Review: Unconventional Success

It's unfortunate that investment books that have sensible advice rarely reach the right audience --- the sophisticated individual investor already knows most of what they have to offer, if they've even read one of the classics, such as A Random Walk Down Wall Street, while the naive investor is unlikely to read the book, since that's the reason why they are naive.

David Swensen comes from managing one of the most successful college endowment investment programs, the one at Yale University (one reason why I can't imagine donating money to a private university is that they have the resources to do well even without charging exorbitant fees, but they do so anyway). Large college endowments can do many things that individual investors cannot --- for instance, they can hold entire office buildings for many years in a diversified porfolio and have it still be only 10 to 20% of their assets. Most individual investors by contrast, can afford to own just their own homes, and for most such investors, that home comprises upwards of 50% of their assets (hence the phrase, "house rich, cash poor"). Bereft of such tools, Swensen does not offer much advice and insight that other, more pedestrain authors haven't already written.

Here are the interesting titbits in the book:

• Core Asset classes include: Domestic Stocks, Foreign Stocks (divided into Developed Markets and Emerging Markets), Treasury Bonds, Tips, and Real Estate. Allocating your money amongst these classes will provide reasonably good opporunity for growth. Swensen does provide a sample allocation, but does not provide any data (or advise) about adjusting the allocation for your particular position in the life cycle.
  
• Corporate bonds do not provide any diversity, and are much worse than Treasuries from an asset-allocation point of view.
• Foreign bonds provide currency risk without the high returns of foreign equity. Since currency speculation is a zero-sum game, foreign bonds are best avoided.
  
• Venture Capital provides surprisingly low returns, mostly because high management fees kill the returns from mediocre VCs, while excellent VCs have such high minimums that most individual investors are locked out.
• Hedge funds also have a poor record, because survivorship bias means that only high performing ones are not shut down after a short time.
• Tax-Exempt bonds are surprisingly dangerous for individual investors.
• Rebalancing is important, since it enforces a "buy low sell high" discipline. When Swensen ran the Yale portfolio, they rebalanced every day! Obviously, due to transaction costs, this should not be attempted by individual investors.
  
• Mutual funds are extremely poor in performance. In fact, honest mutual fund companies are so rare that Swensen names the one honest one. (It's Long Leaf Partners Funds, managed by SouthWestern Asset Management, a privately held company whose employees and management are co-invested in the funds to an incredibly high degree --- naturally, all of Long Leaf's funds are now closed to new investors!) All the others (Fidelity, Putnam, to just name a few) have been involved in so many financial scandals that their commitment to their "customers" (really, victims) is suspect. Page after page was devoted to various mutual fund scandals.
  
• ETFs can vary in quality, so it really makes sense to do your research!
• Vanguard and TIAA-Cref, the two non-profit companies that operate mostly indexed funds (and a few actively managed ones), are the only places where it makes sense to park your money long term. (If you don't already know this, you're probably not reading this blog anyway!)
  

All in all, a surprisingly small number of good bits from a distinguished author. He doesn't mention, for instance,I Bonds, which are an excellent vehicle for most individual investors, because he's not used to managing portfolios less than a few billion dollars. He doesn't mention basic tax trade-offs (Roth versus Regular IRAs and 401ks), or the SEPP 72(t) exception.

All in all, while I'm glad I read the book, the practical advice I got from Brad DeLong last year from a 15 minute conversation while he was at the Google campus did more for my portfolio. On the other hand, his comments about corporate bonds and municipal bonds were very much worth reading, so I'm glad I checked this book out of the Santa Clara County Library.

Economic theory teaches the law of one price, viz., that in freely competitive markets identical goods or services trade at identical prices. In the case of index-fund management, the portfolio management fees charged by various service providers should be identical, or nearly so. Otherwise, rational consumers transfer funds from high-cost providers to low-cost providers, thereby driving the greedy (or inefficient) fund-management companies to reduce prices or exit the business.

Economic theroy fails. In a 2002 study, Morningstar identified fifty-seven S&P 500 index funds that charged more than Vanguard's market-leading 0.18 percent annual fee. The average yearly expense ratio of the non-Vanguard index managers amounted to an over-the-top 0.82 percent...

