In Search of the Perfect Investment

They wanted my money. I asked for a board seat. I never heard from them again.

I didn’t chase them because I was queazy. I listened to the CEO tell me about her valuation of the company (not yet decided), her marketing plans (using Facebook), her ideas about happy employees (very important) and her customers (not yet decided).

There are three types of startups — those friends and family finance, those the venture capitalists finance and the others.

You and I often see the others because they are shopped around. They’re typically the dregs. But there are nuggets.

I like nuggets. I listen and ask questions. I could make a long checklist. But it’s basically gut feel. Fact is starting and growing a business is hard work. You need wizened, skeptical expertise like me.

I’ve found that if I’m involved, it seems to work better and I’m happier — if they listen. Which sadly is not often. You have to test for that.

My biggest fear is I’m financing  a “sandbox” company.

A sandbox company is where the entrepreneur uses your money to have  fun writing software, creating hardware, and doing whatever cool, neat, new things amuses him. These “sandbox” companies will never produce a real product for their customers or a profit for their stockholders.

To be a successful investor, you need to identify sandbox companies and avoid them.

Most entrepreneurs want dummy money — money from dummy doctors, dentists and lawyers.  They want money from people who are awed by the technology but typically don’t use much technology themselves.

I say NO a lot these days.

Why commercial real estate crashed. The BIG mistake was borrowing too short. Three years ago, commercial real estate was hot. You could comfortably buy a building today at an outrageous price, knowing that you could sell it tomorrow for more. In this world, it was cheaper to borrow for three years. If you were lucky you could even pay only the interest.

Three years later things are different. Your loan is due. You can’t sell the building. Your bank won’t refinance at the same rate or for the same money.

You’re screwed. You may lose the building — though you are probably not in arrears. You have to renegotiate some deal with your bank.

One deal: the owner has to invest substantial monies in his building. Upgrade it. Then the bank will refinance. Banks don’t want to own defaulted real estate. Nor do they want to fess up that their real is worth much less than what’s on their balance sheets. If banks did, many would be broke.

In short, don’t buy long-term real estate with short-term money.

Harvard Endowment Posts 11% Return for Year. From the New York Times, September 9.

A year after a disastrous 27 percent decline that prompted layoffs, salary freezes and a halt to some campus expansion, the Harvard endowment on Thursday reported a solid 11 percent increase in its $27.4 billion endowment portfolio for its fiscal year ended June 30.

In her first year as head of the Harvard Management Company, which oversees the endowment, Jane Mendillo struggled as the portfolio she had inherited faced heavy cash demands in the area of alternative investments when the stock and commodities markets tanked, The New York Times’s Geraldine Fabrikant reports.

Since then, Ms. Mendillo has put her stamp on the endowment, increasing its readily available cash and generating a respectable, if not spectacular return, several endowment experts said of the latest performance. The return lags that of stock market averages for the period, though it is better than the internal benchmark used by the endowment.

Ms. Mendillo said that the endowment was more liquid and “well aligned with the long-term need of the university and with regard to the world more broadly.” Saying she was happy with how the portfolio did last year, she struck a note of restraint, adding “there are areas where we need to be more muted in our expectations.”

Harvard is the first of the major university endowments to report returns and as such, its performance is closely watched by institutional investors. For years, the nation’s largest university endowment seemed to defy gravity as it posted sterling gains, bested only by Yale’s endowment.

Those returns fueled grand plans at Harvard and led the school to cover about 35 percent of its budget with endowment funds.

One question is whether the school can continue to count on the endowment for such a large part of its spending or whether it will have to raise tuition or cut costs further in an era where many financial experts expect smaller investment gains.

Over the next several weeks, other big schools will release their investment scorecards. Dan Jick, chief executive of High Vista Strategies, which manages money for endowments, foundations and families, said: “I expect the numbers to be in the pack between 9 percent and 14 percent. If you had a lower-risk profile and lower exposure to public equities, then that number is consistent with that type of diversified allocation.”

