I hope you’re having a great start to June. I’m trying out “green juicing” this week in a valiant effort to improve my health. I’m a bit freaked out by having to juice a crateful of veggies each day so instead of making them I ordered an ice chest full of fresh green juice bottles from a company called Raw to Door. I love capitalism - it’s the only system for the very lazy. The juices taste awful but I’m hoping I’ll come out shiny and new. I’ll let you know how I fare next week.
This is my third post and you know what - I really like writing them so you’ll have to put up with my missives for a while longer.
Have you ever wondered - If God happened to be a fund manager what kind of investor would he be?
well firstly he would have a lot of money to invest, billions and billions
second he would have a long holding period (Eternity) so he could invest in a number of different things and not worry about small ups and downs
lastly using his Godly powers he would be be able to summon the best investments on earth managed by the cleverest and most competent investment managers.
Obviously our hypothetical investing God might or might not exist, BUT what does exist very much here on earth are a few God-like investors with the 3 attributes above.
So who are these God-like creatures who have billions to invest, an investment period of eternity and the access to the best talent?
If you haven’t guessed already they are the endowments for the big US universities like Yale and Harvard. There are a few other university endowments that have stellar performance in their endowments but Yale started the trend of well managed university endowments a few decades ago mainly through the leadership of an alum named David Swensen.
Yale has posted market beating returns since he took over. Harvard, Stanford and other universities started copying this model. They’ve posted returns in the range of 15% over decades.
So why are they successful - firstly they all have the God-like qualities - they have billions to invest on behalf of the university, funds that are invested for the lifetime of the university (Eternity) and every fund manager from New York, London and Timbuktu would give their first born child to be chosen to manage part of the funds. I kid you not… I met someone at the MIT endowment at a conference two years ago and he was swarmed by locusts - I meant fund managers - trying to hand him business cards.
I am not God. In the Church of Investing I wouldn’t even make it to minor sainthood.
I am a devout worshipper though and my little pot of money is like the endowments -- I have a pot of money I completely control to invest and I have a long horizon for investing 15 - 30 years. I unfortunately can’t click my fingers and summon the smartest investment managers, but I can through the internet and books access all their thinking and strategies.
The SECRET is in what they invest in. Basically they spread their bets in a number of different areas NOT just stocks and bonds. They invest in natural resources (oil & gas, metals, minerals forests) and also own lots of real estate. A tactic otherwise known as diversification, preached by many and followed only by a few.
If you’re an experienced investor you’ll have come across the research that says most returns in investing are explained by asset allocation. Don’t worry too much about what that means -- some clever guys already went and reverse engineered what Yale and the other endowments investment allocations for us.
A wonderful book by Faber & Richardson called “The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets” comes to the conclusion that the successful endowments have approximately the following composition spread across the world.
Domestic Stocks (US) 20%
Foreign Stocks 20%
Real Estate 20%
Now the majority of financial advisers are going to sell you stocks and bonds but the really successful funds go further and invest in REAL ASSETS. Now you and I aren’t Yale, Harvard and Stanford with access to super duper funds, but the book does go on to show you how you can try to replicate this mix by buying widely available market trackers (ETFs in non-layman terms). Obviously its not as simple as it sounds, but here is a time tested way of imitating the most successful investors.
Now if this secret sauce stuff has you excited then:
1. Take a look at Yale’s 2014 investments. What can you learn about how to manage your own money for the long term?
No excuses, here’s the link http://investments.yale.edu/images/documents/Yale_Endowment_14.pdf
Pages 10 -13 is where you might want to pay attention.
2. The guy who spearheaded this investing style at Yale (now closely followed by Harvard, Stanford Cambridge etc) is David Swensen. Luckily for us he wrote a book for us individual investors: Unconventional Success: A Fundamental Approach to Personal Investment. This book was written before the 2008 crisis so bear that in mind. It’s also not the most readable text, but if you want to safely handle your investments I can think of no better book. Click here for the link.
3. Lastly here is the link to “The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets”.
Well I hope that provided something for you to think about until I’m in your inbox next.
Have a good week.