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Hittin ‘Em Where They Ain’t Notes from the Diamond #6 of 108 Part 1: Zest in the Pursuit Exploring parallels between and investing David A. Salem Log of all notes in series available here Email: [email protected] All notes optimized for viewing in PDF form Twitter: @dsaleminvestor PDFs available to paid-up subscribers only; subscribe here

F E B R U A R Y 1 4 , 2 0 1 9 R E A D T I M E 1 0 M I N U T E S *

Baseball statistics are not pure accomplishments of men against other men, which are what we are in the habit of seeing them as. They are accomplishments of men in combination with their circumstances. - Bill James

If things come easy, there is no premium on effort There should be joy in the chase, zest in the pursuit. Trivia Question #6 of 108. Of the 877 players on the - rosters of (MLB) teams at the start of the 2018 regular season, how many were People ask me what I do in winter when there’s no baseball. I’ll tell you what I do. I stare out the window and wait for born outside the ? Answer below. spring. -

* Excludes footnotes (which even non-lawyers might enjoy).

Keeping Busy. To help myself and perhaps other What would’ve become of the PE [private equity] members of the ET pack move through the current industry if, instead of devoting a large fraction of MLB off-season more productively than Rogers Yale’s endowment to PE, [Yale CIO] David Swensen Hornsby moved through the many off-seasons he had deployed all such capital via managers investing endured, 1 I’ve crafted a two-part note about a exclusively in publicly traded stocks of owner- cardinal challenge in both baseball and operated firms? ‘Tis hard to say, but I’ll try … in my investing: hittin’ ‘em where they ain't. Part 1 next note. focuses on pros who’ve met this challenge uncommonly well; Part 2 (slated for publication as Before tackling the foregoing question, I feel shifts into high gear later this month) compelled to do two things. First, I’ll encourage will focus on means that investors might employ to readers who haven’t digested fully Note #2 (on meet this challenge in coming years and beyond. excessive “juicing” by private equity and baseball pros) and the aforementioned Note #5 (on excessive Pet Peeve. The prior note in this series (Note #5) mimicry of “the Yale model”) to do so before reading focused on personal traits enabling certain players to what follows, parts of which may seem naïve absent achieve greatness in investing or baseball, and ended such auguries. Second, I’ll raise and answer a with a question about one such great: question that’s both central to this series and worthy of more attention than it typically attracts in

1 Born in 1896, Hornsby was a player, player-, or he’d permitted himself to read or watch movies. He off-field exec in pro baseball from 1915 until shortly refused to do either during his 23 seasons as an active before his death during the 1962-63 offseason. Having player (1915 – 1937), convinced that doing so would harm notched 2,930 fewer MLB hits than Hornsby — generally his eyesight. FWIW, Hornsby didn’t smoke or drink either. regarded as the best right-handed hitter in MLB history — He did gamble, however, compulsively and lucklessly I’m hardly one to critique anything he did or didn’t do. enough (on horse races) to necessitate his working for pay That said, Hornsby might have enjoyed offseasons more if during the entirety of his 25 years as an ex-big leaguer. discourse about greatness in investing or baseball: grading fiat-enabled capital allocators like Fed chair what metrics should be used to distinguish truly Jay Powell as distinct from return-oriented allocators great practitioners from merely good ones? like Swensen or me or perhaps you? Why not? If, as Ben Hunt argues persuasively in You Are Here, To be sure, with computer-based analytics having modern capital markets have morphed into political transformed both the playing and business of utilities, it seems not merely fair but essential that baseball since the current century dawned, pros in we ask whether such utilities’ ongoing that arena devote not merely ample but arguably administration is producing the optimal deployment excessive airtime to quantifiable metrics when of capital — taking due care to define optimal, of grading past or current pros, be they on-field players course. By my lights, optimal in this context means or execs. But there’s scant agreement on optimal the deployment of financial capital that enables the metrics for divining true greatness in baseball, even maximum number of citizens to achieve their full and indeed especially respecting criteria for election potential under whatever boundary conditions the to its Hall of Fame, and frustratingly scant discussion allocators being judged are laboring and neither of optimal metrics for divining competence let alone created themselves nor have the power to change. greatness in finance. The italicized caveats are crucial, as exemplified by the tenures of the greatest and least-great Fed heads in my lifetime: Paul Volcker, Fed chair for eight years starting August 6, 1979; and William Miller, Fed chair for 17 months ending the date Volcker started. Miller didn’t create the stagflation that gripped the US economy in the late 1970s; indeed, given Volcker’s not insignificant role in Richard Nixon’s decision to end the greenback’s convertibility to gold Pray tell, when was the last time you heard Paul in 1971, Volcker arguably deserves no less blame Krugman an “expert” in finance articulate the precise than Miller for the stagflationary conditions both 3 metrics and time horizon underlying whatever men encountered during their tenures atop the Fed. critique of the Fed’s evolving policies they’re serving That said, Miller himself took no effective steps to up on Bloomberg or CNBC? Dunno ‘bout you, but I end such torpor — a scourge whose ultimate purging haven’t encountered such exactitude from a talking by Volcker makes his tenure at the Fed the gold head since the San Diego Padres last won the World standard for greatness in not only central banking Series (WS). That would’ve been ... never, the Padres but arguably also in capital allocation broadly being the longest established MLB team to never win defined. it all: 49 years and counting.2 For me, that standard or test is simply stated: did the Gold Standard. Why demand precision respecting person being graded act boldly enough for long both the metrics being used to gauge results and the enough to boost materially and sustainably the time horizon over which they’re being applied when achievement of human potential?

