In 2003, Vivian and I offered to endow a chair in mathematics at the University of California, Irvine. We were guided by what we had learned from the charitable giving we had done over several decades. One principle was to make the gift transformative, with an impact well beyond what you’d expect from the monetary amount. We also wanted to fund projects that wouldn’t happen without our support. These conditions were met.
A new chairman had transformed the Math Department in the 1990s, quelling the strife, marginalizing the bad actors, and bringing in talented new faculty. Though there were endowed chairs on the campus, math had none. By creating one, we could attract a star and raise the department to a still-higher level. We stated our objectives as (1) to support the research of an individual mathematician of exceptional talent; and (2) using an unusual investment and distribution policy, to cause the principal to increase through compound growth so that the chair eventually becomes one of the most richly endowed in the world, thereby attracting extraordinary mathematical talent to UCI.
To meet our first objective, the endowment is to be used only to supplement the research activities of the chair holder. These funds are in addition to, not instead of, the standard faculty salary and support from the university. If the university is not willing to hire someone, neither are we. This arrangement is to remain unchanged even if, as we expect, the distribution from the endowment one day grows far beyond the salary paid by the campus to the chair holder.
Funds used for general departmental, campus, or university budgets, or for any purpose not directly in support of the research activities of the chair holder, are limited to 5 percent of the annual money drawn. We specified a distribution rate of 2 percent annually, which means 0.1 percent covers administration and 1.9 percent goes to the chair. We knew that limiting the annual draw from the endowment to 2 percent was crucial to our long-term compounding objective.
We donated appreciated Class A shares of Berkshire Hathaway, which eliminated a possible long-term capital gain for us if, instead, we kept the shares and someday sold them. Stock is to be sold only as needed to fund the chair. However, just one Berkshire A share would create far more cash (over $200,000 in 2016) than the annual payment from the endowment. Therefore, when money is needed, we asked that an A share first be exchanged for fifteen hundred B shares, the specified conversion ratio. Worth about $140 each in mid-2016, the B shares could then be sold in precise amounts to create funds when required. The point is to keep the endowment fully invested in stock until cash is needed. When we are no longer alive, remaining shares will be exchanged for a broad, no-load, US stock index fund with a very low expense ratio, such as the Vanguard S&P 500 or the Vanguard Total US Stock Index.
What kind of growth in the value of the endowment might we expect? Over the last two hundred years, a broad US stock index has grown about 7 percent faster than inflation. No one knows whether the future will be equally good, but even if the increase exceeded inflation by only 5 percent, the net annual growth in purchasing power would be 3 percent. Doubling on average every twenty-four years, after a century the endowment and its annual payouts would have grown over nineteen times in today’s dollars. In two hundred years this rate of growth would increase it to 370 times what is was worth when the chair was funded in 2003. If the United States continues to prosper, if the university continues to exist, and if our investment and distribution policies continue to be implemented, the power of compounding may well lead to an endowment fund for our chair in mathematics that, valued in today’s dollars, exceeds that of the current endowment for any chair that now exists in the world.
For those who wonder how likely this is to come to pass, we remind them of a similar plan by Benjamin Franklin to, in the words of biographer H. W. Brands, make a bequest that “would be immediately useful, yet it would gain in philanthropic power with passing years.”
Upon his death in 1790, Franklin set aside two special revolving funds of 1,000 pounds each. One went to Boston, and the other to Philadelphia. They were to be lent in small portions at 5 percent per annum to help “young married artificers.” Franklin expected each fund compounding at 5 percent per annum to increase in a century to over 130,000 pounds, at which point 100,000 pounds was to be used for public works. In the second hundred years Franklin thought the remainder could, at 5 percent, increase to more than 4 million pounds, which then was to be divided between the cities and their states. In actuality, the Boston fund had grown to $4.5 million by 1990 and the Philadelphia fund to $2 million.
How have we done so far? In the first thirteen years, the principal of the endowment more than doubled after spending and despite the 2008–09 market collapse. Regarding the future existence of the university, former University of California chancellor Clark Kerr observed that “since 1520, only about 85 institutions have remained continuously in existence…about 70…[of these]…are universities…few things last longer or are more resilient than universities.”
