Episode #506: Radio Show with Corey Hoffstein: Roaring Kitty, Bitcoin ETF & T-Bill and Chill – Meb Faber Research

Episode #506: Radio Show with Corey Hoffstein: Roaring Kitty, Bitcoin ETF & T-Bill and Chill

Guest: Corey Hoffstein is co-founder and chief investment officer of Newfound Research, which offers a full suite of tactically risk-managed ETF portfolios.

Date Recorded: 10/25/2023  |  Run-Time: 1:30:20

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Summary: In today’s episode, Meb & Corey talk about whether topics are overhyped or underhyped:

• Bitcoin ETF recent news
• BlackRock launching Target-Date ETFs
• The death of the 60/40
• T-Bill & Chill
• The Magnificent 7
• Dividends

They also talk about Roaring Kitty pitching us to come on the podcast in summer 2020 to discuss GameStop, my never ending job application to CalPERS, and more.

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Links from the Episode:

• 1:16 – Welcome Corey to the show
• 3:43 – Evaluating the Bitcoin ETF
• 6:59 – Evaluating Blackrock ETFs
• 11:05 – Direct Indexing
• 13:18 – Why the death of the 60/40 portfolio is over-hyped
• 16:43 – T-Bill & Chill
• 33:18 – The risk of the Magnificent Seven stocks
• 41:04 – Evaluating the merits for Dividends Investing
• 43:04 – The risk of the rise of passive investing
• 46:07 – Weighing in on the Rational Reminder Podcast quote: “Investing is solved”
• 56:22 – Meb’s game plan if he becomes the CIO of CalPERS
• 1:02:35 – What the modern 60/40 portfolio looks like
• 1:10:55 – Simplifying your investment strategy
• 1:16:45 – Future areas in investment that are of interest
• 1:23:50 – Why The Richest Man in Babylon is the best investing book for a high school student to read
• 1:28:05 – Why office space is under-hyped
• Learn more about Corey: returnstacked.com

 

Transcript:

Welcome Message:

Welcome to, The Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing, and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer:

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.

Meb:

Welcome my friends. We have a fun radio show today with guest co-host, Corey Hoffstein. In today’s episode, Corey and I talk about whether investing topics are over-hyped, or under hyped, such as Bitcoin ETF News, target-date ETFs, the death of 60/40, T-bill and chill, the magnificent seven, and dividend income investing. We also talk about Roaring Kitty, my never ending job application at CalPERS and much, much more. This might be our longest episode ever. Stick around, I promise. It’s a lot of fun. Please enjoy this radio show with my bud, Corey Hoffstein.

 

Meb:

Florida man, welcome back to the show.

Corey:

Thanks for having me, Meb. I feel I need to do a little intro here. I’m coming in, and I’m bogarting my way into hosting your podcast for you.

Meb:

We’ll see how that goes. The listeners, what you cannot see for those listening this in their earbuds and not on YouTube is, we have our news studio here in Manhattan Beach, which we’re trying out. I don’t have the same neon as Corey does, but I do have a hat which I can wear, which is probably limited edition collection now. I don’t know how many of these have been made if it’s a-

Corey:

They’re so limited, I don’t even have that hat.

Meb:

It’s a Pirates of Finance hat, which seems to be on sabbaticals. The boat been Lost at sea? What’s going on man? It’s my favorite show.

Corey:

My co-captain Jason Buck went to Europe, spent some time in Europe this summer, came back and said, “Yeah, I’m not doing this anymore.”

Meb:

Decided to sell rugs again in Turkey. Is he following our former guest, Mohnish Pabrai was chatting up Turkish stocks, or was he just crisscrossing across the continent?

Corey:

I think it’s just one of those. Jason is a busy man, and trying to make it work in our schedules every Friday, particularly coming up with the content ourselves, and not being guys who really care much about the existing macro environment, really was not a great mix for a show. It was definitely one of those situations, it was just a matter of time before we got canceled, so we decided to cancel ourselves.

Meb:

I’m ready and willing when you want to spin it back up, and we’ll make it a trinity of people, or add a fourth, make it like the, let’s call it something like, The All In podcast. What’s that? No, sorry, The All Out podcast, the macro crew.

Corey:

That’s all right.

Meb:

Anyway, so today listeners, Corey said he wants to do sort of a, I said a PTI style show. So I’m going to try to work in two topics, I want to talk about, and Corey is going to do his thing, and as usual, these go off the rails. So do you want to kick it off?

Corey:

Yeah, so my idea here was to actually flip it on you, and start to ask you about some current topics, get your view as to whether they’re overhyped, under-hyped, or appropriately hyped, and why.

Meb:

Okay, that’s like second order. So it’s sentiment relative to the base case.

Corey:

You take it however you want. So some of these are going to be easy. Some of them, I think we’ll see where they go. So let’s just start with the layup one I think, which is Bitcoin ETF, overhyped, under-hyped, appropriately hyped.

Meb:

It’s certainly overhyped. I love to tease on Twitter. One, because I like looking back the fact that I’ve wasted 10 years of my life being on that app. But there’s a tweet from 2013 that says, because there was hype back then, said, “There’s no way a Bitcoin ETF is going to be out by the end of the year. I’m willing to bet anyone dinner, I prefer sushi.” I retweet that every year because I would love to see a Bitcoin spot ETF, first of all. I think the futures one is totally fine by the way, but I think over the past decade, the amount of money and lawyer bills, I said, I don’t want to spend millions dollars on legal bills because there’s no way this is coming out anytime soon, and it’s been a long time. So I’ve been a pleasant cheerleader, but certainly, my, God, the amount, our buddy, Phil Bach was pouring cold water on all the Bitcoin bulls where he’s like, “This DTC number really doesn’t mean anything.”

Corey:

I’m laughing. I tweeted something about Eric Balchunas, and the last thing I ever would’ve guessed is that Eric Balchunas was moving crypto markets, but he is. He tweets something, and all these people now follow him for the latest news on the Bitcoin ETF, and it’s moving Bitcoin.

Meb:

I’ll tell you something funny, I have no crypto exposure other than a handful of startup investments in that world, but my guess is it doesn’t come out until Q1 next year. I don’t think 2023. I think that ship sailed. I think 2024 is probably the year.

Corey:

I think there’s some pending legal cases that forced the hand of the SEC at that point.

Meb:

There’s 20 different shops coming out, and what I said a long time ago, I said crypto, and I said, by the way, a lot of FinTech is just Vanguard, but with higher fees. Show me a FinTech startup in the past 20 years that isn’t just Vanguard with higher fees. I think you as well, to an extent. So many of these that are democratizing investing, whether it’s wealth, Robinhood is the worst offender, certainly Wealthfront, Acorns, a lot of these that have this noble mission messaging, and then you look through what they’re doing, you’re like, “Well, actually this is predatory in many ways.”

So I challenge any FinTech startup to say, “Why are you better in Vanguard?” People are always saying, talking about the disruptor. I was like, “Look, Vanguard is a high bar to beat on many of these ideas.” So anyway, I’m a sidelines’ cheerleader. I hope. I was telling one of my buddies who remain nameless, I said, “You’re in this queue, will you please just launch this for 10 basis points?” And just middle finger, BlackRock and all these others. They’re going to be doing it for 80 basis points. I don’t know why crypto, which is supposed to democratize a lot of different things isn’t low cost. Coinbase, my goodness, is a massive feature. Anyway, this is going to take four hours. Next topic.

Corey:

Well, I presume, who knows, BlackRock I would hope have done some pricing studies, and I hope they actually have a good understanding of what it’s operationally legal costs. Who knows, but okay, next topic. So on the topic of BlackRock. BlackRock recently announced that they are relaunching, this is something they had launched and closed a while ago, a suite of target date ETFs, overhyped, under hyped, appropriately hyped.

Meb:

We almost did this and I talked about it for years. In fact, I was to the point where we had lined up, I don’t want to compare myself to Chamath, but do you remember how Chamath, when he was doing all these SPACs was doing the letters of the alphabet? I said, “You could do TDF for target-date fund, A, B, C, D, E, F, G, H, I.” And the cool thing about target-date funds is, A, people mentally bucket this in a way that I think they behave better for whatever reason. So if you had these, hopefully people may not chase performance. I think they still will, of course, but I think there’s a shot that these might be better. On top of that, and the ETF wrapper, taxable assets, I’ve learned over the years, and we’ll put this in the show notes listeners, but taxable assets are actually a minority versus the massive amount of tax advantage accounts, which was a learning, I didn’t know certainly five, 10 years ago, but that having been said, an ETF for a target-date fund would be a better product than other structures.

Particularly, I’ve learned over the years as many of these platforms try to extract the massive amount of fees and conflicts, I could tell stories this entire hour where all the plumbing of the mutual fund world, they’re trying to now do it to ETFs. And Vanguard usually says pound sand. So a lot of these platforms are scrambling to try to figure out a way to extract their pound of flesh from these funds. But anyway, I’m hopeful. So under-hype. I’m trying to do these in a shorter version than blathering for 10 minutes. So under-hype. But I don’t know if anyone will care, by the way. They have a massive marketing engine, but I don’t know if any investors will actually show up, but I think their allocation funds have been mildly successful.

