Unconventional Success: A Book Review

It's been a while since I've done a book review and this is a new genre for me to write a review. If you're not interested, skip down to my post about scooping poop at a dog show or the tribute I wrote for Eddie, a friend who recently passed away. Or you might want to go to the end of the review, where I talk about the political implications of his comments (in relation to Social Security). I'm at the airport while I edit this, waiting for the first leg of a light to take to the Old North State. Catch up with you all soon.

David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment (New York: Free Press, 2005), 402 pages, numerous charts and graphs

I put off reviewing this book long enough. Sitting on a board for a private foundation, I have heard the name David Swensen mentioned over and over from our investment advisors. Swensen is the Chief Investment Officer for Yale University and has attracted the attention of the investment world for his stellar results in that position. His 2000 book, Pioneering Portfolio Management, is a classic guide for foundation portfolio management. When I learned that a revised version of Pioneering Portfolio Management was being written and scheduled to be released in early in 2009, I decided to read his book for personal investment that was published just three years ago. I started this book in mid-September, when things look shaky on the Dow but hadn’t yet gotten down-right depressing. As I read, the market started to react erratic and I, along with everyone else, saw investments drop like lead sinkers. I’ve wondered what Swensen would say about the current turmoil in the market, but I feel he would stand by much of what he’s written.

Unconventional Success is not an “investment how-to book.” There are no “stock tips” here, only warnings. There’s no discussion on building a portfolio or any of those silly charts as to what might happen if we place a hypothetical $100 a month into investments for 40 years. Instead, Swensen takes a more academic approach. The first two parts of the book (roughly the first half) deals with investment theory. Swensen covers asset allocation and market timing. This section was well written and explores the various options for investing and provides a good introduction into the various forms of securities available. Swensen, like most investment gurus, is in favor of well diversified portfolios, where each asset class is large enough to matter but small enough that it mitigates risk. He illustrates a well diversified portfolio with the following targets:

Domestic equity.................................30%
Foreign Developed equity ...............15%
Emerging Market equity................... 5%
Real Estate ........................................20%
U.S. Treasury Bonds........................15%
US TIPS.............................................15%

Swensen prefers bonds back by the federal government and stays away from corporate bonds and foreign debt. Corporate paper limits one’s potential gain. If interest rates fall, corporations can refinance, calling the higher interest bonds and reissuing lower interest bonds, if rates rise, you’re stuck with a lower interest rates. Foreign debt is often risky, especially in countries where the government is shaky. Swensen splits his fixed assets between regular treasury bonds and Tips (Inflation protected bonds). There are some REITS (real estate investment trusts) that he likes for real estate investment component, but he’s also critical of many of them due to their fee structures. He sees REITS as long-term investments (and certainly those who have invested in REITS several years ago will have to take a real long term outlook before they can recoup their investment).

Swensen also sees stocks as a long term investment, although he warns not to be too sentimental over particular companies that you want sell when you need to rebalance. He realizes that most individuals have a hard time investing in individual companies. Traditionally, the rule has been it takes at least 30 different stocks, diversified in various sectors of the economy, to reduce risk. Swensen suggests it may even require 50 different stocks and agrees that the average individual doesn’t have time to make such selections. The alternative, the Mutual Fund Industry, is also flawed and Swensen attacks the industry throughout this book. He’s especially hard on mutual funds that are publically held, seeing a conflict of interest between the fund’s shareholders and the fund’s investors. He examines the various fee structures for funds and is critical of the ways they’ve developed hidden fees to transfer value from the investor to the fund managers and owners. He explores taxes on mutual funds and how when someone else sells their portion of the fund, it creates tax liabilities for all the fund owners. In the whole mutual fund industry, he only identifies three funds favorably. TIAA-CREF (Teachers Insurance and Annuity Association and College Retirement Equities Fund) is a non-profit fund set up for educators. Swensen does admit a conflict of interest with his approval of TIAA-CREF (he’s on their board). He has mostly favorable things to say about Vanguard Funds (it's non-profit) and a Longleaf Partners, a small fund that's mostly closed to new investors. Over all, Swensen prefers index funds (lower fees and lower turn-over of stocks which means less taxes). He also suggests there are some benefits for ETFS (Exchange Traded Funds), but admits that there is already signs of companies marketing EFTS with unfair fee structures.

