Meb Faber’s momentum and income strategies have beaten the market for years. He told us

• Cambria Investments founder and investment chief Meb Faber says stocks could fall much farther.
• Stocks and bonds are both falling, and Faber says investors need much more diversification.
• Two of Cambria’s ETFs are outperforming this year, and he explained how they work.

Sometimes it can seem like the investment world is divided into two distinct camps: People who play it safe and look for steady, reliable income, and those who take risks and look for dramatic, market-beating outperformance.

Meb Faber’s firm Cambria Investment Management, which manages $1.4 billion in assets, has created a formula for doing both, even as the prices of both riskier stocks and safer bonds go through a rare simultaneous drop.

In a recent interview with Insider, Faber said most investors think a traditional portfolio of 60% stocks and 40% bonds has very little downside, even during a disastrous period for markets. He argues that’s not true — and that while periods of sustained and major losses for stocks and fixed income are rare, they do happen. In fact, he thinks one such period could be coming soon.

“The US 10-year CAPE ratio is like 36, historically, in low inflation,” he said. “With high inflation, that gets down into the low teens. So we’re talking about a 50% haircut just on multiple alone if inflation stays elevated.”

A prolific podcaster, Faber has been warning listeners that stocks are now very expensive but trending lower, and that means investors need to tread carefully.

In spite of this tough market backdrop, Cambria’s Shareholder Yield ETF has returned about 1% to investors this year, according to Morningstar, and its Global Momentum ETF has delivered a 7% return. The S&P 500 has declined 13.5% since the start of 2022 and the Barclays Aggregate Bond Index has fallen 9%.

The Global Momentum Fund essentially buys other ETFs that are on the rise and trading above their moving averages. Faber told Insider that that fund in particular is adopting some tactics that investors have been reluctant to use, to their detriment.

Investors often “have way too much in their local market. In our case, US stocks and bonds,” he said. Often, they also have “no exposure to real assets. So you’re seeing that as a pretty big deal this year, meaning commodities, TIPS, real estate. Usually investors have nothing invested there, and I think that’s a mistake.”

The momentum fund has a lot of exposure to commodities and real assets and has almost no exposure to US stocks other than energy securities. Morningstar says its largest holdings include the Invesco DB Energy Fund and iShares Global Energy ETF, both of which hold US energy stocks. 

Faber says those are the paths investors should follow if they want to succeed from here. Unsurprisingly, he’d prefer that they do so by buying Cambria’s ETFs, but that’s not the only way to invest. Faber points out that the income-focused Shareholder Yield ETF tilts toward value stocks, which are cheaper based on metrics like price to earnings ratios.

“Within the US, the value spread is massive relative to history,” he said. “Value stocks are doing amazing, but the spread hasn’t really condensed.”

Buying high-dividend or low P/E stocks, or buying funds that target high-yield or value stocks, are simple strategies that any investor can apply. Notable examples include the iShares MSCI USA Value Factor ETF or the Vanguard Russell 1000 Value Index Fund ETF.

Following trends is a slightly more complex approach than parking money in an ETF, but Faber sees it as a good way to diversify. It’s a strategy that investors can apply by looking at indexes that track various asset classes — like commodities, stocks, and bonds — and buying what’s on the rise or trading above a moving average for a set period, like 100 or 200 days.

The key, according to Faber, is sticking with the strategy long-term, even though its returns during positive markets may be uninspiring. 

“Trend following often has little, small losers, but it understands the big winners will more than make up for them,” he said. “Actual compliance with trend following can be tough for investors, but the acknowledgement there is that it’s hard for buy and hold, too.”