Book of the Week: Unconventional Success
07 Jul 2013
This week, I read Unconventional Success by David F. Swensen, the Chief Investment Officer at Yale. This book is targeted toward the individual investor rather than institutions like his previous book, Pioneering Portfolio Management. This is a good book to read if you are getting into investing. I wish I had read it earlier. TLDR : The best advice is to buy an ETF that tracks the S&P; 500 or Wilshire 5000. On foreign equities
Sensible investors avoid speculating on currencies.
Things turn out to be a wash usually when accounting for exchange rates. On domestic corporate bonds
Both when holding bonds to maturity and for shorter terms, bond investors deal with a decidedly unattractive, limited-upside, unlimited down-side, negatively skewed distribution of returns.
I never liked corporate bonds that much anyway. You want to limit your exposure to bad stuff and exposure yourself to good stuff. This is inline with preparing yourself to take advantage of a black swan and insuring yourself against a black swan. On mortgage backed securities
In extreme situations, the Rube Goldberg nature of asset-backed security arrangements contributes to the potential for serious damage to investor portfolios.
This book was published in 2005. If a professional investor thinks something is complex, it can’t be good. Saying something is complex means that you don’t understand it and are unable to access the risk. Decisions, decisions, blasted decisions There are basically only 3 areas that you have to make a choice in investing: asset allocation, market timing and security selection. Asset Allocation Each type of investment has a different risk/return profile and different correlations to each other. Asset allocation is the high level view of your investment. Where are you going to put your money? Under your mattress, cash, stocks, bonds, foreign stocks, venture capital, hedge funds, real estate, etc. The mixture depends on your personal preference for risk and your timeline for cashing out. Stocks tend to be the riskiest and offer the highest reward while US Treasury bonds offer the lowest return with the least amount of risk. If the US defaults on its bonds, there will probably more to worry about than your investments. Maybe I should add firearms, gold, water and food to asset allocation. There is currently a shortage of ammo, which could pose as a good investment opportunity. Market Timing A fool can tell you to sell high and buy low. Past performance is not a sign of future gains. It is hard to distinguish between luck and skill during the good times, because of survivor bias. Bad funds and traders will disappear and those that have done well historically will remain. You’re only left with the good and lucky ones. One way to distinguish the good from the lucky is to examine returns during bad times. Good managers will limit losses. They will not have as high gains during the good times, because taking positions to limit losses costs money. It is important to maintain your asset allocation by rebalancing. To rebalance, you need to sell your winners and buy your losers. As your assets appreciate and depreciate in value, the composition of your investments will change and deviate from your risk profile that you chose. Without rebalancing, you are letting market forces dictate the makeup of your asset allocation. This leads to increased risk. Discipline is required to maintain asset allocation and ride out bumps in the road. Security Selection Most mutual funds suck. They are all designed to beat the market. Beating the market is a zero-sum game, because there has to be a loser for every winner in a transaction. Mutual fund fees make it a less than zero sum game. You have to beat the market plus fees. This means most mutual funds will not beat the market. Most funds do not beat the market. If you can’t beat the market, then you should just invest in the market. The cheapest way to invest is an ETF which tracks the SP500 or Wilshire 5000 (SPY, IVV, VOO). Unaligned Interest When people are in a position where their interest are not aligned with yours, bad things happen. They can get away with it, because people are willing to invest. Most of us are not in a position to evaluate fund managers. When’s the last time you sat down and had dinner with your fund manager? Purchase Unconventional Success from Amazon.com or check it out from your local library.