Have you ever experienced schadenfreude? If you've learned that a billionaire has lost some money, you might have felt it. Schadenfreude is pleasure derived from someone else's misfortune. I suspect that it's happening at colleges all across America, as they learn that Harvard, with its massive endowment, is reporting "unprecedented losses."

But first, let's put that endowment in perspective. Back in June, the endowment stood at nearly $37 billion. That's richer than the total value of quite a few "little" companies you've probably heard of:


Recent Market Cap

Bank of New York Mellon (NYSE:BK)

$32.7 billion

Time Warner (NYSE:TWX)

$36.3 billion

Colgate-Palmolive (NYSE:CL)

$30.3 billion

Boeing (NYSE:BA)

$31.2 billion

Goldman Sachs (NYSE:GS)

$28.8 billion

American Express (NYSE:AXP)

$25.7 billion


$24.8 billion

Harvard had long enjoyed amazing success with its endowments. So had Yale. We've written plenty about both here in Fooldom, since their investment models did so well for so long. For example, during the 12 months that ended June 30, 2008, a period in which the S&P 500 dropped about 13%, Harvard's endowment fund had reportedly risen 8.6%, and Yale's climbed by 4.5%. Also as of June, the Harvard endowment's annualized five-year return was a mammoth 17.6%.

How have they invested to achieve such success? Well, Harvard's allocation is hardly a secret -- it's published on its management company's website. According to a SmartMoney article, both schools parked considerable assets in foreign stocks, real estate, commodities, private equity, hedge funds, and natural-resource partnerships. They used significant leverage, too.

The fall
So what's going on? Well, according to various reports, this is what I've learned:

  • Harvard's endowment lost some 22%, or $8 billion, from July to the end of October. In fact, according to the school's president, Drew Gilpin Faust, the actual losses may be higher, as some of its managers have yet to report results.
  • Some blame the bad turn on the September 2007 departure of the endowment management company's CEO, Mohamed El-Erian, who joined bond specialist PIMCO. But he'd been at Harvard for only a couple of years.
  • In its annual letter, the endowment's manager explained: "In light of recent market stress and dislocations, however, we are keenly aware that returns produced in the next few years may fall well short of these robust historical levels. We will continue to aggressively pursue our key investment strategies, as well as appropriate risk management, in order to help the endowment navigate these challenging market conditions."

It's not all bad
Keep in mind that during a severe economic pullback, you have to expect endowments to lose money. Most people and institutions that have invested in the market are going to post substantial losses this year.

It's important to think in relative terms, too. Harvard's endowment may have taken a big hit, but if it ends the year having fallen by a whopping 30%, that's likely to still be considerably better than the market, which looks like it may end the year down some 40%.

Remember, too, that losses are not necessarily permanent. If the market gains a lot next year, you'll recover many of your losses. Over a long enough time span, it's reasonable to expect your entire loss to be replaced with a gain.

What to do
Sometimes, the market can simply depress investments. But even the smartest and most able investors have down years. They all make mistakes. One strategy to try minimizing your risk is to seek out undervalued investments for your money.

If you'd like to receive some researched recommendations of undervalued stocks, I encourage you to try out our Motley Fool Inside Value newsletter service -- for free. A free trial will give you access to all past issues and all recommended stocks.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.