David Swensen Unconventional Success

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grok87
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Re: David Swensen Unconventional Success

Post by grok87 »

Coato wrote: Tue Oct 30, 2018 7:42 pm (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).
Agree.
For my risk portfolio I am targeting:
Total world stock index 50%
Reits 10%
Tiaa real estate 10%
Other alts 5%
Treasuries/tips 25%
Cheers
Grok
RIP Mr. Bogle.
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Re: David Swensen Unconventional Success

Post by abuss368 »

grok87 wrote: Wed Oct 31, 2018 7:29 am
Coato wrote: Tue Oct 30, 2018 7:42 pm (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).
Agree.
For my risk portfolio I am targeting:
Total world stock index 50%
Reits 10%
Tiaa real estate 10%
Other alts 5%
Treasuries/tips 25%
Cheers
Grok
It appears that you are allocating a large percentage of equities to real estate as David Swensen recommended.
John C. Bogle: “Simplicity is the master key to financial success."
grok87
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Re: David Swensen Unconventional Success

Post by grok87 »

abuss368 wrote: Wed Oct 31, 2018 8:27 am
grok87 wrote: Wed Oct 31, 2018 7:29 am
Coato wrote: Tue Oct 30, 2018 7:42 pm (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).
Agree.
For my risk portfolio I am targeting:
Total world stock index 50%
Reits 10%
Tiaa real estate 10%
Other alts 5%
Treasuries/tips 25%
Cheers
Grok
It appears that you are allocating a large percentage of equities to real estate as David Swensen recommended.
Yes
The reits are equities. I think swensen describes direct real estate (tiaa real estate fund) as 50/50 stocks/bonds.
RIP Mr. Bogle.
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nedsaid
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Re: David Swensen Unconventional Success

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abuss368 wrote: Tue Oct 30, 2018 11:02 am
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.
I have always said that I have nothing against the simple 3 fund portfolio which is US Total Stock Market Index, Total International Stock Index, and Total (US) Bond Index. It is a simple and elegant portfolio. I have often recommended this portfolio for those who don't want to bother with academic research.

Just want to point out that we have been in a US Large Growth stock market since the 2008-2009 financial crisis. So pretty much all you have really needed since then has been the S&P 500. Indeed, the FAANG stocks had a period where they did so well that all you needed where those five stocks. So pretty much, all the factor tilted portfolios, particularly Small/Value portfolios, have been underperforming the broad market. US has been outperforming International as well. So pretty much, when you have one asset class that has been doing really well, in a sense you don't need diversification anymore at least until that one asset class doesn't work anymore.

As far as TIPS, they aren't included in the "Total" Bond Indexes. I guess "Total" doesn't mean total. One reason I added TIPS, another reason is to have an inflation hedge on the bond side of the portfolio.

So anywho, I keep joking about the five fund portfolio turning into the zero fund portfolio to make a point about diversification. Not only diversification across asset classes but diversification across factors. It looks like the market is rebounding again today and hopefully the "Soar" thread won't spoil it. :wink: But if we slide into a bear market, my jokes about a "Zero Fund Portfolio" will look remarkably prescient.
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Re: David Swensen Unconventional Success

Post by nedsaid »

abuss368 wrote: Tue Oct 30, 2018 11:06 am
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.
Again, my comments about Bogleheads abandoning diversification hold true again. We have had a very strong US Dollar relative to the other strong currencies since the 2008-2009 bear market and financial crisis. The dollar was the cleanest dirty shirt in the laundry hamper. We have seen a flight to quality here. A recently stronger economy and higher interest rates have also added to the Dollar's strength. So this has been a huge headwind for International investments, so the disappointing performance of International REITs is not surprising. Also a reminder that cheap can remain cheap for a long time.
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Re: David Swensen Unconventional Success

Post by abuss368 »

nedsaid wrote: Wed Oct 31, 2018 11:00 am
abuss368 wrote: Tue Oct 30, 2018 11:06 am
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.
Again, my comments about Bogleheads abandoning diversification hold true again. We have had a very strong US Dollar relative to the other strong currencies since the 2008-2009 bear market and financial crisis. The dollar was the cleanest dirty shirt in the laundry hamper. We have seen a flight to quality here. A recently stronger economy and higher interest rates have also added to the Dollar's strength. So this has been a huge headwind for International investments, so the disappointing performance of International REITs is not surprising. Also a reminder that cheap can remain cheap for a long time.
Very true indeed. How do you allocate to REITs and International REITs?
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Re: David Swensen Unconventional Success

