David Swensen and Yale's Endowment

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David Swensen and Yale's Endowment

Post by George$ »

David Swensen may be to university endowments what Warren Buffett is to Berkshire. Thus this thread. It is prompted by Taggart's link to Yale's 2006 Endowment Report in another thread. Some good stuff there. It's an excellent read.

If you put "David Swensen" Yale in google you get 15,900 hits.

Here is what the Wikepedia selection says (with my emphasis):
David Swensen
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David Swensen has been the Chief Investment Officer at Yale University since 1985. He is responsible for managing and investing the University's endowment assets and investment funds, which total about $18 billion. Realizing an annual return of more than 17.2 percent on his investments over the last ten years, Swensen has added more than $12 billion to Yale's coffers, and his consistent track record has attracted the notice of Wall Street portfolio managers.

He is chiefly notable for having invented what has become known as "The Yale Model", a mechanism for Multi-Asset Class Investing.

After receiving his B.A. and B.S. in 1975 from the University of Wisconsin at River Falls, Swensen pursued a Ph.D. in economics at Yale, where he wrote his dissertation, A Model for the Valuation of Corporate Bonds.

Prior to joining Yale in 1985, Professor Swensen spent six years on Wall Street as senior vice president at Lehman Brothers, specializing in the firm's swap activities, and as an associate in corporate finance for Salomon Brothers, where his work focused on developing new financial technologies.

Swensen is a trustee of the Carnegie Institution of Washington and treasurer of the "Hopkins Committee of Trustees". He serves as a trustee of TIAA (Teachers Insurance and Annuity Association of America), and a non-executive director of Schroders PLC. He has advised the Carnegie Corporation, the New York Stock Exchange, the Howard Hughes Medical Institute, the Courtauld Institute of Art, the Yale-New Haven Hospital, The Investment Fund for Foundations (TIFF), the Edna McConnell Clark Foundation, and the States of Connecticut and Massachusetts.

At Yale, where he teaches endowment management at Yale College and at the Yale School of Management, he is a fellow of Berkeley College, an incorporator of the Elizabethan Club, and a fellow of the International Center for Finance.

The Yale Model
The Yale Model was developed by David Swensen, and is described in his book "Pioneering Portfolio Management", it consists broadly of dividing a portfolio into five or six roughly equal parts and investing each in a different asset class, each as far uncorrelated to the others as possible. The Yale Model is an example of Multi-Asset Class Investing.

Particularly revolutionary at the time, but now becoming increasingly mainstream, was his recognition that liquidity is a bad thing to be avoided rather than a good thing to be sought out, since it comes at a heavy price in the shape of lower returns. The Yale Model is thus characterised by relatively heavy exposure to asset classes such as private equity compared to more traditional portfolios.

His ideas have taken some time to spread beyond the USA, but are slowly being adopted in Europe where a particular advocate has been Guy Fraser-Sampson, whose book "Multi-Asset Class Investment Strategy" builds on Swensen's theories and shows how they can and should be adopted by European pension funds
.


And from the Yale 2006 report (page 4) - which I assume reflect's Swensen's views (and my bold emphasis again):
Because investment management involves as much art as science,
qualitative considerations play an extremely important role in portfolio
decisions. The definition of an asset class is quite subjective, requiring
precise distinctions where none exist. Returns and correlations are
difficult to forecast. Historical data provide a guide, but must be modified
to recognize structural changes and compensate for anomalous periods.
Quantitative measures have difficulty incorporating factors such as
market liquidity or the influence of significant, low-probability events.
In
spite of the operational challenges, the rigor required in conducting
mean-variance analysis brings an important perspective to the asset allocation process.
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Post by brucecohen »

Here's an NPR interview that Swensen did in October. I remember hearing it and being impressed by how level-headed and even humble he seemed to be.
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Re: David Swensen and Yale's Endowment

Post by Bylo Selhi »

George$ wrote:Taggart's link to Yale's 2006 Endowment Report in another thread.
See also
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Post by George$ »