Corey:

Well, I’ll give you my thesis here, which is that it’s a product with no obvious buyer. The people who are allocating to retirement but don’t care about investing typically just go through their QDIA and their 401k plan, or they have a pension. But they’re not choosing an ETF. That’s the mutual funds exist in the 401k plan. Then you have the people who are interested in investing on their own. This is the direct consumers you can market to. They like to tinker too much. They don’t want an all-in-one solution for the most part, unless they’re the Bogleheads who then just do the three fund solution, and I’m not sure this solves for that. And then you have financial advisors who most financial advisors, there’s an optical problem if they allocate their client to a single ticker. So other than solving maybe for the small account-

Meb:

It’s called the ‘what am I paying you for problem.’

Corey:

Exactly. So I look at this as an interesting product without an obvious buyer. I think that’s why multi-Asset ETFs have and will continue to struggle. I hope I’m proven wrong there.

Meb:

There’s an app opportunity. I would love to see an app that’s basically Acorns, but without the fees that would almost just allocate to an all-in-one fund, and that’s all that it did. It could have two if it needed to somehow tax loss harvest at some point, but basically just switch out, and that’s literally all data, one in, all in one because people would almost mentally bucket that as savings versus maybe investing. I’m not sure. Anyway, there’s an idea for you listeners, but what you touched on is the so many funds and product pathways have this not product end investor fit, this product advisor fit, which is why you’ve seen so many conflicts of interest where these advisors in old school brokerage world obviously is much more obvious where people would churn accounts, because they would get the commissions. Or you have these various structures that incentivize people to do things aren’t in the end investor’s best interest. I think that’s becoming less so these days. But the question even direct indexing to me is a big one that has product advisor fit, but usually not product investor fit.

Corey:

You hit on it. That’s where I was going next. Direct indexing. Overhyped, under hyped, or appropriately hyped?

Meb:

I think it’s overhyped. Look, I think if you do the two columns of things that are totally fine to invest in, and things that are absolute runaway. There’s not much overlap in the Venn diagram. There’s some in the middle, but I think it’s in the totally fine column. Now, it’s something that’s been around for going on 30, maybe 40 years now, and it’s a giant space, but I think there’s nothing in there, and I’m obviously slightly biased, but that an ETF doesn’t solve or do better. A good example, I was talking to somebody the other day, I said, “Look, again, it’s in the fine column if it’s done reasonably without a ton of crazy fees and generating some of these Robo-advisors got dinged for doing a bad job of tax loss harvesting and mucking it up and they got fined for it.” I think both of them, Wealthfront and Betterment did, getting these super complicated tax reports, but they don’t do other things like short lending to my knowledge, where NETF could generate 10, 20, 50 plus basis points of return, other things like that.

Obviously it’s not risk-free, but I think it’s in the fine column, but it’s something that advisors, there’s one use case in my mind that is good, which is ESG, which is, if a client is like, “You know what? I want this, but I have 50% of my money in Google, so I don’t want exposure to tech or whatever, or hey, just whatever, I do not want any tobacco stocks in my funds.” Or whatever it may be. I think that is a reasonable use case, but it creates different tax problems. It’s not saying that ETFs are perfect, but I think the ETF solution is on average better.

Corey:

I want to keep going down this hole. I’m going to switch it up a little bit. I want to talk about risks, things that people are sort of talking about, a little bit of fear in the market. And one of them, and I’m going to struggle to not laugh with this one because you will have heard this every year of your career, but death of the 60/40 portfolio. Overhyped under hyped, appropriately hyped?

Meb:

Overall overhyped, certainly probably under hyped during the last couple of years of this cycle. I’ll tell you a funny story though. We first published our GAA book about 10 years ago now, which is crazy. This book looked at all the asset allocation portfolios. It was risk parity, permanent portfolio endowment, 60/40. What else is in there? Buffet and Mark Farber, all these portfolios, and they’re all super different. The big takeaway from the book is, if you’re doing buy and hold investing, they all roughly ended up in the same place, meaning the decision to invest was much more important than exactly what you invested in because some had nothing in gold, some had 25%, some had 90% in stocks, some had nothing. Anyway, they all did fine over time, and they took a very different path to get there, which is why people chase these returns because in any given year, it’s like a 20% plus spread between the best and the worst.

That having been said, this book was published in, let’s call it I think 2013, maybe the data went up to 2014. So as you know in the past decade, S&P has just mauled everything. So the best performing portfolio in the book up to that point was the endowment style portfolio, very growth heavy, global diversification. I think, and it’s probably not true now because of last year, but I think since then, the Buffet style, which is literally just S&P, 90% stocks, 10% T-bills would’ve been the better performer. I think you had the longest period in history. We actually took it back to the 1920s. If I ever get around to doing a second edition of this book and showed that this was the longest period and every financial advisor listening this, is going to feel very personally offended by this comment where, or personally a little PTSD where all the portfolios in the book, with the exception of the Berkshire Buffett had the longest stretch of underperformance versus the S&P in terms of losing years in a row plus magnitude of underperformance in the last a 100 years.

So I think it was until last year, every year and the magnitude. So sitting down as a financial advisor, you had to say, “Why do we own bonds? Why do we own foreign? Why do we own real estate? Why do we own commodity? Why do we own anything other than SPY for about a decade?” So I think now that bonds, it’s like the bonds have reset, this is Christmas for retirees and people that like income. You got a 5%, everybody. My last six months has been conversations with everyone just like, “Why don’t I just T-bill and chill?” It’s got this magical 5% yield. We started doing some posts on polls on Twitter about tips, and what yield, or what real yield would you just mail it in, and say, “Look, I don’t need stocks if I’m getting 5% real. Are you kidding me? I’m moving on.” But people were still very attached to their equities. I think the sentiment is certainly still pretty high for this sort of all in on stocks at any price, which has been I think the theme of this cycle.

Corey:

I love that you keep giving me a nice segue. You don’t know these questions that I have, but T-bill and chill-

Meb:

Jordan, I got two to talk to you about. I’m trying to figure out when to work them in.

Corey:

I’m going to keep going until you force it in. But T-bill and Chill was on my list, so let’s go there. T-bil and chill. Overhyped under hype, appropriately hyped?

Meb:

I think there’s two elements to it. I think the first element is under hyped in the sense that you’re getting a 5% nominal guaranteed return, what people consider to be the safest asset in the world on a nominal basis. Zero volatility. On the flip side is I doubt many investors, particularly the ones that had longer duration bonds, so 10 or 30 years, I don’t think anyone owns zeros, but maybe they do in Europe. Those suckers are at historic drawdowns on a nominal and real base, not necessarily real yet on some of them, but pretty massive losses. Most people would only really appreciate in terms of equities, or REITs, or commodities or something.

They don’t expect their bonds to go down by half. So I was questioning on Twitter. I said, “Why aren’t people more up in arms about this?” We know anything about investors is they lose their mind if something goes down 50%, and it doesn’t matter what it is, Bitcoin. By the way, going back to the first topic, I went on CNBC, and I said this a couple of times publicly, I said, “Look, if you want to invest in crypto, here’s an idea for you. As this gets murdered, think about dollar cost averaging in.” I said, “The best idea to do this for me would be GBTC.” I said it, when it hits 50, 60, 70, 80% discount layer in every 10%. I think it hit 49%. So it would’ve been the best trade ever in the world. I think it missed by one percentage point.

Now, the Ethereum, I think sailed way through 50%. I invested in neither of course, but I thought that was interesting. So look, I think there was a long discussion about the justification for equities mental, they don’t call it fed model, but investors in the serp nerp world of, “Hey, stocks are okay, things are going totally nuts because bonds are at zero.”

It’s weird. You don’t really hear the alternative to that much, although you see the flows in the money markets and return stack bond funds, and everything else. But you don’t see investors in my mind talking about it where they say, “Actually stocks are still okay and expensive, but hold on, bond yields are five.” So shouldn’t that matter at some point, and we’ll see if it ever does. But to me it’s an odd flip where people aren’t saying, “II can just chill out in five, and maybe they will. We’ll see. However, that does lead in to my topic.

Corey:

You’re worming your way in.

Meb:

We try to be anti-countercyclical when we launch these. So many of these fun companies, they chase whatever’s hot. So currently, what is that AI? You’ll see 20 of them launch the same fund, throw everything against the wall, and then they close their funds eventually if they don’t work out. It’s like a VC model for ETFs. We don’t like to do that, and so we try to launch them if they’re out of favor. The biggest miss in my career was having a long bond tail risk ETF that we didn’t launch. Now that interest rates have gone from zero to five, I kick myself every day because that fund would be doing great.

But as we started thinking about fixed income, and started thinking about a world where we would no longer be at zero, but maybe at higher rates, I was scratching my head and I said, one of the most predictable return streams, and if you look at things that like the US stock market versus valuation, and, Corey, will start to use phrases like R-Squared, and correlation and all these things. But if you just look at these broad indicators, a lot of them have an okay fit. And typically the longer time, if you use something like 10 year cape ratio, a lot of people say largely useless on a year, but 10 years it lines up, and you got a decent… You buy things when they’re cheap, you end up okay, you buy things when they’re expensive, less okay. But there’s no higher fit that I’ve seen than with starting bond yield nominal and return. So 10 year bonds, it’s at 2%, you’re probably going to get 2% return over 10 years. Is that a reasonable rough?

Corey:

Man, so it’s funny is I actually have an article coming out about this tomorrow.

Meb:

Oh, boy.

Corey:

That’s very topic because-

Meb:

So, it’ll be out by the time this publishes, so we’ll put it in the show.

Corey:

That’s a good point.

