All Hail the Yale Model!

  • David Swenson was onto something with his unique asset allocation.
  • Most of the Yale Endowment is allocated to alternative investments.
  • This may be the perfect model to emulate for the upcoming turbulence.

Happy Friday! 

I’m heading to the Kapitanas Bar tonight in Calbayog for the last big boozy night out with my brother-in-law and his friends.

I can’t wait to relax under the tropical awning, juicing some San Miguel Pilsen.

But first, my coffee.

I haven’t looked at the mailbag yet, so I’m not sure how you felt about yesterday’s perhaps jolting Rude.

Yesterday, my mother texted me, “Scary Rude today.”

Indeed, if you weren’t shocked, I’d think you were silly.

But perhaps no one was more interested in yesterday’s piece than Addison Wiggin, famed author and my new boss. 

Addison and I recorded an hour-long Wiggin Session, where I laid out my points in a conversational fashion.

When the video is rendered and up on the net, I’ll send you the link.

Addison was nice enough to send me his questions beforehand to put a scaffold around the conversation.

But we didn’t get to his final question, as we ran out of time.

That question was, “What do you recommend for individual investors trying to navigate these geopolitical headwinds?”

In this Friday Rude, I’ll answer that question.

A Review of the Yale Model

In an earlier Rude, I wrote about the significant three advantages of university endowments:

    • Presumption of perpetuity – your time horizon is unlimited.
    • Tax-exempt status – how nice!  You don’t pay taxes if the endowment pays out to the university every year.
    • Distinguished and devoted alumni in the financial world – a veritable who’s who on Wall Street will help you out.

The late, great David Swenson, the former CEO of the Yale Endowment, used these advantages to the full.

How do you translate these advantages to your portfolio?

    • Treat your money as more than a retirement account; assume you’re just holding and growing the assets for the next generation.
    • Minimize your tax liability whenever and wherever you can.
    • Get as many other intelligent, wealthy people to help you.

Don’t assume private bankers and stockbrokers know what they’re talking about.  Their jobs are to build their own assets under management (AUM), not to look after your money.

The other big reason to emulate the Yale Model is its asset allocation mix. 

Have a look at this:

Credit: Bloomberg

Notice how domestic, or US, equity – the dark blue at the bottom of the chart – as a percentage of Yale’s portfolio has fallen to under 3%.

That is, a $40 billion endowment fund has only about $1 billion in the public stock market.

Swenson pioneered a surprising way of investing money, contrary to everything taught over the last 30 years.

Perhaps now’s the time to look away from domestic equity, yourself.

Asset allocation drives portfolio return the most.

One of the things financial theorists like Roger Ibbotson and rich guys like Jim Rogers agree on is this point:

Asset returns account for between 75-91% of your portfolio returns.

That means you don’t have to be a great stock picker to get rich.

Here’s the Nasdaq Bubble from 1991-2000:

That would be a 20x return in under ten years – if you got out at the top.

This is gold’s remarkable run from Brown’s Bottom to April 2011:

That’s a 6x return in 10 years.  If you used gold futures, the leverage probably made the return closer to 60x.  Again, that’s if you got out at the top, which most people didn’t do.

Bitcoin’s First Crazy Bull in 2017:

This was a nearly 20x return in one year.

If the present tense is HODL, would it be proper to say they “HEDL?”

You know where BTC trades now, and the HODLers were richly rewarded.

These three admittedly cherry-picked examples show how well you can do when you’ve got the asset class right, be it equity, commodities, or crypto.

Bottom line: if you get the asset class right, you have a far better chance to earn abnormal returns.

International diversification has never been more critical.

Everything I wrote in yesterday’s Rude about the USD losing its dominance echoes this point. 

You simply cannot maintain – or grow – your level of wealth by staying in US stocks.

Or even in the USA, for that matter.

For years, advisors have practically begged investors to get outside the lower 48 to protect and grow their wealth.

Unfortunately, the diversification benefits aren’t as great as in years past because the correlation between the US and global stock markets has increased.

That’s probably due to the “everything rally” the Fed fueled with its idiotic money printing.

But that doesn’t mean you can’t look at international companies, real estate, and commodities.

Europe may not be the answer, but Southeast Asia, Africa, and Latin America may hold some gems.

I’d also start looking at – gasp! – Russia, when its market reopens.  And other central Asian states.  That’s where the Belt and Road will run through.  You may find a few rough diamonds there.

The Middle East oil states may even have a sustained rally once they get off the morphine drip of the USD.

Public market liquidity has dwindled, leading to more volatility.

I wrote about this already in Dr. Liquidity and Mr. Volatility.

The US stock markets aren’t as liquid as they used to be.

Credit: Reuters

Generally, market liquidity is the ability to buy and sell at a fair price.

Specifically, market depth is defined as how big the limit orders are on the order book to be able to take large trades without moving the price too much.

Sure, market depth has been all over the place for the past two years.

But investors have pulled their orders lately.

Remember, liquidity and volatility are inversely related to each other.

Lower liquidity means higher volatility.

We’ve witnessed that in this latest sucker’s rally.

I’m not a huge fan of the public markets anymore.

I think there are better ways to make money nowadays.

Real estate, private equity, commodities, and crypto are smart choices.

With inflation the way it is – and we expect it to remain well into 2023 – I like real estate, private equity, commodities, and crypto.

Real estate can be something as simple as a pied-a-terre in a city you love.

Or some farmland off the beaten path.

Or some high-end real estate next to a lake.

Bottom line: find someplace you love and buy something that will at least hold its value relative to inflation.

Private equity need not intimidate you.

Private equity simply means owning a piece of a company that’s not publicly traded.

This jibes with one of our Rude pillars of starting your own online business.

Or you can invest in your child’s or sibling’s business. 

Or perhaps acquire a piece of a local concern. 

The possibilities are endless.

For commodities, you can own gold bars or silver coins.

Perhaps you’re into investing in commodity-based businesses.

Again, the goal here is to protect your purchasing power from the insidious inflation we’re seeing.

Despite some bad news lately, I still think you should own a bit of crypto, another pillar of Rude’s financial freedom.

You don’t need to own loads.

It is just enough to get acquainted and comfortable with what crypto is, how it protects your purchasing power, and how you can use it.

Some places have limited crypto use.  In some areas, like San Francisco and Zug, Switzerland, it’s higher.

But the point is getting fluent with crypto and letting it work its inflation-defeating magic.

Wrap Up

Macro is the name of the game for me because we’re going through an unprecedented global change right now.

Peter Thiel called the peak of globalization in 2007.

Larry Fink of BlackRock confirmed it yesterday.

We simply don’t know how things will shake out at a granular level.

But the best way to protect yourself is to think like those in the know, like the late David Swenson.

I continue to think the USD’s day is done.

But after that, the world can go many ways.

I’ll keep on top of it for you. 

In any event, have a wonderful weekend!

All the best,



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