Meb Faber: Warren Buffett Didn't Follow His Own Advice | #631

Meb Faber appears as a guest on 'Compounding Wisdom' during Berkshire Week in Omaha, where he had just spoken at a CFA Society dinner. The conversation opens with a striking statistic: Berkshire Hathaway's outperformance since inception is so dramatic that it could decline 99% and still be beating the S&P 500 — illustrating the power of long-term compounding at superior rates.

Faber challenges Warren Buffett's well-known public advice to just invest in the S&P 500, noting that Buffett himself never followed that approach — he actively sought opportunities globally, including recent investments in Japan. Faber argues this advice errs on the side of simplicity but isn't optimal, though he acknowledges a broad index will serve most investors adequately over very long time horizons.

On global diversification, Faber argues that home country bias — concentrating investments in one's domestic market — is historically a poor strategy regardless of nationality. He notes the US currently represents two-thirds of world market cap but only 25% of world GDP, and points to South Korea as a recent example of explosive returns (nearly 200% in one year) when depressed, hated markets recover. He frames the US's 17-year post-GFC dominance as a cycle that shouldn't be extrapolated indefinitely.

Faber draws parallels between today's AI enthusiasm and the 1990s tech bubble, noting that even great businesses like Cisco underperformed as stocks for a decade after 1999 due to excessive valuations. He emphasizes that the quality of a business and the quality of a stock investment are distinct considerations.

On dividends and shareholder yield, Faber argues that focusing solely on dividends is incomplete. He explains that a $100 stock paying a 5% dividend will drop to $95 on the ex-dividend date — there's no free lunch. He advocates for a 'shareholder yield' framework that combines cash dividends with net stock buybacks to get a holistic view of how companies return capital. He notes that US companies now buy back more stock than they pay in dividends, and ignoring buybacks means ignoring half the capital return picture. He also warns about share dilution, particularly from stock-based compensation common in California-based tech companies.

Faber discusses the democratization of investing, noting stock ownership has risen from roughly 8-10% of Americans in the 1980s to about 50% today. He strongly supports broad stock ownership but criticizes the casino-like education many new investors received during the pandemic era — through meme stocks, zero-day options, and prediction markets — rather than learning about long-term compounding.

On behavioral finance, Faber stresses that the biggest risk for most investors isn't choosing between 8% and 10% returns, but rather getting emotionally forced out of the market entirely. He cites Charlie Munger's warning that investors unwilling to accept 50% drawdowns should expect mediocre returns, and Jack Bogle's inversion of 'don't just stand there, do something' — arguing inaction is often correct.

The ETF industry discussion covers how John Bogle's index fund innovation was primarily a cost-reduction vehicle, and how the ETF structure improved on mutual funds through tax efficiency — the SPDR S&P 500 ETF has never paid a capital gains distribution in 30+ years. Faber argues tax alpha dwarfs most other sources of return enhancement. However, he expresses concern about the proliferation of low-quality, gimmicky ETFs, noting there are now more ETFs than stocks, and that the same era that made sophisticated investing accessible has also made it easier to 'totally implode your portfolio.'

In a rapid-fire section, Faber names humility as the greatest attribute of a successful investor, citing Stan Druckenmiller's self-described track record of mistakes as an example, and noting that Buffett's annual letters are beloved precisely because they lead with admissions of error. He references academic research showing that a very small percentage of stocks generate nearly all market returns, making stock-picking inherently low-batting-average work.