Meb:

What’s the title?

Corey:

Bonds Alternatives and Chill.

Meb:

Boy, let’s hear it.

Corey:

There is this rule, and for listeners, I’m using rule in air quotes called the twice duration minus one rule. It basically says that if you want to forecast the returns of a bond fund, and ideally this is a constant maturity bond fund. So you’re buying an ETF that gives you the seven to 10 year treasuries, for example, or the broad aggregate market tends to be constant duration, constant maturity. But the idea is if you look at the current yield or ideally yield to worst, and you look at the current duration, that yield is a really strong predictor of your annualized compound growth rate for that fund over a period equal to two times the duration minus one year’s, regardless of what happens with interest rates. So let me make that clear. Today, the AG is yielding somewhere around 5.5% and has a duration of about six, two times six minus one equals 11.

If I buy the AG today, and just hold it over the next 11 years, I’m pretty confident I’m going to get a 5.5% nominal annualized return, and that rule, regardless of what happens with interest rates. Because if interest rates go up, I’ll have some losses now, but it’ll be offset by higher income in the future. If rates go down, I get some gains now offset by losses in the future, and that two times duration minus one period mathematically works out to be about the period over which those changes average out. Now, it doesn’t work as well for super long-dated bonds. If you try to do it with 20 or 30 year treasuries, there’s a convexity issue, or high yield bonds get a little wonky because you’ve got credit risk issues, or mortgage backed. You have some issues with the embedded optionality, but for intermediate term treasuries, or investment grade.

Corey:

But for intermediate term treasuries or investment grade corporates, it’s a really tight rule. And so the article we wrote was basically saying, if I know I can lock in five and a half percent today in bonds, and let’s say even better, I can stack on something like managed futures where I think I can pretty confidently eek out a two, three percent excess return over the next decade. If I start to say that together looks like an 8% compound return with a huge part of that is I’ve got high degree of confidence in, is that a better take than equities potentially?

Meb:

Interesting. Here’s the thing I was noodling about the other day, and I’ve queried a bunch of my academic and practitioner friends and they oddly enough just kind of mumble and nod their head when I say this, but it seems to be like something that should be fairly well established in the academic literature thinking about. But that was also true when I was talking about kind of our non dividend yielding ideas, which still I can’t find anything in academic literature about.

So here’s my idea. As I was sitting there and we’ve done a lot of research thinking about the yield curve, talking about the yield curve. We have a very old post on the blog where we looked at the yield curve tend to just treasuries. And we said, how do various asset classes perform when the yield curve’s inverted, normal and steep? And at least historically on this, it was when the yield curve was negative cash, T-bills and gold did great. When it was normal, stocks all did totally fine And then when it was really steep, the traditional kind of spread investments like 30-year bonds or REITs particularly did well.

And that style strategy has actually held up quite well since then. But I was thinking about it with specifics just to fixed income, and I am going to make up these numbers, but listeners, you can probably extrapolate. Let’s say T-bills are 5%, which is roughly what they are. And then I said, okay, well what if corporate bonds yield 5%, you know. Triple A, would you buy them? I say, well, you can get kind of T-bill yield, why would you take that risk? What if corporate bonds yielded 4% and T-bills are higher? Why would you invest in corporate bonds?

Now if corporate bonds yielded 10%, it’s a totally different opportunity set. Now you could say the same thing for 10 year bonds, 30 year bonds, tips, REITs, mortgage backed. On and on and on junk merging because every so often you see things like corporate bonds just spike to the moon where these spreads blow out and you have the Howard Marx’ of the world that come in and buy a bunch of them and just hold them for a decade and write memos and become famous and billionaires.

And I said, could you systematize this to where you say, you know what, I wish I could have named the strategy different. I think it should have been T-bill and chill. I wonder if that… Do you think the SEC would allow that, T-bill and chill? They might get upset.

Corey:

The problem is unless you’re 80% of the time holding T-bills in the strategy, they’re going to say no.

Meb:

So here’s the strategy and you can poke some holes in it. The strategy is to sit in T-bills, and then you basically silo out how many ever of these different credit duration, I don’t know what you would call REITs, really types of premiums or risks and say, you know what, we’re only going to invest in these and the numbers are meaningless. But you can broad… There’s trading rules that I think would improve this. But let’s just say for example, we’re only going to invest in these when the spreads are above average or the spreads in the top third of history or top quarter.

So you could do something where say we’re only going to buy them when they blow out to the top third and hold them until they fall back below the top half. And modeling of this is actually pretty interesting. I think the sadness I’m having is like this should have come out two years ago because you would’ve been chilling in T-bills for the last couple years, as T-bills have come up and the rest of the bond marketplace is down 20 to 50%, whatever these various bonds are. What about that idea is… Poke some holes in it, tell me some thoughts on it and what do you think? T-bill and chill. Tactical T-bill and chill.

Corey:

Yeah, so in a different vein, someone who did something similar to this was Dan Rasmussen at Verde. But he did a callable fund, a private vehicle, and he basically said, you’re going to commit capital to me. You can sit on it, so I’m not going to take it and put it in T-bills, but when these certain spreads blow out to a certain point, I’m going to call all the capital and invest it at that point. And I think it was like a one or two month, excuse me, one or two year hold that he would then return the capital, because the whole idea was, I’m going to buy this stuff that I think is massively discounted. I think it was high yield bond spreads was one of the primary indicators. So from that perspective, I think there’s some really interesting… Right, you’re basically talking about making tactical investment choices.

And I love when you can make tactical investment choices that are tied to things that I think are clearly indicators of economic stress, and things are no longer being sold because of a change of view, but things are being sold because people are being forced liquidated. And that’s where there are really opportunities.

So I think what’s interesting about this is then thinking through, not from a strategy perspective, but from a product perspective, you have to think to yourself, where’s this going in the advisor’s portfolio? And you mentioned launching it two years ago. Well, I don’t think many advisors wanted to sit on cash two years ago. They were trying to minimize cash. Now I think the conversation can be had of, Hey, why don’t you sit on cash? It’s going to give you 5.5% in this environment.

They got to reevaluate that for the reinvestment risk every year, but it’s more than zero. It’s pretty interesting. And then opportunistically, we’ll deploy it because I think the number one problem most people have, is when they go to opportunistically deploy into investments, the question is from where? This industry goes, buy when there’s blood in the street, but also says be invested at all times.

Meb:

It’s from where, but it is also painful. They don’t want to when things are distressed, right?

Corey:

Well, but they don’t want to, because part of it’s… They’re distressed, right? If I’m invested a hundred percent of the time, and I go to buy the blood in the street, well that’s my blood in the street. What am I buying with? I have to sell the stuff that I’ve already had at a real loss. So I think there’s a really interesting opportunity in this market environment to package that concept and say, you can sit on cash. There’s going to be an interesting return and this’ll be your buy when there’s blood in the street fund, that taps into these different things that there are strong quantitative signals that indicate that they are extremely stressed and the odds are in your favor to buy a diversified basket of this stuff.

Meb:

So T-bill and chill, distressed opportunities, strategy. That would be a good mouthful. I like that. Well, I’ll tell you the hint is the obvious challenge when you do a simulation of this is obviously when you’re talking about spreads is not having a look forward bias on, Hey, I know spreads have blown out to this. So when you invest in the top quartile, obviously it makes a big difference If you look back. The weird part is that we, I mean, I did the test with full bias and then I did the test where just simply all you did was invest in the top half of average spread up to date.

Corey:

Yeah, like a look back, only. Rolling look back.

Meb:

Right. It’s a rolling look back. So let’s say you only invested in 10 year instead of T-bills, when the 10 year was in the top half of spread up to that date. And it actually does great. It reminds me almost of our old trend falling portfolios. So it gives you similar return to buy and hold, but with much less exposure and sort of volatility. I think the challenge on a lot of these strategies is as bond spreads are blowing out and there’s a flight to safety, invariably you’re going to catch on the big ones the beginning of the downdraft too, which I think people hate doing, buying into a waterfall decline. But the interesting part is you basically can add a couple hundred basis points onto T-bills and still have pretty darn low volatility. And the drawdowns are actually half, which by the way is the biggest drawdown now, I think, on a nominal basis. Anyway, it’s a fun strategy we’ve been playing around for…

Corey:

And I’ll tell you what my honest concern would be, and it’s not a strategy basis. I know, maybe you’re just better at sales than I am, I almost can guarantee I’d go to sell this and someone would go, well, why don’t you just call me when it starts making those investments and I’ll put some money in. So I think, again, you mentioned [inaudible 00:31:54] launch it two years ago. I think this is a product that would’ve been dead in the 2010s, but as long as T-bills offer an interesting nominal return, I think people are willing to chill on T-bills a bit, and this is then not a drag on their portfolio.

Meb:

It’s funny about calling people and saying, Hey, this is the time. Call me when it’s the time, because the conversation I’ve been having all summer, an email I think we sent out was something along the lines of everyone, every single person talking about this value spread. I think our buddy Toby tweets it daily where he is like, look… But my comment is like, look, if you’re ever going to do value, you’re going to do it now or said differently. If you’re not going to do it now, you’ll never do it or you’re going to chase returns in six months when value has a moment and it does great. So I don’t know that people want that call when you call and say, okay, I’m pounding the table.