Had the expensive index funds emanated from a disreputable bunch of bucket shops, investors might conclude that thee poor saps who chose the high-cost funds deserved the consequences of paying active-management fees for less than passive-management results. In fact, the roster of high-fee index fund managers include two of the investment management world's most venerable names --- Morgan Stanley Funds and Scudder Investments.

West Old La Honda Road

 

No, these are NOT natural rock formations

 

View from Harkins Ridge Trail

 

View of the Pacific from Windy Hill OSP

I've learnt not to expect too much from a point and shoot, even the 8 megapixel Canons. But sometimes, I get pleasantly surprised. 

Talking with Grant at the Rivendell Social 1/22/06

 
 

Movie Review: Brothers Grimm

Terry Gilliam presents a fantastic vision of the Brothers Grimm as a pair of con men who are finally faced with justice and sent to confront a truly fantastic situation where they truly have to become heroes. Gilliam manages to sneak in images of Hansel & Greta, the Gingerbread Man, Little Red Riding Hood, amongst others, but those stories while evoking the stories of the original Grimm brothers aren't central to the plot.

It being a Gilliam movie, I kept waiting for the horror or the twist, but it never happened. It truly is the only Gilliam movie I've seen that actually turns out to be what it claims to be, a straight-forward tale told competently. Unfortunately, we've expected more than simply competence from Gilliam, so it was a bit of a let-down.

My other 20% project

Unlike Prophit, gtags will never make it into the New York Times. It is pretty cool to get onto the front page of code.google.com, though. But this is the project I spend most of my 20% time on, and we now have a full time intern working on it as well. There are a lot of obvious refinements possible, but I wanted to get it out there even in this rather raw form to see if there's any uptake at all in the open source community.

I don't think gtags is useful until you have about a million or so lines of source code (though I'd love to find out if I'm wrong!). But if your project has that much code and isn't susceptible to IDEs (C++/C code typically has this property), then I think that having something like gtags around can be a great help. I certainly wrote this tool when I was learning my way around the google sourcebase, and it was valuable enough for other engineers to start using it as well. "Next bench" projects are some of the more gratifying projects you can do, because your customers are other engineers, and those are people you work with every day!

Prospective interns: I've already filled the summer 2006 position, but if you're interested in an internship/co-op with Google in the fall or even winter, and would like to work on gtags, feel free to let the recruiter (or me) know!

A funny post on the Bush presidency

The Bush presidency as a text adventure game. He left out all the tax shenanigans that Bush did, but it's still hilariously funny!

Rivendell Social Ride #1

Lisa & I did 55 miles or so of riding today with the "Rivendell Social" down in San Juan Bautista. Well, the terrain was so ridiculously tandem friendly that we didn't stay social for long and just barrelled along with a couple of other singles and a trike taunting us. I think our average speed ended up being about 15mph, which is unusually good for us. My altimeter read only 2400' of climbing, so that accounts for it, along with the nice tailwind we got on the flat parts. The weather was warm and sunny, and of course getting to see Grant Petersen is great!

Winning the Green Card Lottery

The latest New Yorker has a great article about a couple from Peru who won the Green Card lottery and then moved to the US where the man became a food service worker despite knowing no English and being a mining engineer in Peru (a sought after position on top of the food chain). The reason: the children. It's a stark reminder that despite all the wage compression at the bottom 95% of the U.S., this country is still very much seen as the land of opportunity for most of the rest of the world, if not for the poor immigrants who show up with next to nothing, then (at least in perception) in the hopes that their children will have a better life here than in the home country.

Review: Serenity

Lots of folks have reviewed the movie Serenity, many with more eloquence, passiong, and credibility than I would have. It's a great movie, and if you haven't seen it, you should. I'll review the DVD extras. The crown jewel, of course, is Joss Whedon's sardonic commentary on the movie itself. It's not very special, but he does explain why certain scenes were cut and saved as DVD extras, and how the lighting is done, which is great if you're a photography buff (which I am).

