Daily Speculations

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The Chairman
Victor Niederhoffer

06/15/2004
The Yale Endowment Gift, and Buy-and-Hold

An interesting sidelight of the Yale endowment gift is that the Yale alumni office apparently vehemently opposed the competitors among the alumni from investing in high risk securities favored by fund manager Joe McNay and successfully beat back the attempts of other classes to start similar funds. Apparently $75,000 was originally given in 1954 and another $300,000 in 1981. The fund ceased sometime in mid 2000 at or near the stock market high with $80 million. Seems like a 20% or so internal rate of return in the head. Several lessons from this. Most important is that buy and hold works. Second is that high risk gives better returns than average. Third is that Joe McNay, founder of Essex Capital, is a good man to learn from. Fourth is that one thing you can be most certain of is that with two people in same business or after the same girl, one will always knock the other. Fifth is that that dynamics of bureaucracy are such that bureaucrats will always stifle innovation and attempt to maintain the status quo (yet another reason that agrarian reformism and their doomsday followers of today) will follow. Sixth is that one should be extraordinarily wary of shorting risky stocks. -- Victor Niederhoffer

Dr Elroy Dimson comments:

This is intriguing because of Yale's (then) reputation as a poorly managed endowment. The story is, I think, in the Yale chapter in Classics: An Investor's Anthology by Charlie Ellis and Jim Vertin. I'm relying on memory here, as the book is at work and I am not. (And the Ellis books have been reprinted with new titles, which makes for further confusion.)  

The cause of Yale's troubles was adherence to a static asset mix strategy that triggered regular disposals when an asset class persistently trended in one direction. If bonds keep going down, as they had then done, restoring the target asset mix means buying more and more of the underperforming asset category. That's all in the past now. But these guys clearly didn't like what they saw, and preferred a buy-and-hold strategy.

Ari Siegel comments:

Nice catch on the actual final tally of $70MM in 2000. That would give them an annual compounded return of 32.5% - 35% depending on when in 1981 the original 75K was invested and same with the 300K from 81-84.