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 (
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.
Swensen has written two books about investing, one for professionals and one for the general public. I did not come away from reading them with a feeling that I know how to do what he did. But a couple of things stand out.
One is his long-term focus. Yale lets Swensen invest for the very long term, and does not bother him about quarterly performance. Maybe this allows him to focus more on long-term fundamentals -- and thus to make investments that may not perform well in the short run. But, in fact, he has done consistently well in both the short term and the long term.
Part of the reason for Swensen's success is "absolute return," a term -- now widely quoted in the investment community -- that he coined for unusual investment strategies involving such things as merger arbitrage and distressed securities. He also has invested in non-traditional asset classes, including real estate, oil, timber, private equity, venture capital and buyout firms. These assets are generally not followed by multiple analysts, and are not easily understood, giving him an advantage in applying his intellectual skills and those of others around him.
In these senses, Swensen is completely different from day traders, who are both investing for the short term and trying to beat the most crowded market -- the market for exchange-listed securities.
But I also believe that the wondrous success of Swensen and others like him reflects the environment that Kiyosaki criticizes. The problem is a defeatist attitude, not scholarship.
When an analytical mind, a mind that is trained to search rigorously for the truth and as part of a community of such people is set free from self-doubt, it can do amazing things. Knowing David Swensen, I can attest that he is not a lonely day trader trying to beat the market. He is a good listener, is supportive of people he trusts and is surrounded by a lot of good people with a wide array of skills. And he is certainly not a defeatist.
Robert Shiller is professor of economics at Yale University and chief economist at MacroMarkets LLC, which he co-founded.
Copyright: Project Syndicate
The gutting of Voice of America (VOA) and Radio Free Asia (RFA) by US President Donald Trump’s administration poses a serious threat to the global voice of freedom, particularly for those living under authoritarian regimes such as China. The US — hailed as the model of liberal democracy — has the moral responsibility to uphold the values it champions. In undermining these institutions, the US risks diminishing its “soft power,” a pivotal pillar of its global influence. VOA Tibetan and RFA Tibetan played an enormous role in promoting the strong image of the US in and outside Tibet. On VOA Tibetan,
Sung Chien-liang (宋建樑), the leader of the Chinese Nationalist Party’s (KMT) efforts to recall Democratic Progressive Party (DPP) Legislator Lee Kun-cheng (李坤城), caused a national outrage and drew diplomatic condemnation on Tuesday after he arrived at the New Taipei City District Prosecutors’ Office dressed in a Nazi uniform. Sung performed a Nazi salute and carried a copy of Adolf Hitler’s Mein Kampf as he arrived to be questioned over allegations of signature forgery in the recall petition. The KMT’s response to the incident has shown a striking lack of contrition and decency. Rather than apologizing and distancing itself from Sung’s actions,
US President Trump weighed into the state of America’s semiconductor manufacturing when he declared, “They [Taiwan] stole it from us. They took it from us, and I don’t blame them. I give them credit.” At a prior White House event President Trump hosted TSMC chairman C.C. Wei (魏哲家), head of the world’s largest and most advanced chip manufacturer, to announce a commitment to invest US$100 billion in America. The president then shifted his previously critical rhetoric on Taiwan and put off tariffs on its chips. Now we learn that the Trump Administration is conducting a “trade investigation” on semiconductors which
By now, most of Taiwan has heard Taipei Mayor Chiang Wan-an’s (蔣萬安) threats to initiate a vote of no confidence against the Cabinet. His rationale is that the Democratic Progressive Party (DPP)-led government’s investigation into alleged signature forgery in the Chinese Nationalist Party’s (KMT) recall campaign constitutes “political persecution.” I sincerely hope he goes through with it. The opposition currently holds a majority in the Legislative Yuan, so the initiation of a no-confidence motion and its passage should be entirely within reach. If Chiang truly believes that the government is overreaching, abusing its power and targeting political opponents — then