The "making of" features and the various other features round it out to make it complete for fans of the movie. Unfortunately, it's still not enough to get me to buy it. (Then again, watching firefly the series, as good as it was, wasn't enough to get me to buy the DVD set either)

New Cell Phone

I switched cell phones, cell service providers, and cell phone #. If you're a friend and need my new cell #, send me e-mail and I'll give you my new phone #.

Review: Bend it like Beckham

This is not a deep movie. It's a comedy hybrid of the inspirational sports movie and the cultural comedy. Set in Britain, the story is of a soccer mad high schooler (Jessie) about to graduate who is sported by a local member of the women's soccer team (Jules). Since her (Indian) parents don't approve, Jessie plays with Jules' team without their knowledge, lying about having a summer job. What follows is a series of misunderstandings, betrayals, followed by the film's inspirational message driven home with all the subtlety of a soccer ball headed into the net.

That said, I liked the film quite a bit. Soccer to me is still the sport I grew up with (despite never being any good at it), and is to me a far more beautiful game than American football. The game flows with an intensity and grace that makes top level play enjoyable to watch. And of course, in particular, the USA dominates women's soccer despite a sporting culture that doesn't comprehend the off-side rule (hilariously explained during the movie by Jules' dad as an aside) or the concept that a sport might exist without advertising breaks. That makes the entire film and its premise (that being given a soccer scholarship to Santa Clara University would be a great thing to have) somewhat believeable.

The cultural comedy aspect is enjoyable and very funny, even to Lisa who is not as much of a fan of Indian food as I am. So two thumbs up. This is a delightful film to watch when you're down with a cold and your brain isn't working (which was Lisa's state of mind when watching it), or when you're just in the mood for something light. The message is heavy handed but fits its genre. Just don't expect to come away from the movie with a good understanding of the off-side rule.

Republicans are Evil: Part V

This isn't surprising, considering that the administration designed its Medicare plan to serve its ideological agenda--privatizing government services and enriching special interests like the insurance and pharmaceutical industries--rather than senior citizens. The original Medicare law reflects a rather different tradition: the New Deal. Its architects believed that protecting people from economic and medical risk was a job that only a robust and, yes, big government could do properly. Of course, that's a pretty unfashionable idea nowadays. But that hardly makes it wrong.

Of course, this nation is only getting what it deserves. We were too stupid to see through the insurance company/drug company "hilary-care" scare in the 1990s, so now we get the privatized expensive inefficient care that Republicans want you to have. If you're not wealthy, voting Republican is a very dumb thing to do. In the long run, perhaps, as more Americans lose health insurance, maybe we'll vote in a sensible government. But it might take a lot pain and suffering to do so. (Think about it, Enron didn't get the Bush administration evicted)

Yajie gets her boots wet

I'd never done the Saratoga loop hike before --- I've always just mountain biked it, but in winter part of the trails are closed to mountain bikes, so I got Shyam & Yajie to hike it with me. The river is wide (but mosquito free because it was quite cold), and the hike back up on Charcoal Road is just as hard as I remember biking it. (This was the easier of the two stream crossings --- at the other stream crossing, I was too busy taking off my shoes, tossing them across the stream, and then wading in the cold river to take any pictures) 

Review: Perfectly Legal, David Cay Johnston

I first read this book 2 years ago. Ever since discovering that the Santa Clara County Library's electronic catalog, I've stopped buying most of the books, but when Scarlet pointed me at a recent New York Times article about the poor being audited (and denied tax refunds) at a much higher rate than everyone else, I remembered this book and seeing it in the bargain bin at Amazon.com, decided to buy it.

This is an incredibly well researched book --- Johnston won the Pulitzer prize in 2001, and has been nominated 3 other times, and his writing and research shows. Here are a few questions that Johnston raises and answers: What is the Alternative Minimum Tax, and how did it arise? And why is it becoming something that you should be worried about? Why do the poor get audited 47 times more frequently than everybody else? How did Enron use limited partnerships to pay zero taxes while claiming to make $2 billion a year? Why does the IRS not go after tax cheats? Do the fabulously wealthy (those making $3 million a year or more) really pay a lot more taxes than everybody else? How is the Social Security tax regressive?

