Behavioral Portfolio Management
17 March 2014Synopsis
The investment industry is on the cusp of a major shift, from Modern Portfolio Theory (MPT) to Behavioral Finance, with Behavioral Portfolio Management (BPM) the next step in this transition. BPM focuses on how to harness the price distortions that are driven by emotional crowds and use this to create superior portfolios. Once markets and investing are viewed through the lens of behavior, and portfolios are constructed on this basis, investable opportunities become readily apparent.
Mastering your emotions is critical to the process and the insights provided by Tom Howard put investors on the path to achieving this. Forty years of Behavioral Science research presents a clear picture of how individuals make decisions; there are few signs of rationality. Indeed, emotional investors sabotage their own efforts in building long-horizon wealth. When this is combined with the misconception that active management is unable to generate superior returns, the typical emotional investor leaves hundreds of thousands, if not millions, of dollars on the table during their investment lifetimes.
Howard moves on to show how industry practice, with its use of the style grid, standard deviation, correlation, maximum drawdown and the Sharpe ratio, has entrenched emotion within investing. The result is that investors construct underperforming, bubble-wrapped portfolios. So if an investor masters their own emotions, they still must challenge the emotionally-based conventional wisdom pervasive throughout the industry. Tom Howard explains how to do this.
Attention is then given to measureable and persistent behavioral factors. These provide investors with a new source of information that has the potential to transform how they think about portfolio management and dramatically improve performance. Behavioral factors can be used to select the best stocks, the best active managers, and the best markets in which to invest.
Once the transition to behavioral finance is made, the emotional measures of MPT will quickly be forgotten and replaced with rational concepts that allow investors to successfully build long-horizon wealth. If you take portfolio construction seriously, it is essential that you make the next step forward towards Behavioral Portfolio Management.
Details
17 March 2014
9780857193575About the author
Dr. Howard is co-founder of AthenaInvest, a Greenwood Village-based SEC Registered Investment Advisor. He led the research project that resulted in Strategy Based Investing, the methodology which underlies AthenaInvest's investment approach. He oversees Athena's ongoing research, which has led to a number of industry publications and conference presentations. Dr. Howard currently serves as CEO, Director of Research, and Chief Investment Officer at Athena.
Dr. Howard is a Professor Emeritus at the Reiman School of Finance, Daniels College of Business, University of Denver, where for over 30 years he taught courses and published articles in the areas of investment management and international finance. For many years he presented stock analysis seminars throughout the US for the American Association of Individual Investors, a national investment education organization headquartered in Chicago. Dr. Howard has been a guest lecturer at SDA Bocconi, Italy's leading business school and at Handelsho/jskole Syd in Denmark and was a 2004 Summer lecturer in international finance at EM Lyon in France.
He consulted with a number of firms, most recently First Data Corp and Janus Capital Group, and served for 10 years on the Board of Directors for AMG National Trust Bank N.A., a financial counseling and investment management firm headquartered in Denver.
After receiving his BS in Mechanical Engineering at the University of Idaho, Dr. Howard worked three years for Proctor Gamble as a production and warehouse manager. He then entered Oregon State University where he received an MS in Management Science after which he received a Ph.D. in Finance from the University of Washington.
Reviews
My compliments to Thomas Howard on a book well written.Charles Lewis Sizemore, CFA, editor, Macro Trend Investor, and chief investment officer, Sizemore Capital Management
Professional money managers and investment advisers alike will find Tom Howard's thought-provoking exploration of the practical implications of investing in a world where emotional crowds dominate the determination of prices to be an interesting and engaging read.Jim Peterson, Chief Investment Officer, Charles Schwab Investment Advisory, Inc.
By rethinking the basic challenges of equity investing from a behavioral viewpoint, Professor Howard has arrived at some totally fresh insights into what it takes to be an outstanding long term investor. Though aimed at professionals in the field of investment management, many of the ideas presented in this highly readable book will be invaluable to a wider audience.Andrew Cox, Director, Janus Capital Group
Tom Howard masterfully bridges the gap between the insights of behavioral finance and the demands of portfolio management, and he explains behavioral data investing in a forthright and engaging style. Advisors and investors alike stand to benefit from this book.Philip Lawton, Ph.D., CFA, Research Affiliates, LLC
Books by C. Thomas Howard
Media enquiries
If you'd like to get in touch with the author for interview or comment, or you'd like a review copy of this book, please contact us at pr@harriman-house.com or call +44 (0)1730 233870.
Rights
For information on available rights, please contact rights@harriman-house.com
Bulk purchases
We offer discounts for bulk purchases. Please contact specialsales@harriman-house.com for a quote.