David Swensen Unconventional Success

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David Swensen Unconventional Success

Post by abuss368 »

Bogleheads -

How many folks have read the book Unconventional Success? If you did, what are your thoughts? Is the book still relevant since it was published in 2005? What about other asset classes that may not have been as accessible in a low cost format when the book was published such as International REITs (i.e. Swensen recommend a large allocation to REITs in general and a larger (at the time) international allocation), International Bonds, etc.

Has anyone implemented the Yale investment portfolio personally? In reviewing the Marketwatch Lazy Portfolio's the Three Fund Portfolio is ahead of everything for all time periods. My surprise is was how far ahead the Three Fund Portfolio is. Taylor has always written about the many benefits of the Three Fund Portfolio. How it stacks up to the other Lazy Portfolio's is impressive indeed.
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Re: David Swensen Unconventional Success

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abuss368 wrote: Sat Oct 27, 2018 12:17 pm Has anyone implemented the Yale investment portfolio personally? In reviewing the Marketwatch Lazy Portfolio's the Three Fund Portfolio is ahead of everything for all time periods. My surprise is was how far ahead the Three Fund Portfolio is. Taylor has always written about the many benefits of the Three Fund Portfolio. How it stacks up to the other Lazy Portfolio's is impressive indeed.
Did you look at the bond allocations? The Second Grader (a Three Fund Portfolio) is 90/10. Swenson's Yale is 70/30. Three Fund is ahead because it took more risk.

https://www.marketwatch.com/lazyportfolio
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Re: David Swensen Unconventional Success

Post by staythecourse »

matjen wrote: Sat Oct 27, 2018 12:23 pm
abuss368 wrote: Sat Oct 27, 2018 12:17 pm Has anyone implemented the Yale investment portfolio personally? In reviewing the Marketwatch Lazy Portfolio's the Three Fund Portfolio is ahead of everything for all time periods. My surprise is was how far ahead the Three Fund Portfolio is. Taylor has always written about the many benefits of the Three Fund Portfolio. How it stacks up to the other Lazy Portfolio's is impressive indeed.
Did you look at the bond allocations? The Second Grader (a Three Fund Portfolio) is 90/10. Swenson's Yale is 70/30. Three Fund is ahead because it took more risk.

https://www.marketwatch.com/lazyportfolio
This needs to be highlighted and understood by many of our more novice investors and unfortunately many of our more experienced investors. There is no such thing as a better passive portfolio then another. If one is taking a bogleheads approach one is already choosing a lowest cost, tax efficient fund that mimics its appropriate benchmark. That means ANY return will simply be the reflection of what the benchmark did on a weighted average.

For example, If TSM shoots the lights out then no surprise the portfolio with a huge chunk dedicated to TSM. Low and behold that is the second grader portfolio/ 3 fund portfolio did the best last 10 years since TSM has trounced nearly every asset class due to large cap component. If REITS lights it up I will bet Yale's will do the best going forward since it has 20% dedicated to it. Since stocks usually do the best any long term review will show the one's most heavy on equities will do the best. So my guess is anything that has 90% in equities like the 3 Fund will do the best. Now the real question is how many folks are 90% in equities in their 3 fund especially older investors?

Good luck.
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Re: David Swensen Unconventional Success

Post by abuss368 »

staythecourse wrote: Sat Oct 27, 2018 12:38 pm
This needs to be highlighted and understood by many of our more novice investors and unfortunately many of our more experienced investors. There is no such thing as a better passive portfolio then another. If one is taking a bogleheads approach one is already choosing a lowest cost, tax efficient fund that mimics its appropriate benchmark. That means ANY return will simply be the reflection of what the benchmark did on a weighted average.

For example, If TSM shoots the lights out then no surprise the portfolio with a huge chunk dedicated to TSM. Low and behold that is the second grader portfolio/ 3 fund portfolio did the best last 10 years since TSM has trounced nearly every asset class due to large cap component. If REITS lights it up I will bet Yale's will do the best going forward since it has 20% dedicated to it. Since stocks usually do the best any long term review will show the one's most heavy on equities will do the best. So my guess is anything that has 90% in equities like the 3 Fund will do the best. Now the real question is how many folks are 90% in equities in their 3 fund especially older investors?

Good luck.
You mention very good points. I think there is also something to be said for simplicity. With only three funds, the Three Fund Portfolio is tough to beat from a simplicity standpoint. An alternative would be Jack Bogle's Two Fund Portfolio or perhaps a Target/Lifestrategy/Balanced Fund.

What has hurt the Yale Portfolio, in addition to having a higher allocation to bonds, is REITs and TIPS. When these asset classes are out of favor (as you noted earlier) there is impact to the portfolio compared to a simple TSM fund.
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Re: David Swensen Unconventional Success

Post by raven15 »

I read and own it. The first chapter is great investment reading and I highly recommend it. The next chapters are more of a take down of active management which will not really be useful to long time bogleheads.
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Re: David Swensen Unconventional Success

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raven15 wrote: Sat Oct 27, 2018 2:14 pm I read and own it. The first chapter is great investment reading and I highly recommend it. The next chapters are more of a take down of active management which will not really be useful to long time bogleheads.
Indeed. I assumed (perhaps incorrectly) that more Bogleheads would have read the book or followed the recommended investment portfolio.
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Re: David Swensen Unconventional Success

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abuss368 wrote: Sat Oct 27, 2018 2:08 pm When these asset classes are out of favor (as you noted earlier) there is impact to the portfolio compared to a simple TSM fund.
Correct IF TSM does not outproduce. But then again the argument is the reason we diversify is there is no guarantee (far from it) that U.S. will out gain every other asset otherwise folks would just be 100% TSM.

Good luck.
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Re: David Swensen Unconventional Success

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staythecourse wrote: Sat Oct 27, 2018 3:54 pm
abuss368 wrote: Sat Oct 27, 2018 2:08 pm When these asset classes are out of favor (as you noted earlier) there is impact to the portfolio compared to a simple TSM fund.
Correct IF TSM does not outproduce. But then again the argument is the reason we diversify is there is no guarantee (far from it) that U.S. will out gain every other asset otherwise folks would just be 100% TSM.