Here is another quote from the 2006 Yale Report that raises questions for me: (on page 19, with my emphasis)
Results from Yale’s non-marketable assets demonstrate the value
of superior active management. Private equity earned 34.4 percent annually
over the last ten years
,
outperforming the passive benchmark of
University inflation plus 10 percent by 20.2 percent per year and the
return of a pool of private equity managers compiled by Cambridge
Associates by 14.1 percent per year. Since inception in 1973, the private
equity program has earned an astounding 30.6 percent per annum.
My question. How does one go about calculating investment results if the asset is non-marketable? Do you have to wait until you dispose of it - or can you evaluate it while still holding it?
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Re: David Swensen and Yale's Endowment

Post by George$ »

George$ wrote:David Swensen may be to university endowments what Warren Buffett is to Berkshire.
Not quite it seems! (But then Buffett was not employed by a university.)

From the 2005 Yale Alumni Magazine
Since Swensen's arrival in 1985, Yale's endowment has generated net investment returns that average 16.1 percent per year. "For the last 20 years, no educational institution has a better performance record than Yale," Swensen says, matter-of-factly. By comparison, Harvard's endowment has grown by a still very impressive 14.9 percent a year. Jack Meyer, the outgoing head of the Harvard Management Co., which manages Harvard's money, says, "I think David is the best in the business."

Think of it this way: a $10,000 gift to Yale made in 1985 would have grown by now to $158,328, assuming none of it had been spent. That performance handily beats stock market returns of $95,226, as measured by the S&P 500, and bond market returns of $44,722, as measured by a Lehman Brothers index. (It does not, however, approach the record of Berkshire Hathaway, the company run by the legendary investor Warren Buffett, in which a $10,000 investment would have grown to $413,721.) What makes Swensen's record more noteworthy is that Yale's returns have been generated by a portfolio with less risk than the one he inherited and less volatility than an investment in stocks. That is an investor's dream -- less risk and higher return.
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Post by Brix »

Didn't see a link elsewhere at FWF to this Economist article explaining why you can't possibly do as well as the university endowment funds.

Short answer: you're too small, too mortal and too needy.
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Post by brucecohen »

George$ wrote:Here is another quote from the 2006 Yale Report that raises questions for me: (on page 19, with my emphasis)
Results from Yale’s non-marketable assets demonstrate the value
of superior active management. Private equity earned 34.4 percent annually
over the last ten years
,
outperforming the passive benchmark of
University inflation plus 10 percent by 20.2 percent per year and the
return of a pool of private equity managers compiled by Cambridge
Associates by 14.1 percent per year. Since inception in 1973, the private
equity program has earned an astounding 30.6 percent per annum.
My question. How does one go about calculating investment results if the asset is non-marketable? Do you have to wait until you dispose of it - or can you evaluate it while still holding it?
You can evaluate it while still holding it. I believe common practice is to carry it at cost and raise/lower that value if there is a third-party development. For example, an offer to buy all or part of the company. Or the sale of a similar company. This is a governance issue. The audit committee of the board of directors should have the valuation criteria and process spelled out in writing. There are also people, usually accountants, who are certified as Chartered Business Evaluators Valuators (CBV).

One safeguard against high-balling is for the manager to be bonused on multi-year performance.

While I have little regard for LSIFs, Vengrowth has established itself as a class act both in the LSIF sector and as a manager for private and institutional clients. Here's the applicable section from the prospectus for their LSIFs:
Valuation of Portfolio Companies for which no Published Market Exists
Regular Valuations