2 Hope springs eternal in Sandi, however, especially for approximate interval between the Red Sox’s zenith in Padres fans with multi-year time horizons: taking a page annual talent rankings of MLB farm systems earlier this from the team that won the most recent decade and the team’s most recent World Series win (in using a strategy discussed at length below, the Padres 2018). have built what is widely viewed as the top farm system in 3 Readers seeking more info on Volcker’s role in Nixon’s pro baseball as the 2019 season approaches. If the abandonment of the gold standard in 1971 could do worse immediate past serves as reliable prologue to the future than start with the brief history of this decision published — a concededly shaky premise in baseball no less than by an organization that, like this author, thinks Volcker investing, as also discussed below — the Padres will be subsequently did a superb job as Fed chair. The Hoover world champs within a half-decade, that being the Institution’s brief piece on the topic is available here.

©2019 Epsilon Theory All rights reserved. 2 Strikingly Similar. Which past or present players in ultimately earn degrees. So far as I can tell from investing or baseball meet the test for greatness just published accounts of both men’s dealings as well as proffered while also serving as useful case studies for conversations with Swensen himself, their early 20s contemporary readers seeking to elevate their own were essentially the last intervals in their lives when games? either Rickey or Swensen fancied getting along to even remotely the same degree as getting ahead. Many candidates come to mind, some of whose achievements were flagged in prior notes and will be Indeed, as Lee Lowenfish’s fine biography of Rickey discussed further as this series unfolds, e.g., investor makes plain, and as the ever-expanding universe of par excellence Jeremy Grantham and baseballer par writings by and about Swensen makes equally clear, excellence .4 Here and now, however, the both men rose to the top of their chosen professions tidiest answer I can give to the question just posed by practicing doggedly what Rickey’s fellow Hall of while also moving toward an eventual answer (in Famer preached in his oft-quoted Part 2) to the counterfactual query raised at the response to a reporter’s query about hitting: “I have outset of this note is by comparing the words and already written a treatise [on the subject]”, Keeler deeds of the investment pro mentioned in it to those crowed, “and it reads like this: Keep your eye clear of a legendarily accomplished baseballer whose and ‘em where they ain’t.”5 temperament and indeed origins resembled

Swensen’s: Branch Rickey. Noteworthy Milestones in the Baseball Life of Wesley “Branch” Rickey