Good luck.
Jack Bogle has always recommended a simple Two Fund Portfolio of Total Stock and Total Bond.
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Re: David Swensen Unconventional Success

Post by abuss368 »

I am a little surprised at the lack of responses. I would have thought that a thread on David Swensen would have received many more responses. Perhaps the Yale Portfolio is out of favor.
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Re: David Swensen Unconventional Success

Post by Whiggish Boffin »

OK, I'll play.

I read Unconventional Success in 2007, when I was 55 and just starting to figure out retirement planning. I took it to heart. In January 2008, I wrote an Investment Policy Statement (IPS) that said:
I will not deviate from [Swensen's allocation] unless it is shown seriously deficient. I will consider incorporating small-cap and value tilts according to the Fama-French model, because some of the Vanguard gurus think that’s a good idea. I won’t do that until I understand it and am persuaded by evidence and reason that it’s incontestably better than Swensen’s, which may be never.
In 2008 I felt a need to form a plan and execute. Otherwise, I'd take forever making the perfect plan -- that's my nature and often my downfall. So, I had to accept an argument from authority that was good enough to tide me over while I studied. The IPS concluded with a list of 15 topics for further study.

I latched onto Swensen as that authority. He knew what he was talking about -- doctorate, career on Wall Street, wrote the book on endowment finance. He had gotten rich, but not too rich. He wasn't trying to sell me anything. His plan was simple enough for me to grasp and execute. Thus, he offered credentials, proven performance, alignment of interests, and an executable algorithm. Ten years later, it's good enough to stick to.

Almost. I went a bit Bodie. I attend the DC Area Bogleheads chapter and hobnob a bit with bobcat2 and Grabiner. They haven't persuaded me that the value premium is real. The bobcat did convince me to get a TIPS ladder and SPIA to cover my basic survival expenses.

I know Dr. Swensen is a busy man, and I expect he charges a lot to dispense his wisdom. But, golly, I sure would like it if he'd show up for a Bogleheads conference.
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Re: David Swensen Unconventional Success

Post by staythecourse »

Whiggish Boffin wrote: Sun Oct 28, 2018 10:07 am The bobcat did convince me to get a TIPS ladder and SPIA to cover my basic survival expense.
Hope you bought him a beer. That was literally the best advice a retiree or soon to be one could ever get. Doesn't matter what happens to the rest of your $$$, but knowing you never need to worry about day to day living is both financially and psychologically stabilizing.

There is NO reason any retiree should not approach retirement investing in the same manner. Count up pensions, SS, and principle stable subassets and it should cover monthly liabilities. Only AFTER that one should even think about what to do with the rest of your money. That is the way one should arrive to their asset allocation.

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle
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Re: David Swensen Unconventional Success

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Hey, I found this from Financial Page a Bogleheads Blog. Didn't even know the blog existed.

https://finpage.blog/2018/01/12/david-s ... 17-update/
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Re: David Swensen Unconventional Success

Post by aristotelian »

I thought it was a good book. Interesting thoughts on alignment of interests of market participants. I am not a fan of REIT but I do like the emphasis on Treasuries and TIPS.
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Re: David Swensen Unconventional Success

Post by garlandwhizzer »

I just posted this on the thread about timber investing but I believe it is more appropriate here.
David Swensen, Yale endowment investment advisor, popularized a diversified non-traditional portfolio which included private equity, hedge funds, real estate and alternate assets. His performance relative to other Ivy endowments and to traditional 60/40 portfolios was quite impressive. Swenson himself has said that most endowments that attempt to follow his strategies are unlikely to find such success. The following is an article in Institutional Investor magazine by Julie Segal based on an in depth independent study of Swenson's techniques and success by Markov Processes International. The conclusion is that Swensen's outsized performance comes as a result of taking outsized risk. The Sharpe Ratio (return pre unit of risk) of Swenson's portfolio is very close to that of a standard 60/40 portfolio. Surprise! The more things appear to change in the investing arena, the more they may remain the same.

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Re: David Swensen Unconventional Success

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abuss368 wrote: Sun Oct 28, 2018 9:04 am I am a little surprised at the lack of responses. I would have thought that a thread on David Swensen would have received many more responses. Perhaps the Yale Portfolio is out of favor.
I don't read this kind of what I consider to be schlock anymore. I consider anyone (which is just about 99.9% of what is written about investing, economics, and personal finance) who writes this stuff to have interests diametrically opposed to my own. They have reputations to build/maintain, maybe egos to puff, mortgages to pay, kids cavities to have filled, and cars to have serviced. I just want my race horse to cross the financial finish line without a broken leg cause by a wrong step into complexity.

The deeper I wade into the waters of mental models the more convinced I am that absolutely nothing is more important than studying models demonstrating how the world actually works coupled with models demonstrating faulty human perceptual/cognitive systems. As a result of life lived increasingly in opaque systems, it's so incredibly easy to do something stupid when in search of brilliance much of the time it's better to do nothing at all. Read what Charlie Munger has to say about the power of inversion.
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Re: David Swensen Unconventional Success

Post by abuss368 »

aristotelian wrote: Sun Oct 28, 2018 11:06 am I thought it was a good book. Interesting thoughts on alignment of interests of market participants. I am not a fan of REIT but I do like the emphasis on Treasuries and TIPS.
REITs have been under a lot of pressure.
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Re: David Swensen Unconventional Success

Post by Whiggish Boffin »

I've wondered sometimes -- The book makes no mention of the Fama-French small-cap and value factors. The book's index has no entries for them. Certainly Dr. Swensen is well aware of the factors.

But, REITs are generally classed as value stocks, and some of them are pretty small. Does Swensen's recommendation of 20% REITs in the individual-investor portfolio let him smuggle a small/value tilt into it, without needing to explain the Fama-Frenxh factors and all the boring math that would entail?
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Re: David Swensen Unconventional Success

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I’ve always assumed that TIAA Real Estate (which I’ve never owned) was “safer” than REITs....and then I saw this:

https://nb.fidelity.com/public/workplac ... w-all/OBQA

It performed 54% worse than the SP500 in 2009. :shock:
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Re: David Swensen Unconventional Success

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columbia wrote: Mon Oct 29, 2018 5:35 am I’ve always assumed that TIAA Real Estate (which I’ve never owned) was “safer” than REITs....and then I saw this:

https://nb.fidelity.com/public/workplac ... w-all/OBQA

It performed 54% worse than the SP500 in 2009. :shock:
David Swensen was a board member of TIAA at one time.
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Re: David Swensen Unconventional Success

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columbia wrote: Mon Oct 29, 2018 5:35 am I’ve always assumed that TIAA Real Estate (which I’ve never owned) was “safer” than REITs....and then I saw this:

https://nb.fidelity.com/public/workplac ... w-all/OBQA

It performed 54% worse than the SP500 in 2009. :shock:
And 14% better in 2008. You have to take the 2 years together.

