The California Public Employees' Retirement System, also known as Calpers, is the largest in the nation with $180 billion in assets. Calpers, like most, had a miserable 2008 with a drop of nearly $60 billion. In response, Calpers has brought on Joseph A. Dear who gained a reputation as a daring investor while managing the Washington State pension fund.
Mr. Dear's approach is to dramatically increase high risk investments, such as private equity, hedge funds, junk bonds, California real estate and all things esoteric. Mr. Dear appears to be "on tilt." Going "on tilt" is a mindset familiar to gamblers, who recognize the impulse or seeming necessity to gamble recklessly after a big run of bad luck as the most dangerous of all. Everyone else gets rich at the expense of the mind-altered gambler.
Why doesn't Mr. Dear recognize this dynamic? Deep-seated beliefs. "Private investments, he asserts, will over the long haul outperform stocks by three percentage points a year" (NYT 7/23/09). He views this long haul outperformance as "necessary" to meet Calpers' funding objectives. Having discovered this seemingly God-given performance principle, Mr. Dear is now exploiting it for the benefit, or detriment, of 1.6 million California employees and families.
If these areas get increased funding, what will receive less? Domestic common stocks. This was the very asset class that saved Calpers last year by providing liquidity (at fire sale prices) to meet the continuing calls of "feed me!, feed me!" from private equity, hedge funds and real estate. At the time of the lowest domestic common stock valuations in years, Calpers is moving on. Rather than simply accepting a Buffett challenge to investing, "A fat wallet is the enemy of superior investment results" (BRK 1994 annual report), Calpers appears to be gearing up for stardom - of some type.
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