• Performance persistence is rare: Harvard’s endowment hasn’t always lagged the market. In fact, it produced a remarkable string of successes in the late 1990s and early aughts. Cumulatively over the 15 years through mid-2008, for example, it beat the S&P 500 by more than five annualized percentage points, better than almost every actively managed mutual fund and Wall Street institutional investor. While the odds of producing that 15-year market-beating return were very low, they were even lower that the endowment’s managers would be able to repeat that success. Rather than reacting smugly, we should take to heart that even the best and the brightest are unable to consistently beat the market.
• Overconfidence is an obstacle: One of the reasons that performance persistence is rare is that success breeds overconfidence. I have no inside knowledge about the managers running the Harvard endowment, but it would be difficult not to let a 15-year annualized alpha of over five percentages points go to their heads.
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