• 1905 - 06 Player for St. Louis Browns • 1907 Player for New York Highlanders • 1907 - 08 at • 1910 - 13 Coach (and law student) at UMichigan • 1913 - 15 On-field manager of St. Louis Browns • 1919 - 42 General manager of St. Louis Cardinals Builds MLB’s first farm system • 1942 - 50 General manager of Brooklyn Dodgers Promotes first non-white player to big leagues Recruits MLB’s first full-time statistician • 1951 - 55 General manager of Branch Rickey (1881 - 1965) David Swensen (born 1954) Pioneers active recruitment of Lat Am players (born 1954) • 1959 - 60 President of • 1962 - 64 Special Advisor to St. Louis Cardinals • 1967 Posthumous election to Hall of Fame Clear Eyes. Like Rickey, who lived in central Ohio from his birth through completion of his undergrad studies at Ohio Wesleyan, Swensen trod a Man vs. Machine. While never easy, practicing what conventional path to and through college, earning a Keeler preached is markedly more difficult for bachelor’s degree from the UWisconsin branch current pros in both baseball and investing than it where his father served as dean of the college and was in Rickey’s day. There are multiple reasons why, chemistry department chair (UW-River Falls) and including the adoption in both fields of genuinely from which all five of Swensen’s siblings would also meritocratic criteria for recruitment and

4 I’m also planning to write about a pro whose guts and biography of Swensen has yet appeared, but much has smarts would’ve made him a Hall of Famer if certain team been written about David’s distinctive personality and owners hadn’t been so short-sighted and selfish: Fay methods, including the prior note in this series; a 2017 talk Vincent, for a depressingly brief given by this writer (available upon request via three years ending in September 1992. [email protected]); and, most importantly and 5 Lowenfish’s Branch Rickey: Baseball’s Ferocious authoritatively, in Swensen’s pathbreaking book on Gentleman (2007) remains the best of the multiple Rickey institutional funds management and annual reports biographies published to date IMO. No full length published by Swensen’s office available here.

©2019 Epsilon Theory All rights reserved. 3 advancement (more on which below) as well as a more dominant catalyst for change that Rickey lived and died too soon to have confronted in the workplace (and likely mastered if given the chance): computer-based informational technologies and the quantitative methods for deploying capital they facilitate.

Importantly, in both pro baseball and investing the capital being deployed via increasingly quantitative or formulaic methods comprises human as well as financial capital, with the latter (money) being used routinely to obtain the former (talent) in baseball, via market-clearing contracts for free agent players and coveted executives, and with money in the form of fees being used routinely to obtain the asset management talent institutional investors deem essential to achievement of their stated return 6 goals. To be sure, the illiquid strategies that Swensen has used so effectively on Yale’s behalf — comprising the Crowded Trades. As the fine folks at Vanguard lion’s share of Absolute Return plus all exposures among other straight-shooting investment pros have above it in the nearby graph — haven’t attracted observed, many institutional funds are pursuing unduly large commitments from institutional return goals they have little or no chance of investors as a group merely because David has achieving. More precisely, such funds have little expounded eloquently about them. Rather, locking chance of achieving their stated return goals with up capital to the degree Swensen has on Yale’s their current policies and strategies — means not behalf has become SOP in institutional funds uncommonly adopted with the specific aim of being management because in that arena, as in pro “like Yale.” Paradoxically, as suggested in Wannabes baseball, success breeds copycats. Beware, one reason among others why most institutional funds bent on parroting Yale will fail in Swensen’s success surely has, as did Rickey’s in the effort is because Swensen has proven so developing a system for player recruitment and maddeningly effective in preaching publicly what development that’s served as table stakes for MLB he’s practiced during his commendably long (1985 - teams since it began producing riches for the Rickey- present) and ongoing tenure as Yale’s CIO. led Cardinals a century ago.

6 Of the many books about the impact of computer-based familiar with the use and abuse of data science in finance analytics on pro baseball, the one I’ve found most than in baseball, I haven’t identified any books on illuminating is Travis Sawchik’s Big Data Baseball: Math, quantitative methods for investing that I deem must- Miracles, and the End of a 20-Year Losing Streak, reads. If I had to point ET faithful to a such book published initially in 2015. With help from another while also honoring the principle that it’s better to teach brilliant baseball wonk (Ben Lindbergh), Sawchik has hungry folks to fish than to hand them fishes, it’d be completed a second book on the steadily rising level of Benoit Mandelbrot’s 2006 classic The Misbehavior of play in pro baseball (off and on the field) that’ll be Markets: A Fractal View of Financial Turbulence. FWIW, I released in June 2019 — The MVP Machine: How try to read every word written by my friend and quant jock Baseball’s New Nonconformists Are Using Data to Build extraordinaire Mark Kritzman; a compilation of Mark’s Better Players. Perhaps because I’m more intimately remarkably voluminous writings is available here.

