, it looks a lot like 60, 40 for the past 10, 20, 30 years. And one of the things that I've been very critical of is CalPERS and other large institutions that have a hundred, 500 billion dollars and we often say is like, you know, you guys have all the top resources in the world, how come you're not outperforming? And I think there's a lot of struggles and challenges when you get to be a big institution and we often joke they should fire everyone and just buy some ETFs. And so one of the challenges of benchmarking I think we should be able to beat the NACUBO and endowment averages, but again, I'm not dunking on them because it's been a perfectly fine way to invest. Eight, nine, 10%, you know that's great, well done, but they're not the 13% of Yale. So every June 30th, which is when their fiscal year ends, you know they start to report their returns in the fall We'll throw a little annual shindig. Invite you guys. Unfortunately, it won't be till 2026, because we need a full year performance and then just tease them because, say hey, can you beat a publicly listed ETF? That's low cost and doesn't do anything? It'll be fun to find out, and so correlation to the S&P and treasuries is probably going to be pretty low. I mean, it's equity like right, we got a lot in stocks, but S&P is going to only be probably roughly half of the stock allocation, and then we got all sorts of other stuff in there, and so I imagine a lot of the time it won't look that close to the S&P answer on the number there it won't be zero and it won't be negative, but it won't be one either. Yeah, and we're using. We're using futures and other things like that too, all right. Well, let's get to this 351 stuff, because this is the thing none of y'all have heard of, and I think I said last year on Twitter that this is going to be more impactful than crypto ETFs, and crypto ETFs raised a hundred billion dollars. So what is a 351? If those are familiar with.

Speaker 2: 40:54

1031 in real estate right. You buy a building, you buy some land. Your parents did it. 10, 20 years go by, went from a million to 10 million bucks. You can roll that over. You can sell it, roll it into another property and not pay capital gains Amazing tax deferral right.

Speaker 2: 41:11

This is how generational wealth has been built in the real estate world for many decades. Wouldn't it be nice if you could do that in stocks? You can't right. Your choices today are sell, pay the tax man, die, contribute it upon death, maybe give it to charity. You could do these old school exchange funds from Eden, vance and Goldman, but you have to hold them for seven years. You end up with a sort of portfolio of whatever people have contributed and you got to put 20% in this weird illiquid bucket and they'll probably charge you a percent and a half. Knowing Eden and Goldman, it's probably less. Today I hear they're up around 80 pips now 1%, but who knows? Ask them. But it's not a particularly great solution Until now.

Speaker 2: 41:54

Anyway, what's 351? 351 has been the tax code for many, many, many decades and there's actually been probably 100 of these so far. You guys have probably heard of the mutual fund ETF conversions, dfa a hundred billion or so. There's been some separate accounts. Etf conversions 351 allows you guys to contribute a portfolio.

Speaker 2: 42:13

So let's say you got 20 stocks. You got all these mag seven tech stocks. You're like my God Meb, they've been a 10 bagger. I don't want them. I have to sell them, diversify. I want to buy bonds, real estate, all these other things, but I can't. This tax man's going to kill me. You can seed our endowment ETF, all right. So let's say you got a portfolio Schwab. Your financial advisor, your client's, got a portfolio Schwab. Let's say you got concentrated stocks, all these things.

Speaker 2: 42:37

Direct indexing is a huge solution for that. You can say all right, I'm going to give you this portfolio and then in return I get the ETF and the ETF then becomes. You know it runs its strategy, it's able to trade through creation or deductions and that is not a taxable event. It's a tax deferral. You don't wash the taxes that would be illegal but you do get a deferral into a diversified portfolio and if you know anything about ETFs, they shouldn't pay any capital gains going forward.

Speaker 2: 43:04

So now you've got this diversified portfolio, now there's two rules. If you've got this diversified portfolio. Now there's two rules. If you've got a hundred million of NVIDIA, you can't just give me a hundred million NVIDIA. The top position can only be 25% or less, so it has to be. And then the top no more than half the portfolio can be in five positions. So really you probably need like 12 stocks or more. Or and this is super cool ETFs are passed through.

Speaker 2: 43:30

So let's say, you really just want to get rid of that NVIDIA. You could give me 25 million NVIDIA, 75 million in SPY. Spy is diversified and all of a sudden you have this a hundred million dollar portfolio that is now in this diversified endowment style ETF. Pretty cool, right? So we did the first one of these in December and that was a fund called tax T A X. We raised about 30 million. This one will be bigger. Um, and the way that it works is you know, we've been and if you go to if you go to either of our Cambria fund sites Cambria funds, cambria investments there's a three 51 tab with a ton of PDF downloads, faqs, timelines, descriptions, summaries, all that good stuff, webinars. That walks you through it. But you can see how this idea is massively impactful and massively interesting.

Speaker 2: 44:22

People love to ask what they can contribute. The simple answer is public securities, so stocks and I don't want your micro cap you know $10 million cannabis or junior miners, so large, liquid, liquid, tradable or ETFs you could contribute foreign stocks to. Ideally, it's not in a cash market like Columbia or Brazil or something needs to be something we can trade. Trade. We can't take your private mutual fund. We can't take your real estate. We can't take your fart coin or doge coin. Public stocks, public ETFs, are wonderful contributions, guy, you heard fart coin.