Corey:

They want the call, but they’re not going to do it. Okay, look, so this brings me right back to my over hyped, under hyped or appropriately hyped. Because I want to take the opposite side of value for a second, which is, they’ve gone by many names over the years, whether it’s Fang or Fatman, this year it’s magnificent seven. And one of the big talking points this year you’re seeing in the media is you get rid of the magnificent seven, the market’s down on the year, right, and everyone’s pointing to the valuations of the magnificent seven. Is the risk of the magnificent seven over-hyped, under hyped or appropriately hyped?

Meb:

I think when things were going totally nuts in ’21, was it February ’21? The years are peeling off now when cap ratio is above 40, I would’ve said people are losing their MF minds, like this may eclipse 99 in terms of stupidity and craziness and fun. By the way, we have a funny… You get all these podcast pitches, and for a while we were doing this series where we were calling it, I’m sure you did… You may have highest podcast appearances, by the way. I think you got a solid half dozen now.

Corey:

I need my green jacket or whatever.

Meb:

Yeah, we’re trying to get some hats made. We got some surfboards. Maybe we get to a dozen. I’ll send you a surfboard now. I also bought a barrel of whiskey. That’s a different story.

Corey:

You bought a barrel of whiskey?

Meb:

There’s a Vinovest which does wine investing, and they started doing whiskey investing and I was like, I want to buy a barrel, but actually my problem is I’ll either, I want it delivered and want to drink it or share it with friends or give it to people. And they’re like, well, that’s the whole point me is you can’t drink your profits.

Corey:

You can’t take delivery?

Meb:

Yeah, you can’t take delivery. But I was like, well, what am I going to do with a barrel of whiskey? Just sell it. And I was like, I don’t care about that. So anyway, we’ll see if it tastes any good, we’ll do a Camry whiskey. Anyway, I never saw this until much later. But when we were doing our best ideas series, I just got forwarded this recently. There was an email from account called Roaring Kitty and it had the person’s name, but it was like, Hey, I’d love your show. Would love to come on and pitch this idea of a stock for these various reasons. The stock is GameStop and it’s trading for like a dollar 50, right? It was the summer before it went nuts. And we were just like, ah, God, we’re not going to do stock pitches. What are you guys… We’re not a promotion like some bulletin board thing, even though we owned…

Corey:

I hope he listens to this episode.

Meb:

Even though we owned it, which was funny. But we could do a postmortem now that he’s super famous and rich in movies and commiserate on all the craziness. So we’re talking about the magnificent seven and market cap waiting. I think if there’s a topic I’ve spent more time talking about in the last how many ever years in this podcast, it has been thinking about market cap weighting and other ways to weight things. And it doesn’t matter most of the time in my mind, it matters when things go totally nuts.

Like the crazy bull market that ends up in a bubble. You get the super heavy weighting and then that’s what the problem with the market cap weighting is. You can have no returns for decade, two decades, three decades, and it’s happened many times in history. So market cap weighting is fine most of the time. It’s just when things go totally nuts.

And so I think everyone was just 17% returns to the moon back in 2021, which my favorite chart of the year is this, four peaks of 10 year rolling returns on S&P, and there’s been three peaks of the roaring twenties, nifty fifties internet bubble, and then COVID meme stock mania where you return 15% for a decade, which is incredibly rare. And three of the other four had kind of downside to the backside of the mountain.

So I would’ve said, over hyped then, now, it feels like things aren’t as bad, things aren’t as expensive. There’s plenty of other places to hide out with other options. So I think it’s probably over hyped now, but it’s still not great. I mean, I still think it’s an issue. I just don’t think it’s as bad as it was two years ago. But you still see the spread opportunities in a lot of these.

Corey:

Let’s talk about Roaring Kitty for a second. There’s another risk I want to talk about.

Meb:

Have you seen the movie yet?

Corey:

So I haven’t. But someone was talking to me about it the other day and it brought up this thought which was, was Roaring Kitty fundamentally right about GME, about GameStop, that it was a great value stock or was it this social gamma gamification of options just this point in time that happened to allow GameStop to explode in valuation that he just got lucky and sort of the Reddit Wall Street Bets era that occurred post COVID allowed him to make massive profit on his options? I asked another way, rewind this to a pre COVID 2015 environment. Do his options just expire worthless?

Meb:

Well, I think it’s both. I think it’s the magnitude that really mattered. So I think that the first could have been true, but where maybe it went from two to or whatever it was to 10 or 20, I think going from 20 to 700 or whatever it peaked out at is the latter. Zero day options, it’s been a weird time in invention. I was laughing because one of our friends, this is a great troll, one of my all-time favorite trolls is when interactive brokers would troll Schwab on their commissions in Barron’s, it would be like two pages later, the ad would be trolling the ad. I was like, this is absolutely brilliant. How is Schwab not losing their mind and going nuts over this? But another great troll, one of the most successful funds of this cycle has been JP Morgan’s JEPI, and it’s raised, I don’t know, 50 billion. What is it at? It’s a lot, which to my knowledge, and you could probably correct me, I think is just a covered call fund. Is that what it does? Basically?

Corey:

Yes. I believe it’s basically a covered call fund.

Meb:

Basically a covered call fund income generating ETF.

Corey:

Yeah, I mean it was kicking off something like 11% yield for a while. It’s come down.

Meb:

There’s a… Anyway, just raised a zillion dollars, but I was dying laughing because one of our friends launched the J-E-P-Y-E-T-F, so it was a clear troll on JEPI.

Corey:

Ask that friend, ask that friend the process of trying to find a lead market maker for that fund if you haven’t already. It’s a funny story.

Meb:

Yeah. But whatever, I’m like, look, JP Morgan, you have trillions of dollars. Why are you worrying about these little ants that are below you? Come on, just stop being a D-bag, and if your products are good, people are going to find you and they’re not going to care anyway. But this one I believe is using zero day or very short term, and so it generates just unbelievable yield, but um…

Corey:

Yeah, my recollection is it’s actually… I don’t want to say it’s targeting a yield, and I don’t want to misspeak here, but my recollection is that beginning of the day, it sells intraday options to try to cover a certain amount of premium.

Meb:

I think it’s put writing, but I was talking to a couple of friends who have some of these funds and there’s another one on Tesla where these things yield 20, 30, 50%. And I said, that sounds like a good idea in theory, but then you’re NAV, you’re distributing 50% of this income. And our friend said, no, they actually just reinvest. It’s not like a declining NAV from this people, we believe just actually reinvest in this sort of idea.

Corey:

I would’ve assumed it was bad business. Again, you got to grow the fund a hundred percent every year to come up…. Make up for the yield. Well, so that brings me to your favorite topic, dividend investing. Over hyped under hyped, appropriately hyped. I mean, this is one of those things that sort of blows me away, and I’m going to color this answer for you, but there’s a whole Reddit forum not dedicated to dividend investing, but dedicated to that JEPI ETF, and people are looking at the yield saying that, and they’re trying to make enough money and save enough money so they can quit their job, put it in JEPI and live off the income that JEPI is giving them. And there’s just a fundamental misunderstanding of how finance works. And it really bums me out.

Meb:

Yeah, look, I mean, dividends have the best brand of anything in the world. There’s nothing that people in their minds equate to passive income being on the beach, sipping pina coladas and not working. That’s just this magical income scenario. And as we all know, and no one really gets it more than Buffet talking about dividends. Berkshire, they don’t pay a dividend. The joke always was that they paid it once and Warren said he was in the bathroom when they made the decision 50 years ago, 70 years ago.

And so if you go back to first principles, which was really the phrase of I think 2022, 2021, if you’re a taxable investor, last thing you want is dividends, really, particularly if you’re in my state or New York, your dividends are a pretty high cost, but people still, they equate this return of capital with this magical passive income where you’re getting paid.

And I think certainly over hyped and misunderstood, over under hyped is wrong question. It’s more like it’s just totally misunderstood. But I think there’s no fighting it. There’s no educating on this topic that will change anyone’s behavior in any form or fashion. And we should do it as a test case where we eventually launch our zero yield funds and just kind of see what the reception is. I think the only people that might invest in those would be either CPAs or family offices. I don’t know that any actual investors might do it, but yeah, I mean we could spend an entire two hours on this, but I certainly, over hyped, but I think there’s no fighting it.

Corey:

All right. Totally different change of subject here, but another one that post 2020 has gotten a lot of play, and it’s something I don’t actually think I’ve seen you or heard you weighed into with an opinion, so I’m curious as your thoughts here. The risk of the rise of passive investing. Over hyped, under hyped, appropriately hyped?

Meb:

You know, first, I think you need to be clear on what passive is. I think that that word is lost all meaning where over the past 50 years it been one thing and one thing only. And that was market cap weight, full stop. And you could have a passive anything index at this point. Are the companies located in Manhattan Beach or Tampa, Florida? And that’s a passive index. But if you mean specific market cap waiting, and I was asking…

Corey:

Specific market cap waiting.

Meb:

I was asking the other day, I said, here’s the problem with this analysis and was chatting with Mike Green on this many years ago, I feel like on Twitter, I said, how much of this analysis is, all right, you got these passive index funds. Okay, well what percentage of passive index funds are market cap weighted? Because if you’ve got a biotech fund that’s passive, that’s not market cap weighted. It may be market cap weighted biotech, but it’s not the broad market.

If you’ve got a small cap value that’s passive. It’s not market cap weighted. So I said, I wonder what percentage of actual index funds are ‘market cap weighted’. And then said differently, what percentage of active funds are just closet indexers? Right? I mean, that has to be a huge percentage. And I was scratching my head the other day when we were talking about shareholder yield versus kind of the midcap value category.