There was an issue with stale valuations and the ability to exploit that. It did more or less as well as national real estate indices I believe.
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Re: David Swensen Unconventional Success

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nedsaid wrote: Sun Oct 28, 2018 10:37 am Hey, I found this from Financial Page a Bogleheads Blog. Didn't even know the blog existed.

https://finpage.blog/2018/01/12/david-s ... 17-update/
Thanks for sharing. I was unaware of this site as well. Looks like the home page is here.
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Re: David Swensen Unconventional Success

Post by marcopolo »

Was Swenson's out performance statistically significant, or was it just a "thousand monkeys, at a thousand type writers penning a Shakespeare novel" phenomenon? There must be many thousand on people running endowments, just by random chance some will greatly outperform. I don't see how that is much different than similar out performance (retrospectively) by active mutual fund managers.
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Re: David Swensen Unconventional Success

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marcopolo wrote: Mon Oct 29, 2018 8:47 am Was Swenson's out performance statistically significant, or was it just a "thousand monkeys, at a thousand type writers penning a Shakespeare novel" phenomenon? There must be many thousand on people running endowments, just by random chance some will greatly outperform. I don't see how that is much different than similar out performance (retrospectively) by active mutual fund managers.
Actually, it was far different. For one thing, mutual funds have to invest in liquid investments and Swenson was able to invest a substantial portion of the Yale Endowment portfolio in illiquid or semi-liquid investments. Swenson does not have to provide daily liquidity as mutual funds do. He also had substantial investments in alternatives.

It certainly true that most College Endowments trying to replicate Swenson's success have not even been able to achieve the record of simple 60% stock/40% bond balanced funds. There is a thread out there discussing this topic. Swenson was also the early bird with alternatives. One could say this was luck but I don't think so.
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Re: David Swensen Unconventional Success

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staythecourse wrote: Sun Oct 28, 2018 10:15 am
Whiggish Boffin wrote: Sun Oct 28, 2018 10:07 am The bobcat did convince me to get a TIPS ladder and SPIA to cover my basic survival expense.
Hope you bought him a beer. That was literally the best advice a retiree or soon to be one could ever get. Doesn't matter what happens to the rest of your $$$, but knowing you never need to worry about day to day living is both financially and psychologically stabilizing.

There is NO reason any retiree should not approach retirement investing in the same manner. Count up pensions, SS, and principle stable subassets and it should cover monthly liabilities. Only AFTER that one should even think about what to do with the rest of your money. That is the way one should arrive to their asset allocation.

Good luck.
Agree. Staythecourse, sounds to me like you’re a fan of Bernstein’s liabilitynmatching portfolio and risk portfolio concept. Is that right?

Dave
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Re: David Swensen Unconventional Success

Post by staythecourse »

Random Walker wrote: Mon Oct 29, 2018 9:20 am
staythecourse wrote: Sun Oct 28, 2018 10:15 am
Whiggish Boffin wrote: Sun Oct 28, 2018 10:07 am The bobcat did convince me to get a TIPS ladder and SPIA to cover my basic survival expense.
Hope you bought him a beer. That was literally the best advice a retiree or soon to be one could ever get. Doesn't matter what happens to the rest of your $$$, but knowing you never need to worry about day to day living is both financially and psychologically stabilizing.

There is NO reason any retiree should not approach retirement investing in the same manner. Count up pensions, SS, and principle stable subassets and it should cover monthly liabilities. Only AFTER that one should even think about what to do with the rest of your money. That is the way one should arrive to their asset allocation.

Good luck.

Agree. Staythecourse, sounds to me like you’re a fan of Bernstein’s liabilitynmatching portfolio and risk portfolio concept. Is that right?

Dave
To be honest, I sort of came up with the idea on my own before I even heard Dr. Bernstein and others come up with the idea. It just makes sense. If a person's biggest risk in retirement is not having money to pay the monthly bills because the market has been down the last year so it makes more sense to eliminate that risk by saving up multiple of years of fixed annual expenses.

This is how retirees should be coming up with their asset allocation and not, "Oh well I think I can tolerate a 20% in the market". It sort of works backwards to get to your asset allocation.

Good luck.

p.s. Does give me more confidence in the mental exercise to hear Dr. Bernstein advocate for the same. :D
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Re: David Swensen Unconventional Success

Post by Random Walker »

Staythecourse,
I agree that we should also think both in terms of potential % loss and potential ABSOLUTE $ loss. That really helps clarify some AA issues.

Dave
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Re: David Swensen Unconventional Success

Post by Ice-9 »

I read Unconventional Success in 2009 or 2010, not too long after doing the following:
* learning of Diehards/Bogleheads in 2006 or so and getting started with a high-equity but Bogleheadish portfolio
* experiencing the 2008-9 crash and realizing I wanted to make my portfolio slightly less risky
* coming up with a new 70/30 target allocation based on reading several of William Bernstein's and Larry Swedroe's books

I was pleasantly surprised to find the 70/30 portfolio I had come up with was quite similar to the one suggested and thus mostly validated by the very technical arguments for and against several asset classes in David Swenson's book, which I recall read more like a textbook than Bernstein or Swedroe's books. My new target percentages weren't too far off from Swenson's, and I didn't feel compelled to make the slight adjustments to match his suggested allocations after reading the book, but I appreciated the insight. I've been mostly pleased with the performance and have stayed the course with that allocation ever since.
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Re: David Swensen Unconventional Success

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nedsaid wrote: Mon Oct 29, 2018 9:11 am
marcopolo wrote: Mon Oct 29, 2018 8:47 am Was Swenson's out performance statistically significant, or was it just a "thousand monkeys, at a thousand type writers penning a Shakespeare novel" phenomenon? There must be many thousand on people running endowments, just by random chance some will greatly outperform. I don't see how that is much different than similar out performance (retrospectively) by active mutual fund managers.
Actually, it was far different. For one thing, mutual funds have to invest in liquid investments and Swenson was able to invest a substantial portion of the Yale Endowment portfolio in illiquid or semi-liquid investments. Swenson does not have to provide daily liquidity as mutual funds do. He also had substantial investments in alternatives.

