The Confidential World of Billionaire Families: Jay Rogers Reveals What the Ultra-Wealthy Know (That You Don’t)

Right, we're back at it.

Again, the question was about groupthink driving mediocrity and then just institutional code behavior destroying alpha.

Yeah.

So that was a paper I wrote way back a long time ago.

But that being said, all my theories still hold fast.

Essentially, it's kind of one of the flaws of the system.

in that the way it's structured.

But if you think of large pension plans, large foundations, large endowments, they all hire consultants that come in and tell them, well, this is how we should be allocating our money.

And this is kind of the, they use what's called actuaries to look at the plan assets and tell them, okay, based on the number of future retirement participants or whatever else we're going to have, We need to take that number of people, figure out how much we have to pay them, and then come up with a current value of what the plan is and figure out, okay, based on this, we need to hit an actual real rate of return of six, six and a half, seven, seven and a half percent, whatever else it is every year in order to meet those future goals.

Now, obviously we all know that the stock market doesn't go in a straight line.

So you have up years and down years and all that.

So you have to figure out, okay, I need to average that six and a half or 7% during up years and down years.

And obviously down years are more destructive to your overall curve than the up years.

And so when you look at that, they say, okay, so we're going to create an asset allocation that we think is going to hit this particular number.

And then we're going to benchmark it.

So we're going to use the S&P 500 or the Russell 3000 or whatever asset class we're looking at.

So we're going to divided up a mean 10 or 15 asset classes.

We're going to track each one based on their benchmark.

And then over year after year, hopefully we're going to pick the right managers that can outperform those indexes.

So that way there, they can generate additional alpha.

The problem is they tend to high, especially when you go through a consultant, the consultant wants to make sure that they are never fired.

So they, You know, the old joke on Wall Street is you can never get fired for hiring Goldman Sachs.

Right.

Right.

So they go with the biggest name firm because everybody is comfortable with that big name.