Editors’ Note: This is the transcript version of the podcast we posted last week. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below, if you need any clarification. We hope you enjoy!
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Jonathan Liss: Welcome back to the Cannabis Investing Podcast where we speak with C-level executives, scientists, law and sector expects to discuss the present and future of cannabis investing. I’m your host, Jonathan Liss, filling in for Rena Sherbill.
Before we begin, a brief disclaimer, nothing on this podcast should be taken as investment advice of any sort. A full set of disclosures will be provided at the end of this podcast. As a reminder, you can subscribe to this podcast on Apple Podcasts, Spotify, Google Play, or whichever podcast platform you prefer. And if you could leave us a review on one of those platforms, we would really appreciate it as it helps other investors discover this podcast.
For reference purposes this podcast is being recorded on the afternoon of Wednesday, September 16, 2020. My guest today is the Co-Founder, CEO and CIO of Cambria Investment Management, Meb Faber. Meb manages Cambria’s ETFs, and separately managed accounts. Meb has authored numerous white papers and books and is a frequent speaker and writer on investment strategies. He has been featured in Barron’s, The New York Times, and The New Yorker. Meb is a fellow podcaster. His Meb Faber Show routinely ranks in the Top 50 finance and investing podcasts. Meb is also a social media powerhouse. His Twitter handle @MebFaber has 80,000 followers and counting. He graduated from The University of Virginia with a double major in engineering, science, and biology. Currently resides in Manhattan Beach, California. Anyway, enough of an intro, welcome to the show Meb.
Meb Faber: Great to be here. Thanks for having me.
JL: So, I guess before we get into discussing the ETF issuer, you started, why you started it, and some of the strategies there because you guys have so many interesting and unique funds in your lineup, just curious, you know, COVID is still dominating the news here, obviously, and just been asking different people how it’s changed your work life and how you’ve been managing to maintain a work life balance during this whole ordeal.
MF: I think for a lot of people 2020 has been a long decade already. You know, we’re only three quarters into the first year of the first decade, and it feels like 10 years for most of us, particularly anyone who’s got children at home. You know, I think it’s been an adjustment for everyone. I think, you know, we’re blessed here to – my company has been half remote already where, you know, we have people in Southern California, people in Illinois, Colorado, Texas, kind of all over. And so it’s been Arizona.
It’s been less of a dramatic shift, I think, than most, but we’re adjusting, you know, LA when things started to go a little sideways here. And one of the biggest cities in the world, they closed the beaches, that was the dark moment, because everyone sort of uses that as their backyard here. We packed up the car, threw my three year-old in there and went and hung out with the family in Colorado and Montana and Wyoming, little easier to socially distance there than other places, but we’re optimistic. Hope things are getting a little better.
JL: Yeah, definitely. And who knows, maybe there’ll be some upside in that after like 100 years ago, basically, to the date, I guess it was 102 years ago after the influenza pandemic of 1918. What’s mistakenly called the Spanish flu, because it most certainly did not originate in Spain. We ended up with a roaring 20s afterwards, so who knows maybe it’ll be a roaring 20s Redux or something.
MF: You know, it’s funny, at the end of last year I had a very casual tweet and said often, the end of decade’s mark turning points, big inflections in markets, really just decade defining sort of setup. So, at the end of the 1980s, you had the biggest stock bubble we’ve ever seen in history, which was Japan, the end of the 1990s, of course, we had our own little version here in the United States, the internet bubble. And in the 2000s, of course, marked by the global financial crisis, and I jokingly said at the end of last year, I said, I wonder what the 2020 inflection point will be [in churn] of two months and we have we have our answer.
It’s been quite a different year. We did a four part series this year on – is called The Get Rich Portfolio, The Stay Rich Portfolio, investing in a time of coronavirus, which was in March. And then lastly was how I invest my money, but the investing in the time of the coronavirus. The reason I’m bringing this up is, I think a lot of people really struggle with having a view of the future where most of us want to forecast or have our belief at how the future will play out and investing so much is about the probabilities, even the ones that are somewhat rare.
And so we had written in March, you know when many assets were down 30%, 50% plus. You have to envision a world where there’s a bear case and things get worse by the end of the year and there’s a bull case where things get better and we’re hitting all time highs. And almost no one thought that was even a possibility in March that the stock market by year-end would be back to all time highs, but here we are. We had the fastest from all time highs to bear market and the fastest from bear market to all time highs in the U.S. stock market ever.
