“IF I MANAGED MY ALMA MATER’S MONEY”

This note from a recent John Bogle discussion has been floating around (thanks to Mebane Faber).  It’s full of good insights and ideas.  One part I found of particular interest was the section discussing the various ways in which some famous gurus would invest their alma mater’s money:

“The first essay in the series was written by the late great economist and author Peter L. Bernstein. He was far from certain about what he would do . . . certain only about what he would not do—he would not allocate the portfolio by “flying on automatic pilot,” and warned against the idea that “common stocks, regardless of how high they sell, are destined to be attractive investments.” Perfectly good (if imprecise) advice, I’d say.

Like Peter Bernstein, market strategist and author Barton Biggs, was “terribly wary of the conventional wisdom” that relies on “steering the investment vehicle from the vantage point of the steep, winding mountain road by looking in the rear view mirror at the road over which we have just passed.” He foresaw a “bleak environment.” Also good advice, if some years early.

John Biggs, former leader of TIAA-CREF, would be “aggressive in asset class allocation” (a lot in stocks; a little in bonds–10 percent to 20 percent), which didn’t turn out all that well. But he was (in my opinion) right in keeping “my investment plan simple . . . very well diversified and low-cost.”

William H. Donaldson, co-founder of Donaldson, Lufkin, and Jenrette and founder of the Yale School of Management; Chairman of the New York Stock Exchange; and later on Chairman of the U.S. Securities and Exchange Commission (now there’s a resume!), would hire a full-time investment professional, pay him generously, and make him responsible to an investment committee comprised of a few qualified trustees. That small group would appraise the endowment fund’s results over the long term. And that’s just what Yale did, having selected David Swensen as its leader. Over the 15 years that followed, Swensen would earn a compound annual return of some 13 percent on the Yale University endowment fund, likely the highest among all of its peer institutions. A truly brilliant choice!

Michael Price, for many years the guiding light of Mutual Shares, recommended heavy reliance on equities, focusing on those companies selling at a 30 or 40 percent discount from what other companies would pay to acquire them. “The whole goal is to compound at 15 percent . . . even when the market is up 25 percent (annually).” During the challenging 15 years that followed, neither Mutual Shares (which Mike Price hasn’t managed since 2001) nor the market came anywhere near these returns. But Mutual Shares compounded at 8.1 percent, well ahead of the 6.8 percent annual return for the Total Stock Market Index Fund, a splendid achievement.

The recommendations of “Adam Smith” (George J.W. Goodman), trustee, author and publisher, are a bit hard to replicate. He recommended hedge funds and especially “Julian” (presumably Julian Robertson), a good choice for a while. But Robertson’s firm ceased operations in 2000, and we can’t know who came next. “Hire talent whenever you find it,” was “Adam Smith’s” message. Fine! But as we know, talent is hard to identify, and—as in “Julian’s” case—frequently evanescent.

John M. Templeton, Dartmouth Professor Peter Williamson, and Charles R. Schwab were all true believers in equities. Templeton was unequivocal: “invest 100 percent in common stocks.” (The 6.9 percent annual return on his Templeton Growth Fund for the period, in fact, would barely outpace the bond market return of 6.2 percent, despite assuming twice the risk.) Nor did Williamson accept any need for “an anchor to windward” (in bonds or cash) to modify volatility. Schwab described equities as “the investment of choice,” and—surprising as it may seem for this marketer focused on managed funds with good past performance—favored the use of index funds.

Finally, both George Putnam and yours truly recommended a balanced approach. With bonds then yielding 7 percent and stocks but 2 percent, we both liked the concept of earning more income for endowments that must pay out returns to their universities, as well as the likelihood of substantially reduced volatility. I also urged endowment managers not to rely on “history and computers” to forecast stock and bond returns. My major recommendation couldn’t have been more specific: a 50/50 portfolio using U.S. stock and bond index funds, a balanced portfolio with extraordinary diversification and remarkably low costs—“on automatic pilot,” if you will. Simplicity writ large.”

Pretty interesting thoughts.  You can read the whole piece here and I highly recommend it.