Not one to look a gift horse in the mouth, I've spent the past several days (OK, maybe it was longer, because I kept putting it down so many times) slogging through a review copy of a book sent to me by Free Press, a division of Simon & Schuster. It's a new investment book called Unconventional Success: A Fundamental Approach to Personal Investment, by Yale University's chief investment officer, David F. Swensen. I had been eagerly awaiting its publication, but I ultimately found the book tedious and not particularly groundbreaking.
That could be a problem, because the success of Unconventional Success will depend upon whether it can distinguish itself from the slew of investment books out there. Swensen is a legendary figure in institutional finance, and neither his thesis nor his writing is sloppy. In fact, his work is well-researched and admirable for its compilation of statistical and anecdotal detail. Yet Unconventional Success is much like the required reading of Edmund Spenser's poetry in freshman English -- you know you're a better person for having read it, but getting through it requires more than a few No-Doz. To assist in your pursuit of higher knowledge, I thought I'd tear a page from that other campus standby -- the abbreviated-notes version that comes between the familiar yellow covers -- and provide you with our Fool Notes summary.
About the author
Not many other investment managers can boast of the 16.1% per-annum returns that Swensen, also a finance professor at Yale's School of Management, has generated since he took charge of the school's endowment in 1985. His unparalleled performance among his peer university endowment managers owes much to an investment style that takes note of asset allocation -- a style that emphasizes diversification while seeking opportunities in less liquid markets. His previous book, Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, quickly became a classic in the field of institutional investing upon its publication in 2000.
About the book
Succinctly stated on Page 1, Swensen recommends that "investors engage not-for-profit fund management companies to create broadly diversified, passively managed portfolios." From an investment perspective, you could close the book after having read his thesis and probably even pass any exam requiring an essay describing his directive. Even Swensen acknowledges as much when he states on the following page that "the message of Unconventional Success requires only a few pages to describe the blueprint of a well-diversified, equity-oriented, passively managed portfolio, using not-for-profit investment managers to implement the plan."
So why the other 400 pages? Swensen contends that "a prefabricated version of the recommended strategy provides scant assistance to time-constrained investors. Investment success requires the conviction that comes from a fundamental understanding of the rationale for building the portfolio to certain specifications." Fair enough . but couldn't he have just said, "I'll show you why?" Instead, Swensen proceeds to take us on a yawn-inducing tour of the main sources of return from capital markets -- asset allocation, market timing, and security selection -- and he explains his view of their significance for the individual investor.
More riveting than the financial theory is his angry diatribe at those who he thinks act particularly unethically toward the individual investor. He derides a variety of Wall Street individuals and institutions, lambasting such figures as former Merrill Lynch
Investment advice summary
1. Asset Allocation. Swensen advises investors to diversify among core asset classes of domestic equities, foreign and emerging market equities, U.S. Treasury bonds, U.S. Treasury Inflation-Protected Securities, and real estate. He believes that other sometimes wildly hyped classes should be ignored, since they may inadequately compensate for risk or impose excessive costs.
2. Market Timing. Swensen warns against chasing the performance of "hot" funds and to beware of backward-focused ratings, such as those used by Morningstar
3. Security Selection. Swensen does not believe that most individual investors have the time or the resources to do well actively managing their own securities portfolio. Instead, he opines that individuals should identify core asset class vehicles and invest in similar index-mimicking funds through investor-friendly management firms such as Vanguard or TIAA-CREF (Swensen serves as a trustee of TIAA) or exchange-traded funds for those with more capital who favor a more direct approach.
Is Swensen's advice really unconventional? Not for the well-informed Fool. You are probably already familiar with most of his pronouncements. Although I respect the research and sentiments embodied in Unconventional Success, I wouldn't consider it required Fool reading. But let's take note of the rarefied strata of Fooldom. The only reason you're even reading this article is that you have an interest in finance and investing. For most of the folks on Main Street who do not share a similar interest in Wall Street, it's easy to be lulled into the seemingly effortless way of investing through heavily touted funds without digging deeper into whether the funds' interests are truly aligned with those of their investors.
It would be great if more of Main Street would read Unconventional Success, but that's where my confusion with the book remains -- I'm not quite sure of its intended audience. It's wordy and at times even boring -- too much so to make inroads to Main Street, yet not sufficiently groundbreaking to thoroughly interest the more financially savvy.
Swensen has stepped down from his ivory tower to help individuals make better investment choices. Perhaps the book's most appropriate place, however, is the academic's shelf, where his attention to detail and synthesis of market events may be most appreciated and from which his efforts to guide public policy toward more investor-friendly solutions may be most fruitful.
Study help: Quiz
1. Can you describe your theory of asset allocation and articulate your portfolio's goals?
2. How often do you rebalance your portfolio?
3. How often are you seduced by mutual fund advertisements boasting of past performance or high ratings?
4. How do you determine whether an investment management company has your best interests in mind?
S.J. Caplan welcomes comments. A fan of exchange-traded funds, she does not own shares of any of the companies mentioned in this article. By the way, she never used any commercially available summaries of any required college reading. Honest. The Motley Fool has a disclosure policy.