Imagine getting paid millions each year for your expertise.
Would you feel pressured to deliver results? I would.
It goes without question that such a level of pay demands work that produces an equivalent or greater level of value.
In the investment world, highly paid money managers and consultants always feel the need to be active. They’ve always got to be doing something to justify their salaries.
I mean, they can’t tell their clients or investors the best thing to do is nothing. How could that kind of advice be worth millions per year?
That’s why six years ago, Jane Mendillo, the head of Harvard’s US$37.6 billion endowment fund, spent a week in Brazil…
Betting the farm on another farm
You don’t have to be on Wall Street — or Melbourne’s Collins Street — to manage hundreds of millions. There are many organisations that need able investment managers to invest their endowment fund.
Across America, almost every university has an endowment fund. And Harvard’s is the biggest.
To make sure it stays that way, the managers of the fund thought to invest in assets no other University would — tomatoes, sugar and eucalyptus.
As reported by Bloomberg Businessweek:
‘Jane Mendillo, then head of Harvard’s endowment, spent a week in Brazil, flying in a turboprop plane to survey some of the university’s growing holdings of forest and farmland.
‘That year, Harvard began one of its most daring foreign adventures: an investment in a sprawling agricultural development in Brazil’s remote and impoverished northeast.
‘There, workers would produce tomato paste, sugar, and ethanol, as well as energy after processing crops.’
I know, probably not the assets you were thinking of. But at the time, 2012, Brazil’s economy was booming. The government was pouring money into developing the semi-arid northeast.
If it worked out, profits would outstrip that of stocks and bonds. Thus keeping Harvard’s endowment fund one step ahead of the rest.
I can imagine Mendillo thought these kinds of ideas were exactly what she was paid for.
However, that ‘smart’ bet in Brazil is now facing headwinds. The fund had actually had to write down their natural resources portfolio by more than a billion dollars last year.
Bloomberg Businessweek continues:
‘The venture contributed to the decision by its current endowment chief, N.P. “Narv” Narvekar, to write down the value of its globe-spanning natural resources portfolio last year by $1.1 billion, to $2.9 billion. Harvard, which manages $37.1 billion, has said those investments produced strong returns but now face “significant challenges.”’
And this isn’t the only mistake the smartest university endowment fund has made.
How to outperform Harvard
Harvard ranks as the world’s top university for excellence…whatever that means.
But what about the track record of their endowment fund? Well, that’s not so good.
Over the past 10 years, the fund has underperformed the average, which includes 809 universities and colleges.
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In fact, it would be easy for you to beat such terrible performance. You could simply buy any one of the three major indices in the US (S&P 500, Nasdaq and Dow Jones).
Why didn’t Harvard do exactly that? Because that kind of investment is not worth a million dollar salary.
Investment managers have to come up with something new. Something that nobody else is doing. And if it pays off, then they look like geniuses. If it doesn’t, they can always say it was a good idea that just didn’t pan out this time.
If only Harvard’s endowment funds had listened to Charlie Munger.
Don’t be brilliant, be rational
You don’t need an IQ of 160 to be a great investor. I’m very confident Warren Buffet’s IQ probably wouldn’t amaze you all that much.
But because he’s in control of his emotions and makes rational decisions, he’s been able to grow thousands into billions over time.
Charlie Munger, Buffett’s lifelong partner, said in an interview with Jason Zweig:
‘Warren and I aren’t prodigies. We can’t play chess blindfolded or be concert pianists. But the results are prodigious, because we have a temperamental advantage that more than compensates for a lack of IQ points.’
That’s probably why Harvard and so many other investors suffer poor results — they focus on being brilliant when they should focus on being rational.
Charlie emphasised this point in Berkshire’s 2017 annual general meeting.
‘A lot of people are trying to be brilliant and we are just trying to be rational. Trying to be brilliant is very dangerous, particularly when gambling.’
Of course I’m not suggesting you put all your money into index funds, but maybe it could be a good idea for beginners who don’t want to invest in individual stocks.
It’s worth considering that some of the best investment ideas are the simplest. I mentioned in Friday’s Money Morning that now is a good time to look for lay-ups — investments which are obvious winners.
Right now, the ASX 200 and All Ordinaries are both down a little over 2%. Hopefully, as 2018 drags on, we’ll see more declines. Then, these lay-ups will start to become even more obvious.
You might not get paid millions for finding these no brainer investments. But just a few could easily build a fortune over time.
Editor, Money Morning
PS: No one said you couldn’t speculate as a rational investor. As long as you don’t bet the farm like Harvard, speculating with small sums of cash you don’t immediately need could bring you massive gains. And as cryptocurrency prices start to surge again, you might be able to turn thousands into big profits, according to Sam Volkering, our crypto expert. Find out more here.