When it comes to stock selection and managing portfolios, every buy or sell decision is made with careful, thorough analysis, and they’re all done for a reason. No investment professional worth their salt would say otherwise. But how many of those investment professionals have processes in place to ensure those reasons, analyses, and decisions are all done with the best possible thinking in mind?
Behavioral biases impact us all. Every person, no matter how experienced, is subject to the mistakes of overconfidence, fear of losses, and even something as simple as misremembering the past. These biases can disrupt even the best analysis, and that’s why we believe it’s so important to have processes in place to ensure thorough decision making at all points in time.
Below, we go through three tools that every fundamental, actively managed financial professional should incorporate into their investment process.
Monitoring points are clearly defined, measurable statistics that can be consistently tracked over time to ensure that a company is acting the way the analyst or portfolio manager expects them to. By incorporating and tracking a specific set of strategically selected monitoring points, investors can create a level playing field for analysis. This way, each time a stock goes up for a buy/sell or increase/decrease decision, it is evaluated against the same set of criteria.
A Formal Proposal Process
When it comes to proposing new purchases specifically, having a detailed process that must be followed allows for each stock to be recommended, debated, and decided on with the same rigor, and by the same group of decision makers. Once the recommendation is presented to the broader group of decision makers, both bull and bear cases (i.e., add/don’t add) should be provided to see the issues from all sides. We also advise holding a Q&A session to clarify and consider further issues and risks before deciding. While it’s not a contentious process, it’s a thorough one, all with the goal of aiding in open communication so the team is making a decision with maximum information at hand.
A Team-Based Process
Speaking of teams, we strongly encourage a team-based approach (e.g., using groups or analyst-partners) to encourage collaboration and protect against an individuals’ bias from dominating investment decisions. Further alignment via financial incentives from the recommender through to the rest of the teams can help ensure enough outside perspectives are being fully considered. For us, this entails a group vote before the final portfolio manager vote, and in some cases, getting through the group stage can actually be harder.
Human behavioral biases aren’t just for individual investors. They can have real implications for investment professionals too. At Manning & Napier, we have built and evolved frameworks to collect the cleanest information, formulate the clearest analyses, and make the highest quality investment decisions to best account and mitigate common behavioral biases from impacting our investment strategies.
The processes we discussed above are just pieces of the overall frameworks and disciplines, honed over decades of experience and lessons learned. If you’re interested in digging deeper into our time-tested approach, you can schedule a call any time to talk more with a member of our team.
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