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Wise Words from David Swensen

November 18, 2022

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Jon

David Swensen managed Yale’s endowment for 35 years and transformed how institutions managed money. His Yale model took a simple idea and applied an unconventional approach to great success.

Swensen’s simple idea was that time horizon plays an important role in determining asset allocation. The time horizon for college endowments is basically endless. It allowed Swensen to tilt the portfolio to an equity-oriented allocation to take advantage of that extreme long-term view.

While a typical allocation holds a mix of traditional asset classes like U.S. and foreign stocks and bonds, Swensen shied away from that. Instead, his unconventional approach leaned heavily on what is now called alternative investments.

For example, in 2008, only 30% of Yale’s endowment was invested in traditional asset classes. 70% was in real assets, hedge funds, absolute return strategies, private equity, and venture capital. That asset mix allowed him to focus more on the least efficient markets. His goal was equity-like returns over long periods using uncorrelated assets. And it worked!

Swensen knew that every investor has three tools at their disposal to generate returns: asset allocation, market timing, and security selection. Research shows that market timing doesn’t work. In fact, it’s a net negative. It generates higher turnover, higher fees, and fails to do what’s intended. Returns tend to be worse when market timing is involved. Continue Reading…
The Ten Commandments for Business Failure by Donald Keough

November 16, 2022

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There is no secret formula for business success. Donald Keough inverts the question “How to succeed in business?” He looks back on numerous mistakes in his sixty-year career and identifies common factors that led to business failure so you avoid the same fate.

The Notes

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The Memoirs of Walter J. Schloss by Walter Schloss

November 9, 2022

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Walter Schloss shares stories and lessons from his life growing up in New York, getting his first job on Wall Street, enlisting in WWII, returning to work for Ben Graham, and successfully running his own partnership for 47 years.

The Notes

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Wise Words from Peter Lynch

November 4, 2022

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Jon

Anyone who got the investing itch in the ’80s or ’90s followed Peter Lynch at some point. He was the last star mutual fund manager — who left the game early and for the right reasons. Lynch played at a higher level than everyone else.

One of the best examples of this, that I’ve come across, was in the 1988 Baron’s Roundtable discussion. Ten fund managers gathered in the same room to start the year. You might recognize a few — Mario Gabelli, Paul Tudor Jones, John Neff, Michael Price, Jim Rogers, and, of course, Peter Lynch.

It’s three months after the ’87 crash. They’re jittery. They argue about what’s next for the economy, oil prices, interest rates, inflation, trade deficit, and the stock market. Six hours of “what if there’s a recession or another crash?” Basically, the crap you hear on CNBC every day.

And then there’s Lynch — I picture him sitting quietly, smirking. Finally, he interrupts:

There’s always something to worry about. But it’s garbage to worry about these things… You have to look at corporate profits, and see what’s going on in the companies. It’s total garbage to worry about the things that’s going to drive us to a 300 Dow. It’ll be something you couldn’t imagine if you picked the brightest or dumbest people in the world and assembled them for hours.

Lynch took a shot at the Roundtable itself and made his point. There’s always something to worry about in investing. But it’s a waste of time and energy because we won’t predict it correctly. Continue Reading…
Wall Street Under Oath by Ferdinand Pecora

November 2, 2022

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Ferdinand Pecora was the counsel for the Senate Committee on Banking and Currency investigation in 1933. His book lays out its findings on the widespread speculative, and manipulative, stock market practices leading up to 1929 and the market crash that followed.

The Notes

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The Fall of the Goldman Sachs Trading Corp.

October 28, 2022

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Jon

The rise in popularity of new financial products often coincides with the rising popularity of stocks. And if one takes off, you’re bound to get more.

One of the first examples of this in the U.S. was investment trusts in the 1920s. Investment trusts are a type of fund that got their start in the U.K. in the 1860s.

The first trust of any significance was created in the U.S. in 1924. One of the main selling points was the benefit of a professional investing your money for you. As the 1920s rolled on, another point emerged on how trusts would be a stabilizing force for the stock market during a decline.

Trusts were not an immediate hit. Only $175 million were in investment trusts in 1927. That all changed within a year. The number jumped to $790 million in 1928. Then it hit $2.25 billion in 1929 and represented 22% of all stock issues. In fact, the number of investment trusts more than doubled from 172 at the start of 1929 to over 400 by the end of August of the same year. And more investment trust securities were offered in September 1929 than in August.

But the love affair investors had with investment trusts was short-lived. Like many investment fads, there are always a few bad apples that spoil the bunch. Of all the investment trusts, one stands out as the most egregious. Continue Reading…