It certainly true that most College Endowments trying to replicate Swenson's success have not even been able to achieve the record of simple 60% stock/40% bond balanced funds. There is a thread out there discussing this topic. Swenson was also the early bird with alternatives. One could say this was luck but I don't think so.
There's an academic literature about whether David Swensen is genuinely talented or just lucky.

His success, if there is success, was about:

- being early into a number of asset classes - timber, private equity etc.

- being exceptionally good at picking top quartile managers, in areas of Alternatives where the dispersion of manager performance is quite large. He takes you through that in the Venture Capital class - the top 10% of all funds (actually more like the to 1% of funds by number) extract all the excess performance over the Nasdaq - the other 99% actually perform worse than the Nasdaq

William Bernstein wrote a piece about Swensen and Buffett, pointing out that neither of these two are particularly greedy (Swensen could make 10x times his current compensation on Wall Street).

In each human population, in each time in civilization, a handful of individuals distinguish themselves among their peers. Olympic athletes. Great trial lawyers. Great justices. Great politicians (Robert Harris' Cicero Trilogy is a wonderful depiction of that in late Republican Rome). Great surgeons. The laws of statistics, genetics, circumstances of upbringing throw up such individuals in every generation.

(Robert E Lee corresponds to the stereotype of the great military leader - ranked top of his class at West Point, distinguished service as a junior officer, popular with his men, etc. But so did General George McLellan. It would fall to Ulysses Samuel Grant, an indifferent scholar with known personal problems and a mixed military career, to meet the need of the young Republic at its darkest hours, and lead the Army of the Potomac to Appomattox Courthouse and a place in history).

In late 20th century American capitalism it so happened that there was this profession called "asset management". And it so happened that a handful of individuals really were very good at it. John Bogle found one angle - assume market efficiency and drive down what you can control (costs) and focus on the interests of the fund holders. Warren Buffett found another. David Swensen a third. You'd struggle to find many others - Peter Lynch perhaps. With the added caveat that statistically it is difficult/ impossible to separate that from luck.

Just like most of us would not have made great surgeons, or great generals, we should not assume we would make great university endowment managers.
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Re: David Swensen Unconventional Success

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Alas, Valuethinker, I was not a great investor. My Value tilts have caused me to trail the market since the 2008-2009 financial crisis and bear market. I remember crying in my root beer over the 2018 New Year's weekend. Surprisingly, I have done better than a lot of the "lazy" portfolios listed on Marketwatch but still couldn't match the simple 3 fund portfolio. Reading Peter Lynch's books did not make me into another Peter Lynch and reading about Warren Buffett didn't make me into another Warren Buffett.
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Re: David Swensen Unconventional Success

Post by marcopolo »

nedsaid wrote: Mon Oct 29, 2018 9:11 am
marcopolo wrote: Mon Oct 29, 2018 8:47 am Was Swenson's out performance statistically significant, or was it just a "thousand monkeys, at a thousand type writers penning a Shakespeare novel" phenomenon? There must be many thousand on people running endowments, just by random chance some will greatly outperform. I don't see how that is much different than similar out performance (retrospectively) by active mutual fund managers.
Actually, it was far different. For one thing, mutual funds have to invest in liquid investments and Swenson was able to invest a substantial portion of the Yale Endowment portfolio in illiquid or semi-liquid investments. Swenson does not have to provide daily liquidity as mutual funds do. He also had substantial investments in alternatives.

It certainly true that most College Endowments trying to replicate Swenson's success have not even been able to achieve the record of simple 60% stock/40% bond balanced funds. There is a thread out there discussing this topic. Swenson was also the early bird with alternatives. One could say this was luck but I don't think so.
Fair point about access and how his situation was different compared to mutual funds.
Presumably other endowments have had similar access, but did not have similar success. In the endowment world, is his out performance statistically significant?
He invested in some set of Alts that worked out, I suspect others invested in a different set of Alts, and you never hear about them. Was that due to some inherent superior knowledge, or just random chance?
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Re: David Swensen Unconventional Success

Post by nedsaid »

marcopolo wrote: Mon Oct 29, 2018 10:43 am
nedsaid wrote: Mon Oct 29, 2018 9:11 am
marcopolo wrote: Mon Oct 29, 2018 8:47 am Was Swenson's out performance statistically significant, or was it just a "thousand monkeys, at a thousand type writers penning a Shakespeare novel" phenomenon? There must be many thousand on people running endowments, just by random chance some will greatly outperform. I don't see how that is much different than similar out performance (retrospectively) by active mutual fund managers.
Actually, it was far different. For one thing, mutual funds have to invest in liquid investments and Swenson was able to invest a substantial portion of the Yale Endowment portfolio in illiquid or semi-liquid investments. Swenson does not have to provide daily liquidity as mutual funds do. He also had substantial investments in alternatives.

It certainly true that most College Endowments trying to replicate Swenson's success have not even been able to achieve the record of simple 60% stock/40% bond balanced funds. There is a thread out there discussing this topic. Swenson was also the early bird with alternatives. One could say this was luck but I don't think so.
Fair point about access and how his situation was different compared to mutual funds.
Presumably other endowments have had similar access, but did not have similar success. In the endowment world, is his out performance statistically significant?
He invested in some set of Alts that worked out, I suspect others invested in a different set of Alts, and you never hear about them. Was that due to some inherent superior knowledge, or just random chance?
My guess that a lot of his superior performance in alts were two things: being early to the party and knowing the right people. For example, I doubt that Cliff Asness or Ray Dalio would return my phone calls. David Swenson with his vast contacts through Yale alumni would get those calls returned.
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Re: David Swensen Unconventional Success

Post by Valuethinker »

marcopolo wrote: Mon Oct 29, 2018 10:43 am
nedsaid wrote: Mon Oct 29, 2018 9:11 am
marcopolo wrote: Mon Oct 29, 2018 8:47 am Was Swenson's out performance statistically significant, or was it just a "thousand monkeys, at a thousand type writers penning a Shakespeare novel" phenomenon? There must be many thousand on people running endowments, just by random chance some will greatly outperform. I don't see how that is much different than similar out performance (retrospectively) by active mutual fund managers.
Actually, it was far different. For one thing, mutual funds have to invest in liquid investments and Swenson was able to invest a substantial portion of the Yale Endowment portfolio in illiquid or semi-liquid investments. Swenson does not have to provide daily liquidity as mutual funds do. He also had substantial investments in alternatives.