Swensen warns against the practice of active management funds which try to beat the market, acknowledging that for every win, someone has to lose. Instead of trying to beat the market, he advocates maintaining a close what on ones asset allocations and frequently rebalancing. Yale’s foundation rebalances daily (which he admits is not possible for the individual investor). If the equity market rises, they sell and move it into fixed income. If the markets are down, they bring more money into equities. Such a strategy has enabled Yale to comfortably out perform the market in the long run, while avoiding the extreme highs and lows.

This book has political implication. He suggests that schemes like privatizing social security would be a windfall for the mutual fund industry and would not serve the individual investor. This industry has already received a windfall in most companies shifting from a defined pension plan to a self-directed plan, such as with the 401/403 programs. As an investment guru, he is highly attuned to investment schemes where the fund’s interest is not always aligned with the investor (such as mutual fund companies wooing companies for 401 accounts). Furthermore, he’s also critical of companies like Morningstar, that’s supposed to provide non-biased ratings of funds but often fail to serve the public. (Although he doesn’t address this, this critique seems right on in our recent market turmoil, where bonds had high ratings but were stuffed with subprime mortgages).

I don’t recommend this book if you are looking to start investing. But if you want a deeper understanding of the investment industry, I would recommend this book. He seems to go overboard selling the idea that he mutual fund industry fails to serve the individual investor. Reading all the details of tax implications (which if you’re in an IRA or 401/403 you don’t have to worry about) and of fees (which gets us all), is tiring, but also enlightening. I look forward to reading his updated Pioneer Portfolio Management when it comes out in January.

A Day in the Dalits Caste, or why I should receive the father-of-the-year award and other stuff

It’s snowing and I’m happy. Adding to my glee is a fire burning in the fireplace, the first of the season. Listening to the crackling and hissing of the flames makes me happy. There’s a puzzle on the coffee table for when I need to mindlessly pass the time and it makes me happy. Even the Steeler’s loss can’t dampen my spirit.

Can you believe how gas prices have dropped? The photo was taken on Thursday and it has dropped a few cents more since then! I just hope that because the price drops, we won’t forget our need to reduce consumption and become energy independent.

Let me tell you about my weekend…

I spent yesterday cleaning up poop! My daughter’s 4-H club, as a fund raiser, had poop and piss patrol at a large dog show in a nearby city. The club made good money and this is the only fundraiser they do during the year, but 10 hours of cleaning up after dogs and hauling bags of excrement to the dumpster was humbling and enough to make me cherish my day job. An, coming home last night, I’ve never enjoyed a shower so much! This was my first dog show; I wasn’t quite prepared. I’ve come to the conclusion that there are dog people and dog-show people and, to two borrow from Kipling, “never shall the twain meet.” Dog-show people are weird. They dress in a mishmash of tacky sport coats and faux-leather shoes, looking like salesmen at a Vegas convention or actors trying out for the lead in “The Music Man.” They store their dog treats in their mouth and then feed them to their canine while running, with their arm holding the leash up high, like the British hold teacups. Their dogs get to spend hours on a table in a head harness while groomers comb and blow dry their hair. Racism still exists in the dog world; the dog show may be the only place apartheid is tolerated in the 21st Century. Mixed breeds and mutts are not allowed on the premises.

Now that I’ve offended just about everyone, I will admit that I had a good time. Actually, cleaning poop made the day bearable as I couldn’t have imagined sitting in the stands, watching dogs be shown in the rings for 9 straight hours. I did see a lot of neat breeds. But most importantly, my daughter seemed pleased that I was willing to go and help, especially with the really messy ones. (For such a small butt, it amazes me how much a Doberman Pincher with diarrhea can put out, but that’s probably more than you want to know!)

