The World's Largest Investors Pay Attention Differently
They don't have better markets. They have better attention.
There is a comforting story about large investors: that they win because they can see things you can't — private deals, secret managers, markets closed to everyone else. It is mostly untrue. An endowment and a family can buy the same funds, in the same markets, at the same prices. What separates them is not access. It is attention.
Sit in on an endowment's investment committee and you will hear surprisingly little about which stock looks cheap. You will hear about liquidity — how much can be spent without being forced to sell at the wrong moment. About taxes and structure. About what happens across a decade, not a quarter. About behavior: the rules that will keep the institution from doing something foolish in the years markets are frightening. The conversation is almost never about picking winners. It is about everything that surrounds the picking — the discipline David Swensen built Yale's endowment around, and described for everyone else in Unconventional Success.2
That is the whole difference, and it is not a difference of intelligence or information. It is a difference in what receives attention. Institutions attend to the things that actually determine outcomes — cost, taxes, implementation, discipline, time. Individuals are sold the things that are easy to market — products, predictions, last year's performance. Call it the attention gap.
Institutions receive attention. Families receive products.
Attention, at an institution, also has an order to it. Asset allocation first — the shape of the whole. Then asset location — where each piece is held, and how it will be taxed. Then the taxes themselves; then the estate; then behavior; then time. Each layer decides more than the cleverness of any single holding inside it — the point Brinson, Hood, and Beebower made when they found that the policy allocation, not security selection or market timing, accounted for the great majority of the variation in institutional returns.1 Most investors spend their attention at the very top of that stack, arguing about holdings, and almost none at the layers where the outcome is actually set.
None of this is secret, and none of it is expensive. The endowment has no edge here that a careful family cannot copy. The techniques are public; the discipline is free; the arithmetic is the same at every scale. What the institution has is not better access to markets. It is the habit of paying attention to the parts of investing that don't make headlines.
And there is one advantage the family holds that no endowment can buy. An institution is judged every quarter, and behaves accordingly. A family answers to no one but itself, on no schedule but a life — free to be patient in exactly the way professionals are paid not to be. The attention is available to anyone willing to pay it. The patience is yours alone.
The attention an endowment brings to taxes and location is the same attention our After-Tax Review brings to a single household — the same layers, in the same order, applied to your balance sheet instead of a committee's.
— Driftwood
- Gary P. Brinson, L. Randolph Hood & Gilbert L. Beebower, "Determinants of Portfolio Performance," Financial Analysts Journal (1986); updated 1991. ↩
- David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment (Free Press, 2005); and Pioneering Portfolio Management (2000). ↩