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Even Harvard Can Slip

By Selena Maranjian - Updated Apr 5, 2017 at 8:03PM

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A big name doesn't guarantee success -- big slumps can sink almost everyone.

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:

Company

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

Nike (NYSE:NKE)

$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.

Longtime Fool contributor Selena Maranjian owns shares of Time Warner. American Express is a Motley Fool Inside Value recommendation. The Fool owns shares of American Express. Try our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.

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Stocks Mentioned

American Express Company Stock Quote
American Express Company
AXP
$163.90 (-0.88%) $-1.45
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$353.74 (-0.35%) $-1.23
The Boeing Company Stock Quote
The Boeing Company
BA
$167.20 (-2.84%) $-4.88
Time Warner Inc. Stock Quote
Time Warner Inc.
TWX
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$117.04 (-0.86%) $-1.02
Colgate-Palmolive Company Stock Quote
Colgate-Palmolive Company
CL
$82.17 (-0.01%) $0.01
The Bank of New York Mellon Corporation Stock Quote
The Bank of New York Mellon Corporation
BK
$44.81 (-0.49%) $0.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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