The Manager will assess and, if necessary, adjust the Quarterly Valuations (see “Valuation of Investments - Valuation of
Portfolio Companies for which no Published Market Exists - Quarterly Valuations”) of portfolio companies for which no
published market exists at least weekly or more frequently if requested by the Fund. Such valuations will be determined
employing the principles that govern the valuation policies and procedures followed in completing Quarterly Valuations. The
Manager will input such valuations into its regular determinations of the Net Asset Value of the Fund.
Notwithstanding that the Fund may approve valuation dates be more frequent than weekly, valuations of companies for which
no public market exists included in the Net Asset Value of the Fund will continue to be performed on a weekly basis unless a
material event takes place in respect of an investment prior to such weekly valuation, in which case the Fund may adjust the
value of such investment within the portfolio of companies for which no public market exists sooner.
The valuing of investments for which no published market exists is subject to inherent uncertainties and the resulting values
may differ from values that would have been used had a ready market existed for the investments.
- 43 -
Quarterly Valuations
As at August 31, the last valuation date in November, the cut-off date and the last valuation date in May, the Manager will
determine the value of the Fund’s investments in portfolio companies for which no published market exists (the “Quarterly
Valuations”), on the basis of policies and procedures established by the Board for determining the fair value of such assets,
which are as follows:
• Investments (including warrants and options, etc.) will be valued at estimated fair value which is the cashequivalent
amount that can reasonably be expected to be received in a transaction between fully informed,
knowledgeable and willing parties dealing at arm’s length other than in a forced or liquidation sale, without
discount for minority interest or premium for controlling interest;
• The estimated fair value of investments will be determined on the basis of expected realizable value of the
investments on a going concern basis or if they were disposed of in an orderly disposition over a reasonable
period of time, as appropriate;
• New investments and follow-on investments in portfolio companies will normally be carried at cost for
approximately 12 months as the Fund believes this to be the best indicator of fair value, unless there is a
substantial arm’s length transaction which establishes a different value or there is a significant change from the
Fund’s expectations;
• If there is a substantial arm’s length offer or transaction with respect to an entity in which an investment has been
made, values used in such offer or transaction may be used in the valuation of the investment if circumstances
warrant. Similarly, if there is a valuation prepared by a qualified independent person, such valuation will be
given due consideration in assessing the fair value of an investment;
• If the investment is progressing satisfactorily in relation to the Fund’s expectations, in determining the fair value a
reasonable multiple of either sustainable earnings, cash flow, sales revenue or discounted cash flow (as
considered appropriate) may be used. The multiple may be determined with reference to comparable firms;
• Debt instruments will initially be valued at their purchase price (with accrued interest included in interest
receivable) and any discount, if applicable, amortized to its face value over the term of the debt instrument. In
addition, a debt instrument will be valued having regard to whether the instrument is in arrears or whether a
write-down or other provision is considered prudent due to the unlikelihood of full realization on the investment;
• Convertible securities will generally be valued at the greater of their principal amount (subject to whether the
instrument is in arrears or whether a write-down or other provision is considered prudent due to the unlikelihood
of full realization) and their estimated fair value as if they had been converted, in each case with such estimated
fair value being determined on the basis described above;
• Valuations will take into account the difference between the currency of the investment and the currency of the
Fund;
• Contractual rights that provide the security holder with superior economic rights relative to other security holders
(e.g. liquidation preferences, put rights at specific values, minimum rates of return, etc.) shall be given due
consideration in assessing the fair value of the investment;
• Where performance of an entity in which an investment has been made varies adversely from the Fund’s
expectations, a write-down or other provision will be considered and made where appropriate; and
• In the unusual event that the valuation policies and procedures described above are not appropriate to the
particular investee circumstance then the Valuation Committee of the Fund can approve appropriate valuation
techniques for that investment.
The Valuation Committee of the Fund will review and approve the relevant valuation of the Fund’s investments in portfolio
companies for which no published market exists on a quarterly basis in connection with the Valuation Committee’s review and
approval of the Net Asset Value of the Fund.
Last edited by brucecohen on 21 Jan 2007 19:53, edited 1 time in total.
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Post by arnyk »

My question. How does one go about calculating investment results if the asset is non-marketable? Do you have to wait until you dispose of it - or can you evaluate it while still holding it?
All the flashy investment books were taken out of the library, so recently I've been reading up on "Valuations of Privately-Held Business Interests", thinking that it must all be the same. And to an extent, it is.

If you're valuing the business as a going concern, then you can do the capitalization thingy (read: multiples), or you can do the discounted cash flow thing (I use a DCF model myself, using FCF).

If you're going with an asset based approach (which in most cases assumes liquidation), then it gets a bit tougher with identifying the "actual" value of certain fixed assets, since most of the time the numbers recorded on balance sheets are just formalities.

There's a whole bunch of legal cases I read with the business owners versus the CRA or other owners. It's usually an argument over intrinsic value, which methods are more accurate and such. I found this part a little boring.