MF: And we got three months ago.
JL: Three months and a fairly consequential election as part of that. So, yeah. Who the hell knows what’s coming up the pike here. So, just before we get into some of your specific funds here, and I know the listeners are going to want to get into specifics, because you guys have, I’d say pretty much your whole lineup, actually 11 funds are all relevant to the kind of a market environment that we’re in right now, but what made you decide to start your own ETF issuer is obviously not an easy industry to break into. It’s so top heavy. There’s about five companies that dominate almost all of the assets and you’ve broken in, you’ve managed to carve out a real niche for yourself. So, what was that decision making process like?
MF: So, going back over a decade prior to the last financial crisis, you know, there when we started Cambria, we didn’t quite know what we wanted to be when we grew up, you know, we had managed hedge funds and separate accounts and the ETF structure. You know, I’m in general structure agnostic. And there’s positives and negatives to almost every structure, but the ETF structure has such an advantage when it comes to a number of things. One, the main one we always talk about is tax. And we’re not going to bore everyone, but the tax benefit in a taxable account for traditional equities and other asset strategies like that is probably a larger benefit than the fee discussion.
MF: So that gets glossed over. You know, fees are an obvious one, but you could charge low fees in any structure, people just don’t with traditional hedge funds and mutual funds.
JL: Yeah. I mean, people talk about saving 5 basis points when they’re not thinking about the fact as you pointed out that if you would execute some of these strategies in your own account, without [income] transactions, and all the other benefits that ETFs offer, you literally end up having to give up 20%, 30% of your earnings every single year.
MF: So, when we think about launching funds, you know, the context is there’s over 10,000 funds out there. And the problem with that is, of course, that it’s like going to the grocery store in the cereal aisle, like it’s just limitless choice, and does the world really need more funds. So, when we launch funds, it’s really four criteria, you know, the first is, the fund concept or strategy either has to not exist, or we think we can do it much better or much cheaper, and cheaper is rare these days, you know, with the world of Vanguard at almost zero cost and a lot of these funds, but of our 11 funds, and by the time this publishes we should have 12 out is every single one of them is cheaper than the category average.
So, the world is still dominated by high fees, despite the fact most of the flows are going into low costs, people still have their money in these very high fee funds. So, universally, were cheaper. And in some cases we’re the cheapest fund in the category. But going back to the concept of it doesn’t exist. I mean, that’s pretty rare. You think about it, and we watch these fund issuers every day, just launch these copycat MeToo funds and it doesn’t make sense. So, that’s one. Two, is it has to be backed by a fair amount of practitioner or academic research, many of which we publish.
You know, we’ve put out seven books and a bunch of white papers and blog posts. You can download most of our books for free on our website at Meb Faber at Cambria Investments. And so we want – like the two big pillars we base a lot of our theory on. It’s nothing new. It goes back a 100 years. The basics of it being value investing going back to the time of Ben Graham and then also [trend following] goes back to the time of Charles Dow. Third, it has to be something that I want to put my own money into. You and I discussed previously that the sorry state of investing is that the vast majority of mutual fund managers don’t invest in their fund at all. And if they do invest, it’s less than 100K and so – but they’re happy to go on CNBC EIR or TV EIR the journal and tell you why you should buy the fund. But of course, they don’t own it themselves.
So, I have essentially all of my public assets in our funds, and think it’s very important to have that skin in the game. And lastly, does anyone actually want the strategy or the fund? And this one is probably the toughest for me personally, because there’s a lot of ideas and concepts I love that are a little bit wonky that probably no one else on the planet wants. So, it’s always hard to like the Field of Dreams problem, you build it, does anyone show up?
So, we try to be extremely [indifferent] and I’ll wind down here because the way the asset management industry is moving in the future, it’s going to be a barbell, you’re going to have the Giants, the Vanguard’s, the trillion dollar money managers at almost zero costs that are doing market cap weighted indexes. And that’s fantastic. It’s never been a better time to be an investor. You can buy the world for essentially free. But if you’re going to charge fees, you know, whether it’s 0.5% or more, you have to be doing something either weird or different or something, you have the ability to do much better than anyone else. And that’s pretty hard. This is a pretty competitive game.
