This piece covers Meb Faber's views on investing. He says dividend stocks are bad because you pay taxes on dividends, and suggests using value stocks (cheap relative to company worth) instead. He likes the EV/EBITDA metric for picking stocks. Key holdings: Lyft (he invested early), Vanguard (big fund firm), and warns about Acorns (app charging $1/month on $100 average balance, too expensive).
Meb Faber and Patrick O'Shaughnessy discussed quantitative factors, dividend strategies, angel investing, and fintech trends on their podcast. Key insights include: value and momentum factors are effective over the long term in factor investing but require dynamic adjustments; dividend strategies ar
Meb Faber, founder of quantitative research firm Cambria and podcast host, joins Patrick O'Shaughnessy in a discussion covering factor investing, dividend strategies, angel investing, and fintech. The most impactful takeaway from the episode: Meb Faber argues that "dividend yield is a poor proxy for the value factor, and that high-dividend strategies should be entirely avoided in taxable accounts. By using a pure value factor and excluding the highest-dividend stocks, investors can save 40 to 400 basis points in tax costs annually."
Meb Faber argues that the core of factor selection lies in low correlation and long-term effectiveness, with the value factor (EV/EBITDA) being the top choice.
The two conducted a "factor draft"—each selected five specific factors, constructed an equal-weight portfolio, rebalanced quarterly, held 50 stocks, and competed for excess returns over the next 10 years.
Meb's lineup (in draft order):
1. EV/EBITDA (Enterprise Value / Earnings Before Interest, Taxes, Depreciation, and Amortization) — "This is the winner among all valuation metrics in a horse race"
2. Free Cash Flow / Enterprise Value — Essentially price/free cash flow
3. Momentum (12-month total return) — Low-correlation complement
4. 200-day Moving Average (Trend Factor) — "The U.S. stock market is overall expensive and needs trend protection"
5. 10-year Price-to-Book Ratio (Cyclically Adjusted) — Reduces turnover
Patrick's lineup:
1. Buyback Yield — A component of shareholder yield
2. Market Capitalization (Small-cap tilt)
3. Accruals (Quality Factor)
4. Return on Invested Capital (ROIC)
5. Price-to-Sales Ratio — "The value factor furthest from free cash flow"
| Dimension | Meb's Lineup | Patrick's Lineup |
|---|---|---|
| Core Logic | Value + Momentum + Trend Timing | Capital Allocation + Quality + Pure Value |
| Correlation | Low (Value and Momentum are negatively correlated) | Relatively High (Multiple value factors stacked) |
| Timing | Yes (200-day moving average) | No (Always fully invested) |
| Turnover | Higher, driven by momentum | Lower, driven by 10-year price-to-book |
Patrick's follow-up: "The 200-day moving average factor means you might liquidate positions during market declines, while my portfolio remains fully invested at all times—over a 10-year cycle, starting valuations may have a greater impact on final returns than factor selection itself." Meb acknowledged: "The U.S. stock market is overall expensive, and diversification is important, but trend factors help avoid holding through prolonged bear markets."
Meb Faber argues that dividend yield is merely a "poor value factor," and that high-dividend strategies are highly inefficient in taxable accounts and should be replaced by pure value strategies.
Research conducted by Meb in collaboration with Alpha Architect shows:
"Dividends have a 100-year good brand, like Coca-Cola. But if you invest in a high-dividend strategy in a taxable account, you pay taxes on those dividends every quarter. Value stocks, on the other hand, allow you to defer taxes through capital gains."
Meb's mechanism breakdown:
Patrick's response: "This might be the most unpopular view—especially for older investors who like receiving checks. But the data is clear."
Meb Faber argues that the illiquidity of angel investing is actually a major advantage, and when combined with tax benefits, even if returns merely match the S&P 500, after-tax returns are significantly higher.
Over the past four years, Meb has made approximately 25 angel investments, with individual amounts ranging from $1,000 to $20,000, covering subscription boxes, hotel booking (Hotel Tonight), ride-sharing (Lyft), and others.
Three core arguments:
1. Illiquidity is a behavioral advantage: "The average Robinhood account checks its balance 10 times a day—this only breeds poor behavior. If you can't sell for 5-10 years after buying, you'll choose more carefully and then forget about it."
2. Tax benefits are severely underestimated: Qualified Small Business Stock (QSBS) in the U.S., held for over five years, can exempt up to $10 million in capital gains tax. "Even if you only achieve S&P 500 returns, the after-tax gains are much larger."
3. Diversification is key: Meb adopts a "follow top angel investors" strategy (similar to tracking Buffett via 13F filings), participating through syndicates on platforms like AngelList. "In the first two years, I treated it as tuition—despite high carry, it's the cost of learning."
Patrick's follow-up: "Customer acquisition cost is the biggest challenge for fintech companies—while subscription models have high stickiness, the cost of acquiring users often eats into profits." Meb acknowledges: "The companies I've invested in most are subscription box companies—people forget to cancel, receive a surprise box each month, and the business model is extremely sticky."
