I was saddened to hear the news of the passing of David Swensen, a well-known investor, endowment fund manager, and educator. From the NY Times obituary:

David Swensen, a money manager who gave up a lucrative Wall Street career to oversee Yale University’s endowment and proceeded to revolutionize endowment investing, in the process making Yale’s the best-performing fund in the country over a 20-year period, died on Wednesday in New Haven, Conn. He was 67.

In addition to “revolutionizing” endowment investing, he also wrote a book for the average individual investor called Unconventional Success: A Fundamental Approach to Personal Investment which I read at a very formative period in my investing education. Even though he is best known for being an early adopter of alternative asset classes like hedge funds, private equity, and direct real estate ownership farmland and timber, he recommended something different for those without the time, skill, and existing money (access). From an interview with the Yale Alumni magazine:

That’s why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You’ll end up beating the overwhelming majority of participants in the financial markets.

Here is a brief summary of the important lessons that I learned from his book:

Alignment of interests is key. There are many conflicts of interest in the financial world. Learning to spot them is an important skill. For example, in terms of asset classes, owning shares of businesses (equities) are good because your interests are aligned as a shareholder. However, in the case of high-yield bonds, your interests are not aligned. The borrower wants the lowest interest rate possible, so their job is to seem as safe as possible even if there are significant hidden risks. This is why Swensen recommends sticking only with FDIC-insured cash and Treasury bonds (nominal and TIPS). Take your risks as an owner.

Stick with these six core asset classes. Swensen identified core asset classes that you should invest in. These share three main characteristics:

1. They rely on market-generated returns, not from active management skill (as it is a very rare attribute and hard to separate from luck).
2. They add a valuable and differentiable characteristic to a portfolio.
3. They come from broad, highly-liquid markets.

The six core asset classes he identified are:

• US Equity
• Foreign Developed Equity
• Emerging Market Equity
• Real Estate
• U.S. Treasury Bonds
• U.S. Treasury Inflation-Protected Securities (TIPS)

Swensen shared this sample model portfolio asset allocation:

30% Domestic US Equity
15% Foreign Developed Equity
10% Emerging Markets
15% Real Estate
15% U.S. Treasury Bonds
15% Inflation-Protected Securities

This also meant he was recommending against investing in the following:

• US Corporate Bonds
• High-Yield “Junk” Corporate Bonds
• Asset-Backed Securities (like mortgage-backed bonds)
• Tax-Exempt Bonds
• Foreign Bonds
• Hedge Funds
• Private Equity

Not that they are horribly bad, it’s just that you don’t need them. They either have increased risk that isn’t adequately compensated, added management fees and costs that aren’t adequately compensated, or aren’t different enough to add extra return. Don’t make things more complex without a good reason.

Tips on active management. If you still want to pay someone to pick stocks for you, he recommended looking for the following in a manager:

• Hold a limited number of stocks. Bet boldly on fewer companies (high “active share”), as opposed to being a “closet index fund”.
• High rate of internal investment. The managers should have a high percentage of their own net worth in the same funds that they ask you to invest in. They should “eat their own cooking.”
• Limit assets under management. If there is more money flowing in than they can invest efficiently, they should close the fund to avoid asset bloat. This requires them to turn down more money!
• Reasonable management fees. Active management hash higher internal costs than a passive strategy, but you can still charge less than average.

Money isn’t everything. Find a purpose. Finally, David Swensen walked the walk. He could have made billions by staying on Wall Street instead of moving to Yale. He could have made tons of money being a “money guru” on CNBC, etc. The guy didn’t even bother to publish a second edition or “revised” edition of his book, even though that would have also been easy money. He found a mission. More quotes from Swenson (same NYT article):

Mr. Swensen was particularly proud of how the growing endowment had helped the university contribute to financial aid.

“One of the things that I care most deeply about is that notion that anyone who qualifies for admission can afford to go to Yale, and financial aid is a huge part of what the endowment does,” he said in an interview for this obituary in 2014.

“People think working for something other than the most money you could get is an odd concept, but it seems a perfectly natural concept to me.”

Berkshire Hathaway (BRK) released its 2020 Letter to Shareholders over the weekend. If you also found reading this letter and Charlie Munger’s Daily Journal transcript an enjoyable way to spend your weekend… you might be an investing geek! As usual, the letter is not long at 15 pages. Here are my personal highlights.

I found the overall theme to be “Here’s a reminder of the many ways that Berkshire Hathaway is different than other companies”. For example, Buffett and Munger both started out with partnerships, where they invested nearly all their own net worth alongside their partners. They treated the investments as carefully as if it was their own money, because it was! I want to take the same care in writing this blog. I want to write things that I would want to read myself, and make recommendations that I would want to see being made to my own family and friends.

