You cannot invest like Harvard and Yale: Part II

I wrote about this back in 2007 after I read a Smart Money article ( written by James B. Stewart) about copying the investment methods of these two endowments. I'm bringing it up again because Kiplinger's is now pushing the same naive advice. I thought that I would re-examine the idea and give it a bit more attention than I did two years ago.

To be completely fair, the Kiplinger's article does acknowledge that an individual cannot completely duplicate the strategies of these two endowments. The author, Andrew Tanzer, notes

Unlike the rest of us, the funds pay no taxes and never perish. Moreover, the endowments have huge staffs and access to investments, such as private-equity partnerships and hedge funds, that are unavailable to the common folk.

These are two really big differences. Taxes significantly eat into investment returns. Mortality and life expectancy play a big part in asset allocation, risk tolerance, and the investment instruments.

Furthermore, let's look at some of the ETFs that the Kiplinger's article recommends you use in order to replicate the strategies of Harvard and Yale. First of all, an ETF or a stock is not the same as investing in the physical asset. Investing in a REIT or REIT ETF is not the same as owning real estate. Owning a commodity ETF is not the same as owning an oil& & gas partnership in Oklahoma or a grain elevator in Iowa.

If you haven't read Pioneering Portfolio Management or Unconventional Success by David Swensen, please do. These books illustrate well the tremendous advantages that major institutional investors like big college endowments enjoy. Harvard and Yale have access to the creme de la creme of alternative investments. They can pick and choose exactly where they place their money. Their staffs have incredible access to the top managers as well as knowledge of their strategies. They can perform the type of due dilligence that you and I can only dream of. Harvard invests a good amount of money in timberland. They also have a lumberjack on staff.Hell, David Swensen even turned down Eddie Lampert years ago. Why? He wasn't forthcoming enough about how he was going to invest their money. That's how picky they can be.

Let's say that you did qualify as an accredited investor and could technically invest alongside Harvard and Yale. Many of the biggest and best venture capital, hedge, and private equity funds are closed to new investors. That is, unless you have a relationship that can get you in the door.

However, let's not diminish the importance of size and reputation. Yale and Harvard have billions to throw around. They also have two of the most impressive brands on the earth. They can give instantly credibility to any manager out there. You don't think they use this leverage to secure the most favorable terms that they can?

Think about it like this. Harvard and Yale are like a rich, handsome, well-endowed, smart tycoon that all the prettiest women in the world want to date. He can perform complete background checks, DNA, and psychological testing on any potential beaus. He literally has to have bodyguards in order to fight off these women. It must be nice.

So don't worry about trying to copy Harvard of Yale. You can't. You have to find an investment approach that works well for your personality,financial situation, and goals.