Swensen and Yale

June 8, 2011

For a large pool of money, whether you’re trying to get richer or preserve and enhance wealth, getting your asset allocation right is what the battle for investment survival is all about. I am talking about the objective of fiduciaries—true investors, not speculators—and make no mistake, survival means generating “good real” (inflation adjusted) returns over time. What does “good” mean? Answer: Real returns of 6% to 7%. Bear in mind that in real terms over the 20th century, equities in the U.S. returned 6.7%, Treasury bonds 1.6%, and Treasury bills 1.1%. Swedish and Australian stocks did even better but a lot of markets such as France and Italy generated considerably lower but still positive returns. There are no solid numbers for the equities of the developing countries such as Brazil, Russia, China, and India.

Expectations of “good” performance have escalated in the last hundred years. Back in 1900 the great German “Iron Chancellor” Bismarck demanded his investment adviser provide returns of 2% real. He was skeptical of even successful investment managers, reasoning that they would eventually be emasculated by getting either rich or old. As a result, he favored timberland, which in northern Europe had natural growth of about 2% per annum and which could be held forever. With timberland you didn’t need professional investment management or have to worry about changing your asset allocation.

In my opinion, one of best investors in the world is David ...

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