A comparison of today's 'Magnificent Seven' versus the 2000 tech bubble; Bill Ackman's critique of Harvard; Bloomberg on the Harvard endowment's poor performance; My Harvard Business School 30th reunion
1) Market veterans like me can't help but look at today's "Magnificent Seven" tech stocks and think of their counterparts at the peak of the Internet bubble...
So I was interested to see the below comparison of the Magnificent Seven with the most popular tech stocks back in March 2000, courtesy of a Visual Capitalist graphic from a post on X by Charles Schwab Chief Investment Strategist Liz Ann Sonders:
The data here reinforces what I've been saying for years...
Today's tech giants – with the exception of Tesla (TSLA), in my opinion – are much better businesses... with nearly double the profit margins and, I would argue, far more dominant, diversified, stable business models.
Equally importantly (again, with the exception of Tesla), their stocks aren't wildly overvalued like the 2000 bubble darlings were. In fact, as I've written in many previous e-mails, I continue to believe that my three favorite big-cap tech stocks – Alphabet (GOOGL), Amazon (AMZN), and Meta Platforms (META) – are undervalued.
2) My college buddy Bill Ackman of the famed Pershing Square hedge fund delivered a scathing critique of Harvard – where he and I first met in 1986 – in a presentation at the Grant's investing conference yesterday. (In a post on X yesterday, Bill linked to the full 49-slide presentation posted publicly via the Pershing Square Foundation right here, which is where I'm sharing the details from.)
Much of it is political, which I'm not going to discuss here. But I wanted to share it because it's the first time I've ever seen an analysis of Harvard as a business.
In the first section, Bill showed that while the number of students and faculty have barely grown over the past two decades, administrative staff is up more than 40%, and the all-in cost to attend four years has doubled to $307,000.
These are puzzling numbers for an institution that Warren Buffett once said (correctly) is the world's best business because it has a globally renowned brand name that gives it virtually unlimited pricing power. Even if Harvard raised its tuition to $1 million – or, I suspect, $10 million – per year and offered no financial aid, it could still easily fill the nearly 2,000 seats in its entering class.
Bill noted that it's hard to think of any great business that has failed to grow the number of "customers" it serves in the past half century. (Along the same lines, my friend and NYU marketing professor Scott Galloway has blasted higher education for turning into "a luxury good: exclusive, scarce, expensive" – see this January 2023 essay: How I Got Here.)
Next, Bill turned to Harvard's financials. He started with the endowment, which is the largest of any university, despite significant underperformance over the past two decades (which I discuss further below). Take a look at this slide from the presentation:
In the next slide, Bill broke down the sources of Harvard's $6.1 billion in revenue, noting that 37% is from distributions from its endowment:
Finally, Bill showed that Harvard's earnings before interest, taxes, depreciation, and amortization ("EBITDA") margin would be negative 43.3% without distributions from the endowment and general operating account. Here's the slide from the presentation:
Bill doesn't think Harvard is anywhere close to financial distress... But he noted that much of the endowment is allocated to highly illiquid investments such as private equity and real estate, which has led Harvard to issue significant amounts of debt this year – bringing its total debt to about $6.3 billion. He said that an extended bear market could pressure Harvard.
3) By coincidence, Bloomberg just published an in-depth story about the poor performance of Harvard's endowment: Harvard's Not-So-Smart Money: Two Decades of Poor Returns and Rich Pay. Excerpt:
Over the past 20 years, the 8.8% annualized return for Harvard's endowment ranked seventh of the eight Ivy League universities and, according to the National Association of College and University Business Officers, lagged 60% of university funds with more than $5 billion under management. Harvard's 10-year return trailed 80%.
Former Harvard President Lawrence Summers complained to the Harvard Crimson student newspaper that if the endowment had merely grown as much as its average peer over the past two decades, the university would have about $20 billion more. That sum is almost the size of the University of Pennsylvania's entire endowment.
I'm not writing about this to pile on to the Harvard bashing... but rather to underscore a critical investment lesson about which I often write: the perils of chasing performance.
As the Bloomberg article notes:
The story of the Harvard endowment's lagging performance stems from a classic investment mistake: shifting strategies at inopportune times, chasing gains and, in short, buying high and selling low. Since 2005, Harvard has had seven endowment leaders, including three interim appointments and two who served fewer than two years.
The school ratcheted up risk before market downturns, then cut its exposure right before markets recovered. It bought once hot investments, only to watch them go sour. Recently, Harvard piled into private equity right before its performance lagged. "You just feel they're playing catch-up ball," says Mark Williams, a lecturer in finance at Boston University who's followed Harvard's endowment for years.
4) On a related note, my wife Susan and I had a fun time at my Harvard Business School 30th reunion last weekend...
I'm an extreme extrovert, so I love going to things like reunions, conferences, the Berkshire Hathaway (BRK-B) annual meeting, etc., where I can reconnect with old friends and make new ones.
Here's a picture of me with roughly half of my Section H sectionmates who made it to the reunion (our class of roughly 800 was broken into 10 sections of 80, with whom we took all of our classes in our first year):
I went on a jog along the Charles River, through Harvard Square (there's an Irish pub named Whitney's!), and visited my freshman dorm in Harvard Yard:
Best regards,
Whitney
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