Do Big Pension Fund Investors Know Something You Don’t? – Episode 138

Does it make sense for you to invest like big pension fund managers? The answer may surprise you. In this episode of Dentist Money™ Reese and Ryan take a close look at how investments for large endowments are managed. You’ll hear about the mix of assets in these portfolios, and you’ll learn how “alternative” investments have played into their strategies. Most importantly, you’ll discover if it makes sense for you to follow suit with your own investments.

Podcast Transcript:

Reese Harper: Welcome to the Dentist Money™ Show, where we help dentists make smart financial decisions. Not just smart, but like brilliant financial decisions. I’m your host Reese Harper, here with my trusty old co-host, Sir Ryan Isaac.

Ryan Isaac: Oh, good morning! I read an article this week that said that Salt Lake City, where we reside, ranks as the number three hipster city in the whole country right now.

Reese Harper: Really?

Ryan Isaac: Yeah, and I think you are a hipster.
Reese Harper: I would say that is probably the case.

Ryan Isaac: Are you a hipster?

Reese Harper: (laughs) Yeah! Well, I mean, I’d like, spend more time in the mountains than I do not…

Ryan Isaac: That is very hipster of you. How tight are your jeans?

Reese Harper: I eat, like, fresh vegetables, and I won’t use, like, traditional carpeting for my home. Organic talalay mattress.

Ryan Isaac: I had a mustache for the last ten days. I shaved it, but that was adding to the aesthetic.

Reese Harper: There is a difference between a mustache and a beard, but they are both accepted here in hipsterland.

Ryan Isaac: Yeah, a beard-stache. I just thought I would point that out as you look very trendy today.

Reese Harper: So, Salt Lake also, for those of you who do not know, a side little investment fact… airports are funded through municipal bonds, typically, and Salt Lake has a three-and-a-half-billion dollar airport improvement going in, and it is the only hub constructed in the 21st century, according to a report I read this morning.

Ryan Isaac: Started or announced at all.

Reese Harper: Yeah. So, you have to come visited.

Ryan Isaac: Fly into Salt Lake! Let’s go mountain biking—

Reese Harper: Fly into Salt Lake! You are fifteen minutes from our office, and fifteen minutes from the mountains.

Ryan Isaac: Let’s go mountain biking, or skiing. I can pizza down the hill while you guys ski ahead of me; I’ll meet you at the bottom. That is my hashtag for everything that I do outdoors with people who are way better than me (laughs) on bikes, and hiking and skiing.

Reese Harper: We would love to see you!

Ryan Isaac: Meet you at the bottom (laughs). Okay. Reese, we talk about this sometimes when we are discussing, like, goals, or mentors, or people, or things that we try to emulate, or things we want to do in business, or personal lives. Do you ever look at people who operate like— they are kind of doing something you are doing, but they operate on a much bigger scale? Like a much larger scale, and then you kind of assume, “ahh, if it’s working for them, maybe it works for me too.” For example, maybe like, you know—

Reese Harper: No, for example, your crossfit routine is something that operates at a much higher scale than my F45 routine.

Ryan Isaac: Coincidentally, that is how I feel about my crossfit compared to my friend’s crossfit (laughs). It’s like, “geez! I don’t have four hours a day, buddies.”

Reese Harper: (laughs) yeah, I am excited to have 45 minutes a day. I think I am, like, proud of myself when that happens, so…

Ryan Isaac: Yeah, so do you ever look at people, though, and be like— let’s use business, for example.

Reese Harper: Let’s say a good friend of mine— shout out to my boy Davis Smith. The guy is a legend.

Ryan Isaac: Yeah, right? Runs several very large businesses (laughs).

Reese Harper: And he is meeting with like, Bill Clinton today, and President Bush, in the Presidential Scholars Club.

Ryan Isaac: Yeah, what are we doing? (laughs)

Reese Harper: Yeah, I’m like, “What is going on?!” Like, every time I see him, he’s like, “just today, I’m in Latin America changing the world, and now I’m in Washington D.C. affecting legislation. Now I’m in Asia helping solve world hunger, and now I am back to help my startup become another billion-dollar enterprise.” That’s Davis.

Ryan Isaac: You were on a dental marketing video podcast this morning, though!

Reese Harper: (laughs) that’s true! I mean, I was the host of a live stream on Facebook. So, I mean, shoutout.