©2019 Epsilon Theory All rights reserved. 4 Kevin Kerrane tells the tale briefly and well in Dollar Sign on the Muscle: The World of Baseball Scouting: Select List of Baseball-Related Innovations Credited Rightly to Branch Rickey

[F]rom 1913 to 1917, [Rickey] experimented briefly • Pitching machines with the idea of a farm system—direct control of • Batting cages and helmets minor-league teams by the major-league parent • Advanced stats including OBP and platoon organization ... The farm system was a strategy for effects saving money: instead of bidding against other • Year-round “spring” training facilities major-league teams for minor-league players, Rickey • “Farm” teams owned & controlled by MLB clubs wanted to grow his own. After World War I, when • Hiring of non-white and foreign-born players • Adaptation of church frippery into an enduringly the minors were in a financial slump, Rickey put his attractive and eminently merchandisable logo strategy into effect … [B]y 1939, the Cardinal empire included 32 minor-league teams and about 650 players.

The Cardinals bought pitcher Jess Haines in 1920, and purchased no more players until 1945. The system St. Louis Cards logo conceived by Rickey in 1922 and did save money. But it made money, too. Rickey was used uninterruptedly and profitably since then able to generate such a steady supply of young talent that he could sell off the excess at a nice profit, while providing the Cardinals with enough manpower to Like Swensen’s move decades later to expand win nine pennants by 1946 … The competition among materially the pool from which Yale draws money so many young players in the system operated as a management talent by adding a globally diverse kind of natural selection. The minor-leaguers could array of proven or promising players in illiquid be left on the farms until, as Rickey liked to say, they investing to it, Rickey judged correctly that "ripened into money." [Emphases added] expanding the pool from which his teams drew talent

by adding blacks and foreigners to it would pay off Searching Far and Wide. As noted in the nearby box, big time. It did, with the more genuinely meritocratic building the pro sports equivalent of an early stage criteria for roster construction that Rickey pioneered venture program was but one of several innovations — like other innovations with which he’s rightly Rickey conjured to better the various MLB teams he credited — ultimately becoming table stakes for MLB headed. franchises seeking to field winning teams.7 Indeed,

as of the most recent date for which reliable data are Famously, one such initiative bettered not merely available (Opening Day 2018), 38% of players on Rickey-led teams but America’s national pastime and MLB rosters were African-American or foreign born, indeed the nation more generally: the recruitment including many of the sport’s most talented if not and ultimate promotion to the big leagues of non- also most beloved stars. white and foreign-born players.

7 Revenue-sharing protocols generally enable MLB a manner redolent of the widening gyre in American franchises with aggregate big league payrolls beneath the politics on which Ben Hunt has shed useful light in Things threshold for MLB’s “luxury tax” ($206 million for 2019) to Fall Apart. Whether America’s next national elections on operate in the black even if their big league teams post November 3, 2020 will produce a day of reckoning for losing records and miss the playoffs year after year. How certain politicians or political views remains unclear. But long this not unhappy condition for many team owners it’s virtually certain that a day of reckoning — and perhaps (MLB’s equivalent of closet indexing by active money work stoppage in MLB since 1995 — will be upon managers?!) can or will last is an open question to be us by this time in 2022, given the 2021 expiry of MLB’s explored in future notes. As will be seen, tensions current and increasingly outmoded Collective Bargaining between team owners on the one hand and an arguably Agreement (CBA). overmatched players union on the other are mounting in