It certainly true that most College Endowments trying to replicate Swenson's success have not even been able to achieve the record of simple 60% stock/40% bond balanced funds. There is a thread out there discussing this topic. Swenson was also the early bird with alternatives. One could say this was luck but I don't think so.
Fair point about access and how his situation was different compared to mutual funds.
Presumably other endowments have had similar access, but did not have similar success. In the endowment world, is his out performance statistically significant?
Broadly, yes. But there are never enough data points to fully rule out "lucky" - same problem with Buffett.
He invested in some set of Alts that worked out, I suspect others invested in a different set of Alts, and you never hear about them. Was that due to some inherent superior knowledge, or just random chance?
His thinking was very clear on why he did it, and which areas he went into - that's clear in his books and was no doubt clear in his internal presentations to the university administration and trustees. Being Yale would also give him access to Alts (at least in terms of meeting them) managed by the highly successful alumni in finance of that university -- an advantage only Stanford Princeton Harvard (maybe Columbia) would have to the same degree (Chicago if we include business schools).

We'd need to run an experiment with Yale Endowment and not Yale Endowment, an identical portfolio without David Swensen in charge. In truth, that might be Harvard, and they have not done as well. Larry Summers got them into some financial engineering which cost them dear, and there was a principal-agent misalignment which led the managers to take excessive risks at the wrong time.

The people I would benchmark them against might well be Ontario Teachers Pension Plan - because they really are sharp (although a more fair competition would be CALSTRS CALPERS OTPP & OMERS (Ontario municipal employees)).
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Re: David Swensen Unconventional Success

Post by marcopolo »

Valuethinker wrote: Mon Oct 29, 2018 10:04 am
nedsaid wrote: Mon Oct 29, 2018 9:11 am
marcopolo wrote: Mon Oct 29, 2018 8:47 am Was Swenson's out performance statistically significant, or was it just a "thousand monkeys, at a thousand type writers penning a Shakespeare novel" phenomenon? There must be many thousand on people running endowments, just by random chance some will greatly outperform. I don't see how that is much different than similar out performance (retrospectively) by active mutual fund managers.
Actually, it was far different. For one thing, mutual funds have to invest in liquid investments and Swenson was able to invest a substantial portion of the Yale Endowment portfolio in illiquid or semi-liquid investments. Swenson does not have to provide daily liquidity as mutual funds do. He also had substantial investments in alternatives.

It certainly true that most College Endowments trying to replicate Swenson's success have not even been able to achieve the record of simple 60% stock/40% bond balanced funds. There is a thread out there discussing this topic. Swenson was also the early bird with alternatives. One could say this was luck but I don't think so.
There's an academic literature about whether David Swensen is genuinely talented or just lucky.

His success, if there is success, was about:

- being early into a number of asset classes - timber, private equity etc.

- being exceptionally good at picking top quartile managers, in areas of Alternatives where the dispersion of manager performance is quite large. He takes you through that in the Venture Capital class - the top 10% of all funds (actually more like the to 1% of funds by number) extract all the excess performance over the Nasdaq - the other 99% actually perform worse than the Nasdaq

William Bernstein wrote a piece about Swensen and Buffett, pointing out that neither of these two are particularly greedy (Swensen could make 10x times his current compensation on Wall Street).

In each human population, in each time in civilization, a handful of individuals distinguish themselves among their peers. Olympic athletes. Great trial lawyers. Great justices. Great politicians (Robert Harris' Cicero Trilogy is a wonderful depiction of that in late Republican Rome). Great surgeons. The laws of statistics, genetics, circumstances of upbringing throw up such individuals in every generation.

(Robert E Lee corresponds to the stereotype of the great military leader - ranked top of his class at West Point, distinguished service as a junior officer, popular with his men, etc. But so did General George McLellan. It would fall to Ulysses Samuel Grant, an indifferent scholar with known personal problems and a mixed military career, to meet the need of the young Republic at its darkest hours, and lead the Army of the Potomac to Appomattox Courthouse and a place in history).

In late 20th century American capitalism it so happened that there was this profession called "asset management". And it so happened that a handful of individuals really were very good at it. John Bogle found one angle - assume market efficiency and drive down what you can control (costs) and focus on the interests of the fund holders. Warren Buffett found another. David Swensen a third. You'd struggle to find many others - Peter Lynch perhaps. With the added caveat that statistically it is difficult/ impossible to separate that from luck.

Just like most of us would not have made great surgeons, or great generals, we should not assume we would make great university endowment managers.
Great points. The last (highlighted) statement is exactly correct, IMO. The question is should we believe (i.e., does the evidence suggest) that Swenson, Buffet, etc. are indeed great investors, prospectively? That is, having seen there great track, is it a good bet to follow their approach, or if possible, invest with them to get superior performance going forward? Or is their past performance just statistically expected deviations? I honestly do not know the answer to that.

They have outperformed over long periods of time. Others trying to replicate their approach have not fared as well. Peter Lynch had a great run, as did Bill Miller, until he didn't. Tough to tell which one will maintain out performance going forward.
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Re: David Swensen Unconventional Success

Post by folkher0 »

abuss368 wrote: Mon Oct 29, 2018 7:14 am
columbia wrote: Mon Oct 29, 2018 5:35 am I’ve always assumed that TIAA Real Estate (which I’ve never owned) was “safer” than REITs....and then I saw this:

https://nb.fidelity.com/public/workplac ... w-all/OBQA

It performed 54% worse than the SP500 in 2009. :shock:
David Swensen was a board member of TIAA at one time.
I don't think it makes much sense to compare the TIAA real estate fund to S&P 500 for any short amount of time. The properties of the fund seem to make it very non-volatile. It's a totally different beast than the stock market. In 2009, when the S&P was in recovery mode after a deep crisis, TIAA real estate was just starting to feel the shock.