Post by nedsaid »

abuss368 wrote: Wed Oct 31, 2018 2:03 pm
nedsaid wrote: Wed Oct 31, 2018 11:00 am
abuss368 wrote: Tue Oct 30, 2018 11:06 am
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.
Again, my comments about Bogleheads abandoning diversification hold true again. We have had a very strong US Dollar relative to the other strong currencies since the 2008-2009 bear market and financial crisis. The dollar was the cleanest dirty shirt in the laundry hamper. We have seen a flight to quality here. A recently stronger economy and higher interest rates have also added to the Dollar's strength. So this has been a huge headwind for International investments, so the disappointing performance of International REITs is not surprising. Also a reminder that cheap can remain cheap for a long time.
Very true indeed. How do you allocate to REITs and International REITs?
I own a REIT Index at Fidelity, the Vanguard REIT ETF in a Brokerage IRA, a US REIT fund and a Global REIT fund at a mostly active mutual fund IRA. So not much in the way of International REITs for me.
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Re: David Swensen Unconventional Success

Post by abuss368 »

I had hoped that Unconventional Success would have been updated since it was published in 2005. The flip side would be perhaps nothing has changed.
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Re: David Swensen Unconventional Success

Post by Coato »

abuss368 wrote: Thu Nov 01, 2018 7:42 am I had hoped that Unconventional Success would have been updated since it was published in 2005. The flip side would be perhaps nothing has changed.
Tough to know what would be updated.

Fixed Income: Without new regulations of some kind, it is clear he would never, ever, use corporate bonds. I guess he could change his mind about the duration of Treasuries. Larry Swedroe always cites the DFA rule of 20bp per year added, Swensen could change his thinking from basically Intermediate Term to a shorter horizon given the next 20 years or so. I guess he could apply that. Or Alex Shahidi says to only use Long Term Treasuries and Long Term TIPs because when you need those asset classes you want the maximum impact, which comes at the end of the length spectrum. In theory he could advocate that. But Swensen seems to believe more than most, that differences like that aren't worth worrying about, which is why his writing is always less prescriptive than some want.

Real Estate: Given the amount of time he spent talking about how the ordinary investor is mercilessly abused by unregulated actors, I doubt he would advocate switching to any of these new-fangled RE vehicles (can't remember the names).

Equities: His recommendation of 60/40 US/Int with 25% of the Int. being in EM is basically saying TSM plus TISM. He must have been aware of size and value and doesn't dwell on it. I could see him switching to 50/50 US vs World, but that's probably my own bias at work.Probably given the generalities he talks in, he wouldn't see 60/40 vs 50/50 as being very different. (When I say he speaks in generalities I mean that as a compliment. Bogleheads get frustrated with Buffet for not speaking more specifically about the S&P 500 statements in his 90/10 and Swensen about talking about market duration-or something-in treasuries--and are endlessly worried whether that means Long or Intermediate funds. I think probably both would view that as small thinking and staring at a tree with a beautiful forest around you.)

I think Swensen's mindset is that money is made at work and that investing is a basket to sustain working income past working. He doesn't seem like he is going to get hung up optimizing a portfolio to squeeze a few basis points out. Like Buffet, he assumes everyone could, and should, just make more money at work if they need it. He advocates the 6 asset classes because he thinks that that is the minimum needed to adapt to all environments. The fact that he is at heart an academic seems to inform the portfolio. It could be more utilitarian, but that wouldn't capture the full intellectual range of thinking in construction. It could be more complex, but that would lead the investor into a murky world where s/he is disadvantaged vis-a-vis the industry. So he basically laid out a framework and I doubt e is going to see new information that changes it.
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Re: David Swensen Unconventional Success

Post by CyberBob »

abuss368 wrote: Sat Oct 27, 2018 12:17 pm ...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.
As far as foreign bonds, it doesn't seem that accessibility was the reason that Swensen placed them solidly in the 'Non-Core' category:
  • Foreign-currency denominated bonds share domestic bonds' burden of low expected returns without the benefit of domestic fixed income's special diversifying power. Fully hedged foreign bonds mimic U.S. bonds (with the disadvantage of added complexity and costs stemming from the hedging process). Unhedged foreign bonds supply investors with U.S. dollar bond exposure plus (perhaps unwanted) foreign exchange exposure. Foreign-currency-denominated bonds play no role in well-constructed investment portfolios.
It's interesting that his thoughts on foreign currency risks is pretty similar to Bogle's (25% max versus Bogle's 20%):
  • ...some measure of foreign exchange exposure adds to portfolio diversification. Unless foreign currency positions constitute more than roughly one-quarter of portfolio assets, currency exposure serves to reduce overall portfolio risk. Beyond a quarter of portfolio assets, the currency exposure constitutes a source of unwanted risk.
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Re: David Swensen Unconventional Success

Post by pascalwager »

Coato wrote: Thu Nov 01, 2018 8:17 am
abuss368 wrote: Thu Nov 01, 2018 7:42 am I had hoped that Unconventional Success would have been updated since it was published in 2005. The flip side would be perhaps nothing has changed.
Tough to know what would be updated.

