We all extrapolate our own lived experience. How do these stupid bubbles happen over and over again?
Because there's no natural immunity. Then you have an entire generation 17 years later that have never really experienced pain, and then rinse, repeat. Same story over and over throughout time.
If you pick the exact wrong asset every year, you don't lose money. You get it wrong every single year, you pick the worst choice, and you still make money, and yet people find a way.
This guy saves all his money in a checking account and he only puts it in at all-time highs, right? Did it in 1973-74 bear market, and then he does it for the 1987 crash, stocks fall 30% in a week, dot-com bubble right before it busts, and then the great financial crisis. Like, how did he do? He still ended up a millionaire.
Welcome to a special series of the Meb Faber Show on the past, present, and future of America. I'm sitting down with some of the most notable historians, thinkers, and investors in US financial history, all tied to my new coffee table book, Investing in America: The Rise of a 250-Year Bull Market, out July 4th.
Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria's funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
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Welcome back, everybody. It's summertime. Today, we have a great show with returning guest Ben Carlson of Ritholtz Wealth Management. He's author of a Wealth of Common Sense blog, host of the Animal Spirits podcast. This is his third time on the show. You can search the podcast player for episodes 435, 493. He's got a new book out, Risk and Reward: How to Handle Market Volatility and Build Long-Term Wealth. It's part practical manual, part economic history. Has some awesome charts. Be sure to go on to YouTube to watch the show. Follow along. Ben, welcome back to the show.
How nice is it to finally be on here alone, get away from Batnick, and finally let you talk, you know? We can finally do this unshackled.
Yeah, it feels like I have a separation. I'm a new man.
Let's dive into the book, man. You know I love it cuz it's part history, part get your act together, you know, how ways to invest. Um, kickoff question: you talk about first there's a secret to investing. You want to reveal it to all of us, the holy grail?
It is funny because I feel like when you work with wealthy individuals, they like know intuitively that there is no holy grail, but they're kind of like, 'Yeah, but just between us, like what is it?' Right? And uh, yes, my secret is there is no secret, of course. But like getting back to the strategy we talked about, the big thing for us is, you know, just rules-based is the thing. I think that is like the unlock for a lot of people to make your life easier. But the point is, you studied all the strategies in history like I have. You have your whole book that looks at the different strategies, right? There's nothing that works all the time. It doesn't exist. If there was something, everyone would invest in it, and then it wouldn't work, right? If that thing existed, if it sounds too good to be true, it probably is. That's like the words to live by.
We did something kind of similar. We were talking about like strategies that work. And these are just basic allocation strategies. So, the dispersion, one would think, wouldn't even be as wide between, say, 60/40 and endowment or risk parity and global market portfolio. But the spread between best and worst average like 20 percentage points a year.
And for an allocation strategy, I mean, that may as well be just, you know, miles and miles for you sitting next to your neighbor. My neighbor's like, 'Oh, I got all this in gold.' Or like, 'Well, I got all this in tech stocks.' And so, but like you said, they kind of flip-flop back and forth. But we looked at something called the, you know, if you had just perfect foresight for the last 100 years picking stocks versus bonds, and you got it right every year, crystal ball, you only did, quote, only 20% a year. And that's with like the perfect future telling. But the funny part is that if you flipped it, and you picked the exact wrong asset every year. So, meaning, you know, the years where stocks go down 30, whatever, you don't lose money. Which is crazy to me is like you get it wrong every single year, you pick the worst choice, and you still make money. The funny part about that to me is always that, and yet people find a way.
Yeah, they find a way to lose money. It's even worse than the crystal ball.
That leads me into your most popular post, Bob, the world's worst market timer. Tell us about Bob.