Speaker 1: 45:00

You won't tell us what you got. You really can't take fart coin.

Speaker 2: 45:03

Not yet. Probably soon, though, we can take crypto ETFs. We'll do another webinar on that at some point. Yeah, yeah, yeah. So so those are the basics of what you can contribute. I'm sure you guys have a lot of questions about this. I'll go through some some of the ones that people ask the most often. You know what's the timeline? Well, we're doing this one for endowment. Our goal is to hopefully do this for every ETF we launch. Say, look, once it's launched, you want to buy it, just like any of our other 16, 17 ETFs. Great, but if you want to seed it, let's have that conversation.

Speaker 2: 45:38

So we have a lot of financial advisors that are coming to us with not just one portfolio, but 10 or 20. We have direct indexing people coming to us, and then we have individuals, too Individuals. You know we try to have you work with an advisor. Fidelity and Schwab doesn't love just bringing individuals on. It's a lot of herding cats, and so we have advisors you can work with if not, but traditionally advisors Fidelity and Schwab love us. There's a whole host of other brokerages that are on various levels of approve not approve, okay, not okay but most of them are coming around to this because Goldman just did one for a billion dollars. You got a bunch of these companies that are leaning into this 351 idea because it solves a major headache for many investors, which is they're now offsides and they have way too much in US stocks.

Speaker 2: 46:28

As far as timelines, if you guys are interested in this idea, reach out to me today, this week, our sales team, anyone else we can walk you through it. It's not as complicated as you think. It's actually pretty streamlined. If you want to do it, particularly if you have a somewhat diversified portfolio and the way that it works is. So this March we kind of walk you through it. We you gotta send us a excel tax lot which we can send you. The template. Be like I own this much nvidia, this much apple, this much app loving. Send it back and, um, you know the client will sign a form and, uh, you know, a day or two before launch, the positions transfer and then you open your account at Schwab the day of the launch and guess what, instead of all your positions you got E&DW. Now the cool part is the tax basis for each position transfers over. So let's say you transfer 20 stocks, you'll now have 20 different original tax cost bases for E&DW. Let's say you transfer just nvidia and spy. Well, if you bought nvidia at a dollar, you'll now have endw at a dollar. And let's say you had no gain on spy, you'll have endw at no gain. So very cool.

Speaker 2: 47:38

Um, tax management, I think there's going to be a revolution in tax location ideas in the next five years. Uh, 351 being just one of those arrows in the quiver. You know people were asking us about fact sheets and PDFs. Again, for 351, stuff, we got it For E&DW. If you want to look at the kind of suggested holdings, the generic portfolio allocation, you can, uh, you can send it. Uh, send me an email and we will um, uh, you know, uh, send it to you.

Speaker 2: 48:11

And as far as the requirements on the ETF, people ask us like what's the minimum? You know, we, we say a million for financial advisors. We try to say 10 million, like we don't want you to mess around with just one account, that's like 500 grand, because it's probably a headache for you, it's a headache for us. Um, but, uh, but you know we're, we're somewhat flexible with that. Um.

Speaker 2: 48:36

And as far as we had a question of can we just give you 100 of one stock, we, I think we'll have a solution for that this summer, not yet, um, so stick around, just wait. Uh, it needs to be somewhat diversified. You can somewhat russian doll it, you know. So, like say you got 100 million nvidia, you know you could do nvidia across three or four funds and and be done with it, uh. But if you want to just get rid of it all at once, uh, talk to me again in a month or two. I think we'll have a solution for you. Got to come back to the next guide webinar. We do in a few months, but today, that's not today.

Speaker 1: 49:10

This is also going to be available on the YouTube channel on the LeadLag report side of things. So for those that want to re-listen to things, you'll get another opportunity. Any parting thoughts here, Meb?

Speaker 2: 49:20

Yeah, I got a lot. I mean, you know, for those who are like Meb, this is amazing. This is the best thing I've ever heard. 351,. What an incredible concept.

Speaker 2: 49:30

But I'm going on spring break, I'm going to watch March Madness. I just can't turn this around by. You know, april 10th launch. You know we'll have fund three, fund four, probably like late summer, and then Q4 kind of it's like. It's like once a quarter open enrollment is the way we're going about this. Now the problem is the buffet changes. Where fund one was us stocks, fund two is this diversified portfolio, fund three will be a global equal weight on stocks. So, going back to my market cap comments, however, you know, if you got 100 million, 500 million, a billion and you're like meb, let's do something custom. We're open to those conversations too, too, where we could do a custom idea. But certainly reach out. We can have that chat. And if you guys want to come say hi in Manhattan Beach we're located here in Los Angeles and talk about it over lunch or a pint or a taco, let us know as well. What was that restaurant that I met you at? What was the name of that? Where did MB post?

Speaker 1: 50:29

Post. That's right, that was a very good one.

Speaker 2: 50:32

Yeah.

Speaker 1: 50:32

I literally flew in folks same day from New York to LA to see Meb just to have a nice dinner with him. That's how much I value it.

Speaker 2: 50:38

Where is?

Speaker 1: 50:38

it when it takes half a day. Thank you for joining. I appreciate those that are here and hopefully we'll see you on the next webinar.