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LAST YEAR, an unusual story made the news: The University of Chicago was reportedly looking to sell an entity known as the Center for Research in Security Prices (CRSP). The story came and went quietly, but it’s worth pausing to understand it.
CRSP’s origins date back to the 1960s. Its initial goal was to build a database of historical stock prices. This is harder than it might seem. Before trading was computerized, stock prices were maintained on paper. And when stocks split or companies merged, that added to the complexity.
Despite this seemingly dull mandate, CRSP has played an important role in the development of modern finance over the years. Most notably, the efficient market hypothesis and the capital asset pricing model were both made possible by CRSP data. And today, many of the world’s largest index funds, including Vanguard’s Total Stock Market Fund, are built on CRSP indexes.
For these reasons, CRSP has long been one of the University of Chicago’s crown jewels. So it was a surprise when officials announced it would be putting it on the market—especially since the asking price, at about $400 million, was modest relative to the university’s $11 billion endowment. Why would Chicago feel compelled to sell?
According to an account in the Financial Times, UChicago’s finances have been in tough shape in recent years. Despite a strong market, its endowment has lagged while its indebtedness has climbed.
The story carries useful lessons for individual investors, so it’s worth studying where the university went off track.
Spending
The 1996 book The Millionaire Next Door examined the financial habits of millionaires. A key finding was that the path to millionaire status didn’t require a high-paying job. Regardless of income level, the key to financial success wasn’t complicated: Income simply needed to exceed expenses by a reasonable enough margin. It was almost that simple.
Ironically, the economics department at the University of Chicago is renowned. Milton Friedman, Eugene Fama and Richard Thaler are among its Nobel Prize recipients. Nonetheless, it fell prey to one of the most well known pitfalls in personal finance: overspending—and specifically, overspending in an effort to keep up with the Joneses.
What exactly happened? Several years ago, in an effort to compete with peers, Chicago began investing heavily in new academic programs and buildings. Chief financial officer Ivan Samstein explained that the uptick in spending was intended to “drive the university’s eminence.” But the spending wasn’t accompanied by increases in revenue. As a result, the annual operating deficit rose 10-fold between 2021 and 2024. Total outstanding debt now stands at more than $6 billion.
Clifford Ando, a professor at UChicago, noted that, “the borrowing generated buildings,” but that the university failed to think a step ahead. “With the buildings come operational expenses that the university has not figured out how to fund.”
The lesson for individual investors is almost self-evident: No matter what level of resources one might have in the bank, the importance of planning should never be ignored.
Saving
At least since Biblical times, it’s been understood that economies go through cycles. This is another way in which the Chicago story is instructive. Investment markets have been strong for most of the past 15 years. But instead of taking the opportunity to stockpile resources for the future, administrators decided to ramp up spending and add debt.
This seems like a mistake that should have been easy to avoid, but it is also understandable. When markets are rising, we know the right thing to do is to bolster our savings. But that’s often easier said than done, because of what’s known as recency bias—the expectation that current trends will continue into the future.
Recency bias makes rebalancing, and risk-management in general, feel less necessary when the market seems like it’s only going up. But that’s when, in my view, we should be most diligent about managing risk. Thus, with the market near all-time highs, this is a good time to review your portfolio’s asset allocation.
Investing
A final reason for the university’s tight finances: Like many of its peers, UChicago invested across a mix of public and private funds. But that strategy ended up working against them, in two ways.
First, performance has lagged. Over the 10-year period through the end of 2024, the university’s endowment gained 6.7% per year. In contrast, Vanguard’s Balanced Index Fund (ticker: VBIAX) returned 8.2% per year over the same period. As a result, all things being equal, the university’s endowment would be nearly 15% larger today if it had put all its money in this one simple index fund rather than in the complicated mix of funds it chose.
A further problem for Chicago’s endowment was the nature of its holdings. It had allocated more than 60% of its investments to private equity, real estate and other illiquid assets. That’s made it harder for the university to access funds to cover ongoing deficits. This is likely the primary reason it felt compelled to sell CRSP despite having $11 billion in the bank.
This carries another important lesson:
Private equity is making a push to work its way into everyday investors’ 401(k)s, but it’s not just Chicago’s unfortunate experience that should give us pause. According to a recent write-up in The Wall Street Journal, even Ivy League schools, which had traditionally done well with private funds, “are having second thoughts.” If even these large institutions, with dedicated investment offices, are stepping back from private equity, the message for individual investors seems clear.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
A postscript on this topic: Earlier this week, a private credit fund operated by a firm called Blue Owl Capital, announced that it would no longer be accepting redemption requests from investors. Instead, the fund will only return shareholders’ money at the firm’s discretion over time. This is a perfect case in point. Blue Owl is one of the firms that has been lobbying hard for access to consumers’ 401(k)s.
When it comes to evaluating investments, most discussion tends to focus on risk and return. But the Blue Owl case, which almost perfectly mirrors the University of Chicago’s experience, highlights something important: Risk and return will always be unknowns. But liquidity—that is, the ability for investors to freely withdraw their money—is one of the only variables that we have control over before making an investment.
