A few years ago, Google invited Mebane Faber to their HQ to share his stock investing wisdom with young Googlers. His seminar was titled, "How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns."
The broad investing public is BAD at investing. We are emotional and have a behavioural bias (buy at top & sell at bottom). A systematic investment approach can be used to avoid this behavioural bias. You have to be mentally prepared to last a long-time horizon (with many ups and downs).
Mebane's team apply a valuation metric, based on the collective research of Benjamin Graham, David Dodd and Robert Shiller, across more than 40 foreign markets. They realised that there are even greater examples of bubbles and busts abroad than in the United States.
His team then created a trading system to build global stock portfolios, and find significant outperformance by selecting markets based on relative and absolute valuation.
Mebane also speak about "hacking the hedge funds". Watch this video to find out more...
About Mebane Faber:
Faber is a co-founder and the Chief Investment Officer of Cambria Investment Management. Faber is the manager of Cambria's ETFs, separate accounts and private investment funds for accredited investors. Mr. Faber has authored numerous white papers and three books: Shareholder Yield, The Ivy Portfolio, and Global Value. He is a frequent speaker and writer on investment strategies and has been featured in Barron's, The New York Times, and The New Yorker.
Learn from the Living Legend
Are you making SMART investment decisions like Warren Buffett?
Warren Buffett's investment method condensed into 5 simple steps.
You shall find personal notes and summary below but I highly recommend that you watch the whole seminar yourself to get the most value out of it.
Prepare a hot cup of coffee, get comfy and soak in all that knowledge.
Google thought that this information was worth the one hour for its employees. I'm pretty sure you'll delightfully find that it is worth one hour of your time too.
Hot tip: you can speed up the video during the boring parts to shorten the time frame! I find that when the video is faster, it forces me to pay closer attention too.
Lesson #1: Eliminate Emotional Bias
Investment bubbles and speculative manias have existed for as long as humans have been involved in markets. Is it possible for investors to identify emerging bubbles and then profit from their inflation?
People are emotional & have a behavioural bias. They rush into stocks (funds) at the top of the market and sell at bottom… and they do it over and over again at the wrong time. These emotions cost investors about 2% per year (fees etc).
Lesson #2: "Systematic Investing"
It is not rocket science.
Time your investments by looking at Broad Market Earnings (PE* for the entire market over a longer period). Buy at low point in markets...
- Equities traded at 45x earnings in 1999… just before the great crash
- Equities traded at 5x earnings in the early 1980s… just before the boom
- Equities traded at 26x on 23 June 2014… not optimum time to buy
Avoid Home Country Bias
Investors often invest too much in their domestic market. A portfolio of 70% invested in the respective domestic market is common. But Mebane Faber recommends 50% instead.
*PE: The price-to-earnings ratio, or P/E ratio, is an equity valuation multiple. It is defined as market price per share divided by annual earnings per share (Wikipedia).
- Bull markets begin around 11x and Bear markets around 23x
- Buy when Market Ratio is around 10x
- US investors should have 50% maximum in US stocks (diversification)
Lesson #3: Timing
Long term value investing is essential. Observe the average values of stocks over longer periods of time. Bubbles and crashes can be anticipated.
You have to prepare yourself, not matter how small the probability, that the US market can decline 80% or increase 100%. Most people set up their investments strategies and ignore this… can you sit through an 80% Bear Market?
- The lower the price paid for equities, the greater the future returns (over longer time horizon)
- The ten best times to buy stocks in past 114 years have been when CAPE** ratio (starting valuation) was around 11x. The ten worst times to buy stocks was when CAPE Ratio (starting valuation) was around 23x
**CAPE Ratio: The cyclically adjusted price-to-earnings ratio, commonly known as CAPE or Shiller P/E, is a valuation measure usually applied to broad equity markets. It is defined as price divided by the average of ten years of earnings (moving average), adjusted for inflation (Wikipedia).
Lesson #4: Risk
There is always a very real risk of losing a lot of money. You have to be prepared that markets can decline considerably. Can you sit through a 80% Bear Market.
"Understand the risk… or don’t play the game." - Mebane Faber
In general, stock markets are correlated (markets move together). However, there can still be wide divergence over short periods
- Volatility can be reduced through diversification
Lesson #5: X-treme Investing Strategy
Super-high risk investing based on extreme CAPE Ratio values can potentially offer exceptional returns.
Two of such approaches presented by Mebane:
- Invest in The Lowest Valued Countries (cheapest 25% of CAPE Ratio markets/countries: Greece 4x, Russia 6x, Ireland 8x, Hungary 9x, Austria 9x, Italy 10x as of 2014)
- Invest when there is ‘Blood on the Street’ (CAPE Ratios below 7x)
NOTE: These strategies were not recommendations
Criticisms of Method:
There has been criticism of the Value-based investing method. Mebane addresses these in his presentation (at 20:30):
- Measurement Period is too long.
- Ignores depressions or bubbles.
- Reported vs. Operating Earnings
Buy and hold equities.
Purchase equities when earnings valuations are low (10X or lower).
Take a long-term position and be prepared for the long-term roller-coaster ride.