I started my blog in like 2013, and it was right when we just hit new all-time highs again after the great financial crisis. Remember, it took like 5 or 6 years to hit all-time highs again. And people weren't — you'll remember, people weren't celebrating back then. People were going, 'Oh my gosh, I remember the last all-time high. It led to a cliff.' Yeah, it led to a cliff. And is this going to be that again? And I said, 'Okay, fine. Let's say it is.' You know, it's funny, we've been in a bull market since then, like, you know, over a decade now. And you think, 'Okay, fine. You only invest in all-time highs. What would it look like?' I ran this thing where I said, 'All right, this guy saves all his money in a checking account, and he only puts it in at all-time highs, right?' He did it in 1973-74 bear market, which is probably one of the ones that's lost to history. It was like it was down 50%, but after inflation, way worse than that. Right? Bonds got killed too then. And then he does it for the 1987 crash, stocks fall 30% in a week essentially, 20% in a day, dot-com bubble right before it busts, and then the great financial crisis. Like, how did he do? And I actually had Nick Maggiulli run the numbers for me. Like, the whole point was he ended still up a millionaire cuz he just kept his money in stocks all the time, right? He didn't sell. But I think the IRR was still like 8% per year or something. It was actually really, really good. And the point was, yeah, if you have a long enough time horizon in something like this, you're going to do okay still. I also looked at it in my book, 'Okay, what if he just held cash and bought at the bottom?' How much does it — like, he bought at the bottom of all four of the worst crashes in history. And the results improved, but you're still better off actually dollar-cost averaging than like sitting on cash and waiting to buy at the bottom of a bear market. Cuz those huge bear markets don't happen very often.
For a long time, we have investors always who are asking — they have a position, and it could be anything. Could be SpaceX, could be stocks, could be gold, or they don't have a position, and they always want to think in binary terms. Should I get in? Should I get out? And the amount of stress they have, or they're starting a new account. Say they're rolling into the Porterhouse strategy, and they're like, 'Well, uh, I just, I want, I want to like — should I wait 6 months? Should I do it now? Should I do it in a year?' And we always sit down with people and we say, 'I'm going to give you the correct answer and then I'm going to give you probably the correct answer mathematically and then the correct answer for you.' Correct answer mathematically is invest it all now. Like you said, talk about the dollar-cost averaging. The math on a 9% return versus, you know, a 4% return, whatever it is on cash, you know, is going to play out over time. I said, 'Now the correct answer for you personally is probably diversify the outcomes and just maybe, you know, go in over the course of a year or do something similar.' Emotional hindsight regret is really hard to get over, and so thinking about even investing at these peaks, it worked out just fine. You just had to — big asterisk — you just had to hold it for a little bit.
Had to have the time horizon. And that's like the whole, I think, big picture point of the book is that like defining your time horizon is everything for any investment. Doesn't care what asset you're in. You have to define how long you're planning on holding it for. Like I think the best example of like currently is the private credit stuff that's going on. Like I'm not smart enough to know what's going on in the books of those private credit funds. And it's funny that seems to blow over and people aren't worrying about it as much anymore for some reason. It'll — if it is another headline, people worry again. But the biggest takeaway for me is that all the advisors who rushed in to put their clients in it because they had these high yields and then rushed out the first sign of pain was they didn't define their time horizon. Like this is a 7 to 10 year holding period. That's like the term of these bonds. That's how long you should be investing in these for. Not like, 'Oh, 18 months later we're going to get out of here as quickly as possible.'
This is sort of the number one disconnect in our entire world, and we posted a chart to Twitter, and this is from Virtus, and they did a little piece where they looked at funds in Morningstar that were in the top quartile. So, everyone's dream allocation: I pick an active manager, I pick a fund, and it beats everyone, beats 75% of people over a decade. Like that's what everyone's searching for. Every institution, right? They want to be top quartile. And then it looks at the time it spends in the top quartile, top half, bottom half, bottom quartile over rolling periods. Rolling one year, this fund is only in the top half about two-thirds of the time. That means one year in three, you're going to be in the bottom half. And if we know anything about mathematics, you know, and averages, probability, one in three means you could easily have one, two, three years in a row. And ditto for even the rolling three, rolling five years. And then on the rolling five years, you're only — so the top quartile fund that's in the top over 10 years on a rolling five-year basis, you're only in the top quartile half the time, 53%, which is astonishing, right? So you would assume it would be much higher. But really, and this is almost like an old Vanguard sort of thing, is like you just have to be in the top half and not spend a ton of time in the bottom half or bottom quartile. So the phrase they had was winning over time doesn't mean winning all the time, which I thought was such an interesting way to put it, but it applies to stocks, it applies to asset classes too.
