Unconventional Success: A Fundamental Approach to Personal Investment

This is an extraordinary book written by an extraordinary fund manager that contains information that is of great interest to every investor. As more and more people take more and more responsibility for their own financial future (as more and more companies decline to provide pensions or health care), this information takes on critical importance. There are two parts to this book: 1. An analysis of how individual investors should structure and manage their own portfolios. 2. An analysis of which securities to use to create these portfolios. The portfolio suggested is the following: Wilshire 5000 30% EAFE 15% Emerging Mkts 5% US REITs 20% US Govt Bonds 15% TIPS 15% The security choice boils down to Vanguard and the Federal Reserve with ETFs bought through AmeriTrade for a tax-efficient alternative to index funds. In both parts of the book, analysis becomes expose. Portfolio construction and management should follow well-known precepts such as (a) equity bias (b) diversification and (c) rebalancing. The expose is of the bad advice given by financial advisors and investors' propensity to ignore their portfolios until either greed or fear drive them to self-destructive behavior. Active management is shown to be a failure in the long run, if not a fraud: data is presented that shows that in the 15 years from 1983 - 1998, during the greatest bull market in history - a period ending before the great dot.com collapse - 96% of actively-managed funds failed to beat the Vanguard S & P 500 Index Fund ... failing by an average of -4.8% per year. And the 4% who beat the index did so by a measly 0.6% per year. The security selection expose details the extraordinarily self-serving and client-damaging behavior of the majority of the mutual funds pushed by financial advisors and brokerage companies. Vanguard, Longleaf, TIAA/CREF, AmeriTrade, State Street and Barklays stand alone among thousands of firms as being worthy of their clients' trust. Echos of Warren Buffett abound ("we eat our own cooking") but he is not explicitly mentioned. The downside to this book is that it is hard to read. Both from the standpoint of a college writing course and because a good deal of financial-industry knowledge is assumed. Notwithstanding the writer's style, this book represents a seminal event in the area of investor advice and should sit, dog-eared and well-thumbed, on every investor's, policy-maker's and regulator's bookshelf.

I used to read many investment books. There are many valid approaches to investing. One way, recommended by Peter Lynch and others, is to choose a diversified portfolio of individual stocks. Another way is to choose professional managers, and the easiest way to do this is through mutual funds. I chose a diversified portfolio of mutual funds. It has been a success. However, there have always been aspects that have made me uncomfortable, and this book has forced me to realize that I have been paying a high price for my active management. And this book has forced me to face the hard question: the people who run my funds are without doubt winners in the game of finance, but I am not at all sure that they are making the 1 or 2 percent above market returns every year that justify that expense. Some of the excellent points that are made: mutual funds often have hidden fees, such as kickbacks to brokers. And it is the shareholders who pay these fees (of course). Asset backed securities such as GNMAs may seem like conservative income choices, but how will they behave in extreme markets? As a product of complex financial engineering, nobody really knows. He strongly embraces simplicity and low cost. He recommends the common sense solution of finding a money manager who is working for the client's interest instead of his own interest (which is often completely opposite the client's.) His basic recommendation is plain vanilla market index funds fun by non-profit institutions. It is awfully hard to argue with this reasoning. At the very least, this book has prompted a look back at how my own funds have done versus how his recommended choices would have done. No investment approach is right for everyone. But this approach deserves to be considered seriously.

This book is incredibly important for individual investors, as it not only highlights expensive mistakes to avoid, but also provides actionable strategies for investing that are especially valuable and easy to implement. Swensen's sections on asset allocation, portfolio construction and rebalancing provide an easy-to-understand approach on why proper diversification is critical to success for any investor. However, his in-depth analysis of the pro's and con's of each asset class is what separates this work from any other investment book I have ever read. It is in this area that this book pays for itself 100 times over. For example, the author provides clear explanations on how and where to invest in U.S. equities, U.S. fixed income, international equities, real estate and cash. He also then provides insights, anecdotes and recommendations on other asset classes such as private equity, corporate bonds and venture capital that are at the same time valuable and shocking. Swensen's short, detailed summaries at the end of this chapter add great value to the reader that is short on time, while the stories of abuses in the mutual fund industry (and implications for individual investors) glued me to the pages. Once I opened the book up I couldn't put it down. Truly a great read.