How did you spend your weekend? Did anyone else get down and dirty?

I’m off to North Carolina on Tuesday, to check up on my mom and grandma and the Blues (the fish, not the music). I’ll try to check in occasionally. Be good now, ya’ll hear!

A Lament for a Sheepherder

I digitally copied the photo of Eddie from a print I took in the mid-90s. I took the second photo of sheep on Cedar Mountain in the summer of 2007.
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I got word two weeks ago that Eddie died. I liked Eddie and had over the past few years heard he’d been slipping. When I left Utah nearly five years ago, his hearing was fading and he was having a harder time getting around. He’d just sold his herd, but was still helping the man who brought his sheep. He no longer went up on the mountain or out into the desert every day, but he was still making the trek two or three times a week. I last saw him two years ago. Then, his eyes were going; macular degeneration, I think. He was no longer able to drive. About a year ago I heard he was in a nursing home. Age and illness had robbed this man of the things he enjoyed, running up and down the mountain in all kinds of weather and basking in the beauty of God’s creation. Now, he’s at rest.
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Eddie proudly proclaimed to everyone that he was a sheepherder, even though for him it was business. He hired a herder to stay with the sheep, a man who lived in a sheep wagon and who generally liked being along. Occasionally his herder would come to town for supplies and drink, and after a few days of the latter, he’d go back up on the mountain or out in the Nevada desert, where he’d dry out while tending the sheep, protecting them from predators, and hauling drinking water. Eddie made almost daily trips to check on his herder and the herd, bringing in groceries and feed for the horses and helping him haul water for the sheep. I think he had around 1600 ewes in his herd, which considering that most ewes have twins, equals a lot of lambs. When that many animals are away from a watering hole, a lot of water has to haul. Such a herd also required a large number of rams, along with horses and dogs to help with the work. At night, Eddie did the books and dealt with government leases. Although Eddie was one of the largest landowners around, he still leased land for grazing, especially for winter pasture in eastern Nevada.
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Eddie lived by the rotation of the earth. In the summer, the ewes and lambs would feast on the grass in the high mountains plateaus. Late summer or early fall, the lambs were culled from the ewes and rounded up to be trucked to market. It was always a guess as to how long to wait. The longer the lambs ate the mountain grass, the heavier they were and the more profit they’d bring. But there was always the risk of early snows trapping the herd and he’d have to haul in feed, which would eat up any profit he might have made. And then there was the year of the fire. With much of his range burned, the lambs had to be sold off early, when they were a good 20 pounds light. On another occasion, he told about an early snow. The lambs had already been sold, but the ewes were still on the mountain. The snow was so deep, his truck got stuck and he had to spend a day walking out, while his herder stayed with the herd which was nearly immobilized by deep snow. Getting back to town, he hired a bulldozer to come and clear a path so the sheep could make it down the mountain. In the fall, as the aspen turn bright yellow, he’d ride a horse, trailing the sheep down the mountain and around the south end of town, using a 100 year old livestock trail. As the days shortened, he and the herder would move the sheep from one alfalfa field to another, where the sheep would eat the remains left from the harvest as they moved toward their winter pasture in Nevada. By December, the sheep were roaming around the deserts of eastern Nevada, between Caliente and Pioche, where they ate sage and what grass was left from the summer. If there was snow on the ground, it was easy work for the herders for the sheep could also eat snow for moisture. But if there was no snow, Eddie and his herd would have to drive the old tank trunk to the warm springs at Panaca or another spring on the west side of his property, where they would fill it up and haul the water back to the sheep.

