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The Best Investor You've Never Heard of

Few investors not named Buffett or Lynch have ever achieved sustained returns above 20%. Fewer still can claim to have delivered accelerating returns north of 20% during a period of market turmoil.

But that's what David Swensen's team did. See for yourself:

Fiscal Year

Total Return

2007

28.0%

2006

22.9%

2005

22.3%

2004

19.4%

2003

8.8%

Source: Yale 2007 endowment annual report.

For those who don't know, Swensen is neither a fund manager nor a venture capitalist. He's the chief investment officer for the Yale University endowment. And, over the past decade, you might argue that he's the world's second-best investor. Swensen and his team are up 17.8% a year since 1997 -- and that's after accounting for fees.

Over 20 years, Yale's investments have earned 15.6% a year.

Secrets of the world's No. 2 investor
One way to become a great investor is to study the characteristics that have made the best investors the best. Swensen is an interesting case because he isn't an ordinary stock picker. Rather, he acts more as an asset allocator -- doling out pools of money to expert managers.

Here's how he explained it in a 2005 interview with Motley Fool Rule Your Retirement editor Robert Brokamp:

We look for the best external advisors that we can find to manage portions of each of our asset classes. We just don't think it is realistic that we could bring everybody that we needed to make security-specific decisions to New Haven, Connecticut, and make it happen there. So our partners are scattered all over the world.

And they handle a range of assets. Private equity commands 18.7% of Yale's portfolio, for example. But Swensen also confesses to an "equity orientation" in choosing advisors, which, in turn, has led to Yale holding stocks from a wide variety of industries -- including biotechs such as Celgene (Nasdaq: CELG  ) and big oil firms such as BP (NYSE: BP  ) . Other recent top holdings included Shutterfly (Nasdaq: SFLY  ) and Kraft (NYSE: KFT  ) .

Earlier bets on Stericycle (Nasdaq: SRCL  ) and Alliance Data Systems (NYSE: ADS  ) in 2004 and Exxon Mobil (NYSE: XOM  ) in 2005 have since paid off big.

Perhaps the most encouraging aspect is that Swensen and his team have committed substantial personal wealth to the same investments that spur the endowment with which they are entrusted. Buffett, of course, can make the same claim. So can top mutual fund managers such as Bill Nygren.

Foolish takeaway
There are three takeaways for individual investors from Swensen's strategy, portfolio structure, and record:

  1. Diversification, if done intelligently, can enhance and stabilize long-term returns.
  2. While stocks should compose a hefty part of any portfolio, individual investors will do well to diversify across styles (value vs. growth), size (small vs. large), and geography (domestic vs. foreign).
  3. Trust advice from only those who invest alongside their clients.

But don't take my word for it. Get more advice from Swensen by checking out Rule Your Retirement free for 30 days. You'll get the interview and all of Robert's asset allocation tips for those already living the dream and the many more of us who are dreaming of living it up in our golden years.

Click here for more information. There's no obligation to subscribe.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Kraft is an Income Investor recommendation. The Motley Fool's disclosure policy will meet you at its Spanish villa overlooking the Mediterranean. Please don't forget the wine.


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Tim Beyers
TMFMileHigh

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At Fool.com, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at timbeyers.me or send email to tbeyers@fool.com. For more insights, follow Tim on Google+ and Twitter.

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