Sometimes the most surreal things happen. For example, anyone who remembers the 1980s tennis prodigy Boris Becker may be shocked to learn that last month, in a London courtroom, Becker was declared bankrupt.
After winning Wimbledon and countless other tournaments, Becker’s personal fortune was estimated to have reached $150 million. So how could this have happened? How could he have gone from $150 million to zero, and what can we learn from it?
The answer, according to reports, is straightforward: bad investments. Instead of being satisfied with conventional choices like stocks and bonds, Becker’s advisors apparently sold him on complicated deals, including more than one investment in a Nigerian oil company.
While this is an extreme case, the reality is that it’s representative of a fad in the investment industry that is important to understand. Here’s the story: In 1985 a fellow named David Swensen took over management of the Yale University endowment. After surveying the existing portfolio, Swensen implemented a broad and unique set of changes. In short, his approach was to move away from a traditional stock/bond investment mix and into more esoteric areas, including hedge funds. Over the 30+ years since, Swensen has achieved remarkable success, far outpacing all other endowments.
Because of Swensen’s unconventional approach and his very visible success, huge numbers of investment firms have tried to mimic his methods. But, almost nobody has been able to replicate his success.
This may seem odd — if you buy the same investments as the next guy, shouldn’t you get the same results?
Borrowing from another industry, I believe I can explain this. In an extensive study of the auto industry, MIT operations expert Steven Spear examined why no other car company could match Toyota’s record for manufacturing excellence. His conclusion, after spending dozens of hours inside Toyota factories: “the problem is that most outsiders have focused on Toyota’s tools and tactics…and not its basic set of operating principles.” In short, “decoding the DNA of Toyota doesn’t mean you can replicate it.”
To put it another way, I can wear Air Jordan sneakers, but that’s hardly going to make me into the next Michael Jordan. Unfortunately, when Boris Becker’s advisors recommended that he put his money into those Nigerian investments, that’s exactly what they were hoping. In other words, walk and talk like David Swensen, and maybe we’ll have the same success. Sadly, though, instead of giving Becker a carbon copy of Swensen’s results, what they stuck him with was a shoddy, pale copy.
To be sure, Becker’s case is extreme, and other setbacks also contributed to his woes. Among them: a paternity suit resulting from an encounter with a Russian waitress in the broom closet of a London restaurant.
But, the lesson remains: When it comes to your investments, keep it simple. In my view, unless, like Yale, you run a multi-billion-dollar endowment, are exempt from taxes and have an infinite time horizon, you’re much better off with a straightforward selection of investments. In my upcoming book, I have dedicated a chapter to this topic. If you are interested in learning more, let me know, and I’ll be happy to send you a copy.