Tue, Nov 21, 2006 - Page 9 News List

Academics become good investors by losing the defeatest attitude

The manager of Yale's endowment portfolio has produced an average annual return of 16 percent, yet the `efficient markets hypothesis' says this is impossible

By Robert Shiller

Yale University, where I teach, has entrusted its endowment portfolio to one man, David Swensen, for more than 20 years. During this period, the portfolio has grown from just over US$1 billion to US$18 billion -- an average return of more than 16 percent a year, which appears to be the highest of any major university. And it shows no signs of diminishing. In the latest fiscal year ending in June, the return was 22.9 percent.

Presidents of Yale have come and gone, but Swensen stays on. He has done more for the university than any president, or anyone else. In a university, ideas count more than money, but US$18 billion can create an environment for many new ideas. With 11,500 students, that is more than US$1.5 million per student (not including the university's buildings and art collection, each worth many billions more).

How did this happen? How did Swensen make so much money? Everyone is wondering -- not least those of us at Yale.

After all, many people here have been teaching the "efficient markets hypothesis" that financial markets around the world have become so competitive that it is impossible to make more than a normal return from investing. Anyone who beats the market must simply be lucky.

Studies seem to confirm this. For example, a 2004 study by Brad Barber and Terrance Odean of the University of California and Yi-Tsung Lee (李怡宗) and Yiu-Jane Liu (劉玉珍) at National Chengchi University acquired trade-by-trade data on individual day traders on the Taiwan Stock Exchange.

The study found that only the top 1 percent of day traders made a profit -- after deducting trading costs -- in two consecutive six-month periods, and the median profit was hardly worth the effort: only about US$4,000.

It is easy to conclude that there is just no point in even trying to beat the market. But then one remembers people like Swensen. Can his consistent performance really be attributed to luck?

Robert Kiyosaki, author of the Rich Dad, Poor Dad series of popular investment books, bases his books' titles and themes on a comparison of his own highly educated father with his friend's father, an eighth-grade dropout.

According to Kiyosaki, his poor but scholarly dad tended to be pessimistic about one's ability to achieve anything in the real world, so he discouraged his son from even trying. By contrast, the friend's dad relished trying to achieve something big. Is it just a coincidence that he was rich?

Kiyosaki may try too hard to be inspirational, but I often think of him when I hear finance professors opine on the efficiency of markets and the futility of making money by trading in them. Maybe many academics find it difficult to take the initiative to achieve in the real world -- I have yet to meet another professor who has mentioned having read Kiyosaki.

But Swensen is an academic, with a doctorate in economics. He is surrounded by academics. Somehow, all this talk about efficient markets has not discouraged him from trying, and succeeding.

There seems to be a pattern. Two similar universities, Harvard and Princeton, have had nearly the same success. The Harvard endowment, under Jack Meyer, earned a 15.2 percent average annual return over the last 10 years, compared with Swensen's 17.2 percent average, while the Princeton endowment, under Andrew Golden, earned an average of 15.6 percent per year. In fact, Golden worked under Swensen at Yale from 1988 until 1993.

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