Thread by @MebFaber

We sent a fun email to our investors at the start of the year called:

"Totally (Not) Crushing It"

With stocks at all-time highs, (and investor hubris likewise), we thought it would be instructive to profile a TERRIBLE performing strategy...

I'll summarize below...

Since I can't talk much about our ETFs on twitter, we'll just talk strategy...the old white paper detailing methodology here, don't laugh at my picture:

mebfaber.com/wp-content/upl…

PS you can sign up for future emails and letters below that gets a lot more into my "day" job:

Cambria email list:

eepurl.com/6kyPz

Truncated email here:

If you were to believe all the fund marketing emails, every single asset manager would always be "crushing it".

The reason for this hype is obvious – it's easier to market strategies and raise assets with funds that are performing well.

If you've read our recent profiles of Cambria’s top performers, you would probably place us into that category too.

However, we understand performance will wax and wane. We believe every asset class and strategy will have its day in the sun, as well as a great many days in the shade, too.

Most asset managers that have been around a few cycles have the scars to prove it.

Performance chasing the hot funds and what is working right now is tempting, but is that the right decision?

Shouldn't we rather be focusing on sound assets and strategies that are out of favor?

Shouldn’t we be considering the strategies that might be nearing the beginning of their time in the sun, rather than crowding into those strategies that have been in the sun for many years now and perhaps sunburnt?

Were you buying stocks at the depths of 2009, or did it take you some quarters/years before you were convinced it was safe?

Were you buying stocks this past March when markets were down 30%+? Or did you wait until they’d recouped their losses?

(Meb: remember this email was sent at start of 2021)

With this in mind, today, let's focus on a strategy that is assuredly "NOT crushing it," but one that we believe could be set for a rebound – our old paper focused on buying value and momentum stocks, and hedging them based on top down broad market trend and valuation.

While we originally penned this article at the end of 2020, it seems the strategy may have already taken a positive turn. Strategies with exposure to size and value factors have been outperforming the broad market since the beginning of the year, and even back to early November.

But prior to the beginning of the year, this strategy had been a stinker.

Just how bad?

(Meb: I can't mention the fund here, just the strategy, so let's just say.....bad. You can find similar comps in the market neutral funds run by Vanguard, AQR, Gotham etc)

So, are we just total morons, or is the strategy broken? Or perhaps, it's simply going through a rough patch?

Let's dig under the hood.

At its core, the strategy seeks to accomplish two things:

1. Gives investors exposure to stocks ranking highly on value and momentum metrics.

2. Help investors hedge their overall stock exposure incrementally, based on broad market value and trend metrics. For example, right now, it is approximately 50% hedged.

So, how have all of these exposures impacted performance?

Poorly.

Virtually all of them have acted as headwinds in recent years.

Value combined with momentum exposure has underperformed growth and market cap weighted indexes (strike 1).

The broad value hedge has dragged on returns as the US stock market has continued to get more expensive (strike 2).

The broad trend hedge has hurt as the US stock market has rolled over into downtrends, only to rip right back up to new highs (strike 3).

And to top it all off, the choice of hedge also hurts (S&P 500 Index)...strike 4!

Ouch.

Now, the only positive to this story is that anytime we get too despondent about the performance of this strategy, we remind ourselves what we believe is at the root of all this…

A temporary issue related to a particular market approach.

Most market neutral style funds from giant shops in the industry have been equally as stinky. We believe this reflects how this market approach simply isn’t in favor today.

So, why don't we just close down this strategy like many companies do, and funnel assets into what’s working today? (A recent study from Investment Company Institute’s ICI fact book shows that nearly half of all mutual funds from 10 years ago have shut down or merged.)

Because we still believe in the strategy.

Furthering that point, we believe that, with investing, no strategy dominates year-in, year-out. Instead, seasons come and go.

The challenge is that no one knows how long a season will last. Also, it can be very difficult to identify when a season is actually changing. (PS if you’re looking for a good science fiction book check out The Fifth Season.)

amzn.to/3CbP9cz

By the time hindsight proves that there’s been a true regime shift in the markets, Strategy B is now outperforming Strategy A, an investor who missed this shift might be down big, holding onto the old strategy or suffering an opportunity cost of not being up big in new strategy.

In past blog posts, I’ve highlighted a similar point by looking at Warren Buffett – a staunch value investor who has remained faithful to his market approach throughout all sorts of investing styles du jour.

An investor who put $10,000 into Berkshire Hathaway in 1965 would now have about $200,000,000.

That’s Two. Hundred. Million. Dollars.

(Compared to a still respectable approximate $2mm for the broad stock market.)

But most could never have endured the roller coaster to get there. It’s easy to fantasize about the $200,000,000 finish line but think about suffering through one of Berkshire’s multiple 50% drawdowns as Buffett’s value approach fell out of style with the prevailing market regime

Buffett and friends stock picks, and similarly Berkshire’s stock, have gone loonnnnggg periods underperforming the broad US stock market. While we don’t believe our strategy will continue to underperform, we do believe seasons of underperformance is often the name of the game.

But we also believe the way to do well in this game is by remaining faithful to the styles that research suggests will reward investors in the long-run.

We’re confident a time will come again when our strategy's headwinds turn to tailwinds. Value, trend, and small cap exposures would all potentially help performance, as likely would a long bear market in stocks (if we ever have one again...).

Perhaps a tailwind is even taking shape in front of our eyes. AQR’s Cliff Asness laid out the facts on just how attractive value investing looked recently.

The spread between inexpensive and expensive stocks reached historic magnitude. He demonstrated that a number of value metrics and composites posted a value spread that was at or near the 100th percentile going back to 1967.

In other words, there hasn’t been a better opportunity to own value stocks going back over 50 years.

It has indeed been a long and difficult season for value and the other exposures our strategy relies on. But if it changes, this fund could eventually see its day in the sun.

So, as you review your marketing emails with everyone bragging about crushing it, maybe it would be wise to reflect and think...

What's NOT crushing it? And might we be closer to the day in which that strategy BEGINS crushing it?

If you would like to hear more, Please reply and we can setup a time to chat. You can find the fund’s fact sheet here.

Good Investing,
Cambria team

END OF EMAIL

So, here's the fun part. The strategy that we detailed that was so out of favor.....drumroll....

is up about 40% this year. and that is DESPITE being 50% hedged for the entire year.

Is that the turn? Or just a brief blip in the downward suckiness? ¯\_(ツ)_/¯

Anyways, as you feel the tractor beam temptation of chasing the hot manager or strategy isn't the best idea:

https://twitter.com/MebFaber/status/1344091775850299397?s=20

and here

https://twitter.com/MebFaber/status/1189275415464030214?s=20

and another good piece on how long outperformers can go with years of underperformance

https://twitter.com/MebFaber/status/1419696187762876428?s=20

and another from DFA

but yet most people expect and want their performance NOW

https://twitter.com/MebFaber/status/1441115708776087552?s=20