Meb Faber: Own The Most-Beaten-Down Stocks

April 08, 2014 Where does this ETF fit in a portfolio? Does it replace anything?

Faber: Theoretically it could replace the entire equity allocation. Most investors will not likely feel comfortable moving too far away from their home country and global market-cap-weighted portfolio. A lot of them will use it as part of foreign, developed or emerging allocation, or some sort of satellite allocation.

Theoretically, it could also be the entire foreign portfolio because, in general, while it’s heavy in Europe now and has bits of South America and Russia, its name is agnostic, and in certain periods, like in the late 1990s, it would probably own a lot more in Asia, and in the early ’80s, it would have owned U.S. What are some of the risks with this approach?

Faber: The biggest risk is the emotional one. Markets can always get cheaper, and while the average global valuations are as low as they were in ’08 and back to the early ’80s, which we think is a great thing, they could certainly get cheaper.

When the U.S. went to a CAPE of 5—or in Greece or Russia, when the valuations got to 15, then 12, then 10, then 8—everyone was saying it could not go that low, and it kept going down in some cases. In Greece’s case, it hit one of the lowest values we’ve ever seen, which was 2. Typically, anything below 7 is a generational buying opportunity, and certainly below 10 or 12 is a great investment idea.

The biggest challenge is investing when everyone else isn't.

There's a famous investment quote—I think Mark Yusko uses it a lot—that says that investment is the only area where when things go on sale, everyone runs out of the store. With cheap markets, as they decline, people run away and want to sell. But typically, that’s the best time to be buying. What is the main takeaway you hope investors get from your book, from this approach?

Faber: The first step is to recognize you likely have a home-country bias. In the U.S., that means around 70 percent of your portfolio is likely in domestic equities. Then, realize that breaking that market-cap link is the best thing you can do. Investors should have a lot more money in foreign stocks, and we think it should be in value stocks.

Our fund evaluates the stocks within each country. It goes and picks the 10 best value stocks out of the top 30 market cap in each country.


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