In an average year, S&P will kill TIAA real estate. On a bad year, I would expect TIAA real estate to hold its value, even if it doesn't go to the moon.

In my portfolio it functions as a bond-like alternative, particularly in times of volatility. This year, for instance, it is beating the total bond market and total stock market. However, the day is not over, and the swings in the stock market recently have been wide enough to change that at any time.
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Re: David Swensen Unconventional Success

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abuss368 wrote: Sun Oct 28, 2018 9:04 am I am a little surprised at the lack of responses. I would have thought that a thread on David Swensen would have received many more responses. Perhaps the Yale Portfolio is out of favor.
It's been chewed over here repeatedly, so I don't know that anyone has much new to say. I will point out, once more, that the book outlines a series of principles for portfolio construction and that the Marketwatch version (known as the reference portfolio in the book) is only one possible application of those principles.
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Re: David Swensen Unconventional Success

Post by TN_Boy »

telemark wrote: Mon Oct 29, 2018 12:38 pm
abuss368 wrote: Sun Oct 28, 2018 9:04 am I am a little surprised at the lack of responses. I would have thought that a thread on David Swensen would have received many more responses. Perhaps the Yale Portfolio is out of favor.
It's been chewed over here repeatedly, so I don't know that anyone has much new to say. I will point out, once more, that the book outlines a series of principles for portfolio construction and that the Marketwatch version (known as the reference portfolio in the book) is only one possible application of those principles.
Somebody upthread posted why maybe you are not getting a ton of responses -- US large cap in the form of TSM or S&P 500 has done very well. Why buy anything else!

Note that Swenson's book for the individual investor came out after the 2000 - 2003 bear market and before the 2008 - 2009 crash. Things like REITs did well, as I recall, in 2000 - 2003, but were no help in 2008. If during the next crash, things other than US large cap do really well, you will see more interest in alternatives to the simpler portfolios. :D
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Re: David Swensen Unconventional Success

Post by abuss368 »

nedsaid wrote: Mon Oct 29, 2018 10:33 am Alas, Valuethinker, I was not a great investor. My Value tilts have caused me to trail the market since the 2008-2009 financial crisis and bear market. I remember crying in my root beer over the 2018 New Year's weekend. Surprisingly, I have done better than a lot of the "lazy" portfolios listed on Marketwatch but still couldn't match the simple 3 fund portfolio. Reading Peter Lynch's books did not make me into another Peter Lynch and reading about Warren Buffett didn't make me into another Warren Buffett.
Hi nedsaid -

Well said. I have a large allocation to REITS (i.e. Swensen) and when I look at the simple Three Fund Portfolio it makes one pause.

Even Jack Bogle's Two Fund Portfolio (i.e. Total Stock and Total Bond) makes a lot of sense.
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Re: David Swensen Unconventional Success

Post by abuss368 »

TN_Boy wrote: Mon Oct 29, 2018 1:26 pm
telemark wrote: Mon Oct 29, 2018 12:38 pm
abuss368 wrote: Sun Oct 28, 2018 9:04 am I am a little surprised at the lack of responses. I would have thought that a thread on David Swensen would have received many more responses. Perhaps the Yale Portfolio is out of favor.
It's been chewed over here repeatedly, so I don't know that anyone has much new to say. I will point out, once more, that the book outlines a series of principles for portfolio construction and that the Marketwatch version (known as the reference portfolio in the book) is only one possible application of those principles.
Somebody upthread posted why maybe you are not getting a ton of responses -- US large cap in the form of TSM or S&P 500 has done very well. Why buy anything else!

Note that Swenson's book for the individual investor came out after the 2000 - 2003 bear market and before the 2008 - 2009 crash. Things like REITs did well, as I recall, in 2000 - 2003, but were no help in 2008. If during the next crash, things other than US large cap do really well, you will see more interest in alternatives to the simpler portfolios. :D
True indeed. A large part of Jack Bogle's teachings is reversion to the mean. I would suspect REITs, TIPS, International may be reverting to that mean. US Large Cap probably will at some point.
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Re: David Swensen Unconventional Success

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Another reader. I'd already read 'The intelligent asset allocator' by Bernstein; loved the content and discussion. I think that was in 2015, and was happy to find my portfolio structure was similar to one he proposed. Then I read Swenson right after, and I really liked the book, both for the advice about what types of bonds to hold, as well as for the generic thought process behind the book. I didn't change my portfolio, but it did help cement my investing convictions. I found Bogleheads somewhat later, as I recall.
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Re: David Swensen Unconventional Success

Post by Valuethinker »

nedsaid wrote: Mon Oct 29, 2018 10:33 am Alas, Valuethinker, I was not a great investor. My Value tilts have caused me to trail the market since the 2008-2009 financial crisis and bear market. I remember crying in my root beer over the 2018 New Year's weekend. Surprisingly, I have done better than a lot of the "lazy" portfolios listed on Marketwatch but still couldn't match the simple 3 fund portfolio. Reading Peter Lynch's books did not make me into another Peter Lynch and reading about Warren Buffett didn't make me into another Warren Buffett.
Me neither.

Time to get on with life. To use my skills in other ways.

The name of the game is to stay in it, to stay relevant. To keep searching for meaning - the purpose of the human animal is to find meaning (that philosophy is cribbed from Victor Frankel, Man's Search for Meaning -- his Logotherapy has made a comeback -- Frankel was a Jewish psychiatrist who was kept alive at Auschwitz to minister to the inmates who were not executed, the rest of his family died there - the book is his attempt to make meaning out of senseless violence and cruelty).

I know too many people who retired young and rich out of finance but have nothing to do that is purposeful and relevant - they rot. And for most people the business of just making money gets old pretty fast.
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Re: David Swensen Unconventional Success

Post by nedsaid »

abuss368 wrote: Mon Oct 29, 2018 7:18 pm
nedsaid wrote: Mon Oct 29, 2018 10:33 am Alas, Valuethinker, I was not a great investor. My Value tilts have caused me to trail the market since the 2008-2009 financial crisis and bear market. I remember crying in my root beer over the 2018 New Year's weekend. Surprisingly, I have done better than a lot of the "lazy" portfolios listed on Marketwatch but still couldn't match the simple 3 fund portfolio. Reading Peter Lynch's books did not make me into another Peter Lynch and reading about Warren Buffett didn't make me into another Warren Buffett.
Hi nedsaid -

Well said. I have a large allocation to REITS (i.e. Swensen) and when I look at the simple Three Fund Portfolio it makes one pause.

