In a recent episode of the Excess Returns podcast, investment manager and researcher Meb Faber shared several thought-provoking insights about investing and wealth building. Here are five key takeaways from his discussion:
1. Rethinking Dividends
Faber challenges the conventional wisdom around dividend investing, arguing that while dividends aren’t inherently bad, they shouldn’t be the primary focus of an investment strategy. He points out that dividends are essentially a value factor, and investors might be better served by focusing on value directly. For those in high-tax states, dividends can be particularly tax-inefficient. The key insight is that while dividend investing isn’t necessarily wrong, there may be more optimal approaches available.
2. The Ancient Wisdom of Asset Allocation
Interestingly, Faber draws inspiration from a 2000-year-old investment principle found in the Talmud, which suggests dividing one’s portfolio into thirds: business, land, and reserves. He notes that this translates remarkably well to modern portfolio theory – stocks (business), real assets like commodities and real estate (land), and bonds (reserves). This balanced approach to asset allocation has stood the test of time and remains relevant today.
3. Wealth as Freedom
Rather than focusing solely on numerical targets, Faber emphasizes viewing wealth through the lens of freedom – the ability to make choices about how you live your life. He warns against the “hedonic treadmill” where people constantly adjust their wealth targets upward, noting that research suggests happiness from income tends to plateau after a certain point. The goal should be reaching a level of financial independence that provides the freedom to choose your path.
4. The “Get Rich” vs. “Stay Rich” Portfolio
Faber makes an important distinction between strategies for building wealth and preserving it. He emphasizes that these require different approaches, particularly relevant for business owners who transition from building a company to managing the proceeds from its sale. Once you’ve “won the game,” as he puts it, the focus should shift from maximizing returns to protecting what you’ve built.
5. The Case for Trend Following
Perhaps his most contrarian view is on trend following, where he advocates for a much larger allocation than most professionals recommend. While many investors might allocate 10-20% to trend following strategies, Faber suggests a much more substantial position could be appropriate. However, he acknowledges this approach requires both the right temperament and proper portfolio sizing to be successful.
Key Takeaway
The overarching theme from Faber’s discussion is the importance of challenging conventional wisdom while maintaining a balanced, thoughtful approach to investing. Whether it’s questioning traditional views on dividends, drawing inspiration from ancient wisdom, or taking a contrarian stance on trend following, his insights remind us that successful investing often requires thinking differently while staying grounded in fundamental principles.
