Why I Love David Swensen
This post stands in direct contrast to my earlier missive Why I Hate Jim Cramer. I have long admired David Swensen; his focus on asset allocation, his low-key, humble nature and his intellectual prowess impress me greatly. The catalyst for this post was a piece in today’s Financial Times penned by John Authers, who heard David speak at the recent Yale commencement. Some of David’s comments included:
“Investment management is a simple business,” he said. It came down
to two principles. First, equities are best for the long run (as proved
by many surveys). “With a portfolio like Yale’s, with a time horizon
measured in centuries, everyone would come to the same conclusion: it’s
far better to have equities in your portfolio than bonds or cash.” By
equity, he means any asset where there is a potential upside that can
be taken by the investor.His second principle is simpler: “Diversification is important.”
********************
What of security selection? CAPM suggests this is a mug’s game. If
prices adjust to include all known information, good stock-picking can
be done only by luck.His solution was to buy assets outside
the public markets that are not so efficient. Assets such as private
equity and timber have the added advantage that they are uncorrelated.Is
this something you should try at home? Swensen thinks not. “I know it’s
necessary to be humble,” he told the gathered alumni, “but I think Yale
is set up to make high-quality active management decisions.” It has a
staff of 20, and its time horizon means it can buy illiquid investments
such as forestry.Alternatively, he says, “you are in the
category in which most investors find themselves, where they aren’t set
up to make quality active asset allocation decisions. They should
manage their portfolio passively, through low-cost index funds.”
David Swenson, for me, is an investment deity. He simply speaks the truth - period. Where David speaks softly and carries a big stick, Jim shouts loudly and carries a pencil behind his ear. David speaks of long time horizons, the importance of asset allocation and the over-emphasis on market timing. Jim speaks of “get in now,” single stock positions and places extreme emphasis on market timing. David understands the limitations of individual investors and counsels them to focus on low-cost index funds and passive investing, whereas Jim “empowers” people to make decisions which they are largely unqualified to make, leading to a sharp divergence between perceived skill and actual results. And this is both dangerous and a shame. The kind of investment advice David proffers isn’t sexy and doesn’t lead to bragging rights, at least until it comes time to retire. At that point Swensen devotees will be bragging all the way to the bank. And Jim’s acolytes? Well, they might be bragging on the golf course today, but as to the future, I’m not so sure.