So, we try to exist in that sort of dark corner that no one else wants to play in of weird and concentrated indifferent and the reason most don’t want to be over there with us is they’re not willing to bring on the career risk. You know, being different for most part for a lot of people is uncomfortable. But we think that’s the whole point. And we’ve seen that, you know, unfortunately many times in markets and we’ll probably continue to see it in the future.
JL: Yeah, it makes sense. All right. So, finally, I wanted to discuss here and I want to get into this space more broadly in a top down kind of a way, is your fund TOKE, The Cambria Cannabis ETF, amazing ticker symbol, obviously, definitely a fun one. This obviously been a very emotionally and psychologically taxing period. Social attitudes to cannabis have changed dramatically over the last decade with a much higher level of acceptance for straight up legalization, certainly medicinal applications of cannabis, both in the U.S. and globally. So, just curious, starting out, you don’t really have any other thematic funds. There are nine other funds trading in the U.S., obviously lots of cannabis funds trading in Canada and overseas as well. It feels like somewhat of an oversaturated market. So, what made you decide to get into this space?
MF: Well, when we filed the fund, there wasn’t any out there. But, you know, the regulatory hurdles often can be lengthy and dry.
MF: And no, no pun intended.
JL: I think, why not? You should have intended a pun there.
MF: We wrote an article last summer called the case for investing in cannabis and outlined a very lengthy reason why we launched this fund. You know, if you look at the rest of our lineup, it tends to be very buttoned down, sort of academic institutional level strategies, and quantitative and rules based and say, oh, Meb, what are you doing launching a thematic fund? And we said, look, there’s really only a couple of reasons in our mind to actually launch one, most people launching thematic funds, and it’s our belief that thematic funds don’t outperform. You know, it’s more sort of giving candy to traders, often to fulfill their willingness to gamble on a very specific niche. And so, we say that’s a bit odd that you’re launching one.
Well, we actually did a [indiscernible] study, you know, we look back at history and prohibition and looked at stocks during the alcohol stocks and beer stocks when coming out of prohibition and how they performed and is a scenario that just has unbelievable amount of parallels with the current one, you have a massive black market, massive demand for an industry, essentially operating at the fringes that is going to get legalized. And in that case, you obviously know the story of what happened in prohibition. But in this case, you can see the writing on the wall, the mood, the sentiment changing, and all the catalysts that have happened in the past and continue to happen, and the maturation of an industry. And so, we found that the companies in the alcohol and beer sector outperform S&P by, it was, I think, almost 10 percentage points per year for a decade.
Now it was lumpy, and it didn’t all come at once. And a lot of it actually came in the latter half of the decade. But we expected that to be the case for the 2020s. And so – and actually, when we wrote this article, we said look, you also can’t just be agnostic as to valuations. When we launched the fund, we had like a 25% or 30% chunk in cash. We said, you know, you have to be thoughtful on how you approach this. And not surprisingly, you know, the industry got smashed over the ensuing 6 months, 12 months, but you know, seems to have bottomed and is during coronavirus it certainly seems to have turned the corner on news flow on revenue.
I mean, some of these companies are, you know, it’s not like the internet sector in the 1990s, where they weren’t making any money. I mean, many of these companies are generating very significant revenue and drawing the attention of the large multinational tobacco, alcohol conglomerates. So, it’s a sector that I think is worthy of a long-term bet. You know, I’ve mentioned on social that I’ve, you know, doubled my investment and doubled again, as it’s gone down with the intention of holding it for 10 years.
Now, we’re the cheapest fund in the category, you know, per a lot of our, you know, beginning of this discussion, but also, touching on something I think it’s really important and applies to all funds is that, you know, many funds out there will do short lending of their underlying shares. And not to get too wonky, but the good companies will then distribute that short lending income to shareholders.
You know, so Vanguard does it and in the S&P 500 style funds that may only be 0.1% a year in revenue, or 10 basis points, but in many funds, and many funds BlackRock and others have detailed this in various educational pieces, where the short-lending revenue will be more than the management fees of the fund. So, you may have like a small cap, micro cap fund that has a 40 basis point fee, but it may distribute a 100 basis points in short-lending revenue, meaning for all intensive purposes, you’re getting paid to own that fund, and that’s pretty cool, right?
JL: Yeah, totally.