I am a graduate of the Yale School of Management (with a focus in finance) and have been a fan of Swensen's for a long time. Unconventional Success is, in my view, a must read for anyone who has to manage their own retirement assets (which is most people today). Swensen compellingly makes the case that (a) the vast majority of passively managed funds outperform actively managed funds (after fees), (b) the vast majority of the mutual fund industry allows profit motives to trump their fiduciary duty to investors, and (c) an individual investor's financial assets are best managed by non-profit organizations - i.e., Vanguard or TIAA-CREF. Swensen lays out six "core" asset classes that should form the basis of an individual investor's portfolio, each of which should comprise between 5% and 30% of the portfolio. Below is the "generic" target portfolio outlined in the book: 1. Domestic Equity (30%) 2. Foreign Developed Market Equity (15%) 3. Emerging Market Equity (5%) 4. Real Estate (20%) 5. U.S. Treasury Bonds (15%) 6. U.S. Treasury Inflation-Protected Securities (15%) Swensen also discusses "non-core" asset classes and why each should not be a part of an individual investor's portfolio. These "non-core" asset classes include: 1. Domestic Corporate Bonds, 2. High Yield (Junk) Bonds, 3. Tax Exempt (Municipal) Bonds, 4. Asset-backed securities, 5. Foreign Bonds, 6. Hedge Funds, 7. Leveraged Buyouts, and 8. Venture Capital. We spent so much time in business school glorifying these assets that I found the rationale for why they have no place in an individual's portfolio quite useful. The most valuable lesson in the book for me was the importance of "quarterly, semi-annual, or annual" rebalancing - i.e. selling winners and buying losers to move various asset classes back to long-term targets (taking into account the tax consequences for post-tax accounts). This is a basic lesson, of course, but the reminder was still highly valuable. The book does have a few shortcomings. The book can be a bit technical and dry at times, especially if the reader has no background in finance. I would have also appreciated more discussion of how non-financial assets (e.g., home equity) and personal liabilities (e.g., student loans, mortgage), should impact portfolio allocation. Overall, however, I think anyone with a 401k or a few thousand dollars to invest will benefit from a thorough reading of this book.

David Swensen has managed the Yale endowment portfolio for more than two decades now. Not only have his returns beaten the market, but they've beaten Harvard, Stanford, Princeton and pretty much every other peer portfolio in history. The remarkable thing about Swensen's success is that it is solidly grounded in clearly explainable financial theory. This is perhaps not surprising, since his mentor, James Tobin, won the Nobel prize in economics in large part for his theories of portfolio selection and asset markets. (Tobin was the last great liberal economist to win the prize). What is really surprising is that Swensen wrote a book that brings this theoretical grounding to the practical world that confronts most personal investors. This book is largely about how individuals of modest (or not so modest) means can maximize risk-adjusted, after-tax returns on investment. A remarkable thing about his strategy is that it doesn't take a lot of time, effort or brains to follow it. It does take some courage (rebalancing by selling winning asset classes and buying losing ones is a key part of the plan), but it is easily accessible to anyone who even a few thousand dollars (in or out of a tax-advantaged account like an IRA) to invest. Most reviewers focus on the indictment of the mutal fund industry, which is entertaining (if you can get over your anger at being victimized), but not the most important part of the book. The analysis of how the incentives of managers versus investors play out in various investment vehicles is quite illuminating, and a useful way to look at one's options. Even if you don't care much about financial theory, and don't need to read an attack on the charletans of the investment industry, the clear, actionable and rational suggestions for what to do with your money are worth the price of admission.