It's interesting because any win rate above 50% in the markets is pretty good, right? But everything has periods like this. Even the best factors in the world, you've looked at them. If you can get like, I don't know, 60, 70% win rate over like three, five, 10 years, like you'll probably take that. That's pretty good. Uh, the same thing with the stock market. Like the good news is that the win rate for the stock market goes up the longer you hold. I say that the stock market is the greatest casino ever created. People always say like the stock market is a roller coaster, that kind of makes sense. But people who say the stock market is a casino never made sense to me because the longer you sit at the blackjack table — listen, I consider myself a pretty good blackjack player. I follow the rules, right? I follow the rules. I probably won more than I've lost. But the longer I sit there, the higher the odds that I'm going to walk out a loser cuz the house has the edge. But in the stock market, it's different. You actually have the edge if you hold for the long term. In the short term, the odds aren't quite in your favor as much as you think. I think I calculated it's like 53% or 54% of trading days are positive, meaning like 46%, 47% are negative. So it's closer to a coin toss on a daily basis than you would think in the stock market. And obviously, the longer you hold, the higher your odds of success historically.
You talk about this in the book, and the reason I love reading your writing is you got a lot of great stats. I mean, I think — and I'll get this totally wrong, so you can correct me — but I think you ask a lot of people, oh, you got this traditional 8%, 9%, 10% return in the stock market. What's the average up year? What's the average down year? And I think most people are shocked. The average up year, if I remember, is like 21% or something. But it's way more than — and I think the average down year is like minus 15 or something. So the short-term variability matters a ton. You have a great chart, asset class volatility by holding period. And to me, this is a huge insight unlock because, you know, in the one year, there's like anything can happen. Stocks are four times as volatile as bonds. And there comes a day when it gets to the real inflection — is it about 20 years? But really, it starts to dampen at the 10-year rolling returns, where stocks and bonds have roughly the same volatility. And that is such an eye-opener, I feel like, for so many people. And at 30 years, it's actually even lower. It's like, what a weird takeaway that is. Maybe talk to us a little bit about again kind of like thinking in terms of returns and volatility over these long, long periods.
Yeah, it kind of hurts your head a little bit. Yeah, that stat you gave about every year — yeah, I think it is like 21% average up year. My favorite stat is there have been, in the last 100 years, more 20% gains in the stock market in the S&P 500 than down years. So, you've been more likely historically to have an up year of 20% or more than a down year, which is pretty crazy. And of course, that sort of 8, 9, 10%, whatever the long-term average is, it basically never happens. It's happened like three or four times historically where the number has even been in like the 8 to 12% range. It's almost always much higher, much lower than that. Like, it's funny all the big years we've been having recently, right? 2022 was down almost 20%. Then we've had some up 20%, up 30% years. That's actually more normal than you think. But yeah, this is actually surprising me, the 30-year return. Or if you look at the variability of returns, it really like the line smooths out the longer you go out for stocks. And it's not a wide range of results over those years. But of course, over a one-year period, like the range — you can drive a truck through. And that's our part. You can tell me what you think about this. I think it's never been harder to be patient as an investor than it is today. And part of the reason is there are just so many great strategies to invest in now. The amount of strategies that individual investors have in ETFs today that would just blow your mind if you showed them 20 years ago. Like, you can invest in that strategy in a tax-efficient wrapper for that cost? Are you kidding me? And not pay two and twenty? It's unbelievable. And so, I think the fact that investors have so many more options makes it way harder than ever to just stick with something and not try to tinker and change and like, 'Well, why don't I have some of this? And why don't I put some over here? And why don't I change to this?' I think that's the hard part these days.
