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Behavioral Portfolio Management Hardcover – March 17, 2014
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"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."- J. Chang Hyjun, Seeking Alpha
About 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 Behavioral Portfolio Management, the methodology which underlies AthenaInvest's patented investment approach. Since 2002 he has managed Athena Pure Valuation/Profitability, Athena's signature equity offering, which has been recognized by PSN and Barron's as a top US active equity portfolio. 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 Handelshojskole 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 ten years on the Board of Directors for AMG National Trust Bank N.A., a financial counselling and investment management firm headquartered in Denver. After receiving his BS in Mechanical Engineering at the University of Idaho, Dr. Howard worked for three years at 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.
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Top Customer Reviews
However, the book is more than that. If you are willing to actively participate in his 12-step program you can discover ways to significantly increase your investment returns. You will read about things like Myopic Loss Aversion (MLA) and how it effects your investments. How diversification may not be the best thing for you. Just to name a few issues.
In summary I found the book absolutely fascinating. With that said be aware of 2 issues: 1) although the book is particularly quantitative much of the work challenging old theories is fairly quantitative. 2) If you are firmly attached to the old theories of MPT and EMH you will find the ideas in this book to be very different and very disquieting.
Probably not. You expect the person overseeing your investments to have intimate knowledge of every holding. It’s your money on the line, after all. To not know would be reckless and irresponsible.
Yet for Thomas Howard, finance professor, money manager and author of Behavioral Portfolio Management, not keeping track of his portfolio positions or the prices he paid for them is far from irresponsible. In fact, it’s an important part of maintaining emotional detachment and control. When you see news about one of your stocks in the media, it can cause you to have doubts and second-guess your analysis. And the best way to avoid these doubts is to forget the stock’s name.
Likewise, fixating on your purchase price can lead you to make poor decisions due to “myopic loss aversion,” or a common human compulsion to avoid losses—even small ones—at all cost. This tends to cause investors to follow the money-losing path of selling their winners too soon and holding on to their losers in hope of breaking even. The best way to defuse these impulses is to simply forget the price you paid.
Extreme? Absolutely. I would go so far as to call it wildly eccentric. But it’s hard to argue with results. His Pure Valuation portfolio returned 66% last year and has generated annualized returns of 29.2% over the five years to April 30.
Howard’s Behavioral Portfolio Management starts with a summary of basic behavioral finance principles. Much of this is rooted in the work of psychologists Daniel Kahneman and Amos Tversky on heuristics and cognitive biases in the 1970s. Over the past 30 years a massive body of work has been amassed that has challenged—and largely disproved—virtually all of the core assumptions of Modern Portfolio Theory and the Efficient Market Hypothesis. Howard essentially sums up the findings with the observation that “markets do not correctly price assets and…emotion trumps arbitrage.”
Rather than mitigate our emotional impulses, the industry actually enables and exacerbate them. For example, overdiversification—which gives the appearance of reducing risk—actually just has the effect of lowering returns. There is little diversification benefit achieved by holding more than about 20 stocks; 91% of diversification benefit can be achieved with just 20 holdings. Padding a portfolio with 100 or more stocks—which is standard for most mutual funds—has the effect of watering down the manager’s best ideas.
Similar comments have been made in countless other books on behavioral finance. But Howard gives us quite a bit of new—and controversial—observations and offers tips on how to incorporate them into our investing process.
To start, contrary to popular belief, most mutual fund managers are actually very good stock pickers.
Yes, you read that right.
I know, I’ve seen the statistics too. Most mutual funds underperform the S&P 500 over time. One recent study showed that 76% of active mutual funds underperformed their benchmark.
So, it is safe to say that most mutual fund managers as a group are terrible portfolio managers. It does not mean, however, that they are poor stock pickers. Their highest-conviction holdings tend to do very well—a 2010 study referenced in the book showed that a fund’s top holding added, on average, about 6 points of alpha. But in trying to diversify and to avoid “tracking error” relative to their benchmark, managers dilute their portfolios with low-conviction picks that water down their returns and actually subtract alpha.
And speaking of tracking error, Howard takes a very unconventional view: tracking error is good. A manager should stick to a strategy in which they have expertise, whether it be deep value, dividend growth, special situations, or some other niche. But they absolutely should not stick within the narrow confines of a Morningstar style box. A manager should go where their strategy takes them, regardless of market cap or any standard classification.
How does all of this translate into actual investment decisions? Howard recommends the following:
1. Choose a strategy in which you excel and be consistent within that strategy.
2. Limit your portfolio to a small number of high-conviction picks. Howard himself keeps his portfolio to ten stocks.
3. Don’t be afraid to be concentrated in a single country or industry if that is where your strategy takes you.
4. Above all, maintain your independence. Investing by committee rarely works.
You can sum up Howard’s approach with one quote: “The consistent pursuit of a narrowly defined equity strategy, along with taking high-conviction positions, is the key to earning excess returns.”
My compliments to Thomas Howard on a book well written.