Political fads and fashions come and go. Special-interest groups attempt to advance their agendas by seeking preferences or handicaps for particular subgroups. The history of mathematics through the ages shows contributions from an enormous diversity of cultures, beliefs, and social systems. We specify that there is to be neither preference given nor discrimination against any candidate on the basis of his or her race, religion, national origin, gender, or beliefs, and that mathematical merit and future potential, as well as the will and ability to implement them, be the criteria for selection.
We hope we have planned well and that our gift, like Ben Franklin’s, will accrue to the benefit of many generations.
Another charitable opportunity that fit our criteria arose in 2004. The George W. Bush administration had severely restricted the allowed federal funding of stem cell research. Further, labs doing proscribed research had to be absolutely separate from federally funded facilities. Theoretically, if a pencil paid for by government funds was used for forbidden work, the entire federal grant could and would be revoked.
The nation faced a delay in the development of lifesaving therapies, a massive brain drain as our scientists moved overseas to continue their work, and the loss of our lead in stem cell technology. California voters stepped in, approving a $3 billion bond issue to create CIRM, the California Institute for Regenerative Medicine. The purpose was to provide ten years of support for stem cell research freed from the Bush restrictions.
CIRM intended to fund five or six centers at university campuses throughout the state, each one of which would eventually get hundreds of millions of dollars. The money would help construct research facilities entirely separate from any federal funding, as well as fund grants for faculty to develop new stem cell treatments for diseases. UCI already had an important group of stem cell experts and was strategically placed in biotech-rich Orange County. However, to qualify, the campus had to complete building the research center in two years, and significant portions of the funding had to come from both the university and private donors. Who in Orange County was rich enough and willing to be the lead private donor?
The next part of the story begins back in 1966 when a senior at Duke University had a horrible automobile accident. He lost his scalp and most of his blood. Fortunately a state trooper found the scalp and it was reattached. It took a long time for his body to heal. While spending much of his senior year in the hospital, he read Beat the Dealer. That summer, between graduation and an upcoming three-year enlistment in the navy, he ignored his mother’s advice to the contrary and went to Las Vegas as one of the early card counters.
Using Beat the Dealer as a guide, he brought a bankroll of $200 and ran it up to $10,000. It took four months. The grueling days at the green felt tables often lasted sixteen hours. It was a hard way to earn money but the real value, as with so many before and after him, was in what the young man learned. As he later said, “I had no clue that my four months at the tables in Las Vegas were to lay the foundation for a successful career in Wall Street. [It] taught me several important principles that I’ve employed for the past twenty-five years…”
Returning from Vietnam in 1969, the card counter went to UCLA to get a master’s degree in business. He read about convertible bonds in Beat the Market, which influenced him to write his master’s thesis on that topic. Graduating two years later in 1971, he found that jobs for MBAs were scarce. But when he answered an ad for a junior credit analyst at Pacific Mutual, they liked both the man and the thesis topic.
In the subsequent decades, he co-founded Pacific Investment Management Company, which would one day manage almost $2 trillion. The Duke senior had become a billionaire known worldwide as William H. Gross, the Bond King. Bill and his wife, Sue, had already donated tens of millions for medical causes, so a group at UCI arranged a lunch meeting with Bill to see if he and Sue would give $10 million and become the lead donors for a new CIRM-subsidized stem cell research center.
In the course of the conversation, I mentioned that a $10 million gift would lead to as much as $600 million in the years to come, leveraging their donation sixty times. I saw an instant flash in Bill’s eyes and thought: Bill and Sue must value the chance to make an impact far greater than the value of the amount donated, just as Vivian and I do. After careful consideration, they said yes.
So far, so good. But CIRM also required, as evidence of community support, that significant gifts come from several private donors, not just one. Along with others, Vivian and I added our own contribution. CIRM followed through with $30 million in 2008 and the $70 million facility was completed in less than two years, under budget and ahead of schedule.
The University of California also met another test Vivian and I used when considering a contribution. We wanted at least 90 percent of the amount we gave to be spent directly on our target purpose, rather than on fundraising and administration. You can check this percentage for any nonprofit organization from its annual financial statements by looking at the ratio of money spent on the target to the amount of money spent overall.
Vivian and I were indebted to the University of California system for giving us a quality education that we could not have afforded otherwise. It was also where we met. We enjoyed saying thank you.
The timing for funding the Sue and Bill Gross Stem Cell Research Center was fortunate. The economic climate was about to change drastically for the worse.