David F. Swensen > Quotes

“Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom. Unless institutions maintain contrarian positions through difficult times, the resulting damage of buying high and selling low imposes severe financial and reputational costs on the institution.”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“When you look at the results on an after-fee, after-tax basis, over reasonably long periods of time, there's almost no chance that you end up beating the index fund.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“In fact, wealth-maximizing individuals compare the after-tax costs of debt with the after-tax returns from bonds, liquidating bond positions to pay off loans when the costs of debt exceed the returns from bonds. Rational investors consider liability positions when making asset allocations.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Supremely rational investors take the further step of acting against consensus, rebalancing to long-term portfolio targets by buying the out-of-favor and selling the in-vogue.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Market participants willing to accept illiquidity achieve a significant edge in seeking high risk-adjusted returns. Because market players routinely overpay for liquidity, serious investors benefit by avoiding overpriced liquid securities and by embracing less liquid alternatives.”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“most important distinction in the investment world does not separate individuals and institutions; the most important distinction divides those investors with the ability to make high quality active management decisions from those investors without active management expertise. Few institutions and even fewer individuals exhibit the ability and commit the resources to produce risk-adjusted excess returns.”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“Equity mutual-fund returns in recent decades provide a textbook example of the negative-sum game of active management. Recall that active managers as a group must underperform the market by a margin equal to the cost of trading (market impact and commissions) and the burden of fees. The theoretical possibility exists that mutual funds as a group might exhibit superior performance, with other market players producing shortfalls sufficient to counterbalance the superior mutual-fund results. Unfortunately for the mutual-fund investor, U.S. equity markets contain insufficient numbers of mullets for fund managers to exploit for active management gains. In fact, mutual-fund managers and other sophisticated market participants control such a large portion of the aggregate market capitalization that they dominate the trading of securities and the price-setting mechanism. Because well-informed institutions define the market, would-be market-beating investors as a group face the unwelcome prospect of losing to the market by the amount that it costs to play the active management game.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Establishing a coherent investment program begins with understanding the relative importance of asset allocation, market timing, and security selection.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Another appropriate policy response limits investment alternatives to a well-structured set of choices. Government-provided tax advantages encourage individual participation in defined contribution programs. Suppose the government were to award tax benefits only to accounts that invest in low-cost, market-mimicking funds. By restricting tax-advantaged investments to passive vehicles, investors face far fewer opportunities to make investment mistakes. Government regulation might address market-timing issues by limiting the number and frequency of moves between funds. Educational efforts might deal with the challenges of asset allocation, encouraging individuals to adopt investment programs that fit their specific risk profiles and time horizons. Acting in loco parentis, the government could create powerful incentives to adopt passively managed, appropriately allocated investment programs”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“rich understanding of human psychology, a reasonable appreciation of financial theory, a deep awareness of history, and a broad exposure to current events all contribute to development of well-informed portfolio strategies.”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“Third, those bonds of professional respect and personal friendship extend out to the hundreds of key people working at Yale’s many investment managers and engage them in unusually beneficial ways,”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“If nothing is so useless as an “ivory tower” academic theory that goes unused, nothing is so very practical as the theory that works. At”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“According to Poterba’s calculations, shown in Table 1.5, taxable investors in stocks might lose as much as 3.5 percentage points per year to taxes. In the context of a pre-tax return of 12.7 percent per year, the tax burden dramatically reduces the rewards for investing in equities. The absolute level of the tax impact on bond and cash returns falls below the impact on equity returns, but taxes consume a greater portion of current-income-intensive assets. According to Poterba’s estimates, 28 percent of gross equity returns go to the tax man, while taxes consume 38 percent of bond returns and 42 percent of cash returns. Table 1.5 Taxes Materially Reduce Investment Returns Pre-Tax and After-Tax Returns (Percent) 1926 to 1996 Source: James M. Poterba, “Taxation, Risk-Taking, and Household Portfolio Behavior,” NBER Working Paper Series, Working Paper 8340 (National Bureau of Economic Research, 2001), 90. Tax laws currently favor long-term gains over dividend and interest income in two ways: capital gains face lower tax rates and incur tax only when realized. The provision in the tax code that causes taxes to be due only upon realization of gains allows investors to delay payment of taxes far into the future. Deferral of capital gains taxes creates enormous economic value to investors.