Good Job, Will Hunting...

Remember back in 1997 when Will Hunting spectacularly schooled a few obnoxious (typical?) Hahvid grad students? Where is that guy now? Last we saw he was driving to Palo Alto, CA to "go see about a girl."

This clip has resurfaced again recently (originally from 2013), showing an older Will, with his teacher mom, schooling a couple of obnoxious (typical?) reports on the devolution of education policy in the post, post, post-revolutionary period. What Will says seems spot on as a survey by We are Teachers found that in the U.S. a "majority of teachers (75%) entered the profession because they love teaching, and only a quarter of those surveyed say they entered the field because of factors like job stability and benefits." 

Professor Lambeau and the MIT faculty would approve, despite past tensions.   

DPI is the New IRR? Caveat Emptor...

For the past year, private equity managers have sought to prioritize returning cash to investors after higher interest rates stifled deal activity and exits. The drop in distributions has left many financial institutions that invest in private equity with less money to allocate to future funds. As a consequence, DPI, or distributions to paid-in capital, has replaced IRR, or the internal rate of return as the most important measure of private equity performance—at least for the time being. 

IRR has long been favored by the private equity industry to demonstrate its superiority over public markets. And justify the hefty management and performance fees (?). IRR is a cash-weighted measure of return that takes into account the time value of money, which ROI, or return on investment, does not; which is helpful when committed capital is called over different points of time. However, there are also some unrealistic assumptions underpinning the mechanics of IRR calculations that can make returns appear more attractive than they really are. That effect is compounded by how private equity funds mark their assets. 

The value of an asset is whatever someone is willing to pay for it. But in the absence of an active market for said asset, its value is whatever the fund manager says it is. Now, to be fair, fund managers do consult third-party valuation experts and their valuation processes are usually audited by well-credentialed firms at least annually. Still, as owners and experts on said asset, the fund managers' views carry a lot of weight. And it's not really in their economic interest to aggressively mark things down. So, even when public markets gyrate wildly, private equity valuations tend to remain relatively stable, as fund managers hold out hope for better times. In fact, this is actually an attractive feature of private markets for many investors, to chagrin of others. 

But what if you have to sell? Recently, amidst funding cuts by the Trump administration, the liquidity needs of major university endowments have increased. For example, Yale is reportedly exploring the sale of up to a third of its private equity portfolio. And Harvard tapped the bond market raise $750 million to meet short-term needs. Heck, if multi-billion dollar endowments (like Harvard and Yale with $50.7B and $40.7B of assets, respectively) start selling their massive private equity portfolios to generate liquidity, fund managers are not going to be able avoid price discovery for very long. And investors, long shielded by IRRs, may find actual realized returns, or DPI, are a lot skinnier than they imagined.

The Harvard Humble Brag

Last week Harvard rejected demands from the Trump Administration that threatens $9 billion in federal funding and its non-tax status. University president Alan Garber wrote in a message to the Harvard community: "No government — regardless of which party is in power — should dictate what private universities can teach, whom they can admit and hire, and which areas of study and inquiry they can pursue.” Harvard's defiant stance is very different from that of major law firms and other universities, notably Columbia, who quickly agreed to the government's demands.

That's made Harvard, or Hahvadh, popular again; with individual donations skyrocketing over the past week. Harvard is elite, it's also wildly rich...so naturally, both the Right and the Left have issues with it. Which has forced many Harvardians over the years to hide where they went to school from their less smarter, less richer, less capable non-Harvard peers. Because, apparently, things become awkward when you drop the "H-bomb." 

But now that Harvard finds itself at the forefront of the nation's political/culture wars, people all across the political spectrum have cover to speak about their personal connection to the esteemed university. Not to remind you how smart and capable they are. No, of course not. But to "helpfully" set the context for whatever for/against argument they want to make. But things can still be a little awkward. Take it away Ronnie... 

Best College Prank Ever?

An oldie, but gold. This was an answer to a question on Quora about epic university pranks. There have been many classic ones. This one, perhaps borrowing a page from Cal Tech's 1961 Rose Bowl Hoax, certainly ranks near the top. It was perpetrated on Harvard (or Hah-vahd, if you speak Boston) by their rivals during the annual Harvard-Yale football game on November 20, 2004.  

Months prior, two Yale students, Mike Kai and David Aulicino got a grid of the Harvard Stadium seating and began hatching their plan. They made giant signs with Harvard's red or white colors on them and printed fake T-Shirts that said, “Harvard Pep Squad” as well as fake Harvard student IDs. They handed these out to more than a dozen people who would pass these signs out at the football game to the designated people in the Harvard side of the stands, who were told it would read "Go Harvard."

