CFA Conference: C. Thomas Howard

CFABehavioral Portfolio Management: A New Paradigm for Managing Investment Portfolios

Moderated by Craig D. Senyk, CFA, Mawer Investment Management

C. Thomas Howard is CEO, director of research, chief investment officer, and co-founder at AthenaInvest, a US SEC–registered investment adviser. He led the research project that resulted in strategy-based investing, the methodology that underlies AthenaInvest’s investment approach. Dr. Howard oversees Athena’s ongoing research, which has led to a number of industry publications and conference presentations. He is also professor emeritus at the Reiman School of Finance at the Daniels College of Business at the University of Denver. Previously, Dr. Howard lectured at SDA Bocconi School of Management, Handelshøjskole Syd, and École de Management de Lyon. He has also served as a consultant for a number of firms, including First Data Corp and Janus Capital Group, and served on the board of directors at AMG National Trust Bank. Dr. Howard holds a BS in mechanical engineering from the University of Idaho, an MS in management science from Oregon State University, and a PhD in finance from the University of Washington.

Issues include the following.

  • Measurable and persistent behavioral factors are emerging as a new source of information with the potential to transform how we think about portfolio management and to dramatically improve portfolio performance
  • Behavioral portfolio management (BPM) is the next step in a developing paradigm shift away from modern portfolio theory and toward behavioral finance
  • BPM looks beyond investors’ cognitive errors and focuses on how to harness price distortions driven by emotional crowds to create superior portfolios


My session notes follow. As always, these are contemporaneous notes. I make no guaranty as to their accuracy or completeness.

Behavioral Finance (financial research plus behavioral science) is an emerging paradigm, replacing MPT; we are fundamentally irrational

Fundamental era (1934-1973); MPT (1974-2013?); Behavioral Finance (2014-?)

Behavioral Portfolio Management Principles

  • Emotional crowds dominate pricing and vol (prices rarely reflect underlying fundamentals); emotions drives investing; we should be in stocks, but the average 401k portfolio is 50% cash, 30% cash and 20% stocks; at 66, Howard has a 50-year investment horizon (a few people live that long) – he’s 100% stocks: emotions trump arbitrage
  • Behavioral data investors can earn superior returns (don’t follow the crowd but the behavioral challenges are enormous); seek objectivity about behavioral realities: building superior portfolios is straightforward but emotionally difficult
  • Redefining risk as the chance of underperformance (vol isn’t risk, it’s an emotion)

Therefore, release your emotional brakes, understand randomness and move beyond MPT (rationality model; Sharpe ratio; tracking error)


  • Releasing Emotional Brakes – we need to free ourselves
  • Understanding Randomness – we know much less than we think
  • Excess Returns (almost nobody has a rational client; Sharpe ratio – long-term return v. an emotion: does that make sense?

Implementing BPM

  • We suffer from behavioral and cognitive biases
  • Switch to the language of behavioral finance
  • Understanding randomness – we have great odds with equities over the longer-term
  • But the financial crisis was painful
  • Invest probabilistically – don’t build a strategy around a relatively rare event

Excess returns

  • Avoid closet indexers (“active share”)
  • Best ideas (Cohen, Polk and Silli)
  • Strategy

Manager behavior is key

  • Strategy
  • Consistently pursued
  • High conviction positions

Desirable characteristics (no closet indexers)

  • Focused
  • Smaller (less than $35mm)
  • Concentration
  • Low r-squared
  • High tracking error
  • High style drift
  • High “active share”
  • Solo manager is desirable
  • Brand name of limited value

High Conviction Equity

Best Markets?

  • Sentiment index for small v. large stocks (Baker and Wurgler)
  • T-bills if no market appears attractive
  • Lever during the most attractive periods
  • Correlation irrelevant for long-term portfolios


  • Young funds and managers outperform
  • Smaller and concentrated are better too
  • Thus institutions have a big problem
  • Buffett a great example

His conviction stocks? Ruthlessly drive emotion out of the process. He doesn’t care about stock names and doesn’t know, but he has 10 of them; also, he doesn’t know the price he paid for it


1 thought on “CFA Conference: C. Thomas Howard

  1. Pingback: CFA Conference: Post Compendium | Above the Market

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