A minor surprise was that Buffett’s biggest purchase was $25 billion of BRK’s own shares in 2020 – roughly 5% of all outstanding shares! In other words, they though BRK itself was one of the best investments available in 2020. I guess I should have bought more BRKB when it was lingering at $165 a share.

Last year we demonstrated our enthusiasm for Berkshire’s spread of properties by repurchasing the equivalent of 80,998 “A” shares, spending $24.7 billion in the process. That action increased your ownership in all of Berkshire’s businesses by 5.2% without requiring you to so much as touch your wallet.

He also bought shares of a few big companies like Chevron ($8.6 billion) and Verizon ($4.1 billion), but it would seem that he thinks that most public and all available privately-held businesses are overpriced right now.

While Buffett indirectly pointed out that his Apple shares have gained nearly $90 billion for shareholders ($120B current value minus $31B cost basis), he also admitted a mistake in the price he paid for Precision Castparts:

The final component in our GAAP figure – that ugly $11 billion write-down – is almost entirely the quantification of a mistake I made in 2016. That year, Berkshire purchased Precision Castparts (“PCC”), and I paid too much for the company.

High prices for a stock can be a temporary illusion:

Investing illusions can continue for a surprisingly long time. Wall Street loves the fees that deal-making generates, and the press loves the stories that colorful promoters provide. At a point, also, the soaring price of a promoted stock can itself become the “proof” that an illusion is reality.

But, we should still appreciate our ability to own shares of wonderful businesses by buying shares with just a few clicks:

It took me a while to wise up. But Charlie – and also my 20-year struggle with the textile operation I inherited at Berkshire – finally convinced me that owning a non-controlling portion of a wonderful business is more profitable, more enjoyable and far less work than struggling with 100% of a marginal enterprise.

Be realistic about your expectations for bonds:

And bonds are not the place to be these days. Can you believe that the income recently available from a 10-year U.S. Treasury bond – the yield was 0.93% at yearend – had fallen 94% from the 15.8% yield available in September 1981? In certain large and important countries, such as Germany and Japan, investors earn a negative return on trillions of dollars of sovereign debt. Fixed-income investors worldwide – whether pension funds, insurance companies or retirees – face a bleak future.

Don’t take on unknown risk to chase higher yields:

Some insurers, as well as other bond investors, may try to juice the pathetic returns now available by shifting their purchases to obligations backed by shaky borrowers. Risky loans, however, are not the answer to inadequate interest rates. Three decades ago, the once-mighty savings and loan industry destroyed itself, partly by ignoring that maxim.

Buffett shared some historical profiles of Berkshire-owned companies that started out only as an idea from a single person or couple with limited funds. Through many years of hard work, determination, and taking advantage of the opportunities available in America, these turned into huge businesses. You may recognize the names: GEICO, See’s Candies, Clayton Homes, and Pilot Travel Centers.

Our unwavering conclusion: Never bet against America.

On the creation of wealth (reminds me of this):

Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees. Still, investors must never forget that their expenses are Wall Street’s income.

Past shareholder letters.

• 1977-2020 are free on the Berkshire Hathaway website (PDF). 1965-2019 are $2.99 at Amazon (Kindle). Three bucks seems pretty reasonable for a permanent copy with the ability to search text and maintain highlights.
• 2018 Letter discussed why BRK will continue to do fine without Warren Buffett around.
• 2018 Letter discussed using debt very sparingly and the importance of holding productive assets over a long time.
• 2017 Letter discussed patience, risk, and why they have so much cash.
• 2016 Letter touched on the rarity of skilled-stock pickers and some insight on his own stock-picking practices.
• 2015 Letter discussed his optimism in America and his “Big 4” stock holdings.
• 2014 Letter discussed the power of owning shares of productive businesses (and not just bonds).
• 2013 Letter included Buffett’s Simple Investment Advice to Wife After His Death.

The annual shareholder meeting will be virtual again this year, but at least it will include Charlie Munger! Yahoo Finance will livestream it on May 1st at 1pm EDT. I will probably wait to listen in the car via the Yahoo Finance podcast version.

It seems that every year, Charlie Munger and the Daily Journal Annual Shareholder Meeting gets more and more media attention. Which is great, as Munger is now 97 years old. Yahoo Finance livestreamed the event, and you can view the full two-hour recording on YouTube. It’s much faster to read the entire transcript, kindly provided at sites like Latticework Investing and Junto Investments. Munger covered a lot of ground, and it’s nice to see he hasn’t lost his edge. I’ve edited things down to my personal highlights below.

On the popularity of the short-term trading of stocks like Gamestop. It is nothing fancier than gambling.

…that’s the kind of thing that can happen when you get a whole lot of people who are using liquid stock markets to gamble the way they would in betting on racehorses. And that’s what we have going in the in the stock market. And the frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers.

A few shots at Robinhood.