Ryan Isaac: Okay, that is a really great point. That is a good example, then. So, do you ever look at him— and I don’t know if you want to talk about it much— but he has ran several very very large privately-funded companies. Have any of them gone public?

Reese Harper: Not yet.

Ryan Isaac: Not yet, okay. But he has, like, hundreds of employees in some cases?

Reese Harper: Yeah! Yeah.
Ryan Isaac: Okay. International offices and headquarters. Do you ever look at that like— that seems rational to copy it at some level?

Reese Harper: Yeah! I think about that all the time. I mean I don’t know if I think about— I used to think about it a lot more. At some point, you kind of just accept who you are, and you are happy with it. Like, I am just literally happy that we are doing a good job, and helping a lot of people, and I have a good business! But that has taken a lot of practice of, like— a lot of gratitude, a lot of reading The Book of Joy, Dalai Lama research… you have to, like, embrace the good in your life.

Ryan Isaac: But you can look at maybe a guy like him who runs operations at a much larger scale and go, “there are probably some things I could learn from this, but our worlds are so different; I can’t just do what he’s doing and have the same—”

Reese Harper: Yeah, I look at his environment, and the person he thought he was when he was five years old… I figured out I was going to be a respectable adult probably in my mid twenties, you know? It was kind of a coming of age a little later than most, okay? So, all of us mature at different paces. We define success differently; we look at our life on scales of what we can accomplish based on what our paradigm of ourselves really was. And so, I don’t feel like— I think initially in my career, it was harder looking at other people; I kind of felt like that meant I wasn’t doing as good, but now I am just grateful that there are people like him, and I am just impressed by what he is doing, and I feel motivated and inspired by it to do a little bit of that in my own way, and just be a dent in the—

Ryan Isaac: Yeah, and to kind of be like— if you took a dentist, single doc, single location, doing a million bucks, he can’t say, like, “oh, look at Heartland Dental! I’m gonna do every single thing they do, because it is obviously working for them, so it could work for a little guy like me.” You can’t always make that leap in comparison to other people. Okay. So, the question then… how often do you hear this? This is related to investments and investment allocation, and how people think about markets, and how they invest. How often do you hear this question? Someone will say to you, “shouldn’t I just do what the big pension endowment funds do? They have really smart people.” And they they will say always— it always goes here: “you know, Reese. The Yale endowment…”

Reese Harper: (laughs) yeah, dude! The Yale endowment is— I was going to say that before you mentioned it. That is the thing I usually hear, is like, “you know, I have kind of adopted the Yale endowment philosophy.”

Ryan Isaac: Yeah (laughs), every has adopted the freaking Yale— of course you have adopted it, you know? Okay.

Reese Harper: I’m like, “how much money do you have in your account again? Do you know what Yale is doing? I mean, I wouldn’t want to say you couldn’t even come close, but I will. You can’t come close (laughs).”

Ryan Isaac: Okay, so that’s a common thing. I mean, I hear it frequently. What are people really saying when they are bringing this up? Like, what are they getting at? What are they trying to allude to, or ask to advice on, or what do they want out of that?

Reese Harper: Well, I think they have heard that the secret sauce behind what Yale has done is they have put a portfolio together that allowed them to have access to some investments that were kind of non-traditional that get labeled as “alternatives,” is what the labeling usually is…

Ryan Isaac: Do you want to say, what does alternatives mean?

Reese Harper: So, Yale has this bucket of money that they will call “alternatives,” and it is a huge variety of different things, but when dentists hear that the reason that Yale— and Yale’s returns on their endowment have been above average for a pension, because of this exposure they have had to these great, private, alternative investments. And so, when a dentist is asking me that, typically they are just saying, “I’ve gotta have some of those too so that my portfolio can do what Yale’s did.”

Ryan Isaac: I am always curious to this: why do you think people go there? I mean, are these people who have already… let’s say gone decades in a 60/40 stock-to-bond market portfolio with a 25% savings rate, and now they have just accomplished it, and they are over it?

Reese Harper: I find that it is typically people with less market experience who ask that question, just because they don’t really understand what “alternatives” really means. But if they were just pitched it, I think they would invest in it still. It is kind of like, the more experience you gain, I think, and asset manager, especially at an institutional level, you realize how scary alternatives can be. Alternatives have a lot of different risks.