Fixed Income: Without new regulations of some kind, it is clear he would never, ever, use corporate bonds. I guess he could change his mind about the duration of Treasuries. Larry Swedroe always cites the DFA rule of 20bp per year added, Swensen could change his thinking from basically Intermediate Term to a shorter horizon given the next 20 years or so. I guess he could apply that. Or Alex Shahidi says to only use Long Term Treasuries and Long Term TIPs because when you need those asset classes you want the maximum impact, which comes at the end of the length spectrum. In theory he could advocate that. But Swensen seems to believe more than most, that differences like that aren't worth worrying about, which is why his writing is always less prescriptive than some want.

Real Estate: Given the amount of time he spent talking about how the ordinary investor is mercilessly abused by unregulated actors, I doubt he would advocate switching to any of these new-fangled RE vehicles (can't remember the names).

Equities: His recommendation of 60/40 US/Int with 25% of the Int. being in EM is basically saying TSM plus TISM. He must have been aware of size and value and doesn't dwell on it. I could see him switching to 50/50 US vs World, but that's probably my own bias at work.Probably given the generalities he talks in, he wouldn't see 60/40 vs 50/50 as being very different. (When I say he speaks in generalities I mean that as a compliment. Bogleheads get frustrated with Buffet for not speaking more specifically about the S&P 500 statements in his 90/10 and Swensen about talking about market duration-or something-in treasuries--and are endlessly worried whether that means Long or Intermediate funds. I think probably both would view that as small thinking and staring at a tree with a beautiful forest around you.)

I think Swensen's mindset is that money is made at work and that investing is a basket to sustain working income past working. He doesn't seem like he is going to get hung up optimizing a portfolio to squeeze a few basis points out. Like Buffet, he assumes everyone could, and should, just make more money at work if they need it. He advocates the 6 asset classes because he thinks that that is the minimum needed to adapt to all environments. The fact that he is at heart an academic seems to inform the portfolio. It could be more utilitarian, but that wouldn't capture the full intellectual range of thinking in construction. It could be more complex, but that would lead the investor into a murky world where s/he is disadvantaged vis-a-vis the industry. So he basically laid out a framework and I doubt e is going to see new information that changes it.
I don't want to speculate about Swensen's views/philosophies, but here are some comments based on the book contents.

Swensen believes that the issuers of corporate bonds are smarter than the bond fund managers and take advantage of them. Swensen would seem to agree with Swahidi on extending bond term length, but would still approve of somewhat shorter terms during this period of possible rising interest rates (based on a communication between the former Diehards Forum and Swensen).

On this forum, many seem to view REITs as potential high performers, but he considered this view naive. Swensen considers REITs as a hybrid class providing returns mid-way between stocks and bonds.

In general, he states that no asset class should exceed 30% or be less than 5% of portfolio. And CyberBob covers his prescription for currency risk (not to exceed 25% of assets) above.

Regarding the tree vs forest observation--the Chinese masters would sit and gaze at a tree for ten years before even attempting a painting and would always finally include a purposeful, small defect (departure from reality) to reflect the idea that they had not, even then, attained perfect understanding of the natural object. I don't know if this focus interfered with their ability to also enjoy the beauty of the forest.
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Re: David Swensen Unconventional Success

Post by Northern Flicker »

I would summarize Dr. Swensen’s recommendations for US investors qualitatively as:

1. Prepayment options and credit spreads for bonds are vulnerable to mis-pricing. Stick to treasuries and TIPS.

2. Have a healthy allocation to non-US equities, but less than world market cap weight. Significantly less when REITs are factored in.

3. Tilt non-US equities to emerging markets.

4. Hold a healthy allocation to REITs or, if available. a diversified real estate portfolio, for the diversification benefit.

5. Implement asset classes (at least on the equity side) in one’s asset allocation with market index funds for transparency.

In the book he gives specific recommended allocation weights.
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Re: David Swensen Unconventional Success

Post by abuss368 »

jalbert wrote: Thu Nov 01, 2018 1:51 pm I would summarize Dr. Swensen’s recommendations for US investors qualitatively as:

1. Prepayment options and credit spreads for bonds are vulnerable to mis-pricing. Stick to treasuries and TIPS.

2. Have a healthy allocation to non-US equities, but significantly less than world market cap weight.

3. Tilt non-US equities to emerging markets.

4. Hold a healthy allocation to REITs or, if available. a diversified real estate portfolio, for the diversification benefit.

5. Implement asset classes (at least on the equity side) in one’s asset allocation with market index funds for transparency.

