I re-read the copy of the book that I bought four years ago, when I was learning about investing at the Yale Endowment. My new takeaways are as follows.

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Dare to be great

Human beings are a social species. To survive, we are inclined to huddle together and to imitate each other. For most investors, they care so much about how other people see them that they dare not say anything different or do anything new. If they do, they risk their job security, professional status, and social networks. Those behavioral inclinations are simply a natural part of us, and they are difficult to overcome – just like a software cannot debug itself. Most investors are conventional and do not have the ability to be different. Successful investors are unconventional, and so they are rare.

Swensen cared little about senseless things like how others saw him, and Swensen dared to be different in a big way. In his book, Swensen called out investors by name, wrote down what they did and shamed them for their unethical and/or foolish investment decisions. Few investors dare to criticize their peers; even fewer dare to write bad things down; even fewer dare to publish them. Swensen did it all and did it again and again. By publicizing negative examples, Swensen established what successful investing is not. And in this process, Swensen showed us what “dare to be great” is.

To quote Swensen:

Even with adequate numbers of high-quality personnel, active management strategies demand un-institutional behavior from institutions, creating a paradox few successfully unravel.

And Swensen quotes John Maynard Keynes:

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.

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Active investing, in most cases, destroys value

Swensen’s analytical work led him to the realization that the median returns of most actively managed asset classes, such as PE and VC, are either below passive stock market indices or are negative. Also, today’s investors are keenly aware that most hedge funds, particularly those operating in developed markets, usually underperform passive stock market indices by a wide margin. Yet, individual investors and institutional investors, most of them are still so ready and so excited about participating in the active investing game.

Sensible investors should look into the mirror, self-evaluate their investment results using a relevant market index. If they cannot outperform their indices, those active investors (and their fee-charging businesses) are destroying value.

In this regard, particularly for developed markets, active investing typically destroys value.

To quote Swensen again:

The intensely competitive investment world inevitably punishes casual attempts to beat the market, leading the rational resource-constrained investor to employ a manageable set of low-cost passive alternatives.

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Today’s excess returns come from other active investors

The oversupply of so-called experienced and skillful active investors, ironically, has become a source of excess investment returns for truly unconventional investors. In a relatively efficient market, conventional investors make some gains today, lose on some mistakes tomorrow and they repeat this cycle year in and year out. All in all, they are advancing to nowhere and adding no real value, but leaving a trail of inefficiencies in an otherwise efficient market, creating excess return opportunities for truly unconventional investors to exploit. We have witnessed it for many years, and we are still witnessing it in 2021.

To quote Swensen a final time:

Those institutions that engage in active management without proper support face the unpalatable prospect of generating disappointing results for themselves and creating opportunities for better prepared investors.

Be unconventional and dare to be great!

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