From The Advisor’s Fuel Podcast with Adam Koós, CFP®, CMT®, CEPA — a conversation with Meb Faber, CMT, co-founder and CIO of Cambria Investment Management and host of The Meb Faber Show.
Almost every advisor believes stocks beat bonds over the long run. Meb Faber agrees. He just wants you to look closely at the giant asterisk on the word “long.”
Faber has spent two decades turning uncomfortable market truths into research, funds, and a body of writing that quietly challenges a lot of what advisors were taught. In this first half of a two-part conversation, he digs into why trends persist, why drawdowns break otherwise disciplined investors, and why chasing whatever’s hot is the most seductive mistake in the business. Here’s what stood out.
That stocks always win over any horizon a real person actually invests over.
Faber is clear that stocks are the premier long-term asset. The problem is the gap between the time horizon over which markets deliver that outperformance and the far shorter horizon over which humans want certainty. US stocks have compounded at roughly 15% a year since 2009, one of the best stretches in history, turning into something like a ten-bagger. But there have been long periods where stocks underperformed bonds for decades, went nowhere for decades, or trailed other assets entirely. Faber points out that US stocks have actually underperformed REITs and gold so far this century.
He reaches for the classic study of global markets back to 1900, noting that everyone assumes the US was the single best-performing market when in fact a couple of smaller countries edged it out, and several markets essentially went to zero along the way. The lesson isn’t to avoid stocks. It’s that owning them requires surviving the path, and the path is always uglier than the average return suggests.
It comes from one of the oldest and most durable ideas in markets: trend following, which traces back over a century to Charles Dow.
Faber’s often-cited line about the 10-month simple moving average (essentially the same signal as the 200-day) grew out of that long tradition. He uses monthly data for two practical reasons: it goes back much further, and it means he doesn’t have to stare at charts every day. His deeper point is that trend following is far more mainstream than people admit. Even a market-cap-weighted index fund, the thing everyone holds as the definition of passive, is at its core the world’s simplest trend-following strategy. The only variable determining your weight in a company is its price. As a stock rises, you own more of it; as it falls, you own less, until it eventually drops out. Nobody calls that market timing, but the mechanism is the same.
This connects to what Faber calls the power-law nature of markets. Most long-term returns come from a small fraction of stocks, the rare 10-, 100-, or 1,000-baggers. He cites research on the best-performing US stock of the last century (Altria, reinvesting dividends), which “only” compounded at about 16% a year yet produced a total gain in the millions of percent. The takeaway pairs neatly with trend following: the big money is made in sustained uptrends, and the vast majority of damage happens in downtrends, where volatility explodes.
Because losing money makes people behave irrationally, and that emotion feeds on itself.
Faber’s framing is that each additional 10-percentage-point decline is like moving up the Richter scale: the pain gets exponentially worse, not linearly. Down 20 is uncomfortable; by down 40, 50, 60, people are losing their minds. He compares it to watching someone go on tilt at a poker table or spiral in a gambling spree. Fear, not reason, starts driving decisions, and that panic is exactly why historical volatility runs so much higher in downtrends than in the steady grind higher.
There’s a related trap he raises, one Adam has spoken about too: an entire generation of investors, and advisors, has never lived through a genuine bear market with real money on the line. The 20% dips of recent years don’t count. To have felt a true crash in a meaningful account, you’d have to be well into your forties. That inexperience is dangerous, because your formative market memories shape how you invest. Faber notes a Vanguard chart showing equity allocations differ dramatically based on the era someone started investing. Where you began shapes what you believe, and then you wrongly extrapolate it forward.
Because most people manage their money by the seat of their pants, without a written process, so emotion fills the vacuum.
Faber points to sentiment surveys as proof. The single most bullish reading ever recorded was December 1999, right before the worst possible time to be optimistic. The most bearish was March 2009, right at the bottom. Left to instinct, people buy what’s already gone up and sell what’s already gone down. His analogy: investing without a written plan is like dieting or exercising without one. When the moment of weakness comes, you reach for the cookie at midnight. The whole thesis of the new book he’s writing comes down to a single question every investor should answer before it matters: when it hits the fan, what are you going to do?
He also flags a foundational misconception worth correcting with clients: the traditional ~10% stock return assumes you reinvest dividends. Spend that income instead, and you get a meaningful fraction of that return, not the full number.
It starts with owning the world, staying diversified across asset classes, and keeping costs and taxes low.
Faber calls this the best time in history to be an investor, because you can access nearly the entire global market for almost nothing. The catch is that limitless choice leads people into a messy patchwork of hundreds of unrelated funds. His preferred starting point is simple: buy the world. Be global (the US is a majority of market cap but only about a quarter of world GDP), hold equities as the premier asset, use fixed income as a diversifier, and include real assets like REITs, TIPS, commodities, and commodity equities.
But the single biggest decision dwarfs all of these: the decision to save and put money to work in the first place. Once you’ve built a low-cost, tax-efficient, diversified portfolio, Faber argues you’re already ahead of 99% of what’s out there. From there, if you want to be active, be genuinely active, concentrated and different, rather than paying up for something that hugs an index.
Fairly overrated as it’s commonly practiced, though not harmful in itself.
