Читать книгу Behavioral Portfolio Management - C. Thomas Howard - Страница 19

BPM is built on the dynamic interplay between Crowds and BDIs. Crowds more often than not dominate market pricing and it is only by chance that individual security prices fairly reflect underlying value. Price distortions partially offset one another when aggregated across all securities, but even at the market level significant distortions remain. Thus prices more commonly reflect emotions than they do underlying value.

The events that trigger Crowd responses may be short lived, but the subsequent emotions are long lasting. As a result, price distortions are both measurable and persistent. This provides BDIs with an opportunity to identify distortions and build portfolios benefiting from them. Even though a BDI portfolio will outperform, building such a portfolio is emotionally difficult because the BDI is frequently going against the Crowd. The need for social validation acts as a powerful deterrent for most investors. Given the difficulty of behavior modification, there is little reason to believe that this situation will change any time soon. So I contend that BDIs will have a return advantage relative to Crowds into the foreseeable future.

BDIs depend upon Emotional Crowds for generating superior returns. But the impact of emotion is felt well beyond this relationship. Market professionals, such as portfolio managers, mutual funds, hedge funds, institutional funds, consultants and financial advisors are also impacted. Viewing the world through the lens of BPM reveals that the decisions made by these professionals are often based on faulty emotional analysis. It appears that much of what passes as professional analytics and due diligence is a way to rationalize emotional catering.

In this book, I focus on managing equity portfolios as a way to illustrate the three basic principles of BPM, with the proviso that these principles apply to managing portfolios in other markets as well.

1 BPM’s first basic principle, that Emotional Crowds dominate market pricing and volatility, is presented along with supporting evidence.

2 The second basic principle, that BDIs earn superior returns, is presented along with supporting evidence from the active equity mutual fund research stream. I also discuss the evidence regarding average equity fund performance and reconcile these two results.

3 The third basic principle, that investment risk is the chance of underperformance, is presented alongside the argument that emotions need to be carefully distinguished from investment risk.

I now discuss each of these basic principles in more detail.