I did learn one practical tidbit which I used to enhance my own strategy which was "redundant assets". It explains why some businesses kept showing as really expensive in my DCF model, but once I added in the excess capital, things started to make more sense.
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Post by Bylo Selhi »

For Yale’s Money Man, a Higher Calling
Mr. Swensen, one of the most well-regarded investors in the country, never appears on lists of the most highly paid money managers. Nor has he made headlines by buying expensive homes in New York or Palm Beach or by frequenting cocktail and charity circuits. But in the competitive, performance-driven world of money managers, Mr. Swensen can boast of an extraordinary record.

During his 21 years as steward of the Yale endowment, Mr. Swensen has generated an annual compound growth rate of 16.3 percent, beating the performance of Harvard’s endowment and that of every other major school in the country over the same period, according to data compiled by Yale. Over the years, he has also routinely rebuffed lucrative offers to leave Yale and to cash in on his expertise in a much grander fashion...

Mr. Swensen’s preference for his work at Yale means that he has given up at least tens of millions — if not hundreds of millions — of dollars in personal compensation over the last decade alone. But the 53-year-old economist, who has spent most of his adult career at Yale, said in an interview in the endowment’s nondescript campus office that he plans to stay at the university “as long as they are willing to have me.”...
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Post by George$ »

I see that David Swensen is coming out (Jan 2009) with a new edition of
Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated (Hardcover)

He is well worth reading and listening to. Here are a couple of other links.

(1) re David Swensen

(2) A great CFA webcast lesson from David Swensen -
The Role of Alternative Assets in a Well-Diversified Portfolio
If you listen to the prepared webcast, be sure to also listen to the Q&A part - perhaps even more interesting.
“The search for truth is more precious than its possession.” Albert Einstein
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Post by George$ »

From - Yale Alumni Magazine - December 2007 -
On campus, it's the equivalent of the Super Bowl score or the Best Actress award. Everybody waits for the result: how did Swensen do this year?

Yale's celebrated chief investment officer, David Swensen '80PhD, did not disappoint: Yale's portfolio earned a 28 percent return this year, growing in value from $18 billion to $22.5 billion and outperforming every major university endowment in the country. As the chart at left shows, Yale's return since the turn of the century has outpaced both the S&P 500 and the average of a broad pool of university endowments calculated by Cambridge Associates. And incidentally, he's 16-7 against Harvard since coming to Yale in 1985.

Chart showing Swensen's record
Added later - and a couple of more links

(i) Link to the 2007 Yale Endowment Report ( 32-page pdf file)

(ii) - Keep It Simple, Says Yale’s Top Investor - February 17, 2007 NY Times article --
For most people, he recommends a very basic approach: use index funds, exchange-traded funds and other low-cost instruments, and stick to your long-term asset allocation — even when the markets are in tumult.

Don’t be distracted by market forecasts, he said. “You have to diversify against the collective ignorance,” he said. “I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.”

For most individual investors, he said, copying the strategies of institutions like Yale is virtually impossible: big investors have access to fund managers and arcane strategies that are beyond the reach of most people.
“The search for truth is more precious than its possession.” Albert Einstein
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Post by George$ »

[Where to post this? Dunno for sure. Because Swensen and Shiller are both at Yale I'm posting here :roll: ]
A great set of finance lectures from - Shiller's Yale Economics Course

A listing of all the lectures---
Class Sessions
Click session titles below to access audio, video, and course materials.
1. Finance and Insurance as Powerful Forces in Our Economy and Society
2. The Universal Principle of Risk Management: Pooling and the Hedging of Risks
3. Technology and Invention in Finance
4. Portfolio Diversification and Supporting Financial Institutions (CAPM Model)
5. Insurance: The Archetypal Risk Management Institution
6. Efficient Markets vs. Excess Volatility
7. Behavioral Finance: The Role of Psychology
8. Human Foibles, Fraud, Manipulation, and Regulation
9. Guest Lecture by David Swensen
10. Debt Markets: Term Structure
Midterm Exam 1
11. Stocks
12. Real Estate Finance and Its Vulnerability to Crisis
13. Banking: Successes and Failures
14. Guest Lecture by Andrew Redleaf
15. Guest Lecture by Carl Icahn
16. The Evolution and Perfection of Monetary Policy
Midterm Exam 2
17. Investment Banking and Secondary Markets
18. Professional Money Managers and Their Influence
19. Brokerage, ECNs, etc.
20. Guest Lecture by Stephen Schwarzman
21. Forwards and Futures
22. Stock Index, Oil and Other Futures Markets
23. Options Markets
24. Making It Work for Real People: The Democratization of Finance
25. Learning from and Responding to Financial Crisis, Part I (Guest Lecture by Lawrence Summers)
26. Learning from and Responding to Financial Crisis, Part II (Guest Lecture by Lawrence Summers)


