A few weeks ago, somewhere on a sunny beach, I sat down with David Swenson's revised edition

of pioneering portfolio management that he wrote just before the financial crisis and published

in 2009, nine years after his original work. I found a few gems in his words that struck me as

quite different from how his teachings were interpreted by the industry. This blog highlights

those differences. The Real Yale Model. Investors following David Swenson too often missed the mark

in their interpretation of his theory.

Like children playing the game telephone, they listen to other voices and echo beliefs with

shakier foundations than Yale's. Anyone adopting the Yale model is well served to revisit

David's writing from time to time. I had a chance to do that and found perspectives

on illiquid investments, asset allocation, active management, private equity, and rebalancing

that differ from the conventional wisdom that defines the Yale model. The Yale model in David

Swenson's words.

David's ability to articulate and act on an investment philosophy based on academic research was the foundation of his greatness. Reading the revised edition of pioneering portfolio

management reminded me of the clarity of his ideas and depth of his insight. David put forth a framework for

thinking about the investment problem and shared how he applied that framework to managing Yale's

endowment. He wrote about an investment strategy for educational endowments with a perpetual

time horizon, articulating a series of first principles.

This core of the Yale model, in his words, are as follows.

1. Equity bias. Sensible investors approach markets with a strong equity bias,

since accepting the risk of owning equities rewards long-term investors with higher returns.

2. Diversification. Significant concentration in a single asset class poses extraordinary risk to

portfolio assets. Portfolio diversification provides investors with a free lunch, since risk can be

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