Which is why I think we need a big fat bear market to wash out all the nonsense.
I was just at this tax conference and having a lot of fun because first of all, let me say the intelligence and sophistication level of all the investment people in the tax world — if you're not in that, you know, you need to level up because my god, these people, the regulators have no chance. Like they're the smartest group of people, but it was everything from 351s to tax long-short direct indexing to, you know, all like 50 other things I never even heard of. And we got to the end and I was on a little fireside chat with our buddy Dave Nadig and I said, 'There's one thing that everyone, you know, we've talked about everything, but nobody's mentioned is the best way to clean out these taxes.' And everyone kind of leans in and I was like, 'A nice fat bear market.' You know, like that cleans out all the capital gains.
That's like the new alpha these days is the tax thing. That's what everyone is coming to. As you mentioned, like 351 exchanges, there's the long-short stuff now, there's the direct indexing and all that stuff. But yeah, we tell people, 'Listen.' Because people — the biggest problem, it's funny, the biggest problem people have these days for wealth as far as wealth management clients go is, 'Hey, my capital gains are too big. Help me diversify out of them without triggering too many gains.' And what we say is like, 'That's obviously a bull market problem.' And it's like, but the great news is you won the game. You have these huge gains. Like this is not a problem per se. Yes, we're going to try to help you manage it, but you're right, that is a bull market problem. But that's where people are trying to find alpha these days. People have said, 'All right, fine. I know beating the market is really hard to do, but I know that the tax side of things, I can kind of control that better.' It's funny, people are coming like asking for that as a source of alpha or edge or whatever you want to call it these days, the tax side of things. It's a huge — I think that's one of the biggest changes I've seen in the 2020s in the space.
Let's start talking a little bit about — and you can kind of pick and choose which one you want to start with — any of these periods that were a problem for investors over the past 100 years.
I mean, I think the '70s is pretty apt for today. Uh, the inflation we're seeing now...
Were you born? We're kind of the — you're close to the same age or a little younger, I think. What's...
Yeah, I was born in '81, so yeah, I was born right at the height of mortgage rates, I suppose.
Yeah, so you didn't experience this, but you're a student of history, so let's talk about the '70s.
Yeah. That's funny. My dad tells me like inflation was so bad that to keep up with wages in like the late '70s, his boss gave him a raise twice in the same year once because people like their wages were having a hard time keeping up.
He's like, 'You're not even doing a good job, but we got to just give you some, you know, some comp.'
But it's funny, like as someone who studies not only history but the behavioral side of markets, I think I was surprised and probably underestimated the shock people would have from high inflation, is because we haven't seen it so long, right? It'd been 40 years since we had inflation that high. People lost their minds and freaked out, were so angry. And it's almost like we thought we ironed out that risk and then it came roaring back and we're like, 'Oh my gosh.' It became a political risk. It became obviously a bottom line risk for a lot of people, personal finance risk. People try, you know, it became an investing risk because we had to jack interest rates up, right? And it caused a bear market. And so I think that one is interesting. Inflation has been high this decade, but nothing like it was in the '70s. For the whole decade it averaged 8%. It never once came in below 3%. It was double digits multiple times.
Listeners, think about this just for a second. Mentally picture the amount of wailing that everyone does about your mortgage going up to 5, 6%. Now picture that mortgage being 10, 15, 20. Now realize people still bought houses, they still took out mortgages, and think about your mortgage payment at 10, 15, 20. And yet the world carried on. Like, I mean, that's — I don't even know how many people could even fathom.
Take away like gold and commodities, and that's like the stuff that people could actually invest in back then. Housing was the only one that actually beat inflation. Right? Because the cost of everything went up. It was the only decade I could find on record or last 100 years where cash, which is T-bills, bonds, which I used the 10 years as a proxy, and then stocks all underperformed inflation. It's the only time I could find where all three asset classes lost out to inflation. That's how bad the '70s were. And T-bills were actually your best place to be as far as those main building blocks go because the short-term rates jacked up quickly enough, you know, because of the inflation. So, yeah, that period is kind of lost in history. Plus, you had — not only were returns bad, you had, like I said, a 50% crash, you know, in the mid-'70s to boot. And then everything after inflation was just, you know, that period was nasty.
