What Harvard Can Teach You about Investing; Mistakes Even Smart People Make

Is there an echo in the room?

I often describe our investment strategy as “endowment-style adapted to the time frames and temperament of private investors”.  Larry Swedroe, director of research at Buckingham Asset Management, offers some salient points about the investment approach followed by many Ivy League college endowments in his new book, Investment Mistakes Even Smart Investors Make.

Five of the top 10 university endowments in the U.S. belong to Ivy League schools — Harvard topping the list at $32 billion as of October 2011.  Though all the schools were hit by the downturn late last decade, endowment returns tend to be strong. Harvard boasts a 20-year track record of 12.9%.

Endowments differ from individuals in that their investment time frames can best be described as “Eternity” — longer than even the staunchest buy-and-hold investor.  But that doesn’t mean there aren’t lessons to be learned.

While private clients aren’t able to get access to the same deals as at $20 billion endowments, some aspects of the schools’ approach are quintessential investing 101. Diversifying holdings into foreign, growth, and value plays are boilerplate ideas.  Taking advantage of the premium return potential in illiquid investments is another.  But Swedroe says it is the discipline of the endowments that really gives them an advantage over mom and pop. 

As we do for our clients, endowments have written investment policies for their asset allocations. As an example, there might be a mandate that not less than 8% or more than 12% should be allocated to real estate. “So when real estate does better than the rest of the portfolio, they’ll come in and sell some of it to make sure it doesn’t exceed 12% — and that means they’re selling high,” Swedroe explains. When real estate falls under 8%, the endowment will buy — in effect, buying low. “That’s exactly the opposite of the way most small investors invest, and it’s one of the reasons they do poorly.”

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