In the book he gives specific recommended allocation weights.
Good post. Regarding item #2 above he has recommended approximately 40% of equity to international. Worldwide is approximately 50% U. S. / 50% International. Not significantly below market weight.
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Re: David Swensen Unconventional Success

Post by Northern Flicker »

REITs are equities. Dr. Swensen’s allocation is thus about 27% of equities in non-US equities.
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Re: David Swensen Unconventional Success

Post by staythecourse »

abuss368 wrote: Thu Nov 01, 2018 7:42 am I had hoped that Unconventional Success would have been updated since it was published in 2005. The flip side would be perhaps nothing has changed.
I think I read somewhere he suggested taking 5% from REIT and adding it to EM since his book was released. To be honest, not much is going to happen with that move so I would think his answer is yes not much different.

Good luck.
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Re: David Swensen Unconventional Success

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abuss368 wrote: Thu Nov 01, 2018 7:42 am I had hoped that Unconventional Success would have been updated since it was published in 2005. The flip side would be perhaps nothing has changed.
Well this is a "Stay the Course" forum, or at least it is supposed to be. Probably the best thing is to write one great book and never write another one. Larry Swedroe has written several and he has updated his advice and has caught nothing but grief here. The Bogleheads are a tough crowd. Perhaps Larry should have just stopped with his first book, that way he couldn't be accused of being wishy-washy.

Joking aside, Swenson has been awfully busy running a University endowment and with a bout with cancer. My suspicion is that he might cut the REIT allocation or at least shift half of that to International Real Estate. The case for REITs is not as strong as it was. My guess is that not much else would change.
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Re: David Swensen Unconventional Success

Post by Valuethinker »

pascalwager wrote: Thu Nov 01, 2018 11:52 am

Swensen believes that the issuers of corporate bonds are smarter than the bond fund managers and take advantage of them.
1. yes there is an information asymmetry there. It's not that bond fund managers are not "smart" it's that inherently corporate management know more than they do

2. bond fund managers are examples of the principal-agent problem. We own the funds, but they manage them. They are benchmarked against an index, and need to meet inflows/ outflows into the fund. This biases them away from an optimal strategy, potentially. For example they may move further down the credit rankings to increase yield, thus attracting new investors. Every so often (2008-09) that will turn around and bite them, but of course it's not their money that they are losing.
On this forum, many seem to view REITs as potential high performers, but he considered this view naive. Swensen considers REITs as a hybrid class providing returns mid-way between stocks and bonds.
That's what they should do. And have a higher correlation to inflation than equities.
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Re: David Swensen Unconventional Success

Post by Northern Flicker »

On this forum, many seem to view REITs as potential high performers, but he considered this view naive. Swensen considers REITs as a hybrid class providing returns mid-way between stocks and bonds.
That's what they should do. And have a higher correlation to inflation than equities.
I think that is true of directly held real estate with low or zero leverage, but REITs are equities and I think Swensen would agree.
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Re: David Swensen Unconventional Success

Post by davidsorensen32 »

I was a diehard fan of Swensen and implemented his portfolio for 15+ years and CONSISTENTLY UNDER PERFORMED the 3 fund portfolio BY A STAGGERING 200% over 15 years. Few years ago I redid my portfolio in a simple 2 fund format - Total stock market + Intermediate Bonds. Swensen is outdated, as is his book and his ideas. They worked once. Not any more. Its a sure shot recipe for disaster.
abuss368 wrote: Sat Oct 27, 2018 12:17 pm 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

Post by nedsaid »

Over long time periods, a two fund portfolio of the S&P 500 and Investment Grade Intermediate Term Bonds should do just fine. It is a very simple but effective portfolio. I for one, would prefer to have broader diversification than this. I want International diversification and own both International Stocks and Bonds. That is just me. You do have periods where neither stocks or bonds do particularly well, the 1970's and the stagflation years come to mind. Swenson is trying to cover all the bases with a portfolio that is still relatively simple, hence adding TIPS and REITs.
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Re: David Swensen Unconventional Success

Post by TN_Boy »

davidsorensen32 wrote: Fri Nov 02, 2018 2:00 pm I was a diehard fan of Swensen and implemented his portfolio for 15+ years and CONSISTENTLY UNDER PERFORMED the 3 fund portfolio BY A STAGGERING 200% over 15 years. Few years ago I redid my portfolio in a simple 2 fund format - Total stock market + Intermediate Bonds. Swensen is outdated, as is his book and his ideas. They worked once. Not any more. Its a sure shot recipe for disaster.
abuss368 wrote: Sat Oct 27, 2018 12:17 pm 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.
I'm having trouble seeing how a Swenson's portfolio for the individual investor would underperform a three fund portfolio with an equal equity weight by 200% over 15 years. Could you elaborate a bit? I have a tilted portfolio, and it has underperformed a simple US + bond portfolio, but certainly not by that magnitude.

Looking at Marketwatch Lazy Portfolio's page, it looks to me like Swenson's portfolio has been pretty competitive over a 10 year span where EM and REITs have been out of favor.

