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JMacDonald

Yale's Money Guru Shares Wisdom With Masses

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Hi,

Here is a link that I found on the Diehards Forum: http://www.npr.org/templates/story/story.php?storyId=6203264. It is a good article about Dave Swensen, the genius behind the Yale portfolio. Gee, here you have a guy who beats the pants off of all the others, and nowhere does he recommend a load fund or variable annuities. He recommends index funds: what a thought!

Invest in Nonprofit Index Funds: Since at least 99 percent of mutual funds aren't going to beat the overall market, Swensen says individuals should invest in nonprofit funds that track market segments, such as the S&P 500. There are a range of index funds that track the U.S. domestic stock market, international markets, emerging markets and the real-estate market.

Best Wishes,

Joe

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Guest TR1982

I've always thought the message that guys like him send is somewhat disingenous. Don't try to do what I do because I'm smarter than you and you won't beat me. Also, why is professional money management that he charges for any different than any other professional money management? He isn't a not for profit firm and I don't think Yale endowment fund would keep him around if he mimicked the S&P 500 index.

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He explains why not to do what the Yale group does in his book, "Unconventional Success..." It's in the top 5 best investment books I've ever read, well worth the $$ to order IMHO!

 

JudyS

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TR,

 

Swensen could get paid much more than he does at Yale - he could easily leave and probably make many multiples of his current salary. With the amount of money he has available and the research staff that he has, there are investment options that us little people just don't have access to and wouldn't have the ability to research. This can lead to risks that can be rewarded that we can't buy into at a price where the extra costs would arbitrage away the extra gains.

 

Swensen is anything but disingenous, he's simply honest. Attacking him because he thinks (and the vast majority of research on the topic shows) that indexing will work seems disingenous to me.

 

ScottyD

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Joe,

 

I enjoyed the article and his portfolio recommendations. I think Swenson is one of the greats and gives good advice. I printed out the article and filed it Just as Scotty said, Swenson is honest. I can understand why some financial professionals would have disdain for his advice because some are ethically challenged and are incapable of being that honest when dispensing advice.

 

 

Tony

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Hi Joe,

Thanks for the article. Swenson is getting lots of press lately and thats good. I have not heard of him until about 2-3 years ago. I found out one little tid bit; he went to the same small farming college I went to, University of Wisconsin--River Falls! Thats why he has the good old fashion mid western honesty and self effacing persona. I couldn't believe it. Another connection with him is that he is indirectly watching over my money at TIAA CREF, he is on the board.

 

When I retire in 3 months, one of my first books to read will be his.

 

My favorite quote from the article and we heard it before around here:

 

"He says for-profit mutual funds have an inherent conflict of interest. They make money by charging fees that suck profits away from investors in the funds. In fact, over time -- when you factor in the fees, taxes and other costs -- he says your odds of beating the market in an actively managed fund are less than one in 100."

 

Later,

Steve

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Guest TR1982

ScottyD

I didn't "attack" him, I simply observed what I think are some curious double standards he suggests. Is he impervious to ever making a mistake or maybe letting his success go to his head? Just because you agree with somebody doesn't always mean that their ideas are perfect or can't be challenged. Besides, the acid test is that you challenge me for challenging him rather than examining what I said. If people want to pay you for throwing their money in a few index funds I guess that's ok but I would want more evidence than "I'm smarter than you and have 20 people working for me".

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I've always thought the message that guys like him send is somewhat disingenous. Don't try to do what I do because I'm smarter than you and you won't beat me. Also, why is professional money management that he charges for any different than any other professional money management? He isn't a not for profit firm and I don't think Yale endowment fund would keep him around if he mimicked the S&P 500 index.

 

This is a fair question. If people like me insist that most funds cannot beat indexes, how do we explain Swenson's success? In a word, skill. Swenson is simply being modest, but I suspect that he is actually very, very talented. Ditto for Warren Buffet. However, I also suspect that such talent is highly unusual. Simply put, most actively managed funds do not have this kind of rare talent. In other words, it may well be that Swenson IS smarter than the vast majority of fund managers, and that they WON'T beat him over the long haul.