Thinking about inflation, and you've seen it in little areas, right? Where people talk about, you know, inflation in eggs, where people very specifically can feel it in one area. Eggs, I think, have gone way down again, but one of the problems, particularly with the stock market, and you have a great chart on this, is inflation has a huge impact traditionally, historically, on stocks and the valuation multiples and what people are willing to pay for an inflationary environment. Inflection point, it seems on your chart, like 5%. Is that where it starts to get pretty painful?
Yeah, that's kind of what I found. Yeah, and Buffett wrote about this in the late '70s. He said like if you think about the ROE on stocks as like a perpetual bond, it actually makes sense that in the short run, inflation would eat into that. And that's why the stock market doesn't like high or rapidly rising inflation. I think the volatility of it, too, is the thing that really gets people. Like the fact that inflation was so volatile, you know, I think if we're — let's say we're in this new world of higher inflation, like 3% is the new 2%, right? We had 2% inflation for the 2010s, pretty much. Let's say now it's three. I think if it's three and it just stays constant, that people can be fine with that because it's easier to plan. It's the volatility of it, right? And it went so quickly from essentially zero coming out of the pandemic to 9% in, you know, 18 months or something like that. I think that's the thing that really shocks people. It's when that stuff rises really rapidly. And so it's not only high inflation, but it's rising inflation from one year to the next where stocks tend to underperform.
We found this to be true everywhere as you look at kind of valuation. I think going back to Rob, he called it something like the PE mountaintop or something. Where this is kind of warm, cozy zone where we're still in the US, but as you tick above that certain level, 4 or 5, 6, you know, people start to get that PTSD from things like the '70s. And as been mentioned, there's not much that worked in the '70s. Gold helped. I think value stocks did okay.
Yeah, international stocks did good because Japan was rocking. So there were some things, but for most people it was a dreadful decade for most assets.
Yeah, on an inflation-adjusted basis.
This is a good lead into Japan. Now do Japan, Ben. Let's hear it.
You know, I actually asked my publisher if we could call the book Now Show Japan. They didn't really like the inside baseball of that joke.
You should have just done like an alternate cover. You just do a couple covers. You do one...
Tell them, 'Hey, listen, if we're going to sell the rights for the Japanese version of the book, I want it to say Now Show Japan on there somewhere. It has to.'
That's a great idea. No, they'll just put like gold coins on the cover. Any of their international books, they usually have...
Yeah, you're right. They're brighter, aren't they? The thing is...
There aren't — that is, as far as I'm concerned, it's the biggest bubble in history. And I think you did this originally, and I think I might have stole this idea from you, to show the peak valuation in Japan versus the peak valuation of the dot-com bubble. So I found the CAPE ratio, I think Barclays has this. And it was 100 essentially for Japan in 1989 versus 45-ish or something for the dot-com bubble. So like the biggest bubble we've ever had in history just pales in comparison to Japan. And it wasn't just the stock market then that was trading at 100 times earnings. It was the real estate sector, right? There's the whole — there's a story where the Imperial grounds in Tokyo, that one area was worth more than the entire Canadian real estate market. And then the entire real estate of Japan was worth four times as much as the United States real estate value. And you know how — you know Japan is obviously a lot smaller than the United States, not as many people. And Japan as a culture, they have this thing where they're very conservative by nature. They don't have a history of asset booms and busts like we do. So this was like very rare for them to see. And it's interesting, there aren't that many books written about Japan.
They had no natural immunity. This came along and they're like, 'Oh, wait a minute. This is amazing. This is super fun.'
