Radio Show: Meb on Markets at Extremes, Anything BUT Market Cap, and Embracing Volatility | #616

What It Covers

Meb Faber examines 2025 market extremes with US stocks at 40 CAPE ratio and two-thirds of global market cap, while foreign markets outperformed with 30%+ returns. Discussion covers equal-weight indexing, trend following strategies, gold's historic rally to new highs, and the five critical portfolio mistakes investors make including ignoring fees and lacking real asset exposure.

Key Questions Answered

• •Market Cap Concentration Risk: US stocks reached 67% of global market cap versus Japan's decline from 40% to 5% since the 1980s, with CAPE ratio at 40 and one-third of S&P trading at 10x sales or more. Equal-weight indexing historically outperformed in 13 of 15 years before recent market cap dominance, suggesting potential reversion as valuations reach extremes.
• •ABMCW Strategy (Anything But Market Cap Weight): Breaking the market cap link through equal-weight, fundamental-weight, or multi-factor approaches should outperform when starting from 20+ PE ratios. Market cap indexing acts as basic trend following without valuation anchor, creating vulnerability at extremes. Mid-cap, small-cap, value, and shareholder yield strategies positioned to benefit from mean reversion over next 5-10 years.
• •Five Portfolio Mistakes Framework: Ignoring fees and taxes costs 1-2% annually, turning best-performing allocations worse than worst performers. Home country bias, no real assets exposure (REITs, commodities, gold, TIPS, farmland), no trend following, and no value tilt represent systematic errors. Average mutual fund fee of 1.25% plus 1% advisor fee eliminates entire allocation benefit versus low-cost ETF alternatives.
• •Trend Following as Multi-Problem Solution: Trend strategies solve three portfolio gaps simultaneously by providing downside protection (left tail), upside exposure to uncorrelated assets (right tail), and automatic allocation to foreign stocks, value, and real assets when trending. Current trend portfolios hold 10-30% in gold/silver with multi-bagger gains, plus exposure to outperforming foreign markets, with built-in exit signals for risk management.
• •Gold-Bond Substitution Equivalence: Historical analysis shows substituting gold for bonds in 60/40 portfolio produces similar long-term returns despite different characteristics, challenging conventional fixed income assumptions. With gold at all-time highs and US dividend yield at 1.1%, real assets now outperform traditional bond allocations. Pre-1965 US coins (90% silver) worth $20-50 each versus face value demonstrate tangible wealth preservation.