My self managed accounts beat most of the Ivies endowments last year and even over 3 years.
I keep waiting for a call asking me to take over. what salary should I ask for?
This is a great story, Adam. But so sad. During the same time period that the university logged such dismal results, many regular folks got wealthy by following the simple advice contained in these pages.
“The 1996 book The Millionaire Next Door examined the financial habits of millionaires. A key finding was that the path to millionaire status didn’t require a high-paying job.”
The finding is not even close. That book had laughable bad research. P. 249-250 showed its “research”. It used a non random sample of 385 people (!!!). That would mean there is no way you could have any confidence in any of its conclusions.
Not saying that its perhaps true that “millionaire status didn’t require a high-paying job.” Just that you can’t call it a “finding” with the book’s shoddy F- grade research.
I have read that an estimated 45% of wealth in America is inherited. I would be deeply skeptical of that statement too. It would be extremely difficult to do any kind of rigorous study on the rich.
That would require a huge random sample to obtain enough rich people to obtain statistically valid results. Which would be massively expensive.
Just because you’re big doesn’t mean you’re smart. For a school renowned for its economics reputation, these are bush-league mistakes.
Colleges of all sizes, including the one I taught at went on spending sprees in the 20-teens that they claimed were necessary to keep up with their competitors. While our school now has new dorms, cafeteria, and an activity building with state of the art equipment it also had to layoff 25% of its faculty and staff in the past two years. Glad I retired in 2019.
Good article. It’s no surprise private equity folks are trying to hook the average investor into private equity, given that institutional investors are increasingly wising up to the shortcomings and poor performance of their private equity investments. It may have been the case there were spectacular returns to be had in the space, but with more and more funds being established and more and more money thrown at private equity investments, the chances of being one of those big winners have substantially diminished. The average investor should leave private equity investing to the institutions, in my opinion.
Two lessons:
Adam, your last sentence is ominous. With the recent changes in regulations seemingly opening the door to investments in PE from retirement accounts, this may affect a portion of retirement investors who may catch the tail end of a long run of PE returns.
Or worse yet, fund managers will quietly tuck these illiquid, fee rich products into their popular target date and balanced funds without most retail shareholders ever noticing.
Adam, you have described a time tested way of having peace of mind when it comes to financial security planning.
Several years ago, we invested in a private equity fund. One of the investments did well, the rest not so much. We also determined that our dividend investments would have done better than that one good one.
It helped going into private equity knowing we could be looking at a total loss. At least that wasn’t the case. I’m sure the general population doesn’t have that mindset.
I guess Chief Financial Officer Ivan Samstein never learned that “eminence doesn’t pay the bills”, income does. And how ironic it is that UC has to sell its Center for Research in Security Prices due to its recent expenses outstripping the prices and returns on its security investments. It would be delicious if it wasn’t so very sad.
The teachers pension fund in Ohio is suffering the same malady, with sophisticated investment strategies being trounced by simple ETFs. It almost seems like the brilliant minds managing endowments and public pension funds are engaged in a game of ‘follow the leader’. I see the same thing happening with friends who have invested in all sorts of un-regulated money; I suspect investments in private equity will follow.
I agree, the story carries useful lessons for us all.
When I attended the U of C (late 1970s), the cost of attendance including room and board was just under $5000. Adjusted for inflation and not considering tuition discounts or financial aid, that cost now exceeds three times as much. The unofficial description of the college then, “where fun goes to die”, resonated with me and others, somewhat like a badge of honor. Endowment growth subsequently provided for many more student amenities, in turn enabling more selective admisssions. I wonder, could a university still be viable without those amenities? Would today’s students apply?
Jo Bo,
Even now in the mid 2020’s U of C STILL has the reputation of “where fun goes to die”.
I would note that the 2017 Tax Cuts and Jobs Act (TCJA) imposed a 1.4% federal excise tax on the net investment income of a private college endowment fund when the college has at least 500 tuition-paying students and the endowment fund has assets of at least $500,000 per student.
My youngest was the beneficiary of tuition support of a college with a large per student endowment fund and we are grateful for that support. The amount of that support was a major consideration in the decision of which college to attend.
I hope that private colleges that spend their endowment income in support of student education will continue with limited or no taxation on the endowment.
Insightful message on the basics required of financial husbandry – organic growth is possible when saving and budgeting are even just attempted on a continual basis. In my own history very meager income combined with limited debt has afforded me to both raise a family and retire financially secure. I write this on a first time no-expenses-spared 3 week vacation in New Zealand, and this while my IRA balance continues to rise! Although this astonishing event is happening to me and my wife of 49 years has not been without wrong turns aplenty, merely emphasizing how most people are capable of the same. My oldest son attended the University of Chicago! Listen to people like Mr. Clements and Mr. Grossman, and the many commenters on this site. I have and do.