©2019 Epsilon Theory All rights reserved. 5 Told You So’s. No one can know for sure until the hired an immigrant to crunch numbers for the blessed day arrives how many African-American or Brooklyn Dodgers in 1947. Over the next four foreign-born players will grace MLB rosters when the decades, a Montreal native and former NHL 2019 regular season commences on March 28. statistician named Allan Roth helped first the Barring injury, however, one non-American who Dodgers and in due course not fewer than 20 MLB made his major league debut in 2018 will likely make teams develop enhanced methods for allocating the cut — for reasons that would’ve elicited cheers if both human and financial capital — on the field (via not also an “I told you so” from Rickey. Born and shrewder defensive positioning and other tactics) raised in Venezuela, 27 year-old Willians Astudillo and off it (via shrewder personnel policies). hasn’t done anything as a pro baseballer that would’ve commended him to MLB front offices Roth also helped burnish Rickey’s reputation as “the during Rickey’s many years heading such offices, Brain” of pro baseball by ghost-writing parts of unless they were headed by Rickey himself. “Goodby [sic] to Some Old Baseball Ideas” — a storm-the-ramparts piece published in Life magazine in 1954 that Michael Lewis mentions briefly in Moneyball, his 2003 bestseller on ’s surprisingly lonely efforts as a modern GM to practice what “the Brain” had preached a half- century earlier.

Lonely No Longer. However lonely Beane (or Rickey) might have felt using methods that rival GMs deemed imprudent or distasteful, such loneliness was destined to fade. And so it did, rapidly and rather fully as the Aughts progressed, owing partly to Willians Astudillo at the plate for the Twins in 2018 Lewis’s authorial skills and in larger part to Beane’s

and later Red Sox GM ’s conspicuous Ever heard of Astudillo before reading this note? If success implementing such methods (a/k/a yes, it’s for one or both of two reasons: (1) an ).8 attractively brief and hugely fun video of his homer in a recent winter league game went viral or (2) Similarly, however lonely Swensen (or his longtime Astudillo’s remarkable consistency in avoiding and unfailingly supportive investment committee — a prized skill indeed at any level of play chair Charley Ellis) might have felt using methods in baseball — has created a big buzz in MLB circles, that rival CIOs deemed offputting, such loneliness teeming as they are in the post-Moneyball era with was also destined to evaporate, owing partly to quant jocks cranking out advanced statistics. Swensen’s powers of persuasion and in larger part to the stunningly good returns Swensen notched in the There were no such geeks holding full-time posts in years surrounding his pathbreaking book’s initial pro baseball, and no advanced stats worthy of the release.9 name being compiled in baseball circles, until Rickey

8 This seemingly odd handle for the use of quantitative annum for Swensen’s bulldogs vs. 2.0% per annum for tools in baseball analytics derives from the leading puritans maintaining a 60/40 mix of the S&P 500 and a association of such tools’ users: the Society of American broad US bond index (BBAgg). Crucially for institutions Baseball Research (SABR), founded in — where else? — pondering during the early Aughts whether they wanted Cooperstown, NY in 1971. to “be like Yale,” Swensen trounced the 60/40 bogey 9Over Yale’s six fiscal years ending June 30, 2003 — an during both bull and bear markets for stocks: 23.1% vs. interval embodying a wild ride for investors as a group — 6.1% annualized returns in the three years ending June 30, Yale’s endowment outperformed a 60/40 stock/bond mix 2000 followed by 7.0% vs. -2.7% annualized in the three by an eye-popping annualized margin of 12.3%: 14.3% per years ending June 30, 2003.