MF: So, I can’t claim the exact amounts because it’s not consistent, but you can look it up on the online documents and see that for this fun, not surprisingly, but many strategies like this can generate not just tens of basis points, but hundreds and hundreds of basis points. I mean, I think there was an example of back in the day where like the solar ETF was generating like 5 percentage points or 7 percentage points of income per year, based on the short-lending revenue. Now, you have to be careful because there’s some fund companies out there that keep it or keep a large portion of the short-lending revenue, which we think is pretty bad behavior. But, we don’t keep any…
JL: Yeah. They bury that and their perspective is on like [Page 88] or something.
MF: Yeah, yeah. So, we distribute all of ours, which we think is important.
JL: Yeah, no, that’s great. And I guess because you’re dealing with companies with smaller floats, cost to borrow can be quite expensive in some cases, so you’re able to make real money by doing it, and then you’re passing it back on to people.
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So, you’d mentioned, you know, obviously, cannabis stocks, publicly traded cannabis had really great run up until 2018. Then the funds started launching and I’ve just, you know, somebody who’s been looking at the ETF space for 13, 14 years at this point, I have noticed often that when a – just a rash of thematic funds launched together, maybe four or five funds come out in a few months. That often signifies the top for that theme for at least some period of time because everybody wants to jump on the bandwagon.
In terms of current valuations of this space, you’re saying, you think things have bottomed, do you think that cannabis as an industry, publicly-traded cannabis has reached a point right now in 2020, where the risk reward outlook is really in favor of these companies? Have they grown into decent valuations or shrunk into decent valuations at this point?
MF: Not universally, but many have and you know, let me make a comment, you mentioned which is important. You know, anytime you’re looking at a fund company, we have a lot of investors, we have over 50,000 investors that will say, Meb you’re a small company. I’m worried you might shut down one of your funds. And I always laugh at that, because who shuts down most of the funds is the big guys, because these guys have hundreds of funds. And they’ll just throw everything against the wall. They’ll launch dozens of funds. And if one or two of those raise assets, they’re happy with it.
So, they just take the spaghetti against the wall approach. And so, when you mentioned many people launching funds all at once and thematic, it’s people just chasing assets, you know, they’re chasing the hot strategy, the hot topic du jour, and to me that is such a foolish and short minded approach to investing. We’ve never closed a single fund, and we have been in business, you know, since 2013, launching ETFs. So, almost a decade now, but you start to look at these fund companies and percentage of funds they’ve closed. It’s often shocking.
So, you know, our goal is to never close any funds, hopefully, but who knows, but as far as the sector, look, you know, this is a 10-year play for us. And I think that when you make some of these bets that seem obvious is the wrong word, but just sensible. The valuation that we talked about, you know, others I’d put into this category would be betting on Africa. You know, that’s a theme that I think has huge tail winds, but you’re not going to play out in the next month or quarter or a year, you know, it’s playing out in the decade.
MF: So when you have me back on in 2030, we may be doing like hologram version of this. We can talk about what’s worked and what didn’t. And what we see is the opportunities in 2030, but yeah, I mean, I think many of these companies are trading at absolute – I mean they were down 50%, 60% you know, some of them down more.
JL: You know, Aurora, I think it’s down 90% or more from it’s…
MF: That does a lot to cure valuation when you go down 90%, right. So, you know, unlike many things, the [indiscernible] of the internet industry, you get some hucksters and shysters and people that are not great managers. And money always attracts.
JL: Unsavory types, yeah.
MF: Right. So, we’ll see, but, you know, I think it’s a bet worth making for sure.
JL: Yeah, no, definitely. And I guess I would take a bit of umbrage with your statement about thematic funds in general, because I think there are some other spaces where you can take kind of little direct bets with a few percent of your portfolio. Like, I think back in around 2007, when I started looking at exchange traded funds, I just looked at the situation with global population growth and water. And I said, you know what, I’m going to just put a little bit into water technology fund, because this is an industry that clearly must get significantly bigger. And that’s been – it’s been a good strategy, I think cannabis with the legalization coming up.
The other reason I think thematic funds can be great is a behavioral one. And that is, so I’ve, you know, I have some friends that asked me advice occasionally, I’m not a financial professional, or [indiscernible] or anything, but I’ll give them just basic sound advice. You know, depending on how much risk you want to take, you should have X amount allocated to stocks versus bonds, you know, split globally. And a couple of people, instead of taking their money and putting it into other kind of stupid, get rich, quick things, you have them put 90% or 95% of their portfolio into just kind of boring, you know, index funds, maybe some value or size tilted things. But then you give them 5% of their portfolio and say to them, you know, like what themes are you really into? Or what’s your cause?