I said, why is the mid-cap value category looks so much like the S&P? It’s because so many of them are 50 billion funds that are just closet indexers. So many of these legacy funds that have hundreds of billions either through just size or desire, they don’t want to look that different. And so it’s a little bit of a muddled discussion because my guess would be a lot of active, and certainly on the aggregate, but on a per fund basis, a lot of the active is actually passive. Passive like. It’s not something I sweat and everyone else covers it way more than I do, so of all the discussions, it’s one that I’m just like, I don’t feel like I need to weigh in on this. And my point being, you’ve heard me say this, is that the best time ever to be an investor, you can get the market cap weight for free, zero.

It’s actually expense ratio negative at this point with short lending. So anything else on the active side, if you and I charge more than zero, which we do 50, a hundred, 150 to on and on, you better be doing something super weird and different concentrated and most don’t. And so I think adding something, whether it’s going to make a difference or not, so many people are in these closety funds that make no difference.

Which could lead to my second topic of the day, Corey, if we’re not done with this one. But our friends on the Rational Reminder podcast had a quote the other day, I can’t get out of my head where they said investing is solved, or do you think investing is solved? So let’s hear you weigh in on this first and then I’ll chirp in. But is investing solved? I mean, we’ve done 500 podcast episodes. You and I just spoke for an hour on all these topics. But could it be the case that investing is already solved and has been for a while and we’re just kind of…

Meb:

-is already solved and has been for a while, and we’re just hanging out drinking tea, and just shooting the shit. What’s the deal?

Corey:

I think our friend Jason Buck would say, “We’re just all entertaining each other at this point. Right?” Man, this is such a great question. I love this question. In my younger years I would’ve said it’s absolutely not solved. The question is, “what does solved mean?” There is an article that was written by Cliff Asness back in 2009. It’s a hard article to get your hands on-

Meb:

By the way, I really want Cliff, at some point, to write an article where it’s one of his headlines, Cliff Pon or something, and the article actually has no content, it’s just all footnotes. It maybe has one sentence, and then it’s just-

Corey:

That’s where he’s converging to.

Meb:

The footnotes are longer than the article. You can’t read his stuff without reading the footnotes.

Corey:

He’s getting there. That’s how it’s an authentic Cliff article. It hasn’t been plagiarized.

Meb:

I was going to say, is there an article he hasn’t opined on? When you’re like, “All right. There’s a Cliff article.” I’m like, “Well, is there one that he hasn’t? All right, let’s hear it.”

Corey:

The most frustrating part of my career is every time I write something points out that Cliff wrote an article about it twenty years prior. He wrote this article in 2009, I think it’s something to the effect of Running Big Money for the Long Run. If you Google that, I think you’ll find one PDF copy, not even on AQR’s website. One of the major points he makes is, “Look, at the end of the day, equity beta, bond beta, those are your primary return drivers, and everything else is decoration. Buy those and get your risk level right and that’s a huge solve.”

When we talk about has investing been solved, think about how easy it is to invest today. For the average investor, who we go from this world of corporate pension funds being your retirement to your self-directed 401ks. They get shunted into this QDIA target date fund. As much as you and I might say, “Well, it’s not perfect.” You want to know what? For people who have no idea what a stock or bond is? Wow. I thumbs down myself? For those who can’t see on the screen, somehow a thumbs down just came up on my screen as I was talking.

Meb:

How do you even thumbs down yourself? I don’t even know how to do that.

Corey:

I don’t know. I didn’t touch my computer.

Meb:

I would’ve been thumb thumbs downing you this whole time. Where is it? Keep going.

Corey:

Maybe it was Colby in the background, he didn’t like what I was saying. But where I was going with that, you go, how much does it cost to buy the S&P 500 today? Two BPS? How much does it cost to buy the Barclays US Aggregate bond market? Five BPS? Right? It has never been easier to get access to investments in a cheap, secure, safe, tax-efficient way. And from that perspective, I really think a huge part of the investment problem has been solved. But I don’t think we have solved the financial planning problem. When you go from, “Are the building blocks there?” Yeah. “Do we need the 40th value ETF out there?” No. And this is like-

Meb:

40th? Four 400ths. It’s either 4000th.

Corey:

I’m sure you’re the same way. I used to know every single ETF by ticker back in the early 2010s. And then I mean, they’re still doing two ETFs a day. They just did two ETFs in September a day. There’s just so many that come to market out and close, can’t keep your arms around them. Do they solve a problem necessarily? Most of them don’t. I think a huge majority of the problem is solved with just very low-cost passive exposure to equity and bond beta. From there, I think financial advisors have a very meaningful problem to solve in the financial planning piece, and the estate planning, and tax management, and insurance management, and all that sort of stuff is very non-trivial. I don’t think that is “solved”, but I think a huge part of the investment puzzle with access, easy, low cost, cheap access to the core betas, I think it is solved.

Meb:

Listeners, think in your mind of what you think if this is solved or not. But I lean on the side of agreeing with you. I think it is solved in the sense that we did an old article on the investing pyramid and the things that matter most, how much you save, how much you decide to invest in the first place, all materially more important than what you invest in. It’s just when you start, how much you invest, on and on, way more important. I think, particularly at scale, there are decisions that matter, like they’re worth doing. It starts to become, I don’t know if it’s the final 30%, the final 20%, the final 10%, but even going back to the old 60/40, one of the big things that I didn’t understand early in my career, I’m always learning new things, and one of them was an old article written by Rob.

These two probably cover 99.9% and even though they love to brawl with each other, but it was basically the concept that if you invest in a portfolio, say 60/40 or whatever it is, your real after-inflation income is incredibly stable, despite what happens to the stocks and bonds. If you’re an income person or an institution, it’s incredibly stable because if your bond or stock gets cut in half, essentially, “The income doubles”, but the income stays the same, the relative to the principle. That was a really light bulb moment for me when I thought about this, but we’ve often said for a long time there’s an old post called The Best Way you can Add [inaudible 00:51:42] your Portfolio is to stop spending time on it. So this is a personal finance, I guess it’d be more like a Remeet or Dave Ramsey concept where we said, “How much money do you make?

How much time do you spend on markets per week? Per year? This is how much alpha you have to generate to break even.” I put all my assets into the public portfolios and just leave them on autopilot. I spend essentially almost zero time on the public side. To me, it’s almost viewed as a savings vehicle, as like a yield vehicle. It’s going back to our app, the Hoffstein app on just putting it into one or a couple of funds and just being done with it is such a basic and thoughtful way to do it. The robos have kind of done it, but they’ve made it a little more complicated and some of them have strayed quite a bit from probably what they should be doing.

Corey:

Have you heard of that Fidelity study where they talk about the best performing portfolios are people who are dead?

Meb:

I’ve heard about it.

Corey:

It’s a very famous study quoted everywhere. The problem is it’s actually not true or it may be true, but there’s no actual source. What’s funny is Fidelity will tell you they’re not the source of this, but somehow it’s became gospel in the industry that Fidelity has some study that the people who never touch their portfolios, i.e. people who are dead actually outperform those who tinker. We get in our own way a ton. We all know the behavioral biases that cause us to misallocate capital. I often say, look, if you’ve got a little play capital and that’s what you need 5% to mess around with to keep the other 95% stable, well that’s what you need to keep the 95% stable. That’s just sort of the cost of keep getting out of your own way.

Meb:

One of the challenges I think is finding real fiduciaries that are trying to help you. I like the idea of a brokerage or RoboAdvisor that I’m going to charge you a fee, but at every possible fork in the road, we’re going to try to put you in the right direction when we make a decision. Let’s look back at a couple of historical examples where a group did not do that. We have an old tweet. Fintwit is usually pretty good immune system on this where Schwab, when they introduce their intelligent portfolios, opted investors into portfolios that had big cash balances, in some case up to 40%, and paid nothing on that cash, nothing being like four basis points. When they could have just as easily whatever moron that designed the portfolio, put it in a Schwab ETF that had a reasonable yield for that bucket.

Instead they were making a huge spread and they still do, although a lot of assets are flowing out now. We said at a poll, “Are you considered a fiduciary if you do this, if you knowingly put someone in a lower yielding product because you get paid more on the spread?” Of course everyone was like, “No, you didn’t”. They got fined a multi-hundred million dollar fine for making this just total dipshit decision. You’ve seen others do this where it is such an obvious decision that you’re going to screw over a million people. I think wealth front’s risk parity fund is up there as their merger got squashed because of this, but I don’t know. Even BlackRock, they have an old, their emerging market’s ETF, EEM, the standard MSCI for the industry, charges 70 basis points.

It might be 69 basis points. Last I checked has ten, twenty billion in it still. They have an identical product that charges nine basis points. Instead of just lowering it on EEM, they just launched the cheaper version, but they’re like, this one’s legacy. It’s just generating all these assets and we’re not going to repurpose it. Look, if it wasn’t the same identical product, I wouldn’t be giving it a hard time. I don’t know why I’m on the soapbox. I wanted to mention something to you, and this is a challenge, Corey. I think we both have to do it. I’ve done it once and got rejected. On LinkedIn yesterday, I got marketed a new position available, AKA, the CIO job of CalPERS, which the first-

Corey:

It’s funny you said this was one of my questions for you.

