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Published Mar 25, 2023

WTT - Short-Term Gain, Long-Term Pain, Part 2

Ted Seides delves into the contrasting investment philosophies of Yale and SVB, emphasizing the significance of conservative risk management and long-term principles championed by David Swensen. Highlighting the pitfalls of short-term strategies that lead to financial instability, the episode underscores the need for strategic securities lending and balancing risk for long-term success.
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  • Conservative Strategy

    Yale's conservative risk management strategies, as recounted by , highlight the importance of long-term investing principles. He reflects on his time managing Yale's bond portfolio, which was designed to protect against deflation with long-duration treasuries and agency mortgage-backed securities. This approach, rooted in first principles, avoided unnecessary risks and focused on stable returns.

    David Swensen lived and breathed long-term investing, from his license plate "endow" to his aphorism "don't be so short term."

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    Seides contrasts this with the recent banking crisis, emphasizing how deviations from such principles can lead to significant financial turmoil 1 2.

       

    Risk Management

    Mismanaged risks, as seen in SVB's approach, starkly contrast with Yale's disciplined strategy. explains how SVB extended duration and assumed unhedged rate risk despite low returns, a move that ultimately backfired. In contrast, Yale's strategy involved exiting businesses when risks outweighed potential returns, as demonstrated in their securities lending practices.

    When the return attribution from the program shifted from favoring the lending spread to the reinvestment of proceeds, he said no thanks.

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    Seides underscores the importance of adhering to first principles and being prepared to capitalize on opportunities during times of market stress 3 2.

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