Like, you really into gender diversity, so here is a fund that you can actually invest in. Kind of gets people psyched about investing in a way that I don’t think the S&P 500 or the Russell 2000 ever can. So, I think that there might be a positive aspect even though I do agree that a lot of the thematic funds are kind of just marketing ploy to some extent, but I do think there’s positive behavioral aspects to them for many younger investors in particular.
MF: Well said.
JL: Awesome. Okay, so getting back into cannabis here, we are obviously coming up to a major U.S. election, there are at least some people who think that this may be an inflection point for cannabis becoming legal federally, not really clear looking at Joe Biden’s policies that he will be the one to push federally legal cannabis, but I don’t think it can be ruled out, but I think it begs a larger question of, right now, one of my issues with investing in the cannabis space and why I haven’t bought an ETF in this space is that most of these funds and yours included are loaded up on Canadian LPs and Canada is, you know, good for them for legalizing.
They’re relatively small market. They are, you know tenth of the population of the U.S. And I just wonder how great the value proposition is before cannabis becomes federally legal in the United States. So, how important is federal legalization for cannabis to really reach its full potential? If cannabis doesn’t become legal in the next decade, does that blow up your thesis or not necessarily?
MF: You know, I think betting on politicians is always a risky proposition, but it does seem that the mood has shifted. I had commented earlier this year, I said, there’s potential that within the U.S. that both the sides of the aisle are going to try to outwork each other and try to pass federal legislation at least for banking before the election. Well, we’re getting close to that. So, unlikely that’s going to happen. But it seems like the writing is on the wall. I mean the mood, all those sentiment, all the mood has shifted. And if there’s anything that politicians like, it’s tax revenue. And Colorado kind of being the first used case, you’ve seen, I think it was within the first year that the tax revenue on cannabis outpaced tax revenue and alcohol and Colorado is a big beer drinking microbrewery state.
So, you see politicians want to get their greasy hands all over a new source of revenue. I think there’s very low chance of it not happening at some point universally. You know, you never know, with elected officials, but that would seem to be a low probability event, I think. But if it doesn’t happen, you know, you’ve already built many billion dollar businesses that I think continue to grow and scale and really continue to do well, not just in the U.S. and Canada, but in many other countries all around the world. One of my biggest bullish parts of the thesis, which isn’t there yet, was the biggest consumer of cannabis is Asia. You know, so as Asia comes online, at some point, you know, that to me is a massive tailwind over time.
JL: Sure. And I did not realize that about Asia. Anyway, I’m mindful of your time here. I want to thank you for being so generous with your time today. It’s been great. We’ll have to pick it up some other time. Just tell listeners where the best place to further research everything we’ve been discussing here today is.
MF: Almost anywhere. Come say hi in Los Angeles. We’re located in Manhattan Beach, six feet away, of course. But we got a blog, mebfaber.com. It’s got lots of podcast on there. Meb Faber show. My day job is running Cambria Investment Management. You can also go to cambriafunds.com and find all of our various ETF offerings and you can watch me on YouTube and pick fights on Twitter or at least behave, mostly academic investing fights, but…
JL: I’d say they were the best kind of fights.
JL: Nice. And just so everybody out there understands, you are long pretty much all of your company’s funds right?
MF: Yeah. If I’m not going to believe in them who else is? I’m a big proponent of skin in the game.
JL: Nice. Yeah, we like people that eat their own cooking. Here at Seeking Alpha it’s kind of our – been our methodology from day one. Opposite of your Wall Street Journal paid coverage can actually own anything you write about, environment who’s going to do better due diligence than the person that puts their actual money behind their investing thesis. So, anyway, stay well, wishing you health and sanity in the rest of this year and beyond. And hope we can do this again sometime.
MF: Awesome. Let’s not wait till 2030, we’ll do it sooner.
JL: Yeah, awesome. Cheers.
Disclosure: I am/we are long TOKE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Meb Faber is long TOKE.
Jonathan Liss doesn’t have positions in any stocks or funds discussed in today’s show.