Meb:

The first time I applied, they declined to interview me. Now we’re a little bit bigger of a firm, a little more well-known, so I’m going to reapply. I think you need to also apply. They pay, it’s like half a million dollars. They’ve had something like half a dozen CIOs in the past ten years. It’s some astonishing number. I’m on a mission, as you know, to get CalPERS on the right track.

Corey:

As a California resident, I think that should be applauded. My question was going to be, I have this written down. You finally win the bid to be CIO of CalPERS.

What is the game plan?

Meb:

Clean house. Ten years, I say “I’m going to write an article which we’ve already written, but I need to update it called Should CalPERS be Managed by a Robot?” It applies also to Bridgewater’s All Weather. These strategic allocations you can replicate with a basket of ETFs. The issue that solves is two-fold for these organizations. One is, they have a massive amount of conflicted, interested parties. Particularly on both of, not Bridgewater, excuse me rather, but a Harvard style. You have massive political risk where you invest in all these hedge funds, paying out these hundreds of millions in fees. You have this risk of, “Hey, we’re just funneling money to our buddies or alumni, whatever it may be”. You come up with a basket of public investments and you slowly draw down the private stuff over twenty years and you can fire everyone, which won’t be popular, but we’ll save a ton of money and be done with it. You’ll probably outperform most large asset managers in this sort of endowment space.

Corey:

Is it Nevada that is pure three fund passive?

Meb:

God bless them. You have so much legacy systems and people in place, it’d take a while to wind down, but I think it’s a thoughtful approach. Now that’s not going to happen. CalPERS, if you’re listening, at least give me an interview, I can pitch my article to you.

Corey:

I’ve got so many other questions, but one that I think is sort of an interesting one. I tweeted something out a while ago. This is totally off-topic, no over hyped or anything like that. One of the areas that has always fascinated me is the idea that the entire industry, and we’ve talked about it nonstop by the way on this episode, has somehow converged on this idea of 60/40.

Meb:

Going to your fidelity comment. Every single person I’ve asked, no one can find the origins of this. Everyone’s like-

Corey:

That is exactly where I was going. So about a year ago I tweeted, I think it’s funny, the entire industry has converged on a 60/40 and no one can tell me where the 60/40 came from.

Meb:

It seems more reasonable to a converged on 50/50, right? Doesn’t that make more sense? Why would you converge on 60/40? That’s such a random number.

Corey:

What’s funny is people replied to me. This tweet really blew up more than I expected it to for a throwaway tweet. People replied to me and they were adamant that they knew where it came from. There were people who said it was Bogle, there’s people who said it was Markowitz. They gave all these answers that it was when the original passive portfolio concept came out at the time, the global portfolio was 60% stocks, 40% bonds. None of which is true, or I can find any evidence of. I can find one paper way back in the day about corporate pensions and pension plan investing, the 1950s.

This was before pensions adopted LDI investing. They were still doing asset allocation. This paper showed that based on certain capital market assumptions using a utility function, the portfolio that maximized the utility was a 60/40. It was for a very specific set of assumptions about risk and return and the chosen utility function. It was a popular pension case study paper at the time in the fifties. It was saying this is not necessarily prescriptive that every pension should adopt that, but it was the first time I saw in writing a 60/40 portfolio suggested, and I cannot find any other evidence as to why the industry has converged on a 60/40.

Meb:

Here’s the deal, listeners, if you can find the original reference, not even Fidelity. Some people say Schwab, some people say something else, or you can find the original 60/40 reference, I’ll send you a bottle of the Cambria whiskey or if you’re an NA drinker something similar, Cambria hat, the last remaining Pirates of Finance hat. I’ll send you something as a gift. You guys do your ChatGPT work and see if you can come up with the answer. I also don’t know the answer on either of those. I would like to see it. I ask a lot of people and they always kind of shake their head and say, “I don’t know, Markowitz?” That’s the easy answer, Markowitz.

Corey:

I did an interview with Antti Ilmanen in after he came out with his recent book, and he mentioned that he had done a deep dive and asked his network to try to figure out where the 60/40 came from and he gave up. When he told me that, I was like, well, I’m definitely not even going to bother to search. He’s got a more extensive research network than I do.

Meb:

As you think about you’ve got two products, which I love the concept. I think that it’s resonated this return stack series when you’re talking about stocks and bonds, as you’re thinking about having conversations with everyone. The segue from this is thinking about the 60/40 being the optimal portfolio. We’ve said for a long time, if you run the simulations with the various numbers now, you always end up with more in a trend exposure So managed futures being the moniker that you guys kind of picked.

To me, that optimization ends up being probably 30/30/30, but the trend component is never zero if you run an optimization. Talk to us a little bit about sort of like what the modern 60/40, including this trend component with the return stack and more specifically going back to our earlier part, the advisors and investors. Is it resonating? I feel like managed futures and trend, I said banging my head on the wall for so many years, nobody cared. They cared right after 2008, then they didn’t care for a decade. Even before last year, it’s been the last three or four years people have started to respond differently and I don’t know why that is. You got any thoughts?

Corey:

You’re spot on. You run the optimizations using historical numbers. That’s sort of the best you can do with something like managed futures because it’s hard to predict how managed futures will perform. You have an asset class or strategy that has historically had a positive expected return that is somewhere between stocks and bonds. A meaningful vol profile has done well when stocks sell off has historically done well during inflationary period, so bond selloffs. It has little to no long-term correlation to stocks and bonds. You just throw out that information and it’s no wonder an optimizer loves it because it’s a third leg of the stool. Stocks and bonds historically have low correlation. Now you’re adding a third leg of the stool that historically has low correlation and great return profile. Of course you end up with something that’s a big allocation to that.

The problem is no investor can really tolerate it. We have this graph that we’ve put together where, in the early 2000s, when stocks had their lost decade, investors would have in theory loved diversification. You and I both lived it, investors started adding tons of commodities and emerging markets and started to dabble into alternatives. And then the 2010s were one of the worst periods ever for alternatives relative to a 60/40. The problem that I’ve always found with diversification, at least in my practical experience, is diversification has historically been a process of addition through subtraction. If you want to add a diversifier to your portfolio, you need to subtract exposure to stocks and bonds. What I found happened last year as stocks and bonds sold off together during this inflationary impulse, is that managed futures became very attractive for people, but many people realized that as the year wore on, it became a double bet.

Not only are you making the bet that you’re long managed futures, but you’re implicitly selling the stocks and bonds that you’ve already lost money on. The bigger allocation you make to managed futures, the more that trade becomes a meaningful timing bet on the performance of stocks and bonds. Whether advisors could communicate that effectively or knew that was the reason, I’m not sure many could pinpoint that’s why they didn’t want to make the trade, but the gut feeling was there that they said, “I’ve already lost on the way down. I don’t want to lose on the way up. I don’t want to make this trade at the exact wrong time for my clients”.

Other than dollar cost averaging into this trade, the appetite did pick up for managed futures, but it continues to, in general, struggle because again, of this addition through subtraction. And so that’s where this whole concept of return stacking came for us of saying, “What if you didn’t have to sell your stocks and bonds? What if I could give you a product that for every dollar you give me, I give you either core bonds or core stocks, and then I layer the diversifier-like managed futures on top so that if you sell a dollar of stocks to make room and you put a dollar in our fund, well, you’re getting that dollar of stocks back, plus the managed futures layered on top”.

Obviously the downside there is, if stocks do poorly, you’ve retained your exposure to stocks, you’ll get that downside. It’s less of the meaningful timing bet that it becomes when you have to sell your core stocks and bonds to make room for diversifiers.

Meb:

The whole thing about the timing bets, we always say people consistently, no matter what, want to go all in or all out on any decision. The amount of financial advisor calls where people do all this due diligence and it comes down to, we’re going to buy or not. Right now we’re not. I want to say to them so many times, “Look guys, there’s a third choice, which is you can dollar cost average into this fund to avoid the hindsight bias anxiety of buying at the wrong time, not just for yourself, but for your clients who see this line item on their account”. It doesn’t matter what it is, it could be return stack ETF. It could be one of our camera ETFs, but they never do that. Almost never ever do that. It’s a committee. They’re designed to buy it or not. November 1, boom, we’re buying it or not.

Corey:

Big model allocation. Yes, a hundred percent. You never see the dollar cost averaging thing, which I think is funny. Most of the time they’ll communicate to their clients the benefits of dollar cost averaging. But advisors, it’s just that extra work, they don’t want to say, “I’m going to incrementally introduce this to my portfolio over the next year. That’s a great point. Too many trades. It’s too hard”.

Meb:

That’s a great point.

Corey:

That is a great way to control that risk.

Meb:

I’ve never thought that. They always tell them about dollar cost averaging, but then they themselves don’t dollar cost average the allocations. The bigger one to me is always drives me nuts, is the process not performance on the buy decision. Everyone uses a lot of process, makes a buy decision, and then the only criteria on the sell decision is, “Did this fund outperform either my expectations or whatever else I was going to buy instead of it?” Even the most sophisticated investors in the world consistently do this and make this mistake.

Corey:

And you get it on the upside. I used to have a wholesaler who worked for me who told a great story about how he had this value strategy that he was wholesaling, and he would go around and talk to financial advisors. At the time it was just woefully underperforming, woefully, woefully, underperforming.

