University Endowment Sued for Under performing the S&P 500

After medicine, education is the most labor intensive industry. Both are very high for the same reason. Whereas in most industries improving technology allows the same number of people to be more productive, or the same amount of productivity to be achieved with fewer people, in med/ed people are specifically paying to keep the labor efficiency as low as possible.

When people pay extra to go to a school with a student-faculty ratio of 12 instead of 15, the labor cost is going up by about 20% (you need both more faculty and more support staff for those faculty). Does a 20% reduction in the number of people in a classroom allow the teacher to produce a 20% better education in the remaining students? Probably not. Especially for large intro lectures where there is little meaningful interaction between an individual student and the faculty and the lectures are generally recorded already (even pre-covid), you could easily distribute the costs over thousands of students instead of dozens without lowering quality.

While the value of small class sizes would be critically evaluated if people were paying for them on the spot and out of pocket, subsidized debt financing allows for the price to grow quickly - a person with no money who can take out a 100k student loan can now afford to go to a 25k school, and the person who could afford that 25k school can now afford to go to a 50k school, and suddenly the person with no money needs 200k to get the same education. The same happens with medicine and real estate and any other market where conventional wisdom is that you should get as much as you can afford and what you can afford is not limited by the amount of money you actually have.

Once people stop viewing class size or tuition price as useful proxies for education quality, the rapid tuition price inflation will stop and the labor costs will go down dramatically.

> Non finance people make this mistake all the time, thinking that return is something anyone cares about.

No, return is the whole point of investing. If it wasn’t something anyone cared about, you’d be better off holding a stack of federal reserve notes instead and spending some on your favorite desert because no one cares about the return including the people suing the university endowment. Finance people have such a funny way of using theoretical calculations to confuse themselves out of profits.

The reason for investing is to produce the highest returns within a predefined period of time.

Over 30 years, an endowment that makes 2% higher returns than another endowment will have roughly TWICE as much money as them. That 2% is huge!

You don’t need to be a Katherine Wood to do this. One way to consistently outperform is to pick high performance stocks and avoid (or short/buy puts on) low performance stocks. Try for a moment picking which of these are the better to invest in? Amazon Vs. EBay, SalesForce vs. Oracle, NVidia or AMD vs Intel, Tesla vs Toyota, IBM vs any modern tech company. As a stock picker, you only need to be right 51% of the time to beat the market so if you got 3/5 of the above right, congrats you might be smarter than a university endowment manager. You don’t need to read a 10K or take a finance exam to know that Amazon is going to crush EBay, Salesforce is going to skip along past Oracle, Tesla is going to blow past Toyota, and IBM is going to underperform against any tech index. It’s been that way in the past and barring an act of God or congress, it’s going to continue being that way. Again, you only need to be right 51% of the time to beat an index.

Maybe you don’t have a tech background. Maybe you have a medical background and can pick biotechs. Or maybe you have a grandson or granddaughter. They should be able to pick 2 out of 3 of these out easily: Snapchat vs Instagram (Facebook), Chipotle vs McDonald’s, Netflix Vs. Redbox. Have I made my point yet that making a high return isn’t as complex as finance people want non-finance people to think it is?

Okay but what if your stock picking stills suck? Or after 5 years of stockpicking, you lose your edge but still want to keep your cozy job. What can you do? If you know how to wield options, you can create a synthetic position on a commonly traded index like SPY(S&P500) or QQQ(NASDAQ 100). Hopefully you picked QQQ instead because it has more tech companies and Tesla while SPY has more COVID-impacted companies and will have to purchase Tesla soon. That would’ve earned you a full 32 basis points (32%) more and will continue in the near term to earn you more —- but maybe you didn’t pick it. You can create a synthetic position on your favorite index benchmark with 2year ITM LEAPs by selling a put and buying a call at the same strike. Doing this only deploys 15% of your capital while having the same effect as deploying 100% of your capital on that index. This means you can use all that extra cash sloshing around in your account to buy something that is highly liquid, is low risk, and appreciates or pays a dividend. Bond ETFs such as the ones by Vanguard fit the bill here nicely. And boom, you’re out performing the benchmark by 1%, 2%, or 3%, depending on the bond duration. Also you can sell your usefulness to the university by letting them know that their portfolio has a lower volatility than the index due to the bonds going up if the stock index options go down which steadies the ship.