Author: David F. Swensen

Publisher: Free Press

Pub. in: August, 2005

ISBN: 0743228383

Pages: 416

Measurements: 9.5 x 6.5 x 1.2 inches

Origin of product: USA

Order code: BA00102

Other information: ISBN-13: 978-0743228381

The author is the famed fund manager for Yale's $7 billion dollar endowment. He also wrote the bestselling book Pioneering Portfolio Management.

David Swensen's Unconventional Success provides sensible advice for the average investor - advice that most people will find difficult to follow in both heady and tough times, unless they understand and absorb the principles he is discussing.

He explains why investments must be properly diversified (bonds, real estate, stocks) and how, within these asset classes, there must be further diversification (foreign as well as domestic stocks; TIPS as well as conventional Treasuries). Secondly, he explains why investors must periodically, methodically rebalance - sell off the successful sectors and buy the unsuccessful ones, to keep the same proportions in the portfolio -despite the fact that most other investors will be doing the exact opposite! In addition, the book contains illustration after illustration of irresponsible management and advertising on the part of the mutual fund industry - a valuable caution. While most people buy high and then (in fear) sell low, Swenson's mechanistic practice would insulate the average investor from emotion and keep him or her focused on probability and long-term results - a fool-proof approach over the long term.

Swensen doesn't believe that stock picking and market timing have much to offer ordinary investors. However, he fails to discuss the (admittedly rare) mutual fund managers who do beat their indexes year after year and over the long term, as well as independent advisors who rate mutual funds and maintain model portfolios of mutual funds that ordinary investors can easily follow, such as the newsletters that advise Fidelity and Vanguard investors. Over the long term these model portfolios do provide some of the diversification and the rebalancing that Swensen advocates, as well as offer some success in market timing (via periodic changes in allocation) and stock picking (via the selection of funds run by superior managers, or funds that seem to be in the right place at the right time to provide superior future results - not necessarily the ones that have done so in the past). While it is true that this approach may be less tax efficient than Swensen's approach (which uses all index funds) I believe that long term it provides "average" results (all that the average investor should expect) which can build substantial wealth without as much fear along the way -since a good model portfolio can use timing and stock picking, as well as intelligent diversification, to moderate risk and volitility. A good newsletter, such as Eric Kobren's Fidelity Insight or Dan Weiner's Independent Advisor for Vanguard Investors, can provide (reasonably) disinterested advice along with brief, cogent explanations of what's happening in markets month by month - a form of "hand holding" that makes it easier for average investors to stay calm, follow methodical advice, and avoid costly errors based on exuberance or fear.

Swensen's attack on the mutual fund industry is well-founded, to be sure, and an important lesson for the average investor to digest. (Interestingly, I haven't picked up any refutation of his charges by the mutual fund industry in rebuttal.) However, his blunt and entirely mechanistic approach to investing is going to be hard for the average investor to follow. It may be that balanced portfolios that Fidelity or Vanguard can run for you would provide superior results long term to what most investors would earn for themselves chasing what Swensen refers to as the "flavor of the month." By not examining some of these less pure but still responsible approaches to investing - and discounting anything that the "for profit" sector of the mutual fund industry has to offer - Swensen may not be serving his readers as well as he might.

In fairness, he does explain why, ultimately, crafting a portfolio is an art as well as a science - but I think he could have provided more options for the ordinary investor in his book, and more illustrations of why his method is superior to other systematic and responsible approaches. Running his model through Vanguard's risk assessment tool shows that investors would be encountering some pretty scary periods without any reassuring updated advice from Swensen to keep them calm and focused. Read this valuable book, then, as an important fundamental discussion of investment options, not primarily as a prescription.

(From quoting Alan Feldman, USA)

Target readers: Mutual fund managers and marketers, investment bankers, MBAs, finance majors, investment consultants, anyone else who's interested in mutual fund and stock investing.

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