Even Jack Bogle's Two Fund Portfolio (i.e. Total Stock and Total Bond) makes a lot of sense.
I am keeping my REITs, no plans to sell, but I will keep what I have. The question of valuation and future expected returns is a good one, my take is that REIT prices have improved but that they are no bargain here. Pretty much, I would put a "hold" on these. Mainly keeping them as a diversifier and an inflation fighter. Saw a couple articles that said REITs were 10% or more undervalued compared to their underlying properties but we might be near a top in the Real Estate Market. So a mixed case, not near as strong as when REIT funds started coming available.

No reason to give up on International Stocks either. It is just so sad that Bogleheads are giving up on diversification. At least until the recent twin corrections in 2018, we have been in a Large Growth US Stock Market here. It seems like there has been no need for anything else, even bonds. I have seen the forum largely give up on REITs, TIPS, and International Stocks. As I mused in another thread, we have gone from a five fund portfolio to two and we are on our way to zero. The "stay the course" people are abandoning ship in many ways and I hate to see this.
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Re: David Swensen Unconventional Success

Post by nedsaid »

abuss368 wrote: Mon Oct 29, 2018 7:51 pm
TN_Boy wrote: Mon Oct 29, 2018 1:26 pm
telemark wrote: Mon Oct 29, 2018 12:38 pm
abuss368 wrote: Sun Oct 28, 2018 9:04 am I am a little surprised at the lack of responses. I would have thought that a thread on David Swensen would have received many more responses. Perhaps the Yale Portfolio is out of favor.
It's been chewed over here repeatedly, so I don't know that anyone has much new to say. I will point out, once more, that the book outlines a series of principles for portfolio construction and that the Marketwatch version (known as the reference portfolio in the book) is only one possible application of those principles.
Somebody upthread posted why maybe you are not getting a ton of responses -- US large cap in the form of TSM or S&P 500 has done very well. Why buy anything else!

Note that Swenson's book for the individual investor came out after the 2000 - 2003 bear market and before the 2008 - 2009 crash. Things like REITs did well, as I recall, in 2000 - 2003, but were no help in 2008. If during the next crash, things other than US large cap do really well, you will see more interest in alternatives to the simpler portfolios. :D
True indeed. A large part of Jack Bogle's teachings is reversion to the mean. I would suspect REITs, TIPS, International may be reverting to that mean. US Large Cap probably will at some point.
Well, US Large Cap Growth (the S&P 500) was doing great until 2018 and there are signs that Value might be back. We will see as I got fooled in 2016. If the US Stock Market recovers and gets to new highs, I suppose the "what do we need bonds for anyhow?" threads will start popping up. We will be down to the S&P 500 as a one fund portfolio at the rate we are going. If the US Stock Market enters a bear market and if inflation continues to tick up, that silly old fashioned concept of diversification may come back. Others, I fear will retreat to a zero fund portfolio and just sit the markets out.
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Re: David Swensen Unconventional Success

Post by abuss368 »

nedsaid wrote: Tue Oct 30, 2018 8:41 am
abuss368 wrote: Mon Oct 29, 2018 7:51 pm
TN_Boy wrote: Mon Oct 29, 2018 1:26 pm
telemark wrote: Mon Oct 29, 2018 12:38 pm
abuss368 wrote: Sun Oct 28, 2018 9:04 am I am a little surprised at the lack of responses. I would have thought that a thread on David Swensen would have received many more responses. Perhaps the Yale Portfolio is out of favor.
It's been chewed over here repeatedly, so I don't know that anyone has much new to say. I will point out, once more, that the book outlines a series of principles for portfolio construction and that the Marketwatch version (known as the reference portfolio in the book) is only one possible application of those principles.
Somebody upthread posted why maybe you are not getting a ton of responses -- US large cap in the form of TSM or S&P 500 has done very well. Why buy anything else!

Note that Swenson's book for the individual investor came out after the 2000 - 2003 bear market and before the 2008 - 2009 crash. Things like REITs did well, as I recall, in 2000 - 2003, but were no help in 2008. If during the next crash, things other than US large cap do really well, you will see more interest in alternatives to the simpler portfolios. :D
True indeed. A large part of Jack Bogle's teachings is reversion to the mean. I would suspect REITs, TIPS, International may be reverting to that mean. US Large Cap probably will at some point.
Well, US Large Cap Growth (the S&P 500) was doing great until 2018 and there are signs that Value might be back. We will see as I got fooled in 2016. If the US Stock Market recovers and gets to new highs, I suppose the "what do we need bonds for anyhow?" threads will start popping up. We will be down to the S&P 500 as a one fund portfolio at the rate we are going. If the US Stock Market enters a bear market and if inflation continues to tick up, that silly old fashioned concept of diversification may come back. Others, I fear will retreat to a zero fund portfolio and just sit the markets out.
Hi nedsaid -

I have stayed diversified with International and REITs. I agree that years ago on the forum TIPS, REITs, and International were the rage. I think it is fair to say there are no where near the threads and posts on TIPS and REITs. There have been threads and posts questioning the need for international.

The flip side is both Jack Bogle and Warren Buffett will say nothing else is needed with stocks (Total Stock and S&P 500).

The older I get though I believe more and more there is definitely something to simplicity, unfortunately cognitive decline, and spouses. A simple one or two fund portfolio is easier to manage and easier for spouses and loved ones. I have family that went with Jack’s Two Fund Portfolio and are very pleased and will stay the course. They removed TIPS, REITs, International, various bond funds, etc. For them the simplicity, peace of mind, and performance is hard to beat.
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Re: David Swensen Unconventional Success

Post by abuss368 »

nedsaid wrote: Tue Oct 30, 2018 8:41 am
abuss368 wrote: Mon Oct 29, 2018 7:51 pm
TN_Boy wrote: Mon Oct 29, 2018 1:26 pm
telemark wrote: Mon Oct 29, 2018 12:38 pm
abuss368 wrote: Sun Oct 28, 2018 9:04 am I am a little surprised at the lack of responses. I would have thought that a thread on David Swensen would have received many more responses. Perhaps the Yale Portfolio is out of favor.
It's been chewed over here repeatedly, so I don't know that anyone has much new to say. I will point out, once more, that the book outlines a series of principles for portfolio construction and that the Marketwatch version (known as the reference portfolio in the book) is only one possible application of those principles.
Somebody upthread posted why maybe you are not getting a ton of responses -- US large cap in the form of TSM or S&P 500 has done very well. Why buy anything else!

