Portfolio management is a tough business. Each day, managers face the challenges of an ever-changing and unforgiving market, where strategies and processes that worked yesterday may not work today, or tomorrow. The usual advice for improving portfolio performance—refining your strategy, staying within your style, doing better research, trading more efficiently—is important, but doesn’t seem to affect outcomes sufficiently. This book, by an experienced advisor to institutional money managers, goes beyond conventional thinking to offer a new analytic framework that enables investors to improve their performance confidently, deliberately, and simply, by applying the principles of behavioral finance. It offers a conceptually straightforward and well-tested framework that measures key inputs in active portfolio management to management success like skills, process, and behavioral tendencies with evidence of how it helps managers enhance self-awareness and become better investors. In a series of short, accessible chapters, the author investigates a range of topics from psychology and neuroscience, describing their relevance to the challenges of portfolio management. Finally, the book offers seven ideas for improving. These range from maintaining an investment diary to performing rudimentary calculations that quantify basic skills; each idea, or “project,” helps managers gain a deeper understanding of their strengths and shortcomings and how to use this knowledge to improve investment performance.
The SEVEN IDEAS FOR IMPROVING PERFORMANCE are
• Embracing the Scientific Method • Maintaining a Diary
• Accounting for Skill • Learning about Buying Skill
• Measuring Your Sell Effectiveness • Calibrating Sizing
• Using Checklists
The book is useful for postgraduate students of management and professionals.
“The Disciplined Trader meets Moneyball. This book is a worthwhile read for any portfolio manager, analyst, or trader focused on continual improvement and even greater success.”
—Warren Touwen, Core Product, Bloomberg
“For fund managers seeking to improve their investing skills there are many publications offering tantalizing but fragmented paths for progress. In this book Michael Ervolini brings together topics such as fast and slow thinking, checklists, and self-awareness to construct coherent and pragmatic solutions. Using the principles of the scientific method he shows how a successful investment process can evolve through time, improving the consistency of decision making and keeping investing skills relevant in an ever-changing world.”
—Simon Savage, Asset Manager, GLG Partners
“Michael Ervolini is a clever man in touch with reality. Recognizing that portfolio management is a tough, challenging business full of conflicts, he gets it that rationality is easy to talk about but difficult to implement. It requires recognition of deep uncertainty and the human resource that is emotion. Since passive investing puts you at the mercy of the market, active portfolio management has to be made to work. It can be, Ervolini says, if there is proper feedback. It requires a willingness to be curious about what we do and to create ways to learn from experience. This is what he does in this book. Read it!”
—David Tuckett, Director, Centre for the Study of Decision-Making Uncertainty, University College, London
About the Author
MICHAEL A. ERVOLINI CEO of Cabot Research, a global software company that provides innovative analytics to money managers to help them improve portfolio performance
Table of Contents:
Foreword by Terrance Odean Preface Acknowledgments Introduction Part One: Game Change 1. Industry Challenges 2. Why Johnny Can’t Improve 3. New Analytic Framework 4. Process and Behaviors 5. Feedback in Action 6. Phantastic Risks Part Two: Behavioral Matters 7. What Drives Selling? 8. Sell the Way You Buy—Strategically 9. Bearing Up in a Bear Market 10. Aching Conviction 11. Unconscious Deliberation 12. Investing in Self-Awareness 13. Stressing Performance 14. Thesis, Narrative, or Just Another Disappointing Story 15. Dreaming of Alpha 16. Motivated Reasoning 17. Regrettable Choices 18. Endowing Success 19. Counterfactual Investing 20. Great Investing is Not Natural 21. Inside-Out Investing 22. Beware Phantastic Investments 23. Thanks for the Memories 24. Skills, Process, and Behaviors 25. Processing Success 26. Primed for Success 27. Fear, Anger, and Risk 28. Successful Choices 29. Changing for the Better 30. Portfolio Thinking 31. Promiscuous Thinking 32. Getting in the Flow 33. Believing is Seeing 34. A Storied Portfolio 35. The Trouble with Improving 36. Tired Investing 37. That Winning Feeling 38. Hold That Thought 39. Overcoming Overconfidence 40. The Power of Vulnerability Part Three: Improving Right Away Project 1 Embracing the Scientific Method Project 2 Maintaining a Diary Project 3 Accounting for Skill Project 4 Learning about Buying Skill Project 5 Measuring Your Sell Effectiveness Project 6 Calibrating Sizing Project 7 Checklists Epilogue Glossary
