The January 20th issue of The Economist had a good article on the investment success that American university endowments have had. The article points out that these endowments have done better than other types of investors (pension funds being the most obvious comparison). It also points out that the bigger funds have done better than the smaller ones.

Some of the reasons for this success relate to factors that are beyond the scope of the average individual investor. One example is the endowments access to hedge funds, venture capital, private equity and other "illiquid" investments (e.g. real estate, timber). Not only does their size give them clout when it comes to getting the best exposure to these types of investments, but equally important, they have the brain power and resources to wade into these challenging parts of the market.

While we can't all invest like Harvard, Yale or Stanford, there are lessons to be learned from their approach. Two of these were highlighted in the article:

  • These funds take advantage of the fact that they have very long time horizons (i.e., forever). This allows them to (1) be patient when it comes to dealing with short-term volatility and (2) stick to contrarian bets that may take time to play out.
  • Investment constraints are kept to a minimum. If an investor can latch on to a really talented money manager, the less constraints the better. As a client, you want the manager to use his/her skills and intuition to go wherever the best opportunities are. Do I want to constrain what Francis Chou, Bill Kanko or Jenny Witterick can do? No way. This is a double-edged sword of course. If the manager isn't as experienced or talented, then keeping him/her under wraps is probably a good idea.

As I've noted, it's pretty hard for an individual investor like you or me to invest like one of these endowment funds. But a book that I've referred to often in this space, Unconventional Success - A Fundamental Approach to Personal Investment by David Swensen, the Chief Investment Officer of Yale University, does a good job of trying to adapt the same principles to the individual investor.