A number of guest lecturers including #9 above - David Swensen -
David Swensen, Yale's Chief Investment Officer and manager of the University's endowment, discusses the tactics and tools that Yale and other endowments use to create long-term, positive investment returns. He emphasizes the importance of asset allocation and diversification and the limited effects of market timing and security selection. Also, the extraordinary returns of hedge funds, one of the more recent phenomena of portfolio management, should be looked at closely, with an eye for survivorship and back-fill biases.
“The search for truth is more precious than its possession.” Albert Einstein
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Post by augustabound »

Great link George$.
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Post by bender »

How to Manage a $17 Billion Endowment
The nation's most successful college endowment manager—Yale University's David Swensen—says Yale won't take any sudden or dramatic action in response to a $5.6 billion, six-month drop in the Ivy League school's endowment. Swensen, who steered Yale's endowment fund from just over $1 billion in 1985 to about $17 billion today, says Yale can afford to wait out what he describes as a "transitory" collapse in the investment value of nearly everything but U.S. Treasury bonds. ...[snip]... Yale will stick with plans to spend anywhere from 4.5 to 6 percent of its endowment every year. That means it can wait for the bulk of the endowment—most of which is in alternative investments such as real estate and private businesses—to rebound.
Nothing very exciting in the article, but its nice to see Swensen finally making public comments about the 2008 market.
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Post by George$ »

Yesterday my copy arrived --
David Swensen's - Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated (Hardcover)

No time to read it yet. But from a quick skim, as expected, it looks like there is no mention of the current downturn and recent losses.
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Post by bender »

George$ wrote:Yesterday my copy arrived --
David Swensen's - Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated (Hardcover)
No time to read it yet. But from a quick skim, as expected, it looks like there is no mention of the current downturn and recent losses.
Thanks, that one is on my list too.

Even though the new book was just released, he seems to have avoided the media. The Swensen allocation (for individuals) was unique given the large dollop of REITs -- which wouldn't have helped this year.
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Post by bender »

Here we go.

Yale’s Swensen Sees ‘Extraordinary’ Opportunity to Snap Up Debt
“There isn’t an investment strategy that can produce the kind of long-term results we’ve generated at Yale that isn’t going to post the occasional negative return,” ... “I don’t think people should disregard the book because of the market trauma of the last few months. We’re not even done with the current fiscal year. Judging a long-term investment strategy based on the results of a five- to six-month period is foolish beyond words.”
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Post by George$ »

Thanks. Here is another part of the link I like (my emphasis) ...
Concerns over governance helped Yale stayed clear of Bernard Madoff, the financier accused of a $50 billion fraud. One reason was an inability to see where investors’ money was going, Swensen said.

“If we can’t sit down with the people making the decisions, and understand what it is they’re doing and how they’re doing it, we’re not going to invest,” he said. “We’re not going to have anything to do with it.”

If Madoff’s victims had read his book, Swensen said, Madoff, who relied on money from so-called funds of funds to feed his operation, “never would have been funded.”