Note that the 3 fund portfolio they list (Second Grader's Starter) has only 10% bonds, so naturally it has done quite well over the last 10 years.
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Re: David Swensen Unconventional Success

Post by staythecourse »

davidsorensen32 wrote: Fri Nov 02, 2018 2:00 pm I was a diehard fan of Swensen and implemented his portfolio for 15+ years and CONSISTENTLY UNDER PERFORMED the 3 fund portfolio BY A STAGGERING 200% over 15 years. Few years ago I redid my portfolio in a simple 2 fund format - Total stock market + Intermediate Bonds. Swensen is outdated, as is his book and his ideas. They worked once. Not any more. Its a sure shot recipe for disaster.
Either folks are not understanding or choose not to understand, but there is a STARTLING lack of understanding of one of the fundamental equations in finance and that is portfolio return. The return of a ANY portfolio is simply the sum of all the subassets in its weighted fashion. That seems to be simple, but there are so many posts that make it obvious it is not well understood.

It isn't that the 3 fund or the 18 fund portfolio is better or worse in terms of return. The return simply will be the aggregate of the subassets according to its weighted average. So 3F that is HEAVY in U.S. TSM and low in bonds is no surprise when the U.S. TSM and equities in general of been incredible the last 10 years. No surprise the portfolio that is heavy in REITS and EM have underperformed along with LLT and TIPS. If the 3fund was 80% TIPS how do you think it would have done over the same time period?

That is why there is such irony when one is looking at last 10 year returns of ANY lazy portfolio. It is a COMPLETE waste of time. It is obvious just by knowing which asset classes did well which portfolio HAS to do the best. Now if one can predict which subassets will do the best going forward one can also predict which lazy portfolio will do the best 10 years from now. That, of course, is not possible. Even if it was why would you need a portfolio then? One would just put 100% into that one subasset class. The reason we diversify is that NO ONE knows which will do the best.

I really do hope some of your novice investors understand this concept better then a lot of our more experienced investors.

Good luck.
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Re: David Swensen Unconventional Success

Post by abuss368 »

davidsorensen32 wrote: Fri Nov 02, 2018 2:00 pm I was a diehard fan of Swensen and implemented his portfolio for 15+ years and CONSISTENTLY UNDER PERFORMED the 3 fund portfolio BY A STAGGERING 200% over 15 years. Few years ago I redid my portfolio in a simple 2 fund format - Total stock market + Intermediate Bonds. Swensen is outdated, as is his book and his ideas. They worked once. Not any more. Its a sure shot recipe for disaster.
Wow! I have never read a post that was that unhappy and against the Yale Portfolio for individuals as recommended by David Swensen.
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Re: David Swensen Unconventional Success

Post by Northern Flicker »

I was a diehard fan of Swensen and implemented his portfolio for 15+ years and CONSISTENTLY UNDER PERFORMED the 3 fund portfolio BY A STAGGERING 200% over 15 years. Few years ago I redid my portfolio in a simple 2 fund format - Total stock market + Intermediate Bonds. Swensen is outdated, as is his book and his ideas. They worked once. Not any more. Its a sure shot recipe for disaster.
I have no attachment to Swensen’s portfolio, but I’m curious. The portfolio for individual investors was recommended in the book “Unconventional Success” which was published in 2005. How were you able to have held it already for 15+ years a few years ago? Were you holding the portfolio already for 5+ years when the book was first published in 2005?
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Re: David Swensen Unconventional Success

Post by nedsaid »

abuss368 wrote: Tue Oct 30, 2018 11:02 am
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
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.
I think part of what happened was that REITs and TIPS got too popular. They were new and cool when I started investing in them but now everyone knows about them. Both asset classes got chased pretty hard and experienced valuation issues. With TIPS, I have held firm. REITs I trimmed back about 2 years ago by about 20% but otherwise held steady. REITs were chased very hard for yield when interest rates fell in the aftermath of the 2008-2009 financial crisis. To my untrained eyes, it appears that both TIPS and REITs are cheaper than they were but still no bargain.
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Re: David Swensen Unconventional Success

Post by abuss368 »

jalbert wrote: Fri Nov 02, 2018 5:44 pm
I was a diehard fan of Swensen and implemented his portfolio for 15+ years and CONSISTENTLY UNDER PERFORMED the 3 fund portfolio BY A STAGGERING 200% over 15 years. Few years ago I redid my portfolio in a simple 2 fund format - Total stock market + Intermediate Bonds. Swensen is outdated, as is his book and his ideas. They worked once. Not any more. Its a sure shot recipe for disaster.
I have no attachment to Swensen’s portfolio, but I’m curious. The portfolio for individual investors was recommended in the book “Unconventional Success” which was published in 2005. How were you able to have held it already for 15+ years a few years ago? Were you holding the portfolio already for 5+ years when the book was first published in 2005?
The book "Unconventional Success" by David Swensen was published in 2005. I would have thought that it would perhaps be updated by now.
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Re: David Swensen Unconventional Success

