Harvard Teaches Us What Not To Do

The bloom may be off the rose at the Harvard Management Company for a while. This article from the Wall Street Journal mentions that the endowment has been scalded and goes on to detail about recent comings and goings.

At various points during this event Harvard has taken a big hit, been a forced seller and negatively impacted the school’s operations. I have been writing about HMC for years as I believe there is a lot to learn, not emulate, from their ideas about asset allocation. Over the years articles about HMC, and Yale for that matter, have created awareness of asset classes, how asset classes can interact with each other and lately what not to do.

HMC was very heavy in private equity and other sorts of illiquid assets. This worked very well for years but in the last year or so the wheels have fallen off the bus. To say that HMC never should have invested this way is simplistic and I believe wrong. The returns were fantastic and those returns provided a lot of benefit to the school. A better way to think of it is that the exposure they maintained should have been managed differently.

That may seem like an empty statement but bear with me here. Is there anyone who did not realize that private equity was getting increasingly popular? One day of CNBC back in 2006 would have told you all you needed to know about how popular it had become. Popularity often gives way to mania and then at some point the whole thing blows up. This repeats often across the vast spectrum of investing.  

In your investing you may be lucky enough to be out in front of something that turns into a mania in which case you will make a lot money (that is a gift from the market). In conjunction with this positive turn events must be an exit strategy of some sort; cutting back, selling out completely or some other idea.

It does not take genius to realize a space has become popular and then a mania. These are not necessarily conditions to completely get out but active management of the exposure is crucial to helping avoid big trouble. I have no idea if HMC could have cut back on its PE exposure or not but they should have and you can cut back on anything in your portfolio.

I promise you the above will repeat in other investment segments in the future.