Behavioral Portfolio Management by Thomas C. Howard

I recall the episode of Rumpole of The Bailey titled Rumpole And The Barrow Boy, where a financier blames a crisis on stockbrokers who think like fruit vendors. An unfair comparison, I believe, as the average stockbroker isn’t much different from a fruit vendor;  he has to weed out the bad apples, advise customers on which ones to buy, take stick if his apples are wormy, and watch out for the regulators. The “barrow boy” approach to finance isn’t that bad, compared to the “cowboy” approach, which carries great risk. When you charge in like the cavalry, you lose focus on your target, and that’s no good.

Thomas C. Howard stresses financial planning over investment, with calm and emotional restraint. Too often the broker/advisor goes for risky stocks rather than slow-growth securities, sometimes for the sheer thrill. He does the $100 bill test, to see if a trainee will wait patiently for $100 or gamble $20. Many of them gamble the smaller amount rather than sit like a hen for the greater.

Behavioral Portfolio Management discusses how the financial advisor can reduce risk by diversifying the account with stocks and/or bonds. One method is called “bubble wrap,” where the majority of the securities are stable, with a minority of riskier ones. He also teaches that risk and volatility are not synonymous; a real estate company can take a loss, but if the buildings are in a secure, proven area, the drop isn’t likely to last. In a place like Detroit, a drop isn’t likely to recover.

This book gives good, conservative advice, and does not promote risky cowboy-like investment.  I recommend it to anyone getting into finance, or looking to invest for their retirement.