Note that Swenson's book for the individual investor came out after the 2000 - 2003 bear market and before the 2008 - 2009 crash. Things like REITs did well, as I recall, in 2000 - 2003, but were no help in 2008. If during the next crash, things other than US large cap do really well, you will see more interest in alternatives to the simpler portfolios. :D
True indeed. A large part of Jack Bogle's teachings is reversion to the mean. I would suspect REITs, TIPS, International may be reverting to that mean. US Large Cap probably will at some point.
Well, US Large Cap Growth (the S&P 500) was doing great until 2018 and there are signs that Value might be back. We will see as I got fooled in 2016. If the US Stock Market recovers and gets to new highs, I suppose the "what do we need bonds for anyhow?" threads will start popping up. We will be down to the S&P 500 as a one fund portfolio at the rate we are going. If the US Stock Market enters a bear market and if inflation continues to tick up, that silly old fashioned concept of diversification may come back. Others, I fear will retreat to a zero fund portfolio and just sit the markets out.
Nedsaid -

I even have International REITs. They have not performed as I thought. On one hand someone would say great compared to U.S. REITs as that’s diversification. On the other hand it has been more complexity, higher costs, less return.
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Re: David Swensen Unconventional Success

Post by Steadfast »

I read the book and was deeply influenced by it. There's a lot of Boglehead principles in it. His example portfolio is a great example of good diversification. I think it would work well for most investors who needed a 70/30, and it could be tweaked to an individual's actual needs. I opted for a simpler portfolio and have since excluded REITs and TIPS. But I don't think there's anything at all wrong with the Swensen portfolio for individual investors as long as its implemented in a low cost way, and they stick to it.
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Re: David Swensen Unconventional Success

Post by abuss368 »

Steadfast wrote: Tue Oct 30, 2018 1:37 pm I opted for a simpler portfolio and have since excluded REITs and TIPS.
Hi Steadfast -

Are you basically a Three Fund Portfolio?
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Re: David Swensen Unconventional Success

Post by Coato »

(I have read every Swensen thread on Bogleheads and every single time his thinking on the Yale Endowment and Unconventional Success seem to get combined.)

I read the book and really liked it. Swensen is a clear thinker and explained himself well. The purpose seems to be to protect in all environments.

TIPS for sudden inflation
Real Estate for long term inflation
Stocks for the good times, weighted to Large Cap for mild deflation
Intermediate Treasuries for severe deflationary times.

I think the weights of 15% direct deflation protection, 15% direct inflation protection with light hedges through quality/size and size of equity allocation work pretty well with the framework laid out in Dr. Bernstein's "Deep Risk".

It looks like it is more on the side of the investing universe of the Permanent Portfolio or Dalio All Weather (All Seasons?) rather than the Bernstein "No Brainer" / Buffet 90-10 / T.L. Three-fund / Larry Portfolio / RobertT factor 75-25 / Merriman and TrevH portfolios. It seems like if you fundamentally believe in a certain type of diversification, you talk about the first three (PP vs Swensen), and if you think that equity and bonds are enough to diversify (due to factors, or intl. or whatever) you can debate the second group against each other (Three Fund vs. No Brainer). Talking about the Swensen portfolio vs. the Three Fund makes no sense--the ideas that will attract you to one will nullify the other.

I really like the idea of this portfolio in its simplest form:

50% or 55% Vanguard Total World (55% for me)
20% or 15% TIAA Real Estate or Vanguard REIT (15% for me)
15% Tips
15% Int. Treasuries

This is close enough while cutting the equity portion to 1 fund from 2 or 3. It does move US/Int. from the 60/40 or 55/45 proposed by Swensen, but I doubt that that is a big enough deal to add in TSM/DM/EM and deal with it.

Not sure if everything in this portfolio is "needed" but then who knows what is needed until the time that it is.

I mostly wanted to post because there were a few snarky posts and I think he is one of the good guys in the business. People should be able to question the moving parts of his allocation, but questioning his motives etc. seems wrong.

Caveat: I don't do this portfolio, I do the Bernstein "No Brainer", but he and Bernstein are the writers whose prose I enjoy reading the most, so I have read the book a few times (esp. the section on bonds).
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Re: David Swensen Unconventional Success

Post by abuss368 »

Coato wrote: Tue Oct 30, 2018 7:42 pm I mostly wanted to post because there were a few snarky posts and I think he is one of the good guys in the business. People should be able to question the moving parts of his allocation, but questioning his motives etc. seems wrong.
Well said. David Swensen has written the forward to Jack Bogle's "Common Sense on Mutual Funds - 10th Edition".

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Re: David Swensen Unconventional Success

Post by Northern Flicker »

How many folks have read the book Unconventional Success? If you did, what are your thoughts? Is the book still relevant since it was published in 2005? What about other asset classes that may not have been as accessible in a low cost format when the book was published such as International REITs (i.e. Swensen recommend a large allocation to REITs in general and a larger (at the time) international allocation), International Bonds, etc.
The book contains far more content than just a portfolio recommendation. I think the latter is just one chapter, but it’s been over 10 years since I read it.
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Re: David Swensen Unconventional Success

Post by abuss368 »

jalbert wrote: Tue Oct 30, 2018 10:46 pm
How many folks have read the book Unconventional Success? If you did, what are your thoughts? Is the book still relevant since it was published in 2005? What about other asset classes that may not have been as accessible in a low cost format when the book was published such as International REITs (i.e. Swensen recommend a large allocation to REITs in general and a larger (at the time) international allocation), International Bonds, etc.
The book contains far more content than just a portfolio recommendation. I think the latter is just one chapter, but it’s been over 10 years since I read it.
Agreed. The portfolio construction section is a very small part of the overall book. I think it is fair to note that the problems with the mutual fund industry are a large portion of the book.
John C. Bogle: “Simplicity is the master key to financial success."
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