Ryan Isaac: We will get into that. I think two of the characteristics that lead people to ask this question and kind of go down this train of thought are, they hear the stories of non-correlated, right? Because no one wants to be correlated with the evil stock market casino that is going to do a 2008 again, right? So they hear non-correlated, and then they hear above average market returns, or higher than average market returns, and so, they put those two things together, which… anyway. I think that is part of it. So you mentioned— you know, there is a question, what is in an endowment portfolio? So, there are these awesome studies out there— we will talk about a few of them, here, one of them came from Vanguard, where they take— there was an independent—

Reese Harper: For those of you who do not know what an endowment is, an endowment is the amount of money that a nonprofit college or university or hospital or city has in order to take care of their future. They use it for a lot of different reasons: they use it for construction; they use it for scholarship subsidies; they use it for fundraising. It is just— the endowment is basically the liquid net worth of the institution.

Ryan Isaac: Yeah, to pay pensions and everything… I was reading in some articles, there were some who have fine print written in to some of the big endowments, you know, the Ivy League schools, where it pays for private jet travel, and it pays for some pretty exclusive getaways for executive and board members (laughs), you know? There is legislation currently under way in a lot of states, because they are under heat for some of these behind-the-scenes fees— we’ll get into that. Anyway, I was going to break down really fast– I found the data for Harvard, Stanford, and Yale, on what their portfolios actually look like. So when people are like, “I should invest like that, right?” Well let’s talk about what their portfolios actually look like. So, the biggest position they hold, all three of them— well, on average it is— is private equity. It is described as leveraged buyouts and venture capital.

Reese Harper: And for those of you who don’t know that that means, a leveraged buyout is when one business borrows a bunch of money and buys out another company, or when shareholders of one part of a company get a bunch of debt and buy out the rest of the company. And then venture capital is when you take money and invest, typically in equity of a small startup, or a midsized startup, or it could be a seed startup… most of these venture capital investments that endowments are going to make are in slightly more seasoned mid to larger-sized private companies, so that is kind of what venture capital is.

Ryan Isaac: Okay. So, for some context, Yale has a third of their portfolio in private equity, okay? So when a dentist— let’s make it an above average dentist— let’s say a dentist with $3,000,000 net worth, and a decent little portfolio, and a good savings rate. I mean, does that person have even the ability to even say, like, “I think I need to get some private equity on the table here”?

Reese Harper: Well, the trick, here, is that these usually have minimum investment amounts. Like if it is a good opportunity, it won’t want to take a hundred grand. It will want 500, it will want a million as a minimum, or in many cases, much more than that. And so, you are kind of limited in your ability to participate in things based on the size. So I have a lot of dentists— even this week, I had a client who put a small amount— someone who is worth, you know, let’s say he is worth $5,000,000. That person put $50,000 twice into a small venture startup. I am not opposed to that at that level, because it represents a very small percentage of his total net worth, but it is pretty rare that you will find any reasonable startup that only needs $25,000. Like, if they— and this is what I kind of brought up to him, and he knows this is the risk— if they are really needed $25,000 from you (laughs), and you are one of, like, a hundred people, things must be tight. When you are getting to that point where like, “we just need another 25—” (laughs).

Ryan Isaac: “We need 20 grand!”

Reese Harper: “We’re worth 30 million, but we could use another $25,000 really bad.” You know, like, there is a reason for it. And it might be because you are a really good friend… it might be… but it might be—

Ryan Isaac: Everyone always thinks that is the case, by the way, I have never heard one of these pitches from a client where they weren’t a really good friend with an inside deal.

Reese Harper: Yeah (laughs). It’s always an inside deal; you always got hooked up.

Ryan Isaac: “I have a friend who is just for some reason giving me groundfloor pricing.”

Reese Harper: Now, to be fair, that is a way that you find out about a lot of deals like this! Like, these small companies don’t have the resources to go out and pitch to a thousand people, so they usually pitch to people they know who are close.

Ryan Isaac: Okay, so you are bringing up a really good point. There was this Vanguard study on endowment pensions funds… because there is this independent fund every year that releases returns and allocations, and then it is historical, so Vanguard took all the data, and they had this really cool little white paper— it’s like seven pages long, and it’s pretty easy to read— but they were talking about this. They said, “think about the audience that these Ivy League schools have access to.” So when you say, “that is how you normally find out; it is usually friends and family; you are the first to hear about these opportunities,” think about— not only does Yale have a hundred people to go talk to, they have a hundred of the smartest, wealthiest, most influential and powerful people in the whole world to go talk to! They can go sit in front of— and they don’t even go find them, those people are coming to them, and they are like, the best and the brightest coming to Yale, being like, “here is a new opportunity.” So, of course that is a different— that is a whole other class! I mean, the average person just doesn’t have that kind of access.

