Meb Faber: Own The Most-Beaten-Down Stocks

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April 08, 2014
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GVALCambria Global Value ETF
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The search for value stocks should and can be global using ETFs, Mebane Faber says.

When it comes to investing in equities, it pays to be a value investor, and on a global scale. That’s the message Mebane Faber, Cambria’s chief investment officer, conveys in his latest book, “Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market.”

The 80-plus-page book¸ released last month, came alongside the launch of Cambria’s latest ETF, the Cambria Global Value ETF (GVAL), a passively managed fund that invests in 100 stocks of the world’s 11 most undervalued developed and emerging countries. Think of the portfolio as the “Terrible 11”—teeming with heightened expected returns and poised to bounce back up.

While most might find the idea of buying into the most-beaten-down markets daunting, Faber argues GVAL could replace your foreign stock allocation, if not replace your entire equities allocation.

ETF.com: You’ve published a book that focuses on the benefits of value investing on a global scale. You also have a brand-new ETF that sets out to do just that. Why is it so important to focus on value when looking at an equities allocation?

Meb Faber: It seems fairly obvious to me as a practitioner that bubbles do exist. Valuation is so important because if you look back to the late 1990s, the markets in the U.S. were very expensive, and we’ve had terrible returns since.

The challenge is identifying the bubbles and avoiding their crash—the resulting price declines—as well as being able to invest in their aftermath. To do so, we need to come up with a framework or a metric for being able to identify markets with what we call “fundamental anchor.” Our preferred metric is the 10-Year Shiller CAPE [Cyclically Adjusted Price/Earnings] ratio.

It’s all about avoiding the times when there can be massive wealth destruction because of the expensive markets and also investing when markets are cheap.

ETF.com: In your book, you say things like sentiment and inflation rate ultimately help determine how much a stock is worth. How do you measure value as an investor?

Faber: There are different metrics, but a lot of the valuation indicators will end up lining up on the same side for a stock or country. If you're looking at a country like Russia, most of the valuation metrics line up on the same side, and universally say that it’s cheap. Whereas for an expensive stock, like Tesla, or Amazon, a lot of the valuation indicators will say the same thing.

There's nothing magical about CAPE, but it’s our favorite metric, because it’s been around—variations of it—for over 100 years. It balances out the business cycle over a 10-year period—contractions as well as expansions. It gives the investor, using the U.S. as an example, a framework for trying to assess where we stand in terms of valuation.

 

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