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Revenues

Starting our two week examination of the Provost’s Report, let’s look at revenues: original here, archive here.

1) Pie charts are a stupid way of transmitting information. Bar charts are better, especially a bar chart that shows these categories over the last decade or so.

2) How many times do I need to refute this wishful thinking?

It’s increasingly important that we get our rate of spending from endowment back as soon as possible to a sustainable level, which is generally considered to be around 4.5 to 5% of its beginning-of-year value.

“Generally considered” by whom? Williams can only spend 5% of the endowment if it can grow that endowment at 5% (real) over the long term. It can’t. Believing otherwise is a Ponzi delusion. The sustainable rate is much close to the world GDP growth of 3% or so. (If the Williams endowment could really grow faster than the world, then Williams would eventually own the whole world. How likely is that?)

Still don’t understand this? Think of all the institutions/families in the world that had the equivalent of $1 billion (or some very large amount) in 1910. How many of them could have plausibly claimed, in 1910, that they had a plan which would yield 5% real investment returns over the next 100 years? Round numbers: None. Most of them failed to do nearly as well. And the very few that did were just the lucky monkeys throwing darts. Or, even if they were led by genius investors, those investors are dead now.

Unless you had some magic spell that allowed you to discover market-beating investments year after year, it would have been stupid to think, in 1910, that you could achieve 5% real returns.

Now, its 2010. There are hundreds of large institutions (foundations, pension funds, endowments) with hundreds of billions under management, all of whom think that they can beat the market. It just won’t happen. A few will probably get lucky. But all the wealth in the world can not grow faster than the world itself grows.

Assuming 5% allows us to spend money that we really don’t have.

For 2009-10, the Trustees approved a higher than normal asset use rate of 5.6%, which reflects both a substantial reduction in asset-use and a commitment to maintaining the quality of a Williams education.

The College deserves credit for the real cuts that it has made so far. But more will need to be done, and the sooner we start doing it, the better.

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#1 Comment By JeffZ On February 2, 2010 @ 12:14 pm

We’ve had this debate a zillion times and I still say the same thing: Williams’ endowment grows from DONATIONS in addition to the market, as do all charities. No one is donating 25 million dollars or whatnot to my family, alas (although if there are volunteers, I’ll happily accept). So 3 percent is ridiculous, because it excludes the former.

#2 Comment By frank uible On February 2, 2010 @ 2:33 pm

Does all human endeavor boil down to nothing but greed?

#3 Comment By andy On February 3, 2010 @ 12:58 am

We only got $8.9 million in alumni donations… (http://alumni.williams.edu/af0809report)

This is 0.6% of the endowment.

That said, I’m sure our endowment didn’t start out at $1.4 billion. It had to get to that level somehow…

#4 Comment By jeffz On February 3, 2010 @ 1:35 am

Andy, the alumni fund is a drop in the bucket. Williams just raised, remember, 500 million dollars in a single fund drive. The alumni office publishes a chart of where the endowment would be with and without contributions (DK’s analysis is essentially the “without” one) and the difference is in the many hundreds of millions of dollars over a period of decades … by FAR the primary driving force in growing the endowment are the periodic fund drives and other major annual giving (exclusive of the alumni fund, which goes 100 percent into the annual budget and does not grow the endowment), rather than investment returns. Now, of course, in recent years, a lot of capital giving has gone towards infrastructure needs in addition to the endowment, but once the library is complete, the Williams campus will have almost no significant infrastructure needs beyond period building renovations (outside of substantially improving certain athletic facilities) for at least the next 20 years …