"Then, after they had been distributed to all the Harvard students and alumni. They gave the signal. All of the Harvard students began to hold their signs...And the prank was complete."

"WE SUCK"

The full story, which got a lot of media coverage, is here. The prank was masterfully executed and had the effect of upstaging Harvard's lopsided 35-3 victory.

Everything is Awesome (for Lego Collectors)!

LEGO, sometimes referred to as the Apple of Toys, is one of the most popular toys in the world. Some fun facts: the plural of LEGO is LEGO and the name is derived from the Danish word leg godt, meaning "play well." The 83 years old company also happens to be the world's largest producer of rubber wheels, making more tires per year than Bridgestone, Michelin, Goodyear, etc.! 

Well, now there's another reason to be interested in LEGO (if that was even necessary). They apparently make pretty good investments, too! That's the finding of a study by Victoria Dobrynskaya and Julia Kishilova: LEGO - The Toy of Smart Investors. LEGO are collected by thousands of adults and has a thriving secondary market. The authors tracked the returns of 2,322 sets over 18 years and found that they had an average return of 18.5% p.a., with a standard deviation of 35%. The authors then constructed a LEGO price index from a hedonic regression of coefficients. The LEGO index outperformed large stocks, bonds, gold, and alternative investments in the sample period 1987–2015, yielding an average return of at least 11% (though LEGO underperformed the CRSP index consisting of all stocks in the NYSE, AMEX and NASDAQ exchanges by about 100 bps p.a.). 

Source: Dobrynskaya and Kishilova (2018).

They also found that LEGO returns were not significantly exposed to market, value, momentum, and volatility risk factors. Only the Fama–French size factor demonstrated significance, suggesting that LEGO investments perform similarly to small stocks. The LEGO return index had a correlation of just 13% with the S&P 500 and exhibited a positive skew (0.7). The uncorrelated nature of the LEGO market is reflected in its strong performance through the "dotcom" bubble and Global Financial Crisis.

The main reason for such high returns on the secondary market is diminishing supply over time. LEGO releases new sets each year and retires existing ones periodically. This sets ups interesting pricing dynamics. In the study sample, the returns on individual sets varied from −53.61% to 613.28% p.a. (with the average return of 18.5% p.a., as noted earlier). Very large sets, those with 1200+ pieces, and small sets, those with <340 pieces tended to perform better. Returns also varied dramatically by theme. Out of 44 themes identified by the authors, the 5 best performing were: Ideas, seasonal, superheroes, Minecraft and Friends (averaging 50% returns p.a.); the 5 worst were: Simpsons, Prince of Persia, factory, TNMNT, and space (averaging 2% returns p.a.).

         Source: Dobrynskaya and Kishilova (2018).          

                    

   

                                                                                        Source: Dobrynskaya and Kishilova (2018).

So, from now on always buy two sets of LEGO. One for the kids (or grownups) to play with and one for the investment! Who knows that new set could be the new Lego Millennium Falcon which retailed for $500 in 2007, and today sells for $9,000 on eBay.

The Daily Top 5 List (Oct-7-2020)

The biggest, most interesting things of the day:

5. Entertainment: It's a staple of many, if not most, films and I usually wait for it when watching any film: Movie titles said during the movie. Here's a great compilation of 'title drops'.

4. Health: The US Army's latest weapon is strategic napping. Prioritizing sleep for optimal combat performance.

3. Business: Will remote working be the norm? Several big companies certainly expect it to...This Harvard study touts the key benefits of WFM: higher productivity, lower turnover and organizational costs. OOTH, this Stanford professor warns a rushed and unstructured transition can reduce innovation and productivity. Regardless, here are some fascinating WFM statistics.

2. Politics: Kamala v Pence tonite!...Trump loses tax return subpoena appeal...To focus on SCOTUS nomination before election not stimulus deal...

...while Biden is riding high in polls with 27 days to go, particularly in key swing states...FiveThirtyEight crunches the numbers and estimates Biden has 84% chance of winning, Dems have 68% chance of flipping the Senate and 94% likelihood of retaining the House...

1. Science: The 2020 Nobel Prize for Chemistry goes to Emmanuelle Charpentier and Jennifer Doudna for their discovery of the CRISPR gene-editing mechanism (in only 2012!!). The CRISPR tool has quickly revolutionalized biology with its ability to change the DNA of plants and animals with high precision. Its applications are wide ranging, from producing new crops to curing hundreds of diseases...but also controversial with dangers of producing 'designer humans' (He Jiankui).