Meb:

It’s a little too soon, Corey. I don’t know that values had enough of a emergence to be able to-

Corey:

This was like in the early 2010s too. He’d go around and he’d say, “Do your due diligence. Get comfortable with it, really understand the process, talk to the PMs”. Then the fund ended up going on this and people were like “I don’t like the performance. I don’t like the performance. I can’t trust it”. Then the fund had an unbelievable 12 to 18 months, and everyone who was doing due diligence said, “I feel like now I’ve missed the run, so I don’t want to allocate”. These aren’t supposed to be tactical decisions. These should be long-term strategic decisions you’re making. Yes, there is some element of that initial timing that absolutely impacts your short-term realized experience. If you’re talking 20 or 30 years, which is what we should be mostly talking here, you want to work that strategic-

Corey:

We should be mostly talking here like you want to work that strategic allocation and just get the big muscle movements right.

Meb:

We just recorded an episode or a short podcast, I don’t think it’s out yet, but where we talked about this exact topic where we said, look, there’s three phrases we hear all the time from investors. One is, “Your fund’s been doing great. I’m going to wait until it pulls back to buy some.” Or two, “Your fund’s been doing poorly. I’m waiting for it to recover before I buy some.” And of course, the last one, which is, “This geopolitical event’s going on. I’m waiting until things settle down and become less volatile and more certain before I get back in.”

And I really want to go on CNBC one of these days and say, “Look, in these certain times, in these low-volatility markets,” which no one has ever said ever. And they always say, “This market uncertainty and these high-volatility times, this is why we should do X, Y, Z.” I’m going to say, “Look in these very certain times in these low-volatility environments,” because let’s be clear, for a better part of the last couple of years excluded, from 2009 to 2020 probably it was not a high-volatility environment. The VIX was sub 10.

Corey:

I miss 2017. 2017 was just the best year to just chill.

Meb:

My favorite thing to do, listeners, is to give Corey shit for having this massive quantitative brain and not making billions on all of these esoteric finance concepts like Zed Run, trading Magic: The Gathering ARB cards, doing all these sorts of things-

Corey:

Too clever by half at least.

Meb:

What is on your brain recently? I got a great Taylor Swift story, I’ll tell you later, too long for the podcast. But what is on your brain recently that you’re thinking about, worried about, excited about, you do a lot of writing, although it goes through cycles it seems now that you’re a dad, what’s on your brain? What are you curious about? What are you thinking about?

Corey:

I will say in the market side, I’m trying to do myself a service and simplify a little bit. I think as I’ve gotten a little older, I’ve gotten a deeper appreciation just for getting the major muscle movement right. And there’s so many layers of communication that go from the asset manager to the financial advisor to the end client that, and you have to recognize the limitations of the structure of an ETF and a mutual fund. What actually interesting alpha strategies can be put in there? And so for me, the whole genesis of the return stacked product lineup and hopefully the continued expansion of that lineup is not about trying to put a bunch of esoteric alpha into a package. It is just trying to offer really interesting building blocks for advisors to expand the toolkit and the palette with which they build client portfolios.

And I think in a meaningful, useful way, regardless if for example, we have the single best performing managed future strategy. I think we will have a very good managed future strategy, but I think we’re just trying to do stuff more down the middle of the fairway and offer a really compelling product that adds value. That doesn’t mean though I’m not interested in other weird esoteric stuff, one of which lately has just been the narrative around tokenized real-world assets, which I feel like is something that probably has come across your desk quite a bit.

Meb:

I was actually going to ask you something about this, but in a different format. So go ahead and go with where you’re going and then I’ll follow up.

Corey:

Yeah, so again, I know there’s, crypto is a very polarizing topic, but I think there’s a very interesting idea around taking real-world assets and putting them on the blockchain and making them easier to create markets around. So whether this is club memberships or tickets for a concert or could be real estate, allowing more liquid transparent markets. I think there’s very few cases where that’s not of a true benefit to all parties in aggregate. And so I think there’s a really interesting opportunity. The question is how many of those things just start to massively violate existing regulatory structures and that’ll be a compelling problem, but why can’t you take treasuries and put them on the blockchain? Why can’t you take stocks and put them on the blockchain? Why can’t you take an ETF and put it on the blockchain? There’s no reason you can’t other than regulatory friction.

Meb:

I was going to go a slightly different way, which is, and I don’t know how to the extent you can get swaps on some of these, but the asset classes, I would love to see a return stack fund that had farmland, that had cap bonds, all these little esoteric ideas that you can’t really get exposure to, but perhaps with some sort of derivatives. And this isn’t my world, so I don’t know that it’s even possible, but streams, returns that are in that non-correlated bucket, but you can’t really get in a modern wrapper that easily. So that’s for you to figure out. But I would love, as someone who’s finally trying to sell his farmland.

Corey:

You’re trying to sell it?

Meb:

Well, I was watching the other day, someone talk about they had an Airbnb rental and the tenant upstairs flooded the place with the toilet and then the poo water drenched the entire, they lived downstairs and they rented the upstairs, drenched the entire downstairs and they owed $300,000 to get it fixed and Airbnb, the insurance wouldn’t cover it, just on and on. And I’m just like, real estate is… All the real estate bros out there, all the massive money that’s been made over generations in real estate, God bless you. It is my definition of a nightmare owning real estate and renting it out, whether it be residential, particularly corporate, whatever. Farmland is in the same category. You return money for a reason, which is that it’s a pain in the ass. It’s hard to manage. I would still like to diversify that farmland, direct ownership into more passive, various ownership. And we’ve had certainly a lot of guests on the podcast that I think will be good stewards of that.

But I’m probably selling it to my brother, by the way, so it’s not like it’s going to Bill Gates who’s probably selling his now that he’s getting divorced. I don’t know. He’s probably got to find some liquidity somewhere.

Corey:

He has the largest farmland holdings in the US, right?

Meb:

Yeah. We had a great, sorry to the podcast listener who chimed in after we mentioned Bill Gates. Oh no, sorry, this is Idea Farm member, who signed in from his work account, by the way. So this investment advisor who went on a crazy, something about farmland with Bill Gates and he’s putting robots into your blood and all the vampire stuff that Bill Gates is doing with his crazy initiatives. I was like, “Why’d you send this from your work account?”

Corey:

I guess, I don’t know. Kudos to someone that’s not hiding behind-

Meb:

[inaudible 01:15:38]. Well, it’s true. You can’t prove Bill’s not putting microbots in your blood or whatever he is doing, but I was laughing. I said, yeah, but the farmland, listeners long know this. It’s my favorite asset class that’s not easily investible, which again, I don’t know that any bank is willing to write a swap to the farmland.

Corey:

The thing about return stacking, and this is something a lot of the institutions got in trouble with in 2008 when this was called portable alpha, is mixing daily mark to market leverage with illiquid investments because you need to rebalance.

Meb:

Are you talking about [inaudible 01:16:14]?

Corey:

No. Something like that.

Meb:

As you chat about the return stack concept, often when we write a paper or do a product, we will get responses we weren’t expecting or use cases or whatever it may be. Are there people you talk to and they’re like, “Oh, Corey, we love bond or stock return stack with managed futures, but what we would really like is X.” And you’re like, “Oh, huh, really? You just want dividend return stack something?” Are there any things that pop up or future areas where you’re particularly curious about?

Corey:

So there’s one that’s popped up lately a couple of times. I almost don’t want to say it, but it’s interesting to me because I think it speaks to people’s understanding of what we’re trying to do. And people have said, “I really want T-bills stacked with the S&P.” And you go, “All right, hey, wouldn’t that be wonderful if I could get the S&P plus 5.5%?” The problem is that’s not actually possible because you’re using leverage. So for me, if you give me a dollar and I’m going to give you a dollar of T-bills plus a dollar of the S&P. Well, I have to effectively either explicitly borrow a dollar or implicitly borrow a dollar through swaps or futures, and that dollar that I’m borrowing is almost certainly going to cost me at least T-bills, usually T-bills plus some. So if you say T-bills plus the S&P, well, really what you’re just going to get is the S&P minus a little bit.

And so to me, and I’ve had a number of people ask me for that, and it’s one of these interesting points. For me, I’m saying I’m clearly not communicating the way this process works well enough because people aren’t understanding why that doesn’t actually work.

Meb:

I don’t think it’s a communication on the process. I think it’s that people don’t understand the cost of leverage or how that works. I think they don’t get it.

Corey:

There were some that I expected to be more interesting. For example, I thought gold would be an interesting one. But I’ve found that the people who want to own gold, typically, if they’re all in on gold, they’re putting gold in their safe. Gold in an ETF is an interesting one.

Meb:

There’s some little learnings that I found over the years that I’m often surprised about. I was sitting at a dinner in Las Vegas last week and there’s a bunch of authors and I was dying laughing because I’m in the green room to go give a talk and sitting on a table was Morgan Housel’s name tag. So he’s talking a couple ahead of me. It was quite a lineup. It was like Lance Armstrong, Morgan, and then later the quant nerd right before lunch to put everyone to sleep. So I put on Morgan’s name tag and I was wandering around wearing it and waiting for people to-

Corey:

Did you really?

Meb:

Yeah. Asked me some questions and I wanted to take a bunch of pictures. Morgan’s day in Vegas, take it to the slot. Everything Morgan wouldn’t do. To the slot machines, take it to the strip club. I have people wearing it. Anyway, it’s like, you know The Hangover, the end of the movie where they have the outtakes? It is just like this with Morgan’s badge. Anyway, I was sitting down with a bunch of authors and I said, “Morgan said on a podcast not too long ago,” and this astonished me because I’ve done neither of these, which is pretty indication of why Morgan has sold three million books and I have not, is he said something like half of his book sales were audiobooks. And all the other authors at the table nodded and said, “Yeah, me too.”