As I re-read this book, I am struck again and again by how much the wealthy (anyone making more than $100k a year) and the super-rich ($3 million and up) have skewed our tax system in their favor, while leaving the rest of society to foot the bill and causing our deficit to balloon. I consider this book a must-read for those who wish to consider themselves educated and responsible voters. Even if you don't wish to become one, at least do it so that you won't become one of these chumps:

Tom Toth says he is comfortable with the fact that not everyone received a rebate. And he is also comfortable with the aspect of the Bush tax cuts that drew the most criticism, the fact that 43 percent of the income tax cuts, and more than half of the total tax cuts, go to the top 1 percent. "The top 1 percent is probably paying more than 43 percent of all the taxes, so they should be getting the cuts," he said.

But Tom is mistaken. The tax burden on the top 1 percent is nowhere near that hgh, although so many politicians and antitax advocates have made such false claims so many times that millions of Americans believe it to be true. The top 1 percent paid 36 percent of the income taxes in 2001. But when the burden of all federal taxes is added up --- corporate profits, estate, gift, Social Security, Medicare and excise taxes --- they only paid 25 percent.

When the Bush tax cuts of 2001, 2002, and 2003 are fully in place in 2010, the share of taxes paid by the bottom 95 percent of tax payers will rise by 3.8 percentage points, while for the top 5 percent it will fall by the same amount. Nearly all the tax savings will go to the top 1 percent, whose share will decline by 2.7 percentage points.

It is sad that despite how well written this book and how many awards it has won, it will have no effect on the next election --- our education system has failed us to the point where our politics are determined by sound-bites and TV, not well-informed discussion and debate (believe me, I've had discussions with people in the office I work who come extremely close to saying things like: "Don't confuse me with facts!"). I'm afraid that there will have to be a Great Depression like economic disaster before the population wakes up enough to vote in a responsible politician like Franklin Roosevelt to restore the Great Society.

More Bike Mainteneance

Our tandem timing chain and my commute bike's chain all decided to wear out at the same time, so when I measured the chains today after a ride I had to replace all of them. The commute bike's easy and cheap: 8-speed chains are ancient, and I know the exact length (i.e., one entire box worth of chain), and the chain comes with a handy quick link, so the switch was over in 20 minutes (including time taken to attempt to clean the rear deraileur pulleys).

The timing chain requires 2 chains. I had half of a chain left over, and an extra chain sitting around. I use single speed chains on the timing chain --- the chain never shifts and the chainline is always perfect, so why waste money using expensive deraileur chains? Putting together the chain is a pain, though, since I only have one quick link, I had to pull the pins apart using a chaintool. It's been a really long time since I last did this, so it took me much more time to get it right than it should. And when I was finished, I'd found that I'd put a half-twist in the chain! So it was off and on again. Sigh.

At least we got some riding in today. 38 miles, and we hit our top speed of 52.3mph coming down Los Trancos! Woohoo!

Waking Life

Doug Orleans told me that the two characters from Before Sunset/Before Sunrise show up in "Waking Life", and I'd become a Richard Linklater fan from those two movies alone, that we had to see "Waking Life."

The animation in "Waking Life" was done by filming the movie as though it was a life-action film on digital video and then rotoscoped and recolored. The result is a mish-mash of art styles, where everything moves, buildings, streets, and the position of a person's features. This is not a movie to watch if Doom gave you motion-sickness.

As with the other Linklater movies that I reviewed, this movie is mostly talking heads in a dream-like sequence. Discussion after discussion follow, starting with a pretty decent exposition of existentialism as a philosophy and then transitioning to a lamenting of the limitation of words (a common theme amongst English professors everywhere, it seems), an explanation of how lucid dreaming works, along with some statements on the nature of human living. Linklater attempts to be deep, but seriously, trying to understand anything in depth in a 100 minute movie is a lost cause.