*”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Ultimately, Unconventional Success proposes a positive solution to the investments challenge facing individual investors. The investment management world includes a very small number of not-for-profit money management firms, allowing investors the opportunity to invest with organizations devoted exclusively to fulfilling fiduciary obligations. Moreover, the market contains a number of attractively structured, passively managed investment alternatives, affording investors the opportunity to create equity-oriented, broadly diversified portfolios. In spite of the massive failure of the mutual-fund industry, investors willing to take an unconventional approach to portfolio management enjoy the opportunity to achieve financial success.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Personal residences and privately held businesses constitute important nonfinancial assets on many personal balance sheets. Homeownership insulates individuals from changes in the cost of renting a place to live. Since inflation-sensitive habitation costs constitute a significant portion of most household budgets, homeownership reduces the need for inflation-hedging assets in investor portfolios.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“The perpetual nature of colleges and universities makes endowment management one of the investment world’s most fascinating endeavors. Balancing the tension between preserving long-run asset purchasing power and providing substantial current operating support provides a rich set of challenges, posing problems unique to endowed educational institutions.”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“Poor asset allocation, ill-considered active management, and perverse market timing lead the list of errors made by individual investors.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Market timing fails to make an important contribution to institutional portfolio results, because investors quite sensibly show reasonable constancy in holdings of various asset types.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“From a portfolio perspective, liabilities act like negative assets. In other words, borrowing by an individual offsets lending (ownership of bond or money-market funds) by that individual.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Table 4.1 Equities Generate Superior Returns in the Long Run Wealth Multiples for U.S. Asset Classes and Inflation December 1925–December 2005 Asset Class Multiple Inflation 11 times Treasury bills 18 times Treasury bonds 71 times Corporate bonds 100 times Large-capitalization stocks 2,658 times Small-capitalization stocks 13,706 times Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation, 2006 Year Book.”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“For periods of one to two years or less, investors ought to favor bank deposits, money-market funds or short-term bond funds.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“During the period surrounding the 1987 stock market collapse endowment portfolios first exhibited aspects of disciplined rebalancing in the run up before the crash and then showed signs of perverse market timing in the carnage of the crash.”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“Chapter 8, Obvious Sources of Mutual-Fund Failure, concludes that, in the highly efficient securities markets, mutual-fund managers lose by the amount that it costs to play the game.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Anticipated receipt of a fixed amount from life insurance proceeds represents a virtual fixed-income asset, suggesting a diminished role for bonds in an investor’s portfolio.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Environmental influences almost invariably point investors down the path to investment failure. Advertisements flog stocks at equity market peaks, with nary a mention of diversifying fixed-income assets. After stocks suffer bear-market losses, the media tout the beneficial effects of owning bonds as an important part of a well-balanced portfolio. The overwhelming bulk of messages to investors suggest owning yesterday’s darling and avoiding yesterday’s goat.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Emphasizing inefficiently priced asset classes with interesting active management opportunities increases the odds of investment success. Intelligent acceptance of illiquidity and a value orientation constitute a sensible, conservative approach to portfolio management.”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“From a superficial perspective, tax-exempt bonds appear to offer investors the opportunity to place fixed-income assets in taxable accounts (where their special tax characteristics lessen or eliminate tax consequences), freeing capacity in tax-deferred accounts for higher-tax-burdened assets. Regrettably, the problems of credit risk and callability lessen the appeal of tax-exempt bonds to investors.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“By operating in the institutional mainstream of short-horizon, uncontroversial opportunities, committee members and staff ensure unspectacular results, while missing potentially rewarding longer term contrarian plays.”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated

“Three basic investment principles inform asset-allocation decisions in well-constructed portfolios. First, long-term investors build portfolios with a pronounced equity bias. Second, careful investors fashion portfolios with substantial diversification. Third, sensible investors create portfolios with concern for tax considerations. The principles of equity orientation, diversification, and tax sensitivity find support both in common sense and academic theory.”
― David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment

“Given the difficulties in timing markets and the challenges of security selection, such behavior provides a rational foundation for investment management. By avoiding extreme allocation shifts and holding diversified portfolios, investors cause asset allocation to account for the largest share of portfolio returns.”
― David F. Swensen, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, Fully Revised and Updated