“The reason I don’t like funds of funds is that they facilitate the flow of ignorant capital,” Swensen said.
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Post by bender »

For Swensen fans, an interview on Fox Business. I didn't see that coming... at least the interview was with Liz.
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Post by augustabound »

bender wrote:at least the interview was with Liz.
Hey, thanks for the heads up. I haven't seen her before. I'll have to watch it again and maybe this time I'll hear what Mr Swenson has to say......... :wink:
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Post by George$ »

Swensen has some tough words in the Wall Street Journal - a part of it ....
Yale's Investor Keeps Playbook --- In Line for First Loss Since '88, Mr. Swensen Still Champions 'Alternatives'

By Craig Karmin , 13 January 2009

The university estimated late last month that the endowment had lost 25% of its value since the end of June. That is expected to lead to budget cuts and puts Mr. Swensen in line for his first negative fiscal year since 1988. Other endowments that have set out to follow the strategy he has advocated are also suffering.

Nonetheless, Mr. Swensen is sticking to the same investment approach that he's used in the past. He describes that process in detail in his book, "Pioneering Portfolio Management," which he revised and which was reissued this month.

He spoke to The Wall Street Journal about the financial crisis, hedge funds, scandal-scarred money manager Bernard Madoff, and ill-fated efforts to mimic Yale's investment strategy. Here are questions and his answers, edited for context and clarity.

.....

WSJ: Yet, other endowments have attempted a Yale-like approach, usually with less success. What goes wrong?

Mr. Swensen: A lot of institutional investors think they are emulating Yale, but they are not. Most endowments use fund of funds and consultants, rather than making their own well-informed decisions. You can divide institutional investors into two camps: those who can hire high-quality, active-management investors and those who can't. If you are going to invest in alternatives, you should be all in, and do it the way Yale does it -- with 20 to 25 investment professionals who devote their careers to looking for investment opportunities. Or you belong at the other end, with a portfolio exclusively in index funds with low fees. If you're not going to put together a team that can make high-quality decisions, your best alternative is passive investing. With a casual attempt to beat the market, you're going to fail.

If someone looked at what we're doing superficially and made superficial attempts to copy us, then I have little sympathy for them. It's a much more complicated process than that, and I explain it in detail in the book. If someone read my book and failed, I'd have some sympathy.

WSJ: What about fund of funds and consultants? Can they be a solution?

Mr. Swensen: Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can't make an intelligent decision about picking managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds? There's also more fees on top of existing fees. And the best managers don't want fund-of-fund money because it is unreliable. You need to be in the top 10% of hedge funds to succeed. In a fund of funds, you will likely be excluded from the best managers. [Mr.] Madoff also relied enormously on these intermediaries. He wouldn't have had nearly as much resources were it not for fund of funds.

Consultants make money by giving advice to as many people as possible. But you outperform by finding inefficiencies most of the market has not yet uncovered. So consultants ultimately end up doing a disservice to investors.

......

WSJ: With hedge funds suffering their worst year on record, will institutional investors have more power to demand lower fees?

Mr. Swensen: Put that in the category of wishful thinking. It would be nice if fees were not so onerous. But you still have investors who are happy to pay a high price in hopes of getting the holy grail of extraordinary returns.
“The search for truth is more precious than its possession.” Albert Einstein
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Post by randomwalker »

BNN interviews David Swensen, CIO, Yale University 16th January, 2009

http://watch.bnn.ca/#clip130560
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Post by bender »

BNN interviews David Swensen, CIO, Yale University 16th January, 2009
Thanks for that. When the "well-endowed" caption appeared, I sprayed coffee all over my notebook :lol:
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Post by 660ky612 »

randomwalker wrote:BNN interviews David Swensen, CIO, Yale University 16th January, 2009

http://watch.bnn.ca/#clip130560
Thank you, I am watching the video. Previously I thought Swensen was a boy!

I have also got the book "Unconventional Success" and introduced it to people here locally on April 2008. But up to now, nobody seemed to have interest on it.

Stock picking, chasing news, market timing, predicting the market, short-term speculation are INVESTING here. One says up, another says down. One tells your mom to check whether the stock could hold on a certain price level. Buy, hold, wait, sell, ..... all combinations are there. :-) Perhaps buy high, sell low. Earns a little and loses a lot even after spending arduous efforts :-)

Asset allocation, diversification,
(1 + 10%) ^25 = 10.83 and its sensitivity to cost do not make sense to them.

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Post by George$ »

David Swensen on Charlie Rose - January 21, 2009 - 14 minutes
“The search for truth is more precious than its possession.” Albert Einstein
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