I don't consider the movie a waste of time, but Lisa was thoroughly lost in several sections of it, and keeping up with the dialogue and transitions (some of which don't make sense, just like a dream) was a chore in some cases. A cautious thumbs up from me, but watch "Before Sunset/Before Sunrise" first, and decide if you like Linklater's movies. If you're not already a fan of his work, this movie will leave you cold.

Review: Veronica Mars, Season 1

Lisa & I spent the last couple of weeks watching nothing but Veronica Mars, a TV show hailed by many as the successor to Buffy: The Vampire Slayer. The show, it's basic plot, and the characters involved are discussed extensively elsewhere, so I won't discuss the basics.

Veronica Mars falls into the "mystery story" genre, much like Nancy Drew or the Hardy Boys, or perhaps, Kinsey Milhone in a teen/high school setting. From what I can tell, American High School is hell, and many of America's executive producers and script writers are still trying to work through the trauma of having to attend one by producing TV shows and movies about their experiences. The alternative explanation, that teens are the most avid consumers of TV and (especially) movie media is too depressing to contemplate.

In any case, Veronica Mars is firmly in the genre, with each episode revolving around a (usually high school related) mystery to be solved, with an over-arching plot/mystery involving the protagonist. Most of the mysteries are more easily solved by the viewer by playing the meta-game of figuring out what the misdirection of the plot is, rather than observing the clues provided by the show, since the writers do work very hard at the misdirection. In any case, the mystery is barely the point in most cases, since Rob Thomas tries to make many of the shows as Chandler-resque as possible, down to an occasional voice-over which doesn't quite make it as a "hard-boiled" voice of the protagonist.

Veronica Mars herself is an incredibly strong character. She's smart, sassy, courageous, and has no room in herself for doubt, angst, or self-pity. She has the maturity to admit when she's wrong, and is mature enough to let a beau down as soon as she realizes that she's dating someone else. Too good to be real? Very much so, but this is TV, and while watching the series we did not at all mind listening to Kristen Bell speak dialogue that sounds great when snapped back as an off-the-cuff remark, but we would have taken a day or so before coming back with such a snappy comeback. One does wonder where Veronica finds the time to do homework, but I do have friends who were smart enough that homework took up very little time (especially given the pathetic standards we have for Science and Math in the U.S.), and had time to play pool before finals, and the series does establish Veronica as being a very smart, precocious teen. The supporting cast includes Veronica Mars' convenient contacts: a teacher's aide, a young police officer at the sheriff's office, a computer expert (a girl, of course), and the leader of the local biker gang. Enrico Colantoni also plays Keith Mars, in what I consider to be the healthiest father/daughter relationship I've seen on TV --- Keith Mars is neither an absent father nor a bumbler.

The inevitable comparison with Buffy: Veronica Mars is a genre show that uses its strong characters to provide human interest, mis-direction, and plot, while Buffy is a character-driven show that uses its genre's tropes and plots as a metaphor for what its characters go through as part of growing up. Buffy and "the scoobies" grow and mature over the years, while Veronica Mars is already such a fully developed human being that I don't know if she's got a lot more room to develop as a person (but I am eager for Rob Thomas to surprise me). Joss Whedon is not afraid to put Buffy through hell, and while Veronica does have her (metaphorical rather than literal) demons to confront, she deals with them so deftly and with such self-confidence that the impact on the viewer is lessened.

In any case, Lisa, who could not watch Buffy because of its genre trappings, kept clamoring to see the next episode every time I wanted to pause the DVD for the night, so obviously she gives Veronica Mars a thumbs up, as do I. It is very much worth your time.

STOP READING NOW IF YOU DON'T WANT SPOILERS

There are a few shows that have massive plot holes. For instance, in Kanes and Abels, we are asked to believe that the father of a working class Chinese over-achiever, Hamilton Cho, hired a private investigator to haress an academic rival of Cho's. We've established that a private investigator cost about $250 a day, yet we see Cho working at his father's Pizza Restaurant. I can't think of a situation in which an Asian parent would not hire help for the restuarant during exams for $250 a day and have his kid study instead of the dubious tactic of hiring a PI to
harrass a classmate. Nevertheless, the episode manages to portray the Cho as a cool character, so the episode doesn't suck too badly as a whole.