Post by pascalwager »

davidsorensen32 wrote: Fri Nov 02, 2018 2:00 pm I was a diehard fan of Swensen and implemented his portfolio for 15+ years and CONSISTENTLY UNDER PERFORMED the 3 fund portfolio BY A STAGGERING 200% over 15 years. Few years ago I redid my portfolio in a simple 2 fund format - Total stock market + Intermediate Bonds. Swensen is outdated, as is his book and his ideas. They worked once. Not any more. Its a sure shot recipe for disaster.
abuss368 wrote: Sat Oct 27, 2018 12:17 pm 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.
I ran the two portfolios side-by-side on Portfolio Visualizer and the Swensen portfolio was clearly superior over the period 2001 to date. For 3-fund, I used the typical 30% international (of equities) and 30% TBM to shadow Swensen on bonds (15% TIPS and 15% intermediate Treasuries). And Swensen also provides (dormant) inflation protection.
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Re: David Swensen Unconventional Success

Post by sschullo »

Yeah, I read it a few years ago mainly because of the hype from not only here but elsewhere too. Some people swear by him, and that's fine. I didn't get much from Swenson. I wouldn't recommend it.
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Re: David Swensen Unconventional Success

Post by matjen »

I'm a big Swensen fan. FWIW, in March 2009 he gave an interview to the Yale Alumni magazine and adjusted his portfolio a bit.
Today, Swensen says,
economic conditions
might call for a modest
revision. He now
recommends that
investors have 15
percent of their assets in
real estate investment
trusts, and raise their
investment in emerging market
stock funds to 10
percent.
A man is rich in proportion to the number of things he can afford to let alone.
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Re: David Swensen Unconventional Success

Post by pascalwager »

The Swensen book portfolio is a reference portfolio, not a one-size fits all. For example, if you own a home, you might reduce the REIT as you're not paying rent and would need less inflation protection. So maybe there isn't really a "Swensen portfolio". Trouble is, if you reduce the REIT too much, you would need to increase an equity class beyond his 30% max rule. I don't know how you get around this limitation.

But one could easily recommend the book to a novice just for the discussions about the various core asset classes and commonsense general rules for portfolio construction.
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Re: David Swensen Unconventional Success

Post by Northern Flicker »

The book "Unconventional Success" by David Swensen was published in 2005. I would have thought that it would perhaps be updated by now.
Very little content in the book is dated. Not sure what an update would need to look like. This is not a book touting the latest fashion. The first part is a pretty significant indictment of the mutual fund industry. Not much has changed there.

Swensen recommends implementing asset classes with index funds for transparency. I think he still recommends US investors should tilt US equities to REITs, tilt non-US equities to EM, and hold only treasuries and TIPS for bond exposure.
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Re: David Swensen Unconventional Success

Post by abuss368 »

jalbert wrote: Sat Nov 03, 2018 2:00 pm
The book "Unconventional Success" by David Swensen was published in 2005. I would have thought that it would perhaps be updated by now.
Very little content in the book is dated. Not sure what an update would need to look like. This is not a book touting the latest fashion. The first part is a pretty significant indictment of the mutual fund industry. Not much has changed there.

Swensen recommends implementing asset classes with index funds for transparency. I think he still recommends US investors should tilt US equities to REITs, tilt non-US equities to EM, and hold only treasuries and TIPS for bond exposure.
Hi jalbert -

Good observation and that is my understanding as well with regards to the portfolio.
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Re: David Swensen Unconventional Success

Post by grok87 »

jalbert wrote: Sat Nov 03, 2018 2:00 pm
The book "Unconventional Success" by David Swensen was published in 2005. I would have thought that it would perhaps be updated by now.
Very little content in the book is dated. Not sure what an update would need to look like. This is not a book touting the latest fashion. The first part is a pretty significant indictment of the mutual fund industry. Not much has changed there.

Swensen recommends implementing asset classes with index funds for transparency. I think he still recommends US investors should tilt US equities to REITs, tilt non-US equities to EM, and hold only treasuries and TIPS for bond exposure.
well it depends if you go buy the book or his later update.
book
30% US Stocks
15% Developed International
5% Emerging Markets
20% Real Estate
15% Treasuries
15% TIPs
...
later update
book
30% US Stocks
15% Developed International
10% Emerging Markets
15% Real Estate
15% Treasuries
15% TIPs
...
personally i shoot for in my risk portfolio
50% World Stock index
10% Reits
10% TIAA Real Estate
5% Other Alternatives
12.5% Treasuries
12.5% TIPs

i think 50% World stock index is close enough to swensens original stock recommendation of 30% US 20% Developed International and 5% Emerging Markets. I wouldn't want to have 20% in REITS. i think after the financial crisis swensen rethought 20% in reits as well.
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Re: David Swensen Unconventional Success

