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Behavioral Portfolio Management (Hardcover)
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Behavioral Portfolio Management (Hardcover)
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The investment industry is on the cusp of a major shift, from
Modern Portfolio Theory (MPT) to Behavioral Finance, with
Behavioral Portfolio Management (BMP) 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.
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