©2019 Epsilon Theory All rights reserved. 6 Selfish Concerns. Having fretted publicly at the time allocators of all kinds including but not limited to of Pioneeering Portfolio Management’s initial baseball execs and endowment CIOs: did the publication in 2000 about its potentially deleterious allocator being judged not merely handle effectively impact on my longtime and highly rewarding the external boundary conditions he or she vocation (managing money), I fretted privately at the confronted but take effective steps to reshape them time of Moneyball’s publication in 2003 about its in a socially beneficent manner? potentially ugly impact on my favorite and generally lovely avocation (watching baseball). Rickey obviously did, as Americans will be reminded anew in coming months via festivities MLB has Sad to say, the concerns just referenced have proven planned to mark the centennial of ’s well-founded, with low hanging fruits as well as most birth.11 Swensen’s reshaping of boundary conditions harder-to-reach edibles in the illiquid niches that governing his professional labors, while less obvious Swensen helped popularize now getting eaten by and momentous than Rickey’s earlier reshaping of institutional pachyderms even before they ripen, and his, has been material and laudable nonetheless. By with MLB games getting longer and generally more shifting meaningful fractions of Yale’s investable predictable as quantitative methods increasingly wealth out of marketable securities in general and supplant intuition as the primary basis for decision- tradable bonds in particular into illiquid assets making in dugouts as well as front offices. better suited to the profitable exploitation of endowed charities' perpetual life status, Swensen (Please don’t tell my kids, whose company I’m keen has created the proverbial win-win, lowering the to continue having for Bosox games at Fenway, but cost of capital for enterprises in which Yale has the fraction of plate appearances ending with balls invested while simultaneously boosting returns on put into play has slumped discernibly since the so- Yale’s investable wealth. called sabermetric revolution in MLB commenced — from about 74% in 2003 to about 68% in 2018— with As this unlocking of institutional potential has strikeouts as a percentage of such appearances progressed — initially and most intrepidly at Yale and moving steadily and depressingly in the opposite in due course at other institutions with so-called direction: roughly 22% in 2018 versus roughly 16% in permanent capital to deploy — it has catalyzed a 2003. More on such trends — and parallel trends in parallel unlocking of human potential, with many institutional investing, such as they are — as this intelligent and energetic investment pros granted series unfolds.10) opportunities that earlier generations of workaholics lacked to deploy such capital in a manner befitting Multi-Tasking. Don’t get me wrong. I still love its presumed longevity. investing, and watching baseball, and — please don’t tell my clients — doing both simultaneously. And I’m No One’s Perfect. I recognize that the prior confident both domains will continue producing paragraph may make some readers gag, the illiquid greats as defined above: pros acting boldly enough strategies it commends having destroyed perhaps for long enough to boost materially and sustainably more wealth net of fees than they’ve created for the achievement of human potential. institutions employing them as a group. I recognize too that, as could rightly have been said of Rickey, Rickey and Swensen certainly qualify as greats by my Swensen’s rigorously data-driven approach to capital lights, passing the test just mentioned and in certain allocation hasn’t produced uniformly enlightened respects an even sterner test of greatness for capital decision-making. Obviously, none of Swensen’s slips

10 Sports fans who deem football superior to baseball due 11 MLB will surely and rightly stage similar events in 2034 to football’s seemingly zippier pace should note that the marking the centennial of the birth of the greatest Latino average NFL game takes roughly the same amount of time player in MLB history: (1934 - 1972). A to play as the average MLB game (a tad over three hours) fun and well-researched account of how the Rickey-led but with roughly one-third less ball-in-play time on Pirates “stole” Clemente from the Dodgers during the average in the NFL than in MLB (12 vs. 18 minutes/game). 1954-55 MLB offseason is available here.

©2019 Epsilon Theory All rights reserved. 7 have been bad enough to knock him off his lofty the time the aforementioned Volcker wrapped up his perch in his chosen profession, as happened twice to winning campaign to bend general price inflation Rickey after he became a big shot in pro baseball: downward. That said, if it’s OK for Rusty Guinn “demoted” (as Rickey saw things) from on-field Astros fans to disparage that otherwise superbly manager to “business manager” (and de facto GM) managed team’s 2014 decision to “outright” or fire by the Cardinals in 1925, Rickey underwent similar J.D. Martinez at what proved to be the start of a humiliation four decades and multiple multi-year (and hopefully continuing!) stretch as one championships later, when the same Cards of the best power hitters in baseball, it’s presumably terminated Rickey’s contract as the team’s sage-in- OK for Swensen votaries including me to note that residence following its triumph in the 1964 World bonds have performed much better relative to Series. stocks over the full sweep of David’s tenure than his grand design for Yale’s endowment supposed,

Key Tenets of “the Yale Model” especially on a risk-adjusted basis. Devised by David Swensen Walking the Talk. My fellow ET contributor Peter • Favor equities over bonds – ownership over Cecchini examined the phenomenon just referenced creditorship in a recent post, so I won’t discuss it further here, • Favor inefficient markets – as measured by dispersion of active manager returns except to say this: as Peter hints, applying data- • Sacrifice liquidity – as a necessary means to driven methods like those Swensen used to fashion the end of exploiting inefficiencies “the Yale model” back in the day when fashioning • Diversify — to a prudent but not excessive investment policies in 2019 would be a mistake of extent potentially Snodgrassian proportions.12