Reese Harper: Yeah, that is a really good point. And it doesn’t always mean— it just doesn’t translate down to the individual investor level all the time. Like, my personal network, or your personal network is just not going to present us with the same quality of opportunities.

Ryan Isaac: Hey, shoutout to my network!

Reese Harper: I love my network, you know? It’s a good network, but it is not Yale quality.

Ryan Isaac: (laughs) I will apologize to the networks out there.

Reese Harper: I’m like— my network is primarily public school and undergraduate in a state college, and the guy that went to Yale was like, “seriously? He went to Yale? Seriously? You genius!”

Ryan Isaac: He is your token Yale friend.

Reese Harper: Yeah! And now I talk about him all the time. “I know someone at Yale. I know him! Like, I know this guy.”

Ryan Isaac: You are always starting new conversations like, “my buddy went to Yale. So was I telling you how my buddy went to Yale? Alright, let me tell you this story of when he was at Yale.” Okay. Let’s just keep on the Yale track here. They have about 21% of their portfolio in natural resources and real estate. So, dirt, land, and real estate, okay?

Reese Harper: Just to give some perspective there: north of 50% in non-publicly traded—

Ryan Isaac: Illiquid—

Reese Harper: Mostly illiquid assets. I mean, in order to be able to take that risk of illiquidity, you have to be very very very large. Verrrrry large.

Ryan Isaac: So, the size we are talking about, Harvard’s endowment is 37 billion dollars… Yale’s is 27 billion, and Stanford’s is 24 billion.

Reese Harper: Yeah, this is a very very very large portfolio. You can take liquidity risk at that level—

Ryan Isaac: When you have another fifteen billion dollars sitting around (laughs)–

Reese Harper: Yeah, because you are like, “okay, our annual spend,” or maybe our need… I don’t know what they—

Ryan Isaac: Yeah, or maybe withdrawal rates. I don’t know, I didn’t get into that.

Reese Harper: Yeah, their withdrawal rate is very low. Meaning, there is not a likelihood— like, they have a twelve-year timeframe before they even have to touch anything but public equity. So, almost every private investment can have a very long duration. And they couldn’t be this way when they started; if you think about back in the day—

Ryan Isaac: Well, we will talk about the size— okay, so that is a really good point; I am going to get to that, because of the size of the endowment. It is actually really misleading when people talk about, you know, what the endowment funds do, the big pensions, a billion plus— Yale, Harvard, Stanford— they only represent 9% of the endowment field. The rest of them, and the majority, 53% of endowment funds, have net worths that could be pretty close to like a wealthy dentist. Like, single-digit millions. And what is crazy— and we will get into this too—

Reese Harper: Well you mean, like, seven figures or less?

Ryan Isaac: A $10,000,000 endowment. Some of the highest performing endowment funds over the last ten years have been the micro ones, the small ones, with like $10,000,000 endowments. We will get to it in a second; let me keep going on with this Yale thing. So, they have about 22% of their portfolio in what is called absolute return… so this is trying to get return regardless of market direction. This is like longs, and shorting things—

Reese Harper: Long/short strategies.

Ryan Isaac: Yeah, yeah.

Reese Harper: For people who don’t know what that is, you are kind of trying to, through the use of what are called “options,” you are trying to set yourself up to have a predictable amount of income or return around a set of possible outcomes. It is fairly sophisticated, but it is the use of futures and options contracts to sort of give you a kind of insurance policy on the fact that you are going to get some return. It is not a very very very high return, it is just a predictable amount of return.

Ryan Isaac: Yep. 15% in foreign equity–

Reese Harper: Okay, that is like Europe, and Asia, and stocks. Like, public equity.

Ryan Isaac: And they actually do use funds, like, publicly traded funds, for their foreign equity exposure. Domestic equity is 4%. That is Yale’s domestic equity. Harvard has the largest domestic equity exposure right now at 11%. Now, you probably would call the private equity and real assets and probably absolutely return a big chunk of domestic equity, too, I am sure. If you consider it that.

Reese Harper: Yeah, but it is not publicly traded.

Ryan Isaac: No, it is different. And then fixed income and cash is about 7% for Yale on the high end, and 13% for Harvard.

