Quotes from David F. Swensen

In an extraordinarily offensive maneuver, a number of mutual-fund companies continued to charge 12b-1 fees even after the management company closed funds to new investors.

If an investor pursued an exclusive strategy of day trading stock index futures, investment results for the portfolio would have nothing to do with asset allocation or security selection and everything to do with market timing. The lack of widespread frenetic trading by investors stems either from a general sensibility of the investing populace or from a Darwinian winnowing of the day traders' ranks.

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.

To the extent that size impedes performance, increases in assets lead to lower returns for fund shareholders.

Security selection may provide substantial excess returns to skilled investors, but those excess returns come directly from the pockets of other players who suffer poor relative returns. When aggregating the returns for all actively managed portfolios, the combined results inevitably mimic the market, less a discount equal to the amount paid to play the game. For the investment community as a whole, security selection plays a return-reducing role in investment performance.

By relying on the decisions of others to drive portfolio choices, investors fail to take responsibility for the most fundamental fiduciary responsibility—designing a portfolio to meet institution-specific goals.

Two factors explain the individual's predicament. The first problem stems from the investment choices available to individuals. High costs and poor execution doom the vast majority of offerings. The second problem concerns responses by individuals to markets. Research shortcomings, rearview-mirror investing, and investor fickleness (in the face of both adversity and opportunity) cripple most investment programs.

Market studies focusing only on returns for securities in the United States miss important information. Recent academic work by Will Goetzmann and Philippe Jorion on investor experience in other countries reduces confidence in the long-run superiority of equity investing.

years. Just as the secret of real estate is location, location, location, the real secret to Yale's remarkable continuing success is defense, defense, defense.

Investors generally fail to follow the most basic investment precepts. Instead of concentrating on the central issue of creating sensible long-term asset-allocation targets, investors too frequently focus on the unproductive diversions of security selection and market timing. Instead of constructing equity-oriented, well diversified, tax-sensitive portfolios, investors too frequently choose to mimic the conventional, poorly structured consensus

Passive investors who select Russell style-based indices lose a substantial share of the transactions-cost benefits of index-fund investing.

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.

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.

The aggregate of the compensation paid to mutual-fund managers virtually guarantees that investors fail to achieve market-beating results.

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.

Following the evidence, I concluded that individuals fare best by constructing equity-oriented, broadly diversified portfolios without the active management component. Instead of pursuing ephemeral promises of market-beating strategies, individuals benefit from adopting the ironclad reality of market-mimicking portfolios managed by not-for-profit investment organizations. The

Investment returns stem from decisions regarding three tools of portfolio management: asset allocation, market timing, and security selection.

Investment success requires the conviction that comes from a fundamental understanding of the rationale for building the portfolio to certain specifications. Unless investors truly believe in the efficacy and validity of an unconventional approach to asset management, the end result almost certainly fails to withstand the wear and tear of market forces. Thoughtless