But they tried to say like, 'Listen, the real estate thing, it's not the buildings, it's the land, and we don't ever really sell these houses and stuff, so it's fine.' But guess what? People borrow against that stuff. You know, they were jacking up art prices in the country clubs for golf clubs where like the memberships are going crazy. And so all these stories of Japan. To me, that one's one of the most fascinating in history. So anyone — people always throw that in my face like, 'Hey, Japan peaked in 1989 and it didn't hit new all-time highs again until 2024. Like how can you be a long-term investor when a situation like this exists, right? This is the exception to the rule. This is the outlier.' And my whole thinking is, yeah, I don't think you can base your investment strategy entirely on outlier events. Because if you just pick the outliers, you're never going to invest in something to begin with, because there's an exception to every single rule, right? Everything has downsides. But my favorite stat is, so Japan went from 15% of the world stock market in 1979 to 45% by 1989. So it was bigger than the United States. Japan was a bigger market cap percentage in 1989 than the United States was. Which is kind of crazy because the US was up like 17% per year in the '80s. So it's not like it did bad. But even if you include Japan in that index and you invested in the ACWI, right? The All Country World Index in 1989, over the next — all the way through the end of 2025 or something, you did 8% per year or something. Inclusive of the world's biggest stock market at the time going nowhere. It went from 45% in the index to five. That included that bad outcome. If you still invested in the world, you still did not so bad. So, my point is, like even with that bad piece in there, over the long term, you did okay.
Everyone hears what they want to hear. My takeaway from that is, you know, diversifying globally, having a home country bias can get you up the river and be big trouble. But everyone else hears something different, you know, they hear, 'Oh my god, this is why you got to use valuation.' Other people will say, 'Well, no, this is why CAPE ratio doesn't work.' Other people say, 'This is why you got to use trend following.' This is why you — on and on and on. But the history lookbacks I love doing with investors because I think it's useful. And I was like, you know, imagine telling someone at the peak of this romping, stomping bubble in Japan, 'Hey, guess what? Your stock market's going to go from half to five.' They'd be like, 'There's no scenario as a percentage of the world.' Right? Like it's unfathomable. And so, at least coming up with these, and the one we did also recently was imagine post-Korean War telling, you know, a bunch of Brits that the Korean stock market, and not just half the country by the way, is going to be bigger than the UK stock market. They'd be like, 'Bro, what are you talking about? You're crazy.'
That's like my biggest takeaway from studying market history. It's not that it can help you predict the future, but it just shows you how surprising outcomes can be. There's no way if you would have had this information at that time you would predict it because who in their right mind coming out of 2009 would have said, 'The US is about to embark on a 16-year bull market that is going to come close to rivaling the '80s and '90s.' People would have said you're nuts. Like it was supposed to be the new normal. Everyone was predicting there's going to be lower than average returns. I'm sure I was one of the people saying this. Like, 'Hey, temper your expectations. There's no way.' And now we've been on this bull market for a decade and a half and no one at the time could have possibly foreseen it.
Well, it's getting closer to two decades, Ben. The years are peeling away.
It's nuts. And we haven't had a real recession. I mean, the COVID one doesn't really count because we just kind of turned the Nintendo off and turned it back on again and threw a bunch of money at it. So, that one — we haven't had a real recession in close to two decades as well. And that's another thing with the inflation that we talked about before. Like, how are people — the sentiment right now is as bad as it's ever been. Like if you look at the U Mich consumer sentiment whatever. How are people going to react to an actual recession? It's like people are in a bad mood now when we don't have a recession. What are they going to think of when we actually do have one and people lose their jobs and it's like real bad stuff?
The hard part is thinking about, all right, people are listening to this. They say, 'I get it. Okay, the US has had this monster run. I want to immunize myself from being my own worst enemy, from a bunch of dipshittery, all these ETFs that I keep getting seduced by these 3x ideas.'
What do I do, Ben? Like, how do I think about, you know, when I'm in it? When I'm in the drawdown or I'm in the two years down or whatever, how do I think about it? What do I do? How do I protect myself? How are you?