Reese Harper: What you can see here, though, is a really different portfolio composition than when most people have. Most people that are millionaires but not uber uber— the crazy thing is, when you say “the millionaire next door,” like, most of our clients and most people who are in that category of being a millionaire, they don’t really feel like they are uber wealthy. They don’t feel like they are super sophisticated. And most of those people end up with just very different portfolio mixes than you are going to see from Yale.

Ryan Isaac: Yeah, so the question is— as I went through this stuff, I started thinking, so why is this appealing to individual investors then? Is it because they don’t actually know how this portfolio breaks down, and how hard it would actually be to allocate 30% to private equity, legit private equity, and 20% to illiquid real estate and land holdings? I mean, is it because they don’t know, or what is so appealing then, after you hear—

Reese Harper: Well in 2005 and 2006 and 2007, I mean, this was the talk of the town for quite a while.

Ryan Isaac: Okay. Their losses were dampened, big time.

Reese Harper: Yeah, I mean, the losses that came out of pension funds through the great recession were much less on average than if you were 100% in the stock market, because a lot of these things are private contracts. I mean, a lot of this stuff isn’t even— if you look at the private equity holdings that Yale has, the valuation isn’t even disclosed; you don’t even know what it is; you don’t even check on it, honestly!

Ryan Isaac: They actually bring that up in the study, that a lot of these, the valuations are not even absolutely known until they finally liquidate years in the future. It could be that they have been having horrible returns! We don’t know (laughs).

Reese Harper: But you are going to— your time frame on a private investment like this could be five to seven years before you even really care! You’re like, “that was the objective; that is what the pro forma that we invested in was stating. So, we are not, like, looking for asset performance at the bottom of a market decline.”

Ryan Isaac: But they have to guess it.

Reese Harper: You guess at it… but you know, you are not going to be guessing at it in a way that hurts your returns when you are reporting it to your board. You are trying to just be as conservative as you can, and if the company doesn’t have any data, and it is all good will, you are just reporting it as such!

Ryan Isaac: What kind of spurred this, though, was this story in Yahoo— was this just this year? It was pretty recent, wasn’t it?— on this growth of all these alternatives, and how it is just— there has been this like, flood to all these alternative investments in these funds, and it is not paying off like everyone hoped it would. And Yahoo, what they highlighted in this article that I thought was interesting was kind of the bureaucracy behind how these things come to pass. Because what is happening is you have these fund managers that approach these endowment funds, and they have to pitch them, like, “hire us to manage your stuff,” you know? And what has happened is they have had to pitch higher returns to get the accounts, basically, and also, you will remember from the article that because these higher returns have been talked about and promised, employees have been funding across the board less and less money into the plans. So now you have, like, less funding going into it, and more pressure from the managers now to perform with fewer funds. And then you hear all the time about budget cuts and everything because these plans are underfunded; a lot of these plans are severely underfunded.

Reese Harper: Yeah, the article you keep referencing is— I am just going to make sure people know how to find it— it is from Yahoo Finance on July 12th. You can google “Wall Street managers have cost Americans more than 600 billion over the past decade”. The whole premise of the article is that over the last decade— see, the fund managers tried to follow the Yale endowment strategy, giving them more exposure to alternatives. Alternatives means, like, thousands of different things to different things to different people, and the less sophisticated pension funds, and the smaller pensions funds would try to follow what these large endowments were doing, which these large endowments have a totally different time horizon, and they have a totally different expectation for liquidity, and so, what happened is, from about 2000— I think the article says from 2009, or… okay. 2005, the alternative investment exposure was at 9% of total pension assets. By 2015— this is classic hindsight herd mentality here— these pensions were at 24% alternatives. I mean, they have like tripled their exposure. What the article points out is that this has not been a great time period over the last ten years for especially these state pension funds that are the smaller endowments that we are talking about, right? They are trying to figure out how to be Yale, but consequently, if you look at the last ten years of the state pension funds, I mean, they are in the 5% range, as opposed to north of 7, and the reason it is primarily happening is because of their exposure to underperforming alternatives in a period of time where the stock market has done actually quite well. So, I guess the point I am making is, the longer your time frame, and the more sophisticated your research, and the better access that you have, you can target private investments with a lot more sophistication and success, because you don’t have the liquidity means and demands that a smaller amount of money would have. If you are a state pension fund, or if you are a dentist, even more so the case. You need to be very cautious about exposing the small amount of money you do have to investments that do not have the same predictability as a public market.

