Et in Arcadia ego
October 10, 2018·4 comments·Money
Institutions speak of infinite time horizons while managing money as though permanence is guaranteed. Yet monuments crumble, partnerships fail, and foundations that seem unshakeable are not. The gap between what institutions claim to believe about their future and how they actually prepare for it reveals a dangerous confusion about what it means to preserve a legacy.
• Important institutions disappear without anyone noticing. Rev. Guinn was the most influential man in his town. His grave is now broken and forgotten, his importance erased within a generation or two.
• Long-term thinking doesn't protect against short-term forces. Boards change. Managers rotate. Each new leader wants to leave their mark. An institution's actual horizon is not how long it exists, but how long until circumstances force a change in strategy.
• Endowments create a false sense of security. Universities and foundations use "infinite horizon" language to justify sitting on massive reserves while their stated missions go underfunded. The assumption that they will exist forever allows them to act like they will exist forever.
• Nothing is truly permanent, and that's the point. Partnerships that seemed built to last dissolved. Diseases get conquered. Wealth centers shift. These are not catastrophes but ordinary deaths that institutions must plan for, not against.
• Deferring impact today for tomorrow that may never come wastes the only thing institutions actually have. If time is the only thing that isn't infinite, then spending endowments today on current mission execution becomes not reckless but rational.
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Comments
Having started on Wall St in the mid-'80s when partnerships were still strong - and senior partners kept most of their personal wealth in their firms as, the partners told you, the firm would be here much longer than they ever would - and, then, over the next five to ten years having watched most of those partnerships fail outright, flounder (and then be absorbed by another firm at pennies on the dollar), do kinda okay in a merger or a few, like Goldman, transition to greater riches - I was fortunate to learn early in my career how short “forever” can be.
Tangential to your argument is how little value today (or impact on duration) money out past ten, twenty, thirty or fifty years has. It’s an odd parallel to the power of compounding where investing money for the long-term results in much greater wealth simply owing to math and time. I’m a planner and worrier (the second drives the first in a reasonably rational mind), so I do think and try to plan out ten, twenty and thirty years. But what worries me is what you wrote - we really know so little about what that world will look like then / what will have endured / what can’t-fail business will be gone / etc.
Having lived through four ten-year cycles, and remembering all the advice that was “smart,” “conventional,” “safe,” etc. at the start of so many ten-years periods (and reading a lot of history, this stuff has been going on for thousands of years), I’m too humbled to have much conviction about the future and cynical about those who do. Perhaps you are right and colleges should run themselves more like businesses - “pay out” their “retained earnings” as lower tuition, award more scholarships, and invest in improving their institutions now (more research grants, better capital stock) - keeping only a modest amount of capital as a cushion. The future is unknown; hence, a confident institution, business or university (nonprofit or government), should have a strong balance sheet where assets align with liabilities and a sufficient cushion is kept for surprises, but where its future is based on (borrowing from Ben here) the process the institution has to maintain its competitive edge and relevancy as the world changes - and not on having a large pile of cash that (see Sears) can evanesce quickly if your process fails.
I wrote a paper in 2000 about investment efficiency in which we looked at behavioural factors impacting on investment management structures. SleepWell was all about regret risk and was a positive factor as it stopped structures changing too radically when trustees of pension funds changed.
But as Rusty says “There are other deaths we cannot avoid.”
In practice, your fund’s horizon is as finite as the next person managing the money who wants to make changes to the portfolio to put their stamp on it. Irrespective if the institution managing it does not change.
Exactly this.
Ozymandias by Percy Bysshe Shelley
I met a traveller from an antique land,
Who said—“Two vast and trunkless legs of stone
Stand in the desert. . . . Near them, on the sand,
Half sunk a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them, and the heart that fed;
And on the pedestal, these words appear:
My name is Ozymandias, King of Kings;
Look on my Works, ye Mighty, and despair!
Nothing beside remains. Round the decay
Of that colossal Wreck, boundless and bare
The lone and level sands stretch far away.”
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