About the intelligent investor
The weekly column of ‘The Intelligent Investor’ by Jason Zweig, has been published in the Wall Street Journal for about a decade and is published exclusively in Globes. According to Zweig: “My goal is to help you distinguish between the good advice and the one that just sounds good”
About Jason Zweig
One of the senior journalists of The Wall Street Journal. Author of the book “Your Money and Your Mind: How Neuroscience Can Help You Get Rich”, and the editor of the updated version of the bestseller “The Intelligent Investor”, described by Warren Buffett as “the best investment book ever written”
When the stocks, bonds and real estate are all on the face, maybe it’s time to try something different. You must have lost at least 15% on your stocks, and a similar rate on bonds last year. Issued real estate assets are down nearly 25%. Meanwhile, this year, bonds are on a flat chart and stocks and real estate are just barely avoiding losses.
So your financial advisor may be urging you to consider alternatives: almost anything that isn’t cash, bonds and stocks. Alternatives include commodities, digital currencies, hedge funds, infrastructure, private debt and equity, unissued real estate, venture capital and many other areas of investment.
● “Get the money out quickly, this thing is going to collapse”: behind the scenes of the fall of the high-tech bank
● About two weeks before the collapse: the CEO of Silicon Valley Bank sold shares worth $3.6 million
Many of these assets are rarely, if ever, traded. But as soon as they are packaged in mutual funds, basket funds or other baskets, they become “liquid alternatives” that are traded.
In 2001, public pension funds held just 9% of their assets in things other than stocks, bonds or cash, according to data from Boston College’s Center for Retirement Research. By 2021, these funds will have transferred 29% of their total assets, about $5 trillion, for alternatives.
Universities and other large institutions also joined this panic. Everyone wanted to “be like Yale”.
Everyone ran for today like Yale, like David Swansen
That’s because the Yale Endowment Fund, run by the brilliant David Swanson, has generated extraordinary returns from hedge funds, private equity, venture capital and other private holdings.
Svensen died in 2021. In the 35 years he held his position, the Yale Endowment Fund earned an annual average of 13.1%. This figure crushes the average annual return of 8.8% obtained from a standard portfolio of 60% stocks and 40% bonds – and even the data of the S&P 500 index itself.
But it takes extraordinary experience and expertise to identify alternative funds that have a good likelihood of outperforming. Swansen’s analysts were so good that many of them went on to manage other large endowment funds.
Most of those who want to match Lyle lack her size and abilities. Data from the National Association of University and College Business Administrators shows that institutions with less than $1 billion in assets tend to perform less well than giants like Yale, by an average of 1 percent to 3 percent a year.
In a recent article, Lawrence Siegel, director of research at the CFA Institute Research Foundation, listed the five key principles you must have in common with Swansen and his university to be eligible to invest in alternatives.
expertise. Yale’s large and skilled investment team specialized in private assets. Do your advisors have extensive and deep experience in analyzing alternative funds, including their fees, their managers and their private asset valuation methods?
time. Yale was founded in 1701 and expects to exist forever—giving it the luxury of waiting many years for illiquid investments to pay off. Can you hold non-tradable assets for at least ten years?
risk tolerance. With an almost infinite time horizon and a vast pool of assets, Yale can afford interim – or even permanent – losses of hundreds of millions of dollars on its private funds. Are you able to swallow punishing losses?
new money Yale does not depend on investments for most of its income. Tuition, donations and grants also help fund her needs, and she can cut back on expenses if the portfolio is underperforming. Yale can pump new money into assets that become cheaper when markets decline, potentially boosting future returns.
Do you also have large sources of income apart from the investment portfolio?
size. Yale’s endowment fund is greater than 40 billion dollars. She receives preferential access and commission discounts from the best private fund managers in the world. Yale can diversify investments not just across a few different private funds, but across a vast collection of investment areas. Above all, its size helps it defend against market shocks.
You should have a lot more money
If you are “high net worth” with assets of $1 million or more, you are probably considering – or being urged to consider – alternatives. Siegel says you should have a lot more money.
“People who think they’re rich but aren’t are putting their retirement money at risk by betting on the alternative asset market,” he said.
If you have all five of these characteristics, alternative investments may really be for you. Less than these five? Forget about it.
Private equity worked so well for David Swensen “because he was David Swensen and because he was Bale,” Siegel says. “You are not David Swansen, and almost no one is Yale.”