The Genius of Investing Legend David Swensen That Many People Don’t Know

Tim Denning

He could have become a Wall Street Billionaire. He chose not to and his simple philosophy can help you rethink investing.
Illustration by Zoe van Dijk

You probably don’t worship or follow investors on social media.

The world of finance may not be your passion, which is fine. But I want to introduce you to an investing legend most people have never heard of. His name is David Swensen and he died recently.

David took the Yale University investment fund from $1 billion to $31 billion, making it the best performing fund in America for the last 20 years. With those kinds of results, he could have easily set up a hedge fund and taken money from filthy, stinking rich snobs who take selfies in private jets.

David said no to the money. He chose a mediocre university income.

The Secret to True Wealth

Experts in investing can make huge profits from fees. They can get so rich that they roll up to their Wall Street offices in helicopters or limos. David wanted none of it. Getting rich and becoming elitist didn’t drive him.

After working six years on Wall Street early in his career, he took an 80% pay cut to run Yale’s endowment fund. Wow.

The investing returns David earned Yale University helped them educate more students. David even taught a class to students on investing, despite the lack of financial incentive to do so. A few days before David died from cancer, he was still teaching his investing class after all these years. He was known to mentor students and send them encouraging messages.

Titles on a resume, power, fame, a huge bank account, all meant nothing.

David discovered true wealth is gaining significance from a sense of purpose versus getting it from money.

Mortality motivation is what drove David’s life. His life was about the kind things he could do, the change he could pioneer, the courage he could display to younger generations, the example he could set. It’s no wonder Barack Obama got him to run an economic recovery fund.

What David figured out is true wealth is the legacy that lives on after you die in the people you quietly changed. That’s right — you can live on after you die when you discover this secret to wealth.

Wealth is making a difference.

“Self-confident yet selfless” is how Yale described David’s way of life.

The Practical Approach to Successful Investing That Beats Greedy Hedge Funds

Simple investment advice is what David pioneered. Before he came along it was conventional to invest the majority of your money in stock and bonds.

Then David started investing Yale’s money in real estate and venture capital funds. The New York Times said “diversification is a free lunch” if you understand what he’s doing.

Index funds are the low-cost way he applied higher diversification than normal. Yale’s investment performance increased because David increased how much of their money he invested in higher-growth assets like stocks. This is how I think of it.

Volatility equals growth.

You can follow the sheep and stick to conventional approaches, or you can expand the assets you invest in. I learned from investment legend Ray Dalio many years ago that asset allocation is really the big idea to understand.

Asset allocation simply means the percentage of your money you place into each asset — stocks, bonds, gold/silver, crypto, real estate. Each season — winter, summer, fall, spring — requires small tweaks in asset allocation. Winter is a recession. Summer is a booming economy. Let me explain asset allocation another way.

If you wanted to read the cheat sheet of the best investors in the world, what you’d want to see is their asset allocation over the long term. How do they distribute a chunk of money across different assets?

The percentage of their money that goes into each asset is the secret sauce they hide and charge money for.

What Is Missed by Those Who Fall in Love with an Asset

Investors can get romantic.

Take bitcoin critics as an example. They slam bitcoin and call it a scam. As soon as the highly volatile price drops they shout from their soapbox that the world is caving in. They have no idea about investing.

Investing isn’t about investing in one asset. Dah.

Investing is about having money in all of the main asset classes. Bitcoin is an asset class that includes Ethereum. David Swensen understood that there is a need for cryptocurrencies as an investor.

In 2019 he famously invested in two crypto funds. It’s not that he’s in love with bitcoin or thinks it’s going to the moon. It’s simply that he is staying diversified across all asset classes.

1% of an investment portfolio allocated to higher risk, more volatile assets like bitcoin can be the difference between a market-beating 20% return and making a measly 1% return you got by putting all of your money in a savings account because you’re too romantic and old fashion to understand the basics of digital finance.

Don’t fall in love with one asset. Own all the main asset classes. Figure out how much money to place in each asset based on your risk tolerance and financial situation.

Genius is mostly quiet

There’s not a lot of photos of David online. There isn’t a huge amount of content about him like there is on McDonalds-eating investor legend Warren Buffett. David was low-key. Making money didn’t run his life. The way he lived his life made a mockery of traditional investing.

The only time I saw David pipe up was when his morals were challenged. He turned down one investment opportunity because the manager was profiting off of traders who were found guilty of insider trading. Another high-profile firm was turned down by David because they refused to explain all of the companies they were investing the money in.

David’s genius was that morals mattered more than getting a return on Yale’s money. Money became a way for him to vote for what, and who, he believed was good. The way money is invested can change the direction of society, and that’s a far better cause than another Lambo parked outside a Wall Street-funded mansion.

In the words of David Swensen, “Satisfy your soul.” The rest is nonsense.

This article is for informational purposes only, it should not be considered financial, tax or legal advice. Consult a financial professional before making any major financial decisions.

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