Читать книгу A Wealth of Common Sense - Carlson Ben - Страница 9

Professional investors now control the markets, but it wasn't always like this. Fifty years ago, the little guy controlled the stock market, as individuals made up more than 90 percent of trading volume on the New York Stock Exchange. Today those roles are reversed, as institutions handle more than 95 percent of all trades in listed stocks while trading almost 100 percent of all other investable securities. Institutional investors such as pension funds, endowments, foundations, sovereign wealth funds, and wealthy family offices have trillions of dollars at their disposal to invest.12

Warren Buffett is probably the most well-known investor to the average guy or gal on the street. Not as many individual investors know who David Swensen is. Swensen is Warren Buffett in the world of institutional money management. He's one of the greatest institutional investors of all time. Swensen literally wrote the book on the institutional investment model, called Pioneering Portfolio Management. They even call his style of portfolio management, which has been imitated by hundreds and hundreds of investment funds around the globe, the Yale Model, because he is the chief investment officer for the Yale University endowment fund. Swensen has earned Yale nearly 14 percent per year in gains since the mid-1990s, an unbelievable run of performance over two decades.

Yale's portfolio is currently valued at over $20 billion. For those wishing to replicate Swensen's success, it's worth noting the structure of Yale's endowment fund. The school brings in hundreds of millions of dollars a year in charitable donations and grants. Ivy leaguers love giving back to their alma maters. Yale has a staff of 26 fulltime investment professionals who specialize in particular areas of expertise for the portfolio. Plus, Yale is a tax-exempt organization, meaning they don't have to worry about tax implications when it comes to their portfolio decisions. They also have a time horizon of forever, more or less, as the endowment is a perpetuity to the school. Large institutions, such as Yale, have access to certain funds that most average investors can't invest in because the minimums are far too large. There are deals that the largest players in the industry are involved in that would never become available to individual investors. Large pools of capital get a foot in the door simply for having such so much money at their disposal. The scale of these funds allows them to pay less in fees as a percentage of assets through negotiations because the absolute amounts can be so large.

While it's important to distinguish between individual and institutional investors, Swensen is quick to point out that even within the rank of professional investors there is a hierarchy. In the Yale Investment Office's 2013 annual report, Swensen offered the following advice to both institutional and individual investors alike (emphasis mine):

The most important distinction in the investment world does not separate individuals and institutions; the most important distinction divides those investors that have the ability to make high-quality active management decisions from those investors without active management expertise. Few institutions and even fewer individuals exhibit the ability and commit the resources to produce risk-adjusted excess returns.

The correct strategies for investors with active management expertise fall on the opposite end of the spectrum from the appropriate approaches for investors without active management abilities. Aside from the obvious fact that skilled active managers face the opportunity to generate market-beating returns in traditional asset classes of domestic and foreign equity, skilled active managers enjoy the more important opportunity to create lower-risk, higher returning portfolios with the alternative asset classes, and private equity. Only those investors with active management ability sensibly pursue market-beating strategies in traditional asset classes and portfolio allocation to nontraditional asset classes.

No middle ground exists. Low-cost passive strategies suit the overwhelming number of individual and institutional investors without the time, resources, and ability to make high-quality decisions. The framework of the Yale model applies to only a small number of investors with the resources and temperament to pursue the grail of risk-adjusted excess returns.13

One of the biggest problems for individual investors just starting out is that they try to pursue the grail of earning higher returns with lower risks without the proper understanding of how hard it truly is to obtain. They assume that they need to use the most sophisticated investment strategies to succeed in the markets. On the flipside of that coin, those that are at the top of their game and have used the most complex approaches always seem to offer simple solutions to individual investors. In essence, they are saying, “Do as I say, not as I do.” In a way, it takes an understanding of complexity to see the beauty in simplicity. This is a painful lesson for individuals to learn on their own, which is why it's preferable to let someone else pay the tuition for you. Learn from them and try not to make the same mistakes or understand why they advise you to think and act a certain way when investing.

The middle ground that Swensen describes is a place that many investors often find themselves stuck in. They want to try to beat the market by using sophisticated strategies, but they don't have the resources or knowhow to do it. In this case, trying to be above-average leads to below-average performance. Trying too hard becomes a weight around your neck. There's no shame in admitting that truly extraordinary market performance, such as Swensen's, is difficult to achieve. What hurts most investors is trying to be extraordinary in the markets, without the correct understanding that it's a game suited for a small number of investors.

The middle ground isn't reserved just for individual investors either. It's also littered with institutional investors that don't have the same resources or expertise as Yale. Table 1.1 shows the performance numbers over varying time horizons for Yale's Endowment Fund along with the numbers for one of their peers, Harvard, and the record for all endowment funds set against a simple 60/40 stock/bond benchmark. These numbers show how extraordinary Swensen's long-term results have been over a multidecade time horizon – phenomenal, in fact. Harvard, one of Yale's biggest rivals, has also shown the ability to deliver above average long-term returns, as well. Now look at the results of all endowment funds in this institutional investment universe. When compared to a 60/40 portfolio made up of two simple index funds the results look nearly identical. They basically matched a balanced fund's performance over every period, not something most novice investors would expect.14

Table 1.1 Endowment Fund Annual Performance Comparison

Source: Vanguard.

Not only is it difficult for the average individual investor to come close to matching David Swensen's return figures, but even his peers in the institutional investment community have a hard time coming anywhere near his performance. In fact, most have a hard time beating one of the simplest portfolios you can create for nearly nothing in fees today. Swensen himself is an advocate for passive funds; as he says, “Certainly, the game of active management entices players to enter, offering the often false hope of excess returns. Perhaps those few smart enough to recognize that passive strategies provide a superior alternative believe themselves to be smart enough to beat the market. In any event, deviations from benchmark returns represent an important source of portfolio risk.”15 This comes from a guy who has beat the market handily over the past two and a half decades. Sometimes it takes the perspective from someone that utilizes a complex approach to portfolio management to recognize the beauty of simplicity for everyone else without the same resources at their disposal.

Yale is definitely the Michael Jordan of the institutional investing world. (I guess that makes Harvard the Kobe Bryant?) It's a pipe dream to think individual investors can match their success. But look at the results of the rest of these multimillion- and billion-dollar portfolios: A simple 60/40 mix of stock and bond index funds that merely matches the returns of the market is right there over every single time frame. It's not out of the realm of possibilities for the average investor to hang with professional investment offices, assuming they have the required patience, discipline, and long-term perspective.

To match or even beat the performance of institutional investors, the individual has to think differently. You can't try to beat Wall Street at its own game. In this case, a very simple portfolio pulled in nearly the same performance with much less work involved and a far simpler strategy. Obviously, not all institutional investors can outperform the market. There will always be winners and losers.

Yet just think about all the work that goes into the returns for the institutional investors. Each large fund has a fulltime staff that can range in size from a few trained professionals to more than a couple thousand at the largest pension funds. There are also third-party consultants and back-office employees. The fulltime staffs that run these funds are constantly researching and analyzing the markets for investment opportunities. Although information access is becoming more widespread, annual budgets allow institutional investors to pay top dollar for the best research and market-data providers.

On the flipside, individual investors are on their own more often than not. If you don't work in the industry, you probably have a fulltime job or family to worry about. You can't track the markets or perform research on a daily basis. Even though your investments are extremely important to your future well-being, you have to live your life and likely don't have the time or interest to follow the markets as closely as the pros. As individuals, we are much more emotionally invested in our portfolios because it's our money. It's not other people's money that we're managing. No one's ever going to care more about your money that you. Your investment portfolio really contains your goals and desires.