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Behavioral Portfolio Management

How successful investors master their emotions and build superior portfolios

By C. Thomas Howard
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About the Author

C. Thomas Howard

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, ... Read more on C. Thomas Howard

Contents Listing

About the author
Preface
Acknowledgements
Executive summary

1. Behavioral Portfolio Management

Section 1: The Cult of Emotion

2. Emotional Brakes
3. Randomness
4. Cult Enforcers
5. How the Cult of Emotion Invests
6. Forty Years in the Desert: The Disappointing Tale of MPT

Section 2: Leaving the Cult of Emotion

7. Releasing Emotional Brakes: a 12-Step Program
8. Mitigating Emotional Costs
9. Style Grid Performance Drag
10. Diversification: Applying Bubble Wrap
11. The Volatility Trap
12. Will True Risk Please Stand up!

Section 3: Becoming a Behavioral Data Investor

13. Investment Strategy
14. Best (and Worst) Ideas of Equity Managers
15. Building an Equity Strategy
16. The Power of Dividends
17. Behavioral Market Timing
18. What Future May Come

Appendix: The Bucket Model: a Case Study

Bibliography
Supplemental bibliography

Index
About the author
Preface
Acknowledgements
Executive summary

1. Behavioral Portfolio Management

Section 1: The Cult of Emotion

2. Emotional Brakes
3. Randomness
4. Cult Enforcers
5. How the Cult of Emotion Invests
6. Forty Years in the Desert: The Disappointing Tale of MPT

Section 2: Leaving the Cult of Emotion

7. Releasing Emotional Brakes: a 12-Step Program
8. Mitigating Emotional Costs
9. S ...

Jacket Text

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.

Professional 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

"There has been a glaring hole in the study of behavioral finance, namely, how to incorporate its caveats and principles into successful investment management. Behavioral Portfolio Management helps to fill the gap left behind by theorists with its creation of a unique framework for investment managers." - Jason A. Voss, CFA, CFA Institute Behavioral Finance Content Director, author of The Intuitive Investor, retired investment manager

"Tom Howard was the most inspirational and influential professor in my master's program. I am pleased that he has taken his enthusiastic and thorough approach from the classroom to the real world. His proven ability to harness behavioral factors and rigorously apply them to the portfolio management process makes this book a fascinating read!" - George Spentzos, Managing Director, Societe Generale, London, UK

"This book gives good, conservative advice, and does not promote risky cowboy-like investment. I recommend it to anyone getting into finance, or looking to invest for their retirement." -- Ben Wolinsky, Olive Branch United

"This book is not merely a boring reiteration of the necessary fundamentals, but contains a combination of facts that show weakness of MPT and original ideas. The book contains inconvenient author findings of good stock picking skills of fund managers and obstacles that prevent good fund performance. Although financial gains through common stocks are possible for any investor, the author shows that consistent investment strategy allows increase probability to achieve good results. IMO some author's ideas are still not proven adequately but I think it will be fruitful to read this book not only for CFAs (prime audience) but also for amateur investors."


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Media Coverage

Forbes

Would you trust a money manager who couldn?t recall the names of the stocks in his portfolio?

Probably not. You expect the person overseeing your investments to have intimate knowledge of every ...

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Olive Branch United

I recall the episode of Rumpole of The Bailey titled Rumpole And The Barrow Boy, where a financier blames a crisis on stockbrokers who think like fruit vendors. An unfair comparison, I believe, as ...

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Seeking Alpha

This book is not merely a boring reiteration of the necessary fundamentals, but contains a combination of facts that show weakness of MPT and original ideas. The book contains inconvenient author ...

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