And I go, “I’ve never done an audiobook. What was I thinking?” I was like, “Really?” Because I was like, who the hell is, I’ve had Audible, Audible best business on the planet. I’ve had Audible for 10 years. And every quarter whenever I get an email saying, you have how many Audible credits that are going to expire if you don’t use… I’ve literally never listened to an audiobook. I’m on podcast, I consume a ton, but never an audiobook. And so I was like, God, what a basic thing. And then also Morgan said something like half, not half, but a large percentage, I think maybe it’s 40% of his book sales were from India. And I said, “Why are you huge in India? Why does that matter?”

But so going to the point about gold, I was like, gold, if you do that fund, you need to market it in India, China, Canada, Australia or to certain political… I’m pretty sure you could figure it out on Facebook how to market directly to the people that are really going to want gold.

Corey:

Yeah. Except I’m pretty sure that’s illegal. You’re not allowed to market outside the US I’m pretty sure like that.

Meb:

Well, but you could market your research piece.

Corey:

That’s true. The other one I’ll say, and this was my little pet favorite one that’ll probably never take off, is I look at the way a lot of small pensions and endowments allocate, and they do this thing called liability-driven investing where they look at their future amounts they have to pay to their pensioners and they try to hedge it with bond exposure. And the more you hedge, the better, the more certainty there is that the pensioners are getting paid out. But if you don’t have all the money to pay them out, you need to invest in some risk assets. And so I had this idea of saying, well, most of those pensions, their exposure looks like long-dated corporate bonds. So what if I did a long-dated corporate bond overlaid with some diversified alternatives, overlaid with a little bit of equity?

And the idea is a pension or a small corporate pension or endowment that’s trying to meet these long-dated liabilities could just buy this as a core holding. They get all their liability immunization and then they get these risk assets on top. And it’s a perfect example of a fund that would just never sell because it’s too all-in-one, and it’s not going to go through the NEPCs or Mercer’s of the world. It’s never going to pass committee. It’s like a great little idea that’s actually a horrible product concept.

Meb:

I don’t know that that’s true because the thing that in my mind when we talk about some of these products that, I mean, I’m often amazed at what ends up raising a billion dollars. So who knows? But all you need to find is some very specific niche, and this could be something where it’s an endowment or an insurance company or someone who says, “No, that’s exactly what we want. Not only that, we’ll fund it with 500 million.” So listeners, if you want Corey’s LDI fund, hold on, let me check. I’m checking as we speak.

Corey:

Got a good ticker for me?

Meb:

LDI is reserved. Who’s got LDI? What do they want LDI for?

Corey:

Well, I’m trying to keep the suite clean. All the tickers have to start with RS, so figure it out.

Meb:

Return, stacked, liability-driven. RSLD is available. So there you go. Or would it be LI? LD, probably. Yeah. I mean, to me, that seems obvious. There’s a use case for that, and it’s a big use case and it goes to the problem of, of course, will they do it all-in-one fund with the majority of their assets? No, they’ll probably see the fund call you and say, “Corey, can you run a separate account for us?”

Corey:

Well, that’s exactly what would happen. Yeah.

Meb:

Which is fine.

Corey:

Hey, you want, maybe if it’s a loss leader to a bunch of SMAs.

Meb:

Yeah, that’s not bad. It’s not a bad idea. Any other crazy ideas while we’re thinking about it? I got a couple books as a now father to a six-year-old that I’ve been trying to think about and write, but it’s definitely not happening anytime soon. Maybe next summer.

Corey:

Like books for a six-year-old or-

Meb:

I really want to write an intro kids investing book. I really struggle with, when people ask me what’s the number one book, and I’ve written two blog posts on this and we try to do some summaries. But what’s the number one investing book that you would give to a high school student? Do you have an answer? So niece, nephew, cousin is like, “Hey, my kid graduated high school. What should they read?”

Corey:

I do. But I don’t think, it’s not like modern investing, it’s just thinking about what does it mean to invest and it’s The Richest Man in Babylon.

Meb:

Oh, interesting.

Corey:

I think that’s a quick read that if someone has never thought about investing before, I think at least, it’s been a while since I’ve read it, but makes investing approachable in this parable way.

Meb:

When I did a poll, so this is back in 2017. Well, I did two variants. I did, one was the best book in each category, and listeners, we’ll put this in the show note links. But this one we got over a thousand responses and your Richest Man in Babylon came in 11th. So not top 10, but 11th. It was-

Corey:

What was number one?

Meb:

Intelligent Investor, which is a horrible suggestion because everyone’s just going to read a couple pages and eyes roll back-

Corey:

Fall asleep. Yeah.

Meb:

A Random Walk Down Wall Street, same thing. These are too, I think involved. The Most Important Thing, also no. One Up on Wall Street, probably not. The Little Book of Common Sense Investing. I think that’s probably okay, Bogle.

Corey:

Yeah. That’s designed to be approachable.

Meb:

The Four Pillars of Investing, that’s Bernstein. His skews a little more sophisticated and academic though it is a great book. The Little Book That Beats the Market, What Works on Wall Street, Market Wizards, and Reminiscences of Stockbrokers. See, I wouldn’t give any of these to a first timer.

Corey:

See, I don’t think any of those, a first timer to me is someone who doesn’t know the difference between a stock and a bond. What Works on Wall Street, great book by Jim O’Shaughnessy, friend of both of ours. But that’s not the first book you should read.

Meb:

That’s 300 level. It’s not even 200 level. I think it’s 300 level.

Corey:

Yeah. I always think about, and I think about this a lot now as a new father, not that my son is anywhere close to even being able to babble versus read and think about investing, but my father gave me The Richest Man in Babylon, I think when I was 15 or 16.

Meb:

Still have it?

Corey:

And I remember… I do. I do have the copy he gave me.

Meb:

I’m trying to see if it’s on our shelf. I got a couple, I need to fill out the shelf. I don’t see it, but I need to buy another one.

Corey:

Kudos to you for writing these books, by the way. I don’t think I will ever write a book.

Meb:

Well, you can co-author this one with me, but I want it to be almost like a picture-

Corey:

Only if you let me put my name on it.

Meb:

Yeah, a picture book. Like a kids’, but a very simple… But I struggle because there’s three books and they were all overlapping. One was Teach Kids to Invest. Two was, and Morgan referenced this once on Twitter where we were talking about it, it’s like the chart of the hundred years of investing and returns, and every year the crisis that happened, but yet over that period you did 10% a year and made a ton of wealth. And wanted that to be a coffee table book where each page you have a beautiful photo like, hey, this is this crazy event. Here’s how the market did in the year or the two years, whatever, like the drawdown, and then here’s 20-year return from here, whatever it was. Speaking of product market fit, that’s product advisor. Every advisor will buy that for their coffee table.

The last one, which I’ve written, but it’s not quite right, and so I’m not going to publish it was one on this concept of being the owner. And this was out of the Robin Hood era where it was like they’re leading everyone to the casino for slaughter. It’s teaching the wrong lessons. I want to do one that conveys all the right lessons. It’s just the concept of being an owner. So it profiled a bunch of celebrities, athletes, regular Joe’s that invest. Jordan, Dolly Parton, Serena, but how they all invested, they made all their money from businesses. Jay-Z of course.

Corey:

I love that.

Meb:

I’ll send it to you and see if you can clean it up or give me some suggestions because it just doesn’t, it’s not quite there.

Corey:

I think that’s a great idea. So I have one last question for you, and then I have to go because I was supposed to be meeting with my chief compliance officer half an hour ago.

Meb:

Those are always bangers. All right.

Corey:

I know. Well, I would much rather be here, but he’s knocking on the email door.

Meb:

You’ve said no tickers on the podcast. So tell him this should sail through compliance. Listeners go, is it return stacked? What’s the-

Corey:

Yeah, I think you just go to returnstacked.com if they want to learn more. Okay, so here’s my last question because we’re looking for those of the listeners or viewers that are looking at Meb’s beautiful background. You are in your brand new office space. I know it took you a long time to get in there, but here’s my question. Office space overhyped, underhyped, or appropriately hyped.

Meb:

I think under. We’re hiring, by the way listeners, but we keep finding wonderful candidates that are remote. And I keep thinking in my head, I like hanging out with people. The amount of interaction from walking to get coffee, chatting over lunch, reaching my head down and yelling at someone, it’s hard to replicate that remotely. And so most of our employees are remote, so we’re a modern company. But even then, I think it’s hard to replicate. And we tried to design this office in a fun, modern world of a place you actually want to go to as opposed to cube hell. But I think it’s hard to replicate the human interaction. So as an excuse, we need to go hang out in Tampa or Grand Cayman or somewhere in between. Come on out to California.

Corey:

We’ll figure it out.

Meb:

Corey, it’s been a blast as always. Listeners, return stacked, return stacked ETFs, all things, Corey Hoffstein, thanks so much for joining us again today, buddy.

Corey:

Thanks for having me on, man. I’m glad to retain my what? Number one guest status.

Meb:

You also may have just retained the longest episode ever, so we’ll see if this takes the title.

Corey:

I’m going for all the titles. Wonderful. Thanks, man. I appreciate it.

Meb:

Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at the mebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.