The Standard & Poor’s 500-stock index rose 14.4 percent in the period. Harvard’s internal benchmark is a portfolio that gained 9.4 percent. Harvard also cited a portfolio of 60 percent stocks and 40 percent bonds, which rose 12.6 percent. A third comparison is the 13.3 percent median return of institutional plans, including corporate and public pension plans, foundations and endowments with assets over $5 billion, compiled by Wilshire Associates.

Ms. Mendillo attributed Harvard’s weaker performance to the fact that it had about 20 percent less of its assets in equities.

Ms. Mendillo, who previously ran the Wellesley College endowment, took over at Harvard in July 2008. The endowment had surged for many years under Jack Meyer, who left in 2005 in part because of criticism about his high compensation. He was replaced by Mohamed El-Erian, who stayed just two years before returning to a top post at the Pacific Investment Management Company. Before and after his tenure, the endowment was run by board members.

When the market tumbled during the financial panic, Harvard needed cash and was forced to sell some investments in very successful hedge funds, among other areas.

After that, Harvard reviewed its investment approach.

Ms. Mendillo said that the endowment had not changed its overall approach, which is of a diversified portfolio that includes alternative investments in private equity, hedge funds and real estate, but it now has about 10 percent more of its portfolio in more liquid instruments.

One endowment chief noted that by shifting to funds that can be sold more easily, Harvard may be forgoing some gains in favor of a more conservative strategy.

Recently, Harvard held talks to sell some holdings in United States real estate funds to the China Investment Corporation, a sovereign wealth fund, for about $200 million. Although Ms. Mendillo would not confirm those negotiations had ended, she said that Harvard planned to maintain its weighting in real estate, now 9 percent of the portfolio.

Compensation for money managers at the endowment, where one third of the funds are managed in-house, has often prompted controversy because some alumni view it as excessive for an academic institution.

The pay was disclosed in December for many years. But in May of this year, Harvard announced that Ms. Mendillo had earned about $1 million between July 1, 2008, and the end of last year. Ms. Mendillo said that the endowment had always reported compensation for managers’ calendar year to the Internal Revenue Service in May and that this new approach provided consistency.

By delaying the release until May and tying it to a calendar year, rather than a fiscal year, one endowment expert noted that pay and performance will cover different periods, which could diffuse some of the criticism.

The issue is significant enough that in her report Ms. Mendillo wrote that Harvard had hired a consulting firm to look at pay, and the firm found that Harvard’s operating costs were lower than if it had hired outsiders to manage all its investments.

Where lying makes sense.

+ Your credit card’s expiration date. I’m on auto-pay for some things, like electricity and cable TV.  Every two years or so, my TV goes dead. My credit card has expired. Stupid! Now all my cards expire in 2020.  Not one questions this absurdity and my TV stays on.

+ DirecTV gives you local channels where you are. But there are better local channels. Lie to DirecTV where you are. It doesn’t make any difference to them. You still pay your bills. But you get the channels you want.

For God’s sake send the customer an email or leave a voice mail. I’m awaiting  news from about six vendors — from the tiler to the garage door opener, from the tennis court paver to the someone else — who promised to do something, from send me a quote, to visit for a quote, etc.  They range from days to weeks late. Damn it. I’m spending my money. I’m the customer. Why don’t I get a little respect?

If you run a business, inundate your customers with updates and phone calls. We customers like to be informed. When you finally do send us a quote, call us and discuss why it’s so high. You might find that we’ll actually spend the money, and make you rich.

The US Open Final is on today. It’s at 4:00 PM on CBS. It was rained out yesterday. It’s Nadal versus Djokovic.

It’s turned cold in the North-East.

Harry: “Susan, will you please close the window. It’s cold outside.”

Susan: “Harry, if I close the window, will it get warm outside?”

A curse on God for inventing intelligent wives.

Harry Newton who drives a Subaru. Its “Check Engine” light has just come on. Should I take it in, or simply affix black electrician tape so I don’t see the light? … Too late, I fixed the problem. I wiped the gas filler pipe — the one you use for pumping gas at the gas station. The Check Engine light turned off. One piece of paper towel. I don’t make this stuff up. I can’t.