Spero Consulting

Archive for December 3rd, 2008

The on-​line ver­sion of The Wall Street Jour­nal reports today that Har­vard Endow­ment Loses About $8 Bil­lion. As we read that arti­cle and the actual let­ter from Har­vard it seems that endow­ment is down about 30% since June 30. (The university’s admin­is­tra­tion is not quite sure how much because the value of externally-​managed pri­vate equity and real estate assets are reported on a lag. That is stan­dard prac­tice; so, the inex­ac­ti­tude is justified.)

Don’t fret; the endow­ment still has loads of assets. At one point, it seems that it had more than could be pru­dently man­aged, but that may no longer be a prob­lem. Don’t worry dear reader, we’re not writ­ing as an exer­cise in schadenfreude.

Instead, we’re writ­ing because we like this espe­cially silly line in the arti­cle: “Harvard’s loss is espe­cially strik­ing given the endowment’s for­merly chart-​topping invest­ment per­for­mance.” It was writ­ten by reporter John Hechinger.

Yes, Mr. Hechinger, as it turns out, that is the nature of tak­ing risk: the cost of attempt­ing to gen­er­ate higher returns, usually and espe­cially chart-​topping performance, is the occa­sional loss. Some­times that cost is a greater prob­a­bil­ity of loss, some­times it is a greater mag­ni­tude of loss, and some­times both. In this case, the mag­ni­tude is “About $8 Bil­lion” so far.

Music for Our Times

The tur­bu­lence in the finan­cial mar­kets shows no sign of end­ing. Com­modi­ties buyers, including food com­pa­nies and air­lines, suf­fer large losses from “hedg­ing” pro­grams as prices plum­met. “Hedge” funds suf­fer losses that are exac­er­bated by the high lever­age applied dur­ing calmer days; redemp­tions are lim­ited. Indus­tries and unions beg for our tax dol­lars. State gov­ern­ments beg for our other tax dol­lars. All the while, heap­ing mounds of mort­gages moul­der unval­ued and unsold.¹ As $119 mil­lion man Robert Rubin laments: “Nobody was pre­pared for this…”

It reminds us of (1) the uncer­tainty quote that we often cite from St. James’ only Epis­tle, and (2) Van Morrison’s 1997 song Rough God Goes Rid­ing (from his 1997 CD The Heal­ing Game).

Here’s the quote:

Come now, you who say, “Today or tomor­row we shall go into such and such a town, spend a year there doing busi­ness, and make a profit”—
you have no idea what your life will be like tomorrow.

You are a puff of smoke that appears briefly and then dis­ap­pears.
Instead you should say, “If the Lord wills it, we shall live to do this or that.”
But now you are boast­ing in your arro­gance. All such boast­ing is evil.
So for one who knows the right thing to do and does not do it, it is a sin.

Not all the words that Mr. Mor­ri­son wrote fit so per­fectly, but the ones that do com­bined with the melan­choly har­mon­ica and sax, the slow tempo, and Mr. Morrison’s (ever-​present) anguish, make Rough God Goes Rid­ing the per­fect song for late 2008. Here are selected lyrics:

Oh, the mud splat­tered victims

Have to pay all along the ancient highway, 

Torn between half-​truth and victimization…

…Gap­ing wounds that will never heal

Now they’re moan­ing like a dog in a manger…

…There’ll be no more heroes

They’ll be reduced to zero…

When that rough God goes riding…

Rid­ing on in, rid­ing on in

Rid­ing on in, rid­ing on in

Reminds us of that old curse: “May you live in inter­est­ing times.”

*We must admit that while we did not and do not agree with them, we com­pletely empathized with the CEOs of Chrysler, Ford, and GM when they flew into Wash­ing­ton DC in Novem­ber. (Not when they drove in Decem­ber.) It’s clear that they had absolutely no coher­ent plan (other than beg­ging), but wanted our money. Their think­ing must have been: hey, when did a plan become a prerequisite. Henry Paul­son didn’t need one, why should we? Of course, that’s the prob­lem with arbi­trari­ness, capri­cious­ness, and expe­di­ency; you never know when the rules are going to change – rough God or not.