Strike that: there’s nothing wrong with making data

as distinct from tradition or intuition king in the

policy-making process, as Swensen did as a novice Regrettably for Rickey, but fortunately for Swensen CIO or as Rickey and Roth did for the Truman-era and me and perhaps you, managing money tends to Dodgers, so long as one uses the best available data. be a more forgiving line of work than managing big Having bemoaned above the tendency of finance leaguers. While there’s certainly truth in Rickey’s types to opine on all manner of things without oft-quoted boast remark that “luck is the residue of articulating clearly the metrics and time horizon design,” let’s be honest: to a much greater extent in underlying such judgments, I’ll walk that talk here by money management than in baseball, pros can noting that “best” as I’ve just used it means data commit impactful errors and still come out on top. germane to the deceptively difficult task of This is especially true of errors of omission, which enhancing the real or inflation-adjusted value of Swensen arguably made in applying the tenets invested capital over the next 35 years. flagged in the nearby box when and how he did, and that many US-based institutional investors are Why 35? Because I haven’t a clue how materially arguably making as the current century unfolds. societal and technological changes will affect the future duration of generational cycles; and the 35 Admittedly, none of the tenets just referenced has year investment horizon that the estimable Dr. Hunt proven fundamentally unsound since Swensen’s has referenced in Pricing Power (Part 1 and Part 2) painstaking studies of capital market history caused strikes me as an attractively precise substitute for him to apply them on Yale’s behalf starting around what I really have in mind: a mindset compelling fiduciaries deploying capital today to weigh the

12 Though He Who Must Be Not Named can plausibly lay historians as having committed the worst such gaffe: a claim to having made the worst in MLB history (in dropped fly ball in the final game of the 1912 Series — Game 6 of the 1986 World Series), Fred Snodgrass of the won ultimately by the team that lost the Series in ’86! then-New York Giants is viewed by most baseball

©2019 Epsilon Theory All rights reserved. 8 interests of future beneficiaries of such capital at typical investment committee at work today would least as heavily as the current generation of same. readily endorse will do the trick, least of all US- focused PE of the sort Swensen funded aggressively Clearly, not all readers are aiming to enhance real and adeptly when most institutions would not and wealth over such an extended horizon, even with could not. small portions of their investable wealth. Just as clearly, many endowed charities are, with the typical Indeed, even as Yale wannabes continue ignoring publicly supported non-profit impliedly seeking data Swensen himself cited in Pioneering Portfolio annualized real returns in the range of 4-5%: ongoing Management respecting PE funds’ ugly tendency to enhancements to real wealth needed to offset such underperform comparably leveraged investments in orgs’ customary endowment spend rates of 4-5%.13 marketable stocks, stewards of long-term capital outside as well as within the endowment arena are What to Do? Where in the world can today’s generally ignoring readily available data pointing investors deploy capital with reasonable assurance them toward plausible solutions to the real return of earning annualized real returns of 5% or more quandary raised above. I alluded to such data in the over long and potentially indefinite holding still unanswered! question with which this note periods? Just as no wonk worth listening to on opened and will discuss them and the investment monetary matters should critique the Fed’s evolving pros who’ve brought them to my attention in Part 2 policies without stating clearly the metrics and time of this note. As will be seen, like the astute allocators horizon he or she is using to gauge such policies’ on which this post has focused — Swensen and success, no hired gun worth canvassing on the real Rickey — the pros in question seem to take special return quandary just referenced should address it delight in hittin’ ‘em where they ain’t. without first pushing the ultimate owners of any such capital to articulate with reasonable clarity the End of Part 1 types and degrees of risk they're able and willing to tolerate. That said, I’m skeptical any strategies the

Up next Hittin’ ‘Em Where They Ain’t — Part 2: Addition by Subtraction

Jackie Robinson with Dodgers manager and teammates (1947)

13 Unlike publicly supported .orgs and .edus that engage are subject to minimum payout requirements dictated by routinely in fundraising and are generally free to adopt Congress. These strictures cause such foundations to whatever endowment spending rates (and corresponding distribute mandatorily an average of about 5% of their return goals) they wish, private grantmaking foundations wealth each year.

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