Ryan Isaac: What are the things a dentist should keep in mind when he is thinking, “hey, should I build a portfolio like these funds?” The first point would be, you don’t have the same access that these funds do, right? Like, what would you want to tell a dentist about access to certain things in public markets, or private markets, that are just different on different scales?

Reese Harper: Well I think kind of hit on that at the beginning, you know? It is just— access to the right private investments often requires larger quantities of money, and it requires a lot more screening, and the opportunities you are presented with are often dictated by your network, and so, I just think in order to have really high-quality access, you need to have high-quality opportunities presented to you, and you also have to have larger amounts of money in order to access them.

Ryan Isaac: Yeah, you know what I thought was interesting, too, is the average large-scale fund has an average team of 25 professional investment advisors, and I mean, we are probably talking, like, multiple PhD people, right? Like, literal rocket scientists, building model— right? So, I guess if you want to build a portfolio like a Yale endowment, you should be willing to go hire 25 financial advisors (laughs) to go do the work for you?

Reese Harper: Yeah, that is what I was saying about the analysis required, you know? It is pretty difficult to really, thoroughly— like, I have clients send me private placement pitches quite often, and I mean, just for me to even figure out the entity structure, and—

Ryan Isaac: Oh yeah. Go through a P&L—

Reese Harper: Yeah, and the pitch decks are alway really bad depending on the person, so, I mean, not everyone presents their investment in the right light, and with the right data, and you can’t just like, take what you are given at face value… so it is just expensive to analyse this stuff.

Ryan Isaac: Yeah, I thought that was interesting, man. I mean, a team of 25 people? So, if you are willing to hire 25 people to work for you (laughs), then— but that’s what I think I have a hard time with. Now, I don’t mind if someone is asking that question; I think it is a totally logical question. Like, you look at this fund, or this portion of the investment world where they have out-performed for a long period of time. I think it is rational to be like, “should I do that too?” But when you learn about it, I just think you have to take a step back and go, “I mean, it is just such a totally different world, you know? And I can’t have those same expectations.” So, there are also a lot of the funds, especially the private equity stuff, that these endowments use their direct— if you want to touch on that for a little bit, what is different between a dentist finding a private fund, having middle men to go through, and then these big funds that can take, you know, a billion dollars, and go direct to something? Like, how does that affect it?

Reese Harper: I think ultimately, though… the question that a lot of dentists are asking is, “what can I invest in that is not “the stock market”? I want something that is not the stock market.”

Ryan Isaac: That is the underlying question.

Reese Harper: Yeah. And the reality is, the first thing we talked about initially was access. The second thing you are saying is, there is a difference between going through a pooled investment. And that is where I think some of the inefficiency comes in alternatives. Like, there are a lot of mutual funds and ETFs that are trying to target these asset classes, but they are not really pure investments directly into a source, you know? And when you have an intermediary fund that you are going through, trying to access a private investment, a lot of times, there are layers of inefficiency that could be better diversification in some cases, or it could just be muted returns, or it could be— once it starts becoming more like a public market security, then you might as well just take the purest version of the public market and invest in that, as opposed to diluting it down so much. I would just say that access is really difficult, and it is important to try to get direct access into an investment, but—

Ryan Isaac: Without very large sums of money. And cost and fee structure are very different when you have a larger scale, and more money; going direct to something is going to cost you differently. Here are two things I would want to ask about. One of them would be, how do you see the objectives of a dentist— let’s say he has two millions bucks across a few different buckets of accounts, 401ks, brokerage accounts, you know, maybe his net worth is $4,000,000 with some real estate and practice. How are that person’s objectives different than what these big funds are trying to do that someone feels like they have to emulate?

Reese Harper: It is all about liquidity. I mean, it is all about liquidity, and a large fund is not trying to create liquidity for themselves, and even they are investing over multiple lifetimes. Like, their time horizon is beyond the life expectancy of even the manager; they are trying to say, “okay, well this tranche of money is for 50 years out,” or 40 years out, or 30 years out. I mean, when you are an endowment, literally, your time frame is forever, you know? And when you are a dentist—

Ryan Isaac: It’s like, 30 years tops.

Reese Harper: Yeah, most people don’t even have— you know, they have a 50-year time frame from the time they start working to the time of their life expectancy, in most cases…

Ryan Isaac: You mean, dead.