Post by Northern Flicker »

Since Unconventional Success was published in 2005, the Swensen portfolio and a 3-asset-class market index portfolio have tracked closely:

https://www.portfoliovisualizer.com/bac ... 5&REIT1=20

The Swensen portfolio had a little higher volatility. REITs were hit hard in the global financial crisis and using 2008 as a start date gives the edge to the 3-class portfolio:

https://www.portfoliovisualizer.com/bac ... 5&REIT1=20

But with earlier some start dates than 2005, e.g. the earliest date with data for all of the classes in portfoliovisualizer is 2001, the Swensen portfolio won handily:

https://www.portfoliovisualizer.com/bac ... 5&REIT1=20

Of course a start year of 2001 is biased against large-cap stocks and growth stocks of all caps.

The only change I’m aware of is Dr. Swensen may have reduced the REIT allocation to 15% and increased EM to 10%. This could be in response to REIT volatility in the global financial crisis and the prior recommendation may have been biased by REIT performance before 2005, but the recommended change is fairly minor in any case.
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Re: David Swensen Unconventional Success

Post by abuss368 »

jalbert wrote: Sat Nov 03, 2018 2:17 pm Since Unconventional Success was published in 2005, the Swensen portfolio and a 3-asset-class market index portfolio have tracked closely:

https://www.portfoliovisualizer.com/bac ... 5&REIT1=20

The Swensen portfolio had a little higher volatility. REITs were hit hard in the global financial crisis and using 2008 as a start date gives the edge to the 3-class portfolio:

https://www.portfoliovisualizer.com/bac ... 5&REIT1=20

But with earlier some start dates than 2005, e.g. the earliest date with data for all of the classes in portfoliovisualizer is 2001, the Swensen portfolio won handily:

https://www.portfoliovisualizer.com/bac ... 5&REIT1=20

Of course a start year of 2001 is biased against large-cap stocks and growth stocks of all caps.

The only change I’m aware of is Dr. Swensen may have reduced the REIT allocation to 15% and increased EM to 10%. This could be in response to REIT volatility in the global financial crisis and the prior recommendation may have been biased by REIT performance before 2005, but the recommended change is fairly minor in any case.
I would have expected the same. Since 2005 the two portfolios are nearly the same.

If we go back to 2001 and the technology bubble popping, REITs were one of the only asset classes to have a positive return. I would expect the Swensen portfolio to out perform the Three Fund Portfolio. Any portfolio with a large allocation to REITs should have.

Taking into consideration Reversion to the Mean, I guess the question is why not use the simple portfolio rather than the complex one if they are mirroring each other over longer periods of time.
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Re: David Swensen Unconventional Success

Post by Northern Flicker »

The reason would be if you believe one of the portfolios better manages risks (such as accelerating inflation) that did not materialize during the backtest period.
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Re: David Swensen Unconventional Success

Post by Robert T »

.
Swensen's first book "Pioneering Portfolio Management" (2000) had a significant influence on my fixed income allocation.

I also liked his "Unconventional Success" book. He presented one 'sample' portfolio together with his detailed rationale for inclusion of each asset class.

He has made one change in 13 years (suggested reducing REITs from 20% to 15% and increasing EM Equity from 5% to 10%). I like the inactivity and consistency. Something often in short supply.
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Re: David Swensen Unconventional Success

Post by abuss368 »

I would like to see more interviews and articles form Dr. Swensen but it appears that any information is few and far between.
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Re: David Swensen Unconventional Success

Post by Northern Flicker »

He has made one change in 13 years (suggested reducing REITs from 20% to 15% and increasing EM Equity from 5% to 10%). I like the inactivity and consistency. Something often in short supply.
Agreed. Too many authors on investing are busy touting today what worked yesterday, ready to revise it tomorrow when it doesn’t work today.
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Re: David Swensen Unconventional Success

Post by Steadfast »

abuss368 wrote: Tue Oct 30, 2018 6:54 pm
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?
Yes with 2 exceptions: I have a substantial position in Vanguard's Global Minimum Volatility fund in tax-protected accounts (28% of equity - the rest is indexed), and I use Vanguard's CA muni bond funds extensively for fixed income, as we have substantial after-tax investments and live in CA.
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Re: David Swensen Unconventional Success

Post by abuss368 »

Steadfast wrote: Mon Nov 05, 2018 4:39 pm
abuss368 wrote: Tue Oct 30, 2018 6:54 pm
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?
Yes with 2 exceptions: I have a substantial position in Vanguard's Global Minimum Volatility fund in tax-protected accounts (28% of equity - the rest is indexed), and I use Vanguard's CA muni bond funds extensively for fixed income, as we have substantial after-tax investments and live in CA.
Thank you.
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Re: David Swensen Unconventional Success

Post by Valuethinker »

abuss368 wrote: Sun Nov 04, 2018 6:53 pm I would like to see more interviews and articles form Dr. Swensen but it appears that any information is few and far between.
Where is he at with his cancer treatment?

