The Econophysics Blog

This blog is dedicated to exploring the application of quantiative tools from mathematics, physics, and other natural sciences to issues in finance, economics, and the social sciences. The focus of this blog will be on tools, methodology, and logic. This blog will also occasionally delve into philosophical issues surrounding quantitative finance and quantitative social science.

Thursday, February 22, 2007

Profile of David Swensen, Yale's legendary investor

This Sunday's New York Times had a fascinating profile of , Yale's legendary chief investment officer and a faculty member of its business school: For Yale’s Money Man, a Higher Calling (Feb. 18,2007). In over two decades, Mr. Swensen "has generated an annual compound growth rate of 16.3 percent" for Yale's endowment "beating the performance of Harvard’s endowment and that of every other major school in the country over the same period." This amazing performance over the years has accounted for over $7.8 billion into Yale's coffers ... making him the largest financial contributor to the school over the last 20 years.

In the article, David Swensen mentions two contrarian maxims that have guided him both as an investor and as a man over the years. The first of these maxims is that he looks for "people who define success by generating great returns, not by making as much money as they can." This may sound odd coming from one of the greatest investors in recent memories but it makes a lot of sense in both a practical and a philosophical way.

From a practical perspective, it makes sense for an investor to entrust money to someone who is more focused on performance rather than on generating fees. As Mr. Swensen explains it:
“If you make money personally by gathering a huge pile of assets, it is great for the management company because they make bigger fees,” Mr. Swensen says. “But if the fund goes from $2 billion or $3 billion to $20 billion, they are inevitably going to reduce their ability to generate investment returns. Size is the enemy of performance."
From a philosophical perspective, Mr. Swensen's first maxim is consistent with a meritocratic view of life. In other words, it's performance and merit that should matter most rather than just having access to a pile of assets.

Mr. Swensen's second maxim is that the art and science of investing can be applied to things beyond making the wealthy wealthier. Investing can be used to support non-profit causes and other endeavors that can make contributions to sorting out the world's problems. This second maxim has led to Mr. Swensen spurning generous offers to become an investor in the private sector for substantially higher pay.

Besides his contributions to the practice and philosophy of investing, David Swensen is an author of two of the best books on finance ever written: Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, and Unconventional Success: A Fundamental Approach to Personal Investment. Anyone serious about learning the art and science of investing should read both of Mr. Swensen's books.

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