Investing Lessons from Ivy League Endowments - Ep 114

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In this episode, we explore how the Ivy League endowment model can inform smarter investing for oil and gas professionals. We discuss how these massive funds balance long-term growth with liquidity and why even “permanent capital” requires flexibility. Listeners will see the blind spots of the largest pools of institutional capital and learn why no one invests to optimize for total return.
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Takeaways:

• This episode elucidates the unique financial strategies employed by Ivy League endowments, particularly Yale, which has yielded remarkable returns over decades.
• Listeners are introduced to the concept of managing liquidity in investments, emphasizing the importance of not being forced to sell at inopportune times.
• The conversation highlights the significant differences between institutional investors and individual investors, particularly in terms of risk and return expectations.
• We discuss how the lessons from institutional investing can be applied to personal finance, particularly in managing asset allocation and liquidity needs.
• The podcast underscores the necessity of aligning investment strategies with individual financial goals, rather than blindly mimicking institutional approaches.
• Lastly, we explore the implications of significant capital calls and liquidity challenges faced by both large institutions and individual investors alike.

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Chapters:

• 00:34 - Lessons from Ivy League Asset Allocation

• 02:37 - Understanding Endowments: A Deep Dive into Yale's Investment Strategies

• 11:01 - Investment Strategies and Liquidity Management

• 18:48 - Investment Strategies and the Yale Model

• 21:43 - The Importance of Asset Allocation

• 29:14 - The Role of Tuition in Higher Education

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Resources & Links

Wall Street Journal Article by Jason Zweig

Yale reports investment returns for 2024
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The Yale Model in David Swensen’s Words:

David’s ability to articulate and act on an investment philosophy based on academic research was the foundation of his greatness. Reading the revised edition of Pioneering Portfolio Management reminded me of the clarity of his ideas and depth of his insight.

David put forth a framework for thinking about the investment problem and shared how he applied that framework to managing Yale’s endowment. He wrote about an investment strategy for educational endowments with a perpetual time horizon, articulating a series of first principles. This core of the “Yale Model” in his words are as follows:

1. Equity bias. “Sensible investors approach markets with a strong equity bias, since accepting the risk of owning equities rewards long-term investors with higher returns.”^[1]
2. Diversification. “Significant concentration in a single asset class poses extraordinary risk to portfolio assets. Portfolio diversification provides investors with a “free lunch,” since risk can be reduced without sacrificing expected return.”^[2]
3. Alignment of Interest. “Nearly every aspect of fund management suffers from decisions made in the self-interest of the agents at the expense of the best interest of the principals. By evaluating each participant involved in investment activities with a skeptical attitude, fiduciaries increase the likelihood of avoiding or mitigating the most serious principal-agent conflicts.”^[3]
4. Search for inefficiency. Focus on asset classes with a wide dispersion between top and bottom performers and employ external managers to exploit opportunities.

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‍Disclosure: This information is for informational purposes only. Nothing discussed during this video should be interpreted as tax, legal, or investment advice. If you have questions pertaining to your specific situation, please consult the appropriate qualified professional.