Reese Harper: And I’m just saying like, you start investing in your late 40s, your mid 40s, your early 40s, you might only have like a 30-year investment period, and some people 20 of accumulation. So, liquidity is just really valuable, so I guess the only point I would really want to make to all of this is, in my mind, the reason you use public markets and you don’t follow a Yale endowment fund and try to match exactly what it is doing is because you value liquidity more than they do, and for you to have a return that is like, approximating what they do, but not having to take the illiquidity risk… because if you did, like the example you gave— let’s say you have a $5,000,000 portfolio, and you are going to have over half of it in multi-generational illiquid assets— that only leaves you with two and a half million in liquidity, and you could be putting yourself in a situation where you have to withdraw very high amounts of that liquidity, and it puts it at risk while you are waiting for that illiquid stuff to pay off. And I just think the smaller the portfolio, the more important that it is that it is liquid so that the beneficiary, you, the dentist, and actually enjoy your life along the way. Investing, to me, isn’t just about, like, “one day, I’m gonna take the money out,” it is partially about, “you know what? I just want to live better now, and living better now means I have more access to capital any time I need it.” It doesn’t mean you are going to go get it, but just the idea that it is sitting there, invested, and it is accessible to you, that creates a huge psychological benefit for you to be able to live your life the way you want, travel, vacation, not work as hard, not push yourself quite as hard… so you are investing partially so you can have life today feel better to you, as opposed to investing in like an endowment that is really just trying to say, “we are trying to match liabilities that are coming down the road in future— like, this building we are going to build in nine years. This building is going to be seven years out. This building is twelve years out.” And the Yahoo article, on of the larger points it is making is, a lot of the exposure that people have been having to these private investments has kind of hurt smaller portfolios in some degree, right?

Ryan Isaac: Now, this all makes me wonder, too, when people, when dentists talk about needing exposure to non-market non-correlated assets, do you think they overlook the fact that they are already a decade of time, and resources, and probably half a million dollars plus invested into a private equity resource in their practice, or do you think that gets overlooked? Because, I mean, we track that— if you go to our website, dentistadvisors.com and click on “Services” and then “Elements®”, the bottom row of that Elements® table, it looks like a periodic table, that is where we track our clients’ net worth. And one of the bricks that we are tracking is how much of their net worth are they accumulating in private businesses, right? Mostly their practice. I mean, we track this stuff, we report on it every year, and we show that there is as fairly significant part of a dentist’s net worth that is sitting in this thing already. Do you think— I feel like that gets overlooked a little bit.

Reese Harper: Yeah, sometimes early in their career, it is a 30%, 40%, sometimes 50% of their net worth, and it will shrink over time to still 20% of their net worth, you know? And it is a significant risk and investment you already took to get to the point that you are at. I think the real factor here is that in public investing, you just have access to your capital in a really easy-to-get way. I love liquidity, and I think that Yale just doesn’t care about it as much.

Ryan Isaac: Yeah, just totally different stories. So, the last thing I would ask you, then, is— I feel like some of these questions are personality-driven too, because you can take two dentists— let’s take two really high net worth dentists: worth ten billion bucks each, they have $5,000,000 portfolios… one dentist by personality is going to be completely uninterested in this stuff, and they will never ask about it, you know? They just don’t think about this stuff. The other one, it is personality-driven, because multiple times a year, they are trying to find the new investment, or the different place for money, or the new thing. I think it is really personality-driven, but for that type of personality, when is the appropriate time to say, “ I have a big enough portfolio to take some more illiquid risks,” or “I can take the risk of trying to get a higher return out of a non-correlated asset without putting my other stuff at risk.” Like, what is the point where you would indulge that for somebody?

Reese Harper: You know, it just depends on the person, I think; it just depends. Are you the type of person who can go throughout your life and not be— because for a lot of people who invest in this stuff, it is not really about the return they are trying to generate, it is about the experience of investing in something like that and knowing that they are putting their money behind something that they want to put their money behind. You know, they believe in something, or they want to support something, or they want to invest to see something grow that is personal to them. And a lot of people will give up a maximum security, right, in exchange for seeing cool things happen that they are a part of. And I just— I don’t know. I think the place that I would caution someone is when their desire to want to do that puts their personal liquidity at risk, meaning, you know, if you have the ability to ever invest in private investments, I would like you to at least have several years, maybe as much as five years worth of personal liquidity before you are really starting to contemplate private investments that could put your liquidity at risk, and put your basic lifestyle at risk. But for most people, I would encourage people to get financially independent like the Yale endowment is, or like a lot of the investors who invest in the Yale endowment are. Get to the point where you are financially independent before you start taking your assets and putting them towards private investments in a significant way, right? And that is at 25x your spending, 30x your spending, somewhere in that range, your annual spending multiplied by 30, or 25, somewhere in that range, you are probably getting to a point where you are probably secure; that would probably the best advice for most people to avoid private investments until they have got to that level of wealth, because you have already taken so much risk in your practice to get here in the first place. But some people are just not wired to live life that way, and they just don’t want to be that safe, and they just want to see cool things happen (laughs), and they don’t care.

