Meb Faber 7.4 36 ideas

Speaker explicitly recommends a 10-20% allocation to trend-following strategies for most advisors, stating it is "about as close as you can get" to a magic free diversifier and is the "premier diversifier" to a buy-and-hold portfolio. Trend-following provides an asset-class and approach-agnostic source of returns that is historically uncorrelated to traditional equities, improving portfolio resilience. LONG because it is viewed as a high-conviction method to address a common portfolio construction mistake and improve risk-adjusted returns over the long term. Extended periods of underperformance (e.g., during strong, steady bull markets) and implementation costs.

Speaker states foreign and emerging markets had a "monster year" (e.g., +30%), and you could see an "extended move in foreign equities over the next few years." This is due to a combination of relative undervaluation, recent outperformance, positive momentum, and most investors being structurally under-allocated to non-US markets after a long cycle of US dominance. LONG because the shift away from US concentration and toward global diversification is believed to be in its early stages and could persist for years. A resurgence of US market strength and dollar momentum could halt or reverse the relative outperformance.

I got a bunch of Mac 7 and you know what? I can't take it anymore. I see some of these starting to underperform and now I realize they don't always outperform forever and I need to diversify. Wealthy investors and advisors are sitting on massive, highly concentrated gains in mega-cap tech. As momentum slows, there is a structural and urgent push to use complex tax vehicles (like Section 351 ETF seeding and 721 exchange funds) to offload this concentration risk. This creates a hidden, structural supply overhang for the market's biggest historical winners as early holders look for the exit. WATCH. The smart money is actively paying legal and structuring fees to figure out how to exit their massive mega-cap tech winners without paying taxes, signaling a desire to rotate away from top-heavy concentration. Mega-cap tech companies continue to post massive earnings beats, punishing those who diversify too early and forcing capital to remain in the market-cap weighted leaders.

The biggest Achilles heel of market cap weighting is people are kind of stuck in these positions and they get bigger and bigger. Theoretically, if you could sell out of them, recycle into for example small caps, smaller companies, that theoretically makes the ecosystem a little bit stronger. The current tax code creates a dead weight loss that traps capital in massive, appreciated mega-cap stocks because investors refuse to pay the capital gains tax to sell. As the financial industry scales tax-efficient diversification tools, this trapped capital will finally be unlocked and recycled down the market cap spectrum into under-owned, smaller companies. LONG. The proliferation of tax-efficient exchange funds and ETF conversions will systematically funnel capital out of the top-heavy indices and into broader, smaller-capitalization equities. The IRS cracks down heavily on Section 351 and 721 exchanges, keeping capital permanently trapped in mega-cap tech stocks due to the friction of capital gains taxes, or small caps continue to suffer from higher relative interest rates.

"You got funds like DXYZ... It'll be curious to see how these in my mind this mismatch of liquid illquid gets handled... Do you think the Robin Hood fund is going to hit a 25% premium or discount first? I imagine it'll do both." Closed-end funds holding private assets (like SpaceX or OpenAI) often trade at massive dislocations to their Net Asset Value (NAV). Meb highlights the extreme volatility and "strangeness" of these vehicles. Watch for extreme dislocations (deep discounts to buy, massive premiums to sell/short), but avoid as a passive hold due to premium risk. Buying at a 100%+ premium (as seen historically) guarantees underperformance relative to the underlying assets.

"SYLD... has struggled recently, placing it in the bottom 11% versus its category in 2025... P/E for SYLD was 12.52... S&P a whopping 27.61." The fund has underperformed for two consecutive years (2024-2025), creating negative sentiment and outflows. However, the underlying holdings are trading at less than half the valuation of the broad market (12.5x vs 27.6x). Historically, buying quality strategies during periods of peak pessimism and low valuation leads to significant mean reversion and outperformance. Long positions are warranted to capture the valuation gap as the "rough patch" normalizes. The "value trap" dynamic could persist longer than expected; the strategy is actively managed and may deviate significantly from benchmarks.

"S&P [P/E was] a whopping 27.61... Valuation metrics offer little insight into potential short-term market movements, they have historically exhibited explanatory power over extended horizons." The speaker uses the S&P 500's high valuation as a cautionary benchmark. A P/E of 27.6x implies future returns are "constrained by starting prices." The logic suggests that capital should be reallocated from the expensive broad index into cheaper pockets of the market (Value/Shareholder Yield). Avoid or underweight broad large-cap indices due to compressed equity risk premiums and high multiples. Momentum in large-cap growth/tech could continue to defy valuation gravity in the short term (irrational exuberance).

"For the category, which is Morningstar Midcap Value, [the P/E was] 17.86." While the speaker is pitching a specific active fund (SYLD), he explicitly benchmarks it against the Midcap Value category. He notes this entire category is trading at a massive discount to the S&P 500 (17.86x vs 27.61x). Investors who prefer passive exposure over active management can still capture this thematic "value spread" by buying the index tracking the Midcap Value sector. Long Midcap Value as a sector rotation play away from expensive large caps. Economic recession could hurt mid-cap companies more than diversified large caps.

Meb points out that European banks have quietly outperformed the "Mag 7" and the S&P 500 over the last 1, 3, and 5 years. This performance divergence signals a regime shift from growth/tech to value/financials that the broader market has largely ignored. The trend is established but sentiment remains bearish/neutral, offering a "wall of worry" to climb. Long European Financials to chase established momentum in a neglected sector. A European recession or ECB policy error cutting rates too aggressively, hurting bank net interest margins.

Faber notes that while the US is trading at a "nosebleed" 40x P/E (implying near-zero real returns for the next decade), Foreign Developed markets are in the low 20s, and Deep Value/Emerging markets are in the low teens. This valuation spread is as wide as it was in the 1980s (Japan vs. World). The mean reversion trade has already started (2025 was a monster year for ex-US), and momentum is favoring the cheapest global assets over the expensive US market cap leaders. Long Global Value and International Shareholder Yield to capture the continued rotation out of the US. A "melt-up" continuation in US tech/growth that defies historical valuation gravity.