 

Think of the bell curve. People like Swenson and Buffet are way, way, way over to the right, maybe more than three standard deviations away from the mean.

 

The message for average investors is to not even bother trying to beat someone like Swenson. Furthermore, there is no need to even do so. Market returns of a diversified portfolio over the long haul have been quite good. Once I understood this, I no longer agonized over fund selection, fund manager turnover, underperformance. I simply determine my asset allocation, invest regularly in a diversified portfolio of index funds, rebalance regularly, and stay the course. Even (or especially) for a competitive type A personality like me, it has been liberating.

 

 

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AP,

Your response to TR is simply amazing. In fact, your overall contributions to this board is built on rock solid investment knowledge, your analogies that make complex concepts simple to understand and your constant positive attitude when suggesting revolutionary ideas on changing rigid SD bureaucracies. You have done your homework.

Keep up the great work,

Warm regards,

Steve

 

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Guest TR1982

AP,

Do you suppose your answer would satisfy the people who are responsible for selecting the investment managers for the Yale endowment? If not, how would they would they go about choosing an investment manager? Past performance? Aptitude tests? IQ tests?

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AP,

Do you suppose your answer would satisfy the people who are responsible for selecting the investment managers for the Yale endowment? If not, how would they would they go about choosing an investment manager? Past performance? Aptitude tests? IQ tests?

 

Another fair (and good) question. Maybe #1, but obviously not #2 and 3. I do not know the answer, but I will speculate.

 

Places like Harvard and Yale are rarefied environments, and through their networks they have access to certain people that others would not have a chance at.

 

For example, their law school will attract a professor that, say, USC would not have a chance at. USC has an excellent law school, but it would typically not have a prayer at hiring someone that Harvard wants. Again, think of the bell curve. That professor is way over to the right, just like Harvard. USC is not quite so far away from the mean.

 

Just as there has been a sorting out in academia, I suspect (again, I'm just guessing here) that the same holds true in investment management, and especially so when it comes to long-established elite institutions like Yale. So how did Yale select Swenson? Probably because he was somehow connected to that small, elite network to which places like Yale have access.

 

 

 

 

AP,

Your response to TR is simply amazing. In fact, your overall contributions to this board is built on rock solid investment knowledge, your analogies that make complex concepts simple to understand and your constant positive attitude when suggesting revolutionary ideas on changing rigid SD bureaucracies. You have done your homework.

Keep up the great work,

Warm regards,

Steve

 

Thanks very much, Steve. And thank you for all of the work you have done for teachers over the years.

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Guest TR1982

I think you're missing my point. If so many of you here believe that there is no point in trying to achieve results that are no better than market averages and past results have zero predictability in terms of future results, than why pick Swenson? Would they keep him if he mimicked the S&P 500? This is what is empty about his comments: I can beat the markets because I'm "smarter" than you so the best you can hope to do is mimic the market. In the meantime, I'll give the Yale endowment fund a 23% return and all those other peons will have to be average. How arrogant.

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If so many of you here believe that there is no point in trying to achieve results that are no better than market averages and past results have zero predictability in terms of future results, than why pick Swenson? Would they keep him if he mimicked the S&P 500? This is what is empty about his comments: I can beat the markets because I'm "smarter" than you so the best you can hope to do is mimic the market. In the meantime, I'll give the Yale endowment fund a 23% return and all those other peons will have to be average. How arrogant.

 

I did attempt to answer that first question.

 

To your second queston: no.

 

I don't mind at all that he has been able to beat the markets. More power to him. I also do not mind that the best I can do is mimic the market because, as I pointed out, mimicking the market has been quite profitable. I don't consider myself a "peon" at all because, by investing in index funds, I am quite likely to do better than most folks who invest in actively managed funds.

 

So I certainly do not resent Swenson's talent, nor do I consider him to be arrogant at all. The cold, hard truth is that some (a very few, I believe) can probably beat the markets over time. I am not in that category (darn!), but I can do very well for myself by following a simple investment strategy.

