C. Thomas Howard, CEO and director of research at AthenaInvest, caps off the number of holdings in the portfolios he manages at 10. More remarkably, though, Howard swears that “I forget the names of the stocks I buy, as well as the price I paid for them.”
“Sure,” says Howard, a former finance professor at the University of Denver and the author of the upcoming book “Behavioral Portfolio Management.” “People do get nervous when they hear me say this.”
But he firmly believes that forgetting what he owns once he’s bought it is the only way to completely remove individual emotions from investing. And this, Howard says, is vital for behavioral portfolio management, a method he converted to about a decade ago and that he believes is far more fruitful a way to get the best out of the markets.
Human behaviors and biases are well-documented and everyone, including the portfolio manager, exhibits certain traits when it comes to investing. Behavioral portfolio management calls for an investment manager to completely distance himself or herself from those emotions, Howard says, but it also means “harnessing” those same emotions on a broader, societal level to maximize portfolio returns.
“In short, we take out emotions on an individual level but we follow the emotional crowds around, watch their behavior – which is a proxy for price distortions in the stock market – and then we build a portfolio,” Howard says.
For AthenaInvest, the investment outcomes derived from behavioral portfolio management are far greater than those that result from modern portfolio management theory. The firm’s Athena Pure portfolio, which has been in existence for 12 years and picks stocks based on five behavioral factors, has doubled the market in five years, Howard says.
Most of the investment management community still follows modern portfolio management theory, which is based on the idea that although there are many irrational investors, the universe of rational investors dominate the financial marketplace and they quickly arbitrage away any price distortions.