Faber gives the historical context: for centuries, dividends were the entire point of owning a company; investors didn’t expect capital gains. That shifted in the 20th century. Today the market’s dividend yield sits near record lows, around 1.2%. When you specifically sort for high-dividend-yield stocks, you’re really getting a backdoor value tilt, because a high yield often means the price has fallen relative to the payout, which tends to select for more established but sometimes junkier, more indebted companies. That value tilt historically beats plain market-cap weighting by a bit, but so does almost any tilt, precisely because market-cap weighting has no tether to fundamentals and piles the most money into whatever has already risen most.
Adam’s cautionary tale drives the danger home: a prospect once refused to sell a stock paying a 24% dividend. Adam guessed the holding immediately, because the yield had “doubled” only for the ugliest reason. The stock had fallen by half, mechanically doubling the yield. A fat yield is not the same thing as a good investment. And to actually earn the long-term return, you still have to reinvest those dividends rather than spend them.
They play a useful role now that yields have recovered, but they are not the reliable stock hedge many investors assume.
Faber’s nuance: bonds are easier to reason about than stocks because, absent default, you largely get the coupon, and government default risk is minimal. The real wild card is inflation. He likes to quiz people on the “safest” asset: most say T-bills, which is true nominally, since they don’t drop. But on a real, after-inflation basis, T-bills have lost half their value in the past. The genuinely safest holding, counterintuitively, turns out to be a diversified portfolio of stocks, bonds, and real assets, not any single instrument.
His current warning is one where he’s out of consensus: he doesn’t understand why so much of the bond market offers so little extra yield. Corporate bond spreads over T-bills are among the tightest ever. Historically, buying riskier bonds when they offer little spread over T-bills has been a poor deal. He also reminds advisors that 2022 shattered the assumption that bonds always cushion equity drawdowns. Sometimes they help, sometimes they don’t, much like gold.
As one asset-class-agnostic piece of a diversified whole, not a religion.
Faber’s most striking illustration: take the classic 60/40 portfolio and swap the entire 40% bond sleeve for gold. Intuitively that should torpedo returns. Over the last 50 to 100 years, it made essentially no difference to the end result, even though almost nobody would actually do it. The point isn’t that gold beats bonds; it’s that every asset has its season, and the better answer is usually “some of both” rather than going all-in on one thing. Faber urges advisors to approach markets with a beginner’s mindset and avoid becoming a “gold bug” or a “stock guy.” As the old adage goes, there’s always a bull market somewhere, and it’s rarely where you’re emotionally attached.
This is where he and Adam land on shared ground: don’t try to predict what’s next. As Adam puts it, be a trend follower, not a trend predictor. Or in Faber’s version, quoting a line often attributed to Ned Davis, price is the one variable that can’t diverge from itself. Valuations can always get more expensive; the truth is ultimately in the price.
Chasing performance, full stop.
Faber’s favorite reality check comes from asking how long you’d give an underperforming strategy before selling. Most advisors say zero to three years. When he asked Ken French (the longtime research partner of Nobel laureate Eugene Fama) how long you statistically need to judge whether an active strategy is good, the answer was 64 years, far longer than anyone will actually wait. That mismatch is the engine of bad behavior. Investors and institutions alike buy what’s hot, watch it cool, then buy the next hot thing, a pattern visible in decades of fund-flow data. His classic example: a fund can be the top performer of a decade while the average investor in it loses money, because they piled in only after it had already run.
Faber makes a point of publicly profiling his own struggling strategies (one email to 150,000 investors was literally titled “Totally Not Crushing It” about a global deep-value fund that later surged). And he’s candid with clients who complain a fund is down after six months: it can get far worse, and it might underperform for years before its turn comes. What he has never once heard, across thousands of conversations, is a client calling to sell because a fund has done too well and it’s time to rebalance out of it.
Buy-and-hold’s Achilles’ heel is the drawdown, and trend following exists to help investors survive it.
Faber lays out the compounding math advisors know but clients feel in their gut: down 50% requires a 100% gain to recover; down 75% requires 300%. Worse, a traditional asset sits at all-time highs only about a quarter of the time and spends most of its life in some form of drawdown. Investors anchor to the peak value, so a decline from a hard-won $1 million portfolio feels like loss even when the plan is intact. Told in advance that a holding could fall 40%, they nod. When it actually happens, alongside a mortgage, kids, and college bills, many simply capitulate at the worst possible moment.
The part that breaks Faber’s heart is what comes after: he’s talked to countless investors who sold near the 2009 bottom and never got back in, missing the entire recovery. That’s the core flaw of a pure exit strategy without a disciplined re-entry. It’s why he allocates far more to trend following than almost any institutional peer (his default is around 50%, versus the 5 to 10% most consider). The reward is a better shot at reaching the finish line; the cost is looking different from your neighbor when buy-and-hold is winning.
It maps directly onto what Adam tells advisors. Clients want to know two things during every correction: am I going to be okay, and are you actually doing something about it? “Just stick with it, everything comes back” is an increasingly hard answer to sell. A rules-based process, whether it’s the advisor’s own or a manager’s like Cambria’s, is what lets you answer yes to both.
Faber’s through-line, that a written, rules-based process beats emotion and performance-chasing every time, is exactly the discipline that separates a practice that plateaus from one that scales. If you want to build that kind of process into your own advisory business:
For more on rules-based defense advisors can actually execute, see our conversation on market breadth and risk management with Vincent Randazzo. And for the behavioral psychology behind reading the tape, try decoding market psychology with David Keller.
Listen to the full episode here.
Stay tuned for Part 2, where Meb gets into applying these ideas through Cambria, the mistakes advisors make with client allocations, and the behavioral biases quietly killing wealth-building efforts.