Ryan Isaac: Or feel like they are just doing something that is just not the norm, or not the boring thing, or it is just like, “oh, this is so easy to just buy some mutual funds and have my advisor take care of it for me.”

Reese Harper: They want something more interesting, and I get that. It is not the safest way, and as you can tell from these articles that we have been citing today, the odds are not in your favor, and the statistics are not in your favor. Even the smartest endowment funds for the last ten years have largely underperformed a basically no-brainer plan (laughs), and they have expended probably hundreds of millions of dollars of research capital and fees of acquiring different projects—

Ryan Isaac: So, on the fee thing, I thought that it was interesting that the article brought that up. There are lawsuits right now and new legislation all over the country for these funds, because for these funds because of the excessive fees that are happening in these big ones. Like, Colorado has a big thing going on right now. California alone pays 1.5 billion dollars a year in just their private equity fees. That is not their other management team, or that is not other investments that they manage, that is not the real estate stuff— like, just their private equity stuff is one and a half billion dollars in fees every year.

Reese Harper: And that is a calPERS pension?

Ryan Isaac: Well, it just said the state of California, and they have the two big ones, so… I mean, it is such a good point, man. Okay, I wanted to end with maybe a little bit of a long quote, but there is this professor at Chicago School of Business— I think it was School of Business– his name is Harold Pollack, and he wrote a personal finance book called The Index Card. But when I was looking, I was trying to find arguments why investors should try to emulate. I was trying to find some good writing about, what is a good argument of why someone should try to do this stuff? I came across a little bit of a side note, but it was an interview with this guy who wrote this book, and the interviewer was asking him, “should people try to act like Warren Buffett?” And I thought this was the same kind of thing, because you hear that same kind of thing too. “ Well I am sitting on cash, because I heard Warren Buffett in an article sitting on cash.”

Reese Harper: “Buffett is out of the market” (laughs).

Ryan Isaac: “Buffet’s out, so I’m gonna be out too, and if it works for him, it works for me.” You know? And I thought this was a really relevant response that he had. So, bear with me here for a second. He says, “none of us are Warren Buffet. In fact, Warren Buffett tries to remind his children that they are not Warren Buffett, and he advises them to invest his fortune in index funds rather than try to emulate what he did.” So, right off the bat, he reminds his kids that they aren’t him either. He says, “ I think there are a couple of important points — first of all, Warren Buffett has tens of billions of dollars and access to information and resources that the rest of us don’t have. Also, because he is a marquee name, people are offering him deals, because he really is Warren Buffett. If I’m trying to set up some sort of leveraged buyout and I say Warren Buffett is one of my partners, that brings an instant legitimacy to me. So there’s really nothing about the way that Warren Buffett invests that I can emulate as an ordinary investor myself. People like Warren Buffett are just doing a fundamentally different activity with fundamentally different sources of information than what I’m going to have. So I have to let go of the possibility that I might become a billionaire by playing them that way.”

Reese Harper: Yeah.

Ryan Isaac: And so, I don’t know. I just think that is a good reminder that your friend who runs these businesses who you have seen do things over the last couple decades that are just on such a bigger scale… there might be things to learn, but it doesn’t mean that what works for him is going to work for you. And I think investors need to remember that too: what works for Warren Buffett or the Yale pension fund is not going to work for the average dentist. And that is all I have to say about that. If this mic wasn’t attached to a wall, I would drop it.

Reese Harper: Yeah. Love it! Thanks for tuning in today.

Ryan (laughs) yeah, thank you everybody. If you have questions about your portfolio, we would love to talk to you about it. You can schedule a free consultation on our website; just go to www.dentistadvisors.com and click the button that says “Book Free Consultation”. If you would like to submit a question to the podcast, go to our website, click on podcast, and submit a question, or you can text or call us at 833-DDSPLAN. Thanks for joining us!

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