 

Again, TR, this is pretty liberating. Give it a try.

 

 

 

 

 

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I've always thought the message that guys like him send is somewhat disingenous. Don't try to do what I do because I'm smarter than you and you won't beat me. Also, why is professional money management that he charges for any different than any other professional money management? He isn't a not for profit firm and I don't think Yale endowment fund would keep him around if he mimicked the S&P 500 index.

 

This is a fair question. If people like me insist that most funds cannot beat indexes, how do we explain Swenson's success? In a word, skill. Swenson is simply being modest, but I suspect that he is actually very, very talented. Ditto for Warren Buffet. However, I also suspect that such talent is highly unusual. Simply put, most actively managed funds do not have this kind of rare talent. In other words, it may well be that Swenson IS smarter than the vast majority of fund managers, and that they WON'T beat him over the long haul.

 

Think of the bell curve. People like Swenson and Buffet are way, way, way over to the right, maybe more than three standard deviations away from the mean.

 

The message for average investors is to not even bother trying to beat someone like Swenson. Furthermore, there is no need to even do so. Market returns of a diversified portfolio over the long haul have been quite good. Once I understood this, I no longer agonized over fund selection, fund manager turnover, underperformance. I simply determine my asset allocation, invest regularly in a diversified portfolio of index funds, rebalance regularly, and stay the course. Even (or especially) for a competitive type A personality like me, it has been liberating.

 

 

TR:

 

You are wasting your time responding to these posters because they dont understand that the "bell curve" that that propels Swenson's high rate of return has little to do with skill and more to do with the structual advantages that endowment funds like Yale (23B) and Harvard (35B) have over taxable mutual funds and individual investors.

 

1. Yale like other universities is a tax exempt organization which means that it pays no federal or state income tax. Federal tax rates can be as high as 35%. This allows Yale to reinvest all of its investment gains tax free just like a retirement plan.

 

2. According to the 2007 annual report, Yale's endowment is about 82% invested in non traditional investments including absolute funds (23%), foreign equity (14%), Private equity (18%) and Real assets (27%). Only 11% is invested in domestic equities, 4% in bonds and 2% in cash which are investments used by mutual funds. In 1987 80% of Yale's endowment was investing in stocks, bonds and cash. The non traditonal investments are where the real gains are made because private equity investments pay double digit guaranteed rates of return to investors like Yale and include other features like equity kickers that pay the investors an additional amount such as 25% of the profit when the investment is sold. Absolute investments seek the highest rates of return by rapid turnover of investments which do not incur any tax by tax exempt universities.

 

3. Yale like other institutional investors has access to hedge funds which provide high investment returns through offshore entities. Some hedge funds use debt financing (leverage) to increase their rate of return above the rates in 2 above. Generally tax exempt entities that invest in leveraged hedge funds located in the US are required to pay a special income tax of up to 35% of the profits. To avoid US taxes, colleges invest their funds in tax sheltered debt/leveraged hedge funds located overseas which are not subject to the additional 35% tax. See Paul Finn, Chronicle of Higher Education, May 10, 2007 "Colleges's offshore hedge funds draw Senate Scrutiny".

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Hi Joe and AP,

Wow! Following this discussion has left me wondering if there are any heroes left in the world. The trashing of Swenson continues unabated with TR and Intruder using the same old arguments and worn out tirades, the first that he is arrogant and a hypocrite and the later is that the fund does not have to pay taxes and that’s why he has done so well, plain and simple. By the way, in his lonely triade, he/she says that the foreign equity (14%) is a non traditional asset class. Now thats stretching, but thats our beloved Intruder who has to make sure that we know he is smarter than all of us put together.

 

Intruder; in the immortal words of Gone with the Wind, "Frankly my dear, we don't gave a damn" what you say or what you think. You are pure entertainment, and its cheap enough for this diehard to enjoy.

 

Have a great weekend,

Steve

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