Still on leave of absence?
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Re: David Swensen Unconventional Success

Post by abuss368 »

Valuethinker wrote: Tue Nov 06, 2018 8:08 am
abuss368 wrote: Sun Nov 04, 2018 6:53 pm I would like to see more interviews and articles form Dr. Swensen but it appears that any information is few and far between.
Where is he at with his cancer treatment?

Still on leave of absence?
I thought there was an article a while back that he was better.
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Re: David Swensen Unconventional Success

Post by abuss368 »

I recently read another article noting how Swensen and Yale has invested in two bitcoin operations. That surprises me!
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Re: David Swensen Unconventional Success

Post by columbia »

abuss368 wrote: Thu Nov 08, 2018 9:24 am I recently read another article noting how Swensen and Yale has invested in two bitcoin operations. That surprises me!
Maybe...I mean, I’d be far more inclined to invest in a gold re-selling company than gold itself.

Not that I would ever specifically choose to do so, of course.

Or another version: think of the various financial operations which you hold on your portfolio. They’re generally good long term investments, even if you would never let them rip you off with one of their high cost investment vehicles.
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Re: David Swensen Unconventional Success

Post by staythecourse »

columbia wrote: Thu Nov 08, 2018 9:28 am
abuss368 wrote: Thu Nov 08, 2018 9:24 am I recently read another article noting how Swensen and Yale has invested in two bitcoin operations. That surprises me!
Maybe...I mean, I’d be far more inclined to invest in a gold re-selling company than gold itself.

Not that I would ever specifically choose to do so, of course.

Or another version: think of the various financial operations which you hold on your portfolio. They’re generally good long term investments, even if you would never let them rip you off with one of their high cost investment vehicles.
I am sure this was not an investment in an alternative to gold, but part of the allocation he has to PE/ VC. His "pioneering portfolio management" talked more about PE as a significant slice of asset allocation for the INSTITUTIONAL investor.

Good luck.
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Re: David Swensen Unconventional Success

Post by Valuethinker »

staythecourse wrote: Thu Nov 08, 2018 9:44 am
columbia wrote: Thu Nov 08, 2018 9:28 am
abuss368 wrote: Thu Nov 08, 2018 9:24 am I recently read another article noting how Swensen and Yale has invested in two bitcoin operations. That surprises me!
Maybe...I mean, I’d be far more inclined to invest in a gold re-selling company than gold itself.

Not that I would ever specifically choose to do so, of course.

Or another version: think of the various financial operations which you hold on your portfolio. They’re generally good long term investments, even if you would never let them rip you off with one of their high cost investment vehicles.
I am sure this was not an investment in an alternative to gold, but part of the allocation he has to PE/ VC. His "pioneering portfolio management" talked more about PE as a significant slice of asset allocation for the INSTITUTIONAL investor.

Good luck.
It was. It was a tiny fraction of 2 VC funds that was invested in a couple of crypotcurrency-related companies*. I have little doubt they managed to have some (tiny) exposure to Theranos, which was valued in the billions at one point.

The Yale portfolio right now is something like 15% VC funds (19%?). Given what Swensen has to say about investing in those (that if you are not with the top 10 partnerships, you will significantly underperform the Nasdaq) I wonder how much of that is the "Unicorn bubble". These will be the valuations of the fund investments marked up to reflect later stage funding rounds - it's nothing like realized cash. If a fund invested in Uber at say $1 bn pre money (or $100M) they are sitting on a theoretical 70x gain.

If I was Yale Endowment, I would almost carve out that part of the portfolio and run that separately. Because there is a good chance the reported value of the funds is, 2000-like, much greater than what the actual realizations would be.

In other words, they should not count their chickens before they are hatched.

* a crypto miner would have been a good investment down the last few years. Or a company that made chips for mining (one floated on HK relatively recently).
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Re: David Swensen Unconventional Success

Post by abuss368 »

Agreed. I have read that Yale owns a lot of raw land and timber. Ordinary individual investors do not have access to these markets.
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Re: David Swensen Unconventional Success

Post by abuss368 »

Thanks again Bogleheads for an excellent thread!
John C. Bogle: “Simplicity is the master key to financial success."
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abuss368
Posts: 27850
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!
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Re: David Swensen Unconventional Success

Post by abuss368 »

Whiggish Boffin wrote: Sun Oct 28, 2018 10:07 am 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.
Could one imagine? That would be awesome.
John C. Bogle: “Simplicity is the master key to financial success."
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