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At the end of winter, Eddie’s sheep got to ride in trucks back east to the lambing barns near Kanarraville. The sheep would first be sheared, usually by men from Australia and New Zealand, who sheared the herds in the American West from late February through April, then returned home, shearing sheep Down Under in their spring which is our fall. Lambing came after shearing (there’s less problems with birthing when the ewe is sheared). For a few weeks, Eddie would hire a host of people to help him by serving as mid-wives to the ewes. Then, as the weather warmed and the snows retreated on the mountain, they’d moved the herd up to the mountain, where the cycle would repeat itself.
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“How are we today,” Eddie would ask with a big grin, whenever he greeted anyone. He was always cheerful even though he’d known his share of heartache. His wife, the love of his life, had died of cancer a few years before I met him. In his living room was a photograph of a large aspen tree. When the tree was small, Eddie had carved a heart and added his name along with the names of his wife and daughter. Carving on aspens was common among sheepherders. Eddie had forgotten about this tree, but as it grew so did the carving and one day a hunter came upon it. He photographed the tree and gave it to Eddie as thanks for allowing him to hunt. Eddie was pleased.
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Eddie also loved his daughter and doted on her and made sure she was well cared for. She was a few years older than me and mentally challenged. Although I never asked, I couldn’t help but wonder if his wife’s cancer and his daughter’s limited mental capacity had anything to do with those blinding predawn sunrises from the west that Eddie and his wife experienced back in the early 50s. Above ground nuclear testing was common in that decade and although the government assured them they were safe and there was nothing to worry about from the white ash sometimes fell afterwards, we now know otherwise.
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I am thankful for the few times I took Eddie up on his invitations to take a day off and ride with him. We’d head out early. Sometimes we stop for breakfast or coffee. In his truck, he’d have some groceries and a few tools to repair fences or gates, maybe a salt block or two. Depending on where the herd was located, we’d drive an hour or two, all the while Eddie telling stories about his dad and about the sheep business and about how lazy the cattlemen could be (there is little love between sheepherders and cattlemen, a feud that goes back into the 19th Century). Lunch was always at the sheepherder’s wagon. In the winter, we’d all go inside to get out of the cold and wind. The smells were enchanting. Pinion burned in the stove as coffee perked. Mutton was always served. Some days we’d eat it with potatoes and carrots, other days we’d have it in a sandwich, the bread lathered with mayonnaise and cheese. We’d wash it all down with coffee.
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Some afternoons we’d scout out the next spot for the camp. Others, we’d take the tank truck out for water. As we drove around, Eddie would show me how he cared for the land. He’d show me where he had been working to stop erosion and to restore the grass that use to be more abundant. Over-herding animals in the first half of the 20th Century had taken its toll. When Eddie got into the business, he decided to run half as many sheep on the land as his dad and the previous tenants. His decision was slowly paying dividends and he was proud of his work and of his land. After he’d do the chores for the day, as the sun was dropping in the sky, we’d head back toward town.
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“When I was in my 20s and just starting out, I was told by another herder that sheepherding was a young man’s business,” Eddie confided in me one day. “Now I believe him.” And now Eddie can relax and let the Good Shepherd take over.

Election Day Rant

A few years ago I’d said that we have about the same chance of having 70 degree weather at this latitude in November as we do of electing an African American to the presidency. Today, thanks to global warming (or a freak sign from heaven) combined with Bush’s eight disastrous years, it looks like both will occur. I voted at 8 AM this morning (wearing a short-sleeve knit shirt) and must have hit the polls at just the right time. I didn’t have to wait at all. But by the time I’d finished filling in all the little ovals on my ballot, a line had formed. They’d been busy earlier, too, but they seemed to have more staff than normal and it made the process go smoothly. I did have to show my picture ID, even though I knew two of the three women handing out ballots and they greeted me by name.

And yes, I voted for Obama. I admit, I did vote for McCain back in the Michigan primary, only because there were no Democratic primary and I feared a Rommey presidency. I feel sad for McCain. I was excited about him in 2000. Back then, he was a maverick. I was even excited when there was a rumor about him being on Kerry’s ticket in 2004. But the maverick spent the past few years kissing up to those on the extreme right and buying into the belief that tax cuts, when we have a 10 trillion dollar deficit, can do everything including cure cancer. McCain has become an old mare and it’s time for him to go out to pasture.

