Investing Advice from a Guy Who Manages $22.5 Billion

A reader recently sent me this article on Yale's top investor, David Swensen. Under Swenson's care, the endowment earned 28 percent in its last fiscal year, beating all other endowments, and finished the year with $22.5 billion. Not bad, huh?

The article has many interesting points, but let's start with this one -- his recommendation of how the average person should invest (especially in these uncertain times):

For most people, he recommends a very basic approach: use index funds, exchange-traded funds and other low-cost instruments, and stick to your long-term asset allocation — even when the markets are in tumult.

Hmm. Did someone say index funds? ;-)

“Most people do not have the resources and time to pick market-beating managers” of hedge funds, private equity funds or funds of funds, he said. And he said that the techniques used by hedge funds often result in higher taxes than those of index funds.

Why do people think they can pick winning stocks when most fund managers who spend their entire careers looking for good stocks can't beat the market once costs (fees and taxes primarily) are taken into account? That's why I invest primarily using index funds.

The article continues:

He criticized the approach of Jim Cramer, the CNBC host, who encourages investors to trade stocks in strategies that Mr. Swensen says cost heavily in commissions and taxes.

“There is nothing that Cramer says that can help people make intelligent decisions,” Mr. Swensen said. “He takes something that is very serious and turns it into a game. If you want to have fun, go to Disney World.”

Ha! I love this guy! ;-)

As some have already commented here, if you want entertainment, Cramer is ok. If you want investing advice, he's not so good.

Here's Swenson's final thought:

Mr. Swensen says investors should forget market timing entirely. Once an individual sets up a program, it should be rebalanced quarterly or semiannually, he said, “but it should be disciplined.”

When the markets decline, try not to pay attention, he said. “Let yourself off the hook,” he said. “If you pursue the sensible long-term policy, look at it over a 5- to 10-year period. Don’t look at five months.”

Exactly. Invest early, invest often. Do this throughout your life and you'll end up being rich. Pretty simple, huh?

Comments

[Jesse]

If Im not mistaken he is also the top performing investor for endowments in the last 15 years averaging something like 15% per year. Not too shabby!

[Mike S]

Swensen's latest book "Unconventional Success" is a must read. I cannot imagine anybody investing in actively managed mutual funds after reading this book. It's not an easy read, but it's worth the investment of your time.

[Kyle]

I second the Unconventional Success recommendation. Swenson's asset allocation is very unorthodox. He invests heavily in market-neutral strategies, commodities (especially timber), and real estate. His strategy probably isn't practical for most indvidual investors because large forests are expensive and good hedge funds difficult to get into unless you pony up millions. Still a good primer on the virtues of diversification, though.

[Money Blue Book]

I completely agree with this guy! That is why I never mention individual stocks. I don't believe ANY one can ever truly predict the performance of any individual stock. Even so called experts do not really know what will happen. The best course is thus to stick with broad index funds in sectors you have long term faith in and let compounding take its long term course.
-Raymond

[Dividend growth investor]

That's some controvercial advice from a guy that is paid to beat the market. I do agree though that the majority of investors underperform the stock market for a variety of reasons.
As for investing in timber, you can buy timber REITS - PCL and RYN are two that come to mind.