I have a very simple idea on the subject. I think you should try and make your money in this world by selling other people things that are good for them. And if you’re selling them gambling services where you make profits off of the top, like many of these new brokers who specialize in luring the amateurs in, I think it’s a dirty way to make money. And I think that we’re crazy to allow it. […] Well, it’s most egregious in the momentum trading by novice investors lured in by new types of brokerage operations like Robinhood. I think all of this activity is regrettable. I think civilization would do better without it.

Nope, Robinhood is not free.

Robinhood trades are not free. When you pay for order flow, you’re probably charging your customers more and pretending to be free. It’s a very dishonorable low-grade way to talk. Nobody should believe that Robinhood’s trades are free.

On SPACs:

Well, I don’t participate at all. And I think the world would be better off without them. I think this kind of crazy speculation in enterprises not even found or picked out yet is a sign of an irritating bubble. It’s just that the investment banking profession will sell shit as long as shit can be sold.

On Treasury bonds, government stimulus, and low rates:

Well no, I don’t think we have a bubble in Treasury securities. I think they’re a bad investment when interest rates are this low. I never buy any and neither does Daily Journal. But, no, I don’t think Treasury securities are a big problem.

I do think that we don’t know what these artificially low interest rates are going to do or how the economy is going to work in the future as governments print all this extra money. The only opinion I have there is that I don’t think anybody knows what’s going to happen for sure. Larry Summers has recently been quoted as being worried that we’re having too much stimulus. And I don’t know whether he’s right or not.

On higher stock prices due to low rates:

I think everybody is willing to hold stocks at higher price-earnings multiples when interest rates are as low as they are now. And so I don’t think it’s necessarily crazy that good companies sell at way higher multiples than they used to.

On the other hand, as you say, I didn’t get rich by buying stocks at high price-earnings multiples in the midst of crazy speculative booms. I’m not going to change. I am more willing to hold stocks at high multiples than I would be if interest rates were a lot lower. Everybody is.

On why DJCO kept its Wells Fargo shares when Berkshire Hathaway sold them all off:

Well, I don’t think it’s required that we be exactly the same on everything. We have different tax considerations. […] So, you can understand why Warren got disenchanted with Wells Fargo. I think I’m a little more lenient. I expect less out of bankers than he does.

On Bitcoin:

So, I don’t think Bitcoin is going to end up as the medium of exchange for the world. It’s too volatile to serve well as a medium of exchange. It’s really kind of an artificial substitute for gold, and since I never buy any gold, I never buy any Bitcoin. I recommend that other people follow my practice.

On Costco. Munger has said in the past that 1/3rd of his net worth is in Costco.

Costco I do think has one thing that Amazon does not. People really trust Costco will be delivering enormous value. And that is why Costco presents some danger to Amazon. They’ve got a better reputation for providing value than practically anybody, including Amazon.

How do you know you really understand something? Avoid confirmation bias.

Well, I do have a tip. At times in my life, I have put myself to a standard that I think has helped me: I think I’m not really equipped to comment on this subject until I can state the arguments against my conclusion better than the people on the other side. If you do that all the time; if you’re looking for disconfirming evidence and putting yourself on a grill, that’s a good way to help remove ignorance.

Can anyone become a great investor? Bad news.

I think people have the theory that any intelligent hardworking person can get to be a great investor. I think any intelligent person can get to be pretty good as an investor and avoid certain obvious traps. But I don’t think everybody can be a great investor or a great chess player. […] I don’t think it’s easy for ordinary people to become great investors.

What does Munger advise his charitable institutions to hold as assets? Munger also has 1/3rd of his assets run by Li Lu, and the final 1/3rd is Berkshire Hathaway shares.

Well, the one charitable institution where I have had some influence for a very long time has a whole bunch of hotshot financiers in every branch of wealth management there is on the board. And that institution has two assets in its endowment account. One is a big interest in Li Lu’s China fund, which is a limited partnership, and the other is a Vanguard index fund. As a result of holding those two positions, we have a lower cost than anybody else and we make more money than practically everybody else. So you now know what I do in charitable institutions.

Most people have “happiness thermostats”:

I think most people who are assuming tolerable success in life are about as happy as they were ordained to be. They wouldn’t be a lot happier if they were richer or a lot less happy if they’d been poor. I think most people are born with a happystat. That happystat has more to do with their happiness and their outcomes in life.

More on happiness:

The first rule of a happy life is low expectations. That’s one you can easily arrange. If you have unrealistic expectations, you’re going to be miserable all your life. I was good at having low expectations and that helped me.

On choosing a spouse:

A little wisdom in spouse selection is very desirable. You can hardly think of a decision that matters more to human felicity than who you marry. […] Well, you know, I had a failed marriage, so I don’t think I’m in the perfect position to advise the young about marriage.

Here are last year’s 2020 Daily Journal meeting video, transcript, and notes. Here are links to past Daily Journal meeting transcripts and lots of additional Munger material.