The Buys You Can’t Make Yourself

One of the primary benefits of investors removing themselves from the investing process is that there are some investments they simply cannot make for themselves – even if, intellectually, they know they should.

Everyone recognizes the benefit of owning cheap stocks and not owning expensive ones – but the amplification of trends and investment themes in the financial media drives people to do the exact opposite. Coupling this tendency with the kind of surface insights civilians receive about the world at large from their local newspaper coverage or Facebook feed, and you get a recipe for the quasi-informed investor to act against his or her own interest when allocating assets. “No, I don’t want Europe, I hear it’s bad over there,” and “I better buy a lot of China, they’re taking over this century.”

My pal Mebane Faber is out with a new ETF that may be of service to both investors and market professionals who have trouble allocating globally – either due to lack of understanding  or because career pressures and “optics” make this sort of thing a risky proposition. He’s called it Cambria Global Value (GVAL) and it’s the product of his recent work on country CAPE ratios and the importance of avoiding asset bubbles via price-aware stock selection.

He’s gotten a bunch of good coverage since the launch, I particularly liked this exchange with about naming the product itself… Your ETF invests in the 10 or 11 cheapest countries, or those that have been really beaten down. We were debating the other day whether it should be called the “Terrible 10 ETF.”

Faber: That’s funny. But this is an important point, and it ties in to why the strategy works. When you’re investing in the cheapest valuations—Greece at 4 and Russia at 6—you’re invariably investing in markets that have already declined a lot. Valuations correlate very highly with drawdowns. The most volatile part of the price/earnings ratio is the price, how much things have moved. Many of these markets have declined 40, 60, 80 percent at some point, so you’re investing in what many would consider to be terrible markets.

Usually these declines are consistent with terrible geopolitical headlines. Think of Russia right now. But if, behaviorally, no one wants to own these individually, imagine the career risk you would be taking if you were an investment advisor and you were going to people saying, “We should be buying Russia and Greece.” You’d probably get fired. That’s one of the reasons value investing works.

The problem with calling it the Terrible 10 ETF, of course, would be that it would be challenging for an advisor/investor to buy these names. “Global value” to us seems a lot more tolerable.

Josh here – There’s something to be said for having an advisor make the buys that an individual simply can’t make for himself. That one degree of separation could mean the difference between a successful portfolio or a portfolio that “looks” good now but is destined to underperform due to its popularity-based weighting.

Head over for the whole interview, Meb’s one of the sharpest guys I know.


Faber: Own Most Beaten-Down Stocks  (ETF)

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