Tuesday, November 7

Unconventional Success: a book review

David Swensen has written an excellent book for individuals investors. He boldly criticizes (by name in some instances) the greed and evil of the mutual fund industry, and advocates individuals to create simple, but broadly diversified and passively managed investment portfolios with not-for-profit fund management companies. He also discuss each investment product in detail and the benefits of sticking with the core asset class.

  • Most fund managers try to beat the market. However, this proves so difficult to be done that most individual investors are better off using market-mimicking, passively-managed strategies.
  • These strategies involve picking investments only from core asset class (US/non-US stocks, US Treasuries and real estate). The proportion can vary based on the investor’s risk appetite, knowledge and personal preference for any of the investment products.
  • Rebalancing is very important as the action is a way to ensure “buy low sell high”. For example, the current environment favors energy stocks and shuns tech stocks. A rebalancing act would mean selling energy (at high price) and buying tech (at low price), thus achieving the “buy low sell high” principle.
  • Rebalancing often means a contrarian approach – only a very rational investor can do this in a consistent basis, but he believes this is one of the success factors behind his own Yale Endowment Fund.

On Mutual Funds and Hedge Funds

  • Active management by mutual funds and hedge funds only makes sense if the manager can deliver a superior return. Unfortunately most don’t.
  • He believes the Morningstar rating system of statistical, backward-looking analysis does not make sense because it encourages the tendency to invest based on past experience, a conventional (but wrong) way of investment.
  • Don’t pick the funds based solely on performance. The ones with best performance this year often have dismal performance in the next (e.g. internet funds).

On Selecting Fund Houses

  • If possible, pick the non-profit fund managers, such as Vanguard and TIAA-CREF (teacher Insurance Annuity Association and the College Retirement Equities Fund).
  • ETFs are good alternatives because of their low cost and passively-managed nature. The best ones are offered by State Street and Barclays. Beware of the sophisticated ETFs offered by retail-oriented banks as they carry a much higher management cost with no value.


  • Mr. Swensen's advice is so elegantly simple that even a beginner in investment can reap much benefit from reading his book.
  • In fact, I have constructed a balanced, diversified and easy-to-manage portfolio based on his advice. You can join my learning experience here.
  • However, for a financial professional like myself, I have to say I still prefer active management / stock picking for a big part of the portfolio because it has been proved successful in my case. Unlike his $14 billion Yale Fund, my portfolio is small enough for individual stocks to make a difference. Maybe this is the reason?


Blogger Fibonacci said...

hello, i'm interested in your stock portfolio, too. (i.e. on top of the ETF portfolio you show in your blog)...

would you mind highlighting some of your current holding ? :-)


Thursday, June 07, 2007  

Post a Comment

<< Home