I voted for Obama for three primary reasons. First of all, I think he has the ability to restore our image in the rest of the world. Second, we need a radical change and barring something wild like having two different political parties represented on the same ticket, Obama may be the closest we’ll get to a seismic shift in politics in my lifetime. Finally, he’s a great communicator. I hope he comes to understand that we must make some serious sacrifices in order to rebuild our financial house and that he uses his oratorical skills to sell us on making the necessary sacrifices (as opposed to tantalizing us with new promises for things we can’t afford).

I fear, however, one party dominating both the legislative and executive branches of government. We saw what kind of chaos having no one mind the hen house caused in Bush’s first 6 years. If Obama is elected, I hope Congress keeps him accountable and doesn’t give him a blank check like they gave Georgie Boy. Our government depends on checks and balances!

I hope that whoever is elected will find some wise economic advisors. In the blog of my friend, the economic professor, I came upon this quote and I bring it up because I am a cynic at heart:

Doctor Memory at Blah, Blah, Blog explains the bailout: In a sane world, this would be the beginning of an epochal re-alignment in American party politics. Everyone who voted "no" on this monstrosity would immediately join a new party, let's call it for the sake of argument the "For The Love Of God Don't Do Completely Insane Shit" party. Everyone else would be in the "OMG FREE PONIES!!!11" party. Except that's too depressing a thought to contemplate, since based on the roll call, the Ponytarians have at least a 2-to-1 advantage. And by the way, whatever happens on November 4th, one of them is going to be President.

One final thing on the elections: Yesterday, Arianna Huffinton provides us in her blog the 60 most memorable commercials for the campaign. I’m not sure why Huffington (she’s far more beautiful than Sarah Palin or maybe I’m more drawn to a Greek accent than to a moose gutter), thinks we need to have these commercials available at our fingertips. Perhaps she’s hoping to provide a public service by easing the pain of those addicted to this seemingly eternal campaign. So, to keep them from having to withdraw “cold turkey,” they can listen to the commercials and slowly be weaned of the rhetoric. Or maybe she’s more like Sarah than I think, and has a sadistic streak that runs down her spin, and gets a kick out of tormenting us once more with all the hot air.

Halloween and other updates

I never got around to doing a Halloween post, but here is the pumpkin my daughter and I carved. She picked this one out—it was huge! Halloween was warm for this latitude, a light jacket was all one needed to be outdoors. Normally I have a fire after trick-or-treating, but this year it was too warm. Yesterday, I spent some time cutting, splitting and stacking wood and bringing in some of last years wood and storing it on the back porch for when it finally gets cold enough to use the fireplace.

I had a friend here on Friday and half of Saturday. We spent Friday afternoon on the river, catching the last of fall’s fading splendor. Mostly it’s the oaks that are still colorful, the maples having surrendered their leaves. It was perfect weather to paddle, the temperature being in the low 60s.

We spent the afternoon catching up on each other's life and talking about the books we've been reading, our thoughts on the election, philosophy and theology and other such subjects.
I love it when the sun drops low, later in the afternoon, and the water shimmers with reflected light.




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Yesterday, I came across this quote from Sam Ervin, the late Senator from the Great State of North Carolina:
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"Let books be your friends, for, by so doing, you can summon to your fireside in seasons of loneliness the choice spirits of all the ages. Observe mankind through the eyes of charity, for, by so doing, you will discover anew the oft forgotten fact that earth is peopled with many gallant souls. Study nature and walks at times in solitude beneath the starry heavens, for, by so doing, you will absorb the great lesson that God is infinite and that your life is just a little beat within the heart of time. Cling to the ancient landmarks of truth, but be ever ready to test the soundness of a new idea. Accept whatever your mind finds to be true, and whatever your conscience determines to be right, and whatever your heart declares to be noble, even though your act in so doing may drive a hoary prejudice from its throne. And, above all things, meditate often upon the words and deeds of Him who died on Calvary for, by so doing, 'ye shall know the truth, and the truth shall make you free.'"