Harvard's Lesson: Set a Defensive Strategy


Dennis Slothower Image Dennis Slothower Chairman and CIO, Alpine Capital Management

Sell and move entirely to cash when the S&P 500 monthly price fell below its 10-month moving average.

In July 2001, economist Lawrence Summers, became the 27th president of Harvard and pushed to have the endowment's cash all invested, including the general operating account.

Despite warnings from Meyer, Harvard Management Chief for 15 years, Summers felt the cash risk was worth taking. Meyer left Harvard after clashing with Summers.

In a vote of no-confidence by Harvard’s faculty, Summers then resigned. Then the stock market crashed in 2008 and Harvard lost 27% of its $37 billion endowment in 2008!

The moral of this story is not Harvard, Jack Meyer, or Larry Summers. The moral of this story is that under Jack Meyer Harvard’s endowment had a risk management strategy to defend against the damages of bear markets, but when Meyer left Harvard, the endowment no longer had a strategy to defend itself against bear markets.

Whether it is the 10-month SMA or the death cross of the 50-day crossing through the 200-day moving averages, investors need to decide ahead of the next recession how they want to approach investing.

An investor can raise cash by selling the most vulnerable components of one’s portfolio, selling those corporations most vulnerable in a recession, or allocating to the best value and most liquid stock, but these are all defensive maneuvers.

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