Meb's self-criticism: "I'm essentially an optimist, maybe a bit too trusting. My 'no/yes' ratio is low—this is a behavioral flaw. But I prioritize companies that already have a product and traction, rather than flashy concepts."
Meb Faber argues that in the automated advisory space, custodians with proprietary funds (such as Vanguard and Schwab) will dominate the market; early-stage asset managers (e.g., Wes Gray's Alpha Architect) are better investment targets.
Competitive Landscape:
Areas Meb Favors:
Areas Meb Criticizes:
Patrick's Addition: "Customer acquisition cost is the biggest variable in fintech — even with high subscription stickiness, the cost of acquiring users often makes unit economics unviable."
Meb Faber introduces the concept of a "Forever Fund" — a 10-year lock-up period with penalty fees for early redemption, but the fees are distributed to other investors, thereby rewarding long-term holders.
Mechanism Design:
Patrick's Response: "This solves the principal-agent problem — investors won't redeem during poor performance, and fund managers won't be forced to sell due to capital outflows. But the legal risk is significant — similar structures have been sued before."
Meb's Quote: "Warren Buffett's 13F strategy has outperformed the market by 5% annually over the past 20 years, but it has underperformed in 6 of the last 8 years — if investors didn't know this was Buffett, the strategy would have shut down 6 years ago. His greatest alpha is not stock picking, but sticking to the strategy without wavering."
Meb Faber believes the biggest pain point in the podcast industry is the discovery mechanism — the lack of an episode-level rating system leads to significant time wasted on low-quality content.
Patrick's resonance: "The tools are terrible — only the top 20 shows get recommended, and there's no episode-level discovery. Apple is changing how it reports data, so there might be improvement in the next year."
Meb's envisioned solution: "I'd be willing to spend $50,000 a year to hire someone to curate the 5 best investment podcasts for me each week — but how do you pick 5 from 200 applicants? Or should it be crowdsourced to 200 people? The incentive problem is hard to solve."
| Position | Guest Stance | Key Data |
|---|---|---|
| Lyft | Hold for Observation (Angel Investment) | Late-stage private company, valuation in the hundreds of millions of dollars |
| Hotel Tonight | Hold for Observation (Angel Investment) | High product satisfaction, but "not suitable for family users" |
| Vanguard | Bullish (Industry Leader) | Automated service scale approaching $100 billion |
| Schwab | Bullish (Industry Leader) | Automated service scale exceeding $20 billion |
| Acorns | Risk Warning (Criticism) | $1 monthly fee, average account balance of $100 (12% annualized fee) |
| Stash | Risk Warning (Criticism) | Fee structure similar to Acorns |
| Robinhood | Neutral (Benchmark for Comparison) | Commission-free trading, but users check balances 10 times per day on average |
| Alpha Architect (Wes Gray) | Bullish (Investment Target) | Early-stage asset manager pursuing unique strategies |
| Ritholtz Wealth Management | Neutral (Industry Case Study) | Known for Twitter and content marketing expertise |
1. Meb Faber argues that "dividend yield is a poor value factor" — the value composite factor outperforms dividend yield by 2–3 percentage points per year over the long term; avoiding the top 50% of high-dividend stocks can save 40–400 basis points in taxes annually in taxable accounts.
2. Meb Faber proposes that "the illiquidity of angel investing is a behavioral advantage" — "the average Robinhood account checks its balance 10 times a day," while lock-up periods force investors to choose carefully and forget about holdings, avoiding chasing gains and panic selling.
3. Meb Faber believes that "the QSBS tax benefit is severely underappreciated" — qualified small business stock held for more than five years can exempt up to $10 million in capital gains tax; "even if you only achieve S&P 500 returns, the after-tax outcome is much larger."
4. Meb Faber introduces the concept of a "forever fund" — a 10-year lock-up period, with early redemption fees going to other investors; "Warren Buffett's biggest alpha is not stock picking, but sticking to a strategy without wavering — his 13F strategy has underperformed in 6 of the past 8 years, but if investors knew this was Buffett, they would have bailed 6 years ago."
5. Meb Faber argues that "the winner in automated advisory is the custodian" — Vanguard's scale is close to $100 billion, larger than all other robo-advisors combined; "this is not a robo-advisor revolution, but a technology adoption — just like no one called us 'email advisors' back in the day."
6. Meb Faber criticizes the fee structure of Acorns/Stash — "a $1 monthly fee on an average account balance of $100 equates to an annualized fee of 12%. Why not use Robinhood or E-Trade's free services?"
7. Meb Faber believes that "podcast discovery is the biggest unsolved problem" — "I can't turn it off after 10 minutes; FOMO makes me worry about missing an investing gem at minute 58"; he would be willing to spend $50,000 a year to have someone curate the five best investment podcasts each week.
8. Meb Faber proposes a "factor draft" framework — EV/EBITDA is the preferred value factor, momentum provides low-correlation diversification, and the 200-day moving average offers protection in expensive markets; "over a 10-year cycle, starting valuation may have a greater impact on returns than factor selection itself."