Meb Faber, co-founder and chief investment officer of Cambria Investment Management, joined Phil Rosen on Full Signal to discuss the bear market in diversification, cheap stocks outside the US, global buybacks and the AI trade.
His core takeaway is that after a historic run for US large caps, better opportunities now sit in value, smaller companies, foreign markets and stocks that return cash to shareholders.
What Faber means by the bear market in diversification
"Macro backdrop is bull market, baby," Faber said, noting the S&P 500 has compounded at about 15% a year since 2009.
Cambria found only three comparable stretches since 1900. They were the 1920s, the Nifty Fifty era and the dot-com boom. His point isn't that a crash must follow, but that investors shouldn't expect 15% returns forever.
Over this cycle, he said, almost any diversified portfolio has lagged the S&P "probably 15 of the last 17 years."
Why US stocks look expensive next to the rest of the world
The US is about two-thirds of world stocks and 10 times the size of the second-biggest market, Faber said. Japan was 40% of the total in the 1980s and is about 5% now.
In Cambria's quarterly valuation update of 45 stock markets, the US is one of the most expensive, with a 10-year P/E above 40 versus an average in the high teens to low 20s.
"Investing all your money in one country has been a terrible, horrible, very bad, awful idea," he said.
He called today "an expensive market in an uptrend," historically the second-best environment, and said "there's no ceiling to valuation." He sees better value in US mid caps, small caps and value stocks, plus foreign and emerging markets.
The global buyback boom behind the international thesis
Faber's international case rests on a structural shift. US companies began buying back stock en masse in the 1990s, which he said helps explain the S&P 500's record-low 1.04% dividend yield.
He calls cash dividends plus net buybacks shareholder yield, a premier factor for sorting stocks over the past 100 years.
Companies in the UK and China are catching on, and Japan was early to the trend, with buyback charts that "look like J curves over the past 10 years." In Korea, where he said much of the market trades at 0.5 times book value, buybacks are "dry kindling with gasoline on it."
Where the AI trade could go wrong
Rosen asked whether Faber avoids tech because he's cautious on the AI build-out. He said no, noting tech has been a top sector in Cambria's emerging-market fund because those companies are "vastly cheaper there."
One thing this cycle has lacked compared with past market tops, he said, is new stock supply. SpaceX went public in June, and if Anthropic and OpenAI follow, the three "will be bigger than all the IPOs in the 1990s combined," inflation adjusted, he said.
For another quant view on the AI cycle, see Sparkline Capital's Kai Wu on the AI bubble.
How Faber would build a portfolio from scratch
When Rosen asked about building a portfolio for a 30-year-old, Faber said the first decision is simply to invest, noting $1 in the US stock market in 1800 would be worth $200 million today.
From there, he would go global, add real assets like TIPS, REITs and commodities, and use trend following, or managed futures. His default allocation puts half in that strategy, versus the 5% or 10% most investors use, he said.
Energy shows why real assets matter, he said, noting the sector is up more than 50% this year but is just 4% of the S&P 500, versus 30% in the 1970s.
Rosen cited a stat from Faber's book that stock investors spend about 80% of their time below their previous peak. "I think you need to be a good loser to be an investor," Faber said, calling bear markets "a feature, not a bug."
Faber described shareholder yield as "a great Buffett style strategy" that does best when markets go sideways or down. He said all five of Cambria's shareholder yield ETFs are up roughly 20% to 30% this year.
He argued the valuation gap versus the S&P 500 is "Grand Canyon wide." Cambria manages about $5 billion across 20 ETFs and is marking its 20th anniversary, he said.
Tune in to the full conversation with Meb Faber on YouTube, Spotify and Apple Podcasts.
For more on diversification and portfolio building, read Jared Dillian on the AI Top, Bonds and the Awesome Portfolio, and subscribe to the free Opening Bell Daily newsletter for a daily briefing on stocks, macro and Wall Street.
This article is for informational purposes only and is not investment advice. Views and stock opinions are those of Meb Faber and market figures are as stated by the guest at the time of recording.
