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CFA Institute
How Professional Is the Professional Portfolio Manager?Author(s): Mark J. ApplemanSource: Financial Analysts Journal, Vol. 29, No. 2 (Mar. - Apr., 1973), pp. 32-33Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4529568 .
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by Mark J. Appleman
How Professional is the
Professional Portfolio Manager?
The article below presents an informal ques- tionnaire for the portfolio managers among FAJ readers. Although a questionnaire of this sort is something of an experiment for the Journal, the role of emotion in the decisions of investment professionals seems to us a subject important enough to warrant an unor- thodox approach. In hopes that you will like the experiment enough to share your answers with us (anonymously, of course), the Journal has so designed the questionnaire portion of the article that you can respond without dam- aging your copy of the Journal. We plan to publish a summary of the survey results so that you will be able to compare your answers with those of other respondents. (Don't forget to make a photocopy!)
A SURGEON will be readily excused from per- forming a delicate operation on a member of his own family, for the same reason that
a lawyer who represents himself in court is said to have "a fool for a client." Indeed, the only cate- gory of professional commonly supposed to be immune to subjective influences is that of portfolio manager. The professional investor has acquired the image of a freeze-dried stock picker who is equipped not only with periscopic eyes for seeing around business corners but also with safety valves for ears to keep from blowing his slide rule.
This impression of a shock-proof, pressure- proof animated calculator derives in part from ignorance, in part from the tendency of portfolio managers to identify themselves with the scientific disciplines of economic forecasting, portfolio strategy and securities analysis, while disdaining the applied arts of evaluating analysts and institu- tional salesmen as well as the ephemeral aspects of the data they bear.
A physician contemplating surgery for a patient can usually make an educated guess at the risks in- volved. A lawyer taking on a tough case can almost always find precedents to guide him in weighing the odds against winning, losing or achieving a settlement. But a portfolio manager rarely enjoys more than a hazy notion of the risk/reward ratio attendant upon an everyday decision to buy, sell or hold almost any issue that he may consider. Market precedents may be misleading, while pos- sible alternative selections will often be at the mercy of the unknown and the unknowable.
It is one of the occupational hazards of portfolio management that, given a clear, logical economic outlook by a recognized authority, and having developed an appropriate portfolio strategy, any professional investor can go wrong, even with a stock about which he has made a thorough and up-to-date analysis. Disappointment may result
Mark J. Appleman, a professional marketing man who has worked in Wall Street for a dozen years, has written and lectured extensively on investor psy- chology, as well as on the stock market and the securities business.
32 0 FINANCIAL ANALYSTS JOURNAL / MARCH-APRIL 1973
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from countless causes, including non-economic and non-analytical factors, such as acts of God, man and government, or subconscious influences on the portfolio manager himself.
Yet despite - or, possibly, because of - their fallibility, relatively few institutional investors have ever kept score on themselves. Although in other fields professionals may live or die by a batting average, it is an uncommon portfolio man- ager who knows how to rate his own performance or who can even define the standards by which his performance might be rated.
The purpose of the questionnaire is three-fold: to survey the extent to which-
1) decisions based on thorough, timely infor- mation tend to yield results that meet the portfolio performance goals of professional investors;
2) portfolio performance may be affected by unknown factors or unanticipated changes in conditions;
3) decisions may or may not be influenced by non-objective factors.
By trying to answer all questions candidly, a portfolio manager, in effect, fashions a profes- sional mirror in which he may see his own reflec- tion. And at the same time he contributes to the sum total of information which, when evaluated, should produce useful yardsticks by which he may be able not only to measure his own performance but also, if necessary, to adjust his expectations of those economists, portfolio strategists, securities analysts and institutional salesmen on whom he must depend. *
from countless causes, including non-economic and non-analytical factors, such as acts of God, man and government, or subconscious influences on the portfolio manager himself.
Yet despite - or, possibly, because of - their fallibility, relatively few institutional investors have ever kept score on themselves. Although in other fields professionals may live or die by a batting average, it is an uncommon portfolio man- ager who knows how to rate his own performance or who can even define the standards by which his performance might be rated.
The purpose of the questionnaire is three-fold: to survey the extent to which-
1) decisions based on thorough, timely infor- mation tend to yield results that meet the portfolio performance goals of professional investors;
2) portfolio performance may be affected by unknown factors or unanticipated changes in conditions;
3) decisions may or may not be influenced by non-objective factors.
By trying to answer all questions candidly, a portfolio manager, in effect, fashions a profes- sional mirror in which he may see his own reflec- tion. And at the same time he contributes to the sum total of information which, when evaluated, should produce useful yardsticks by which he may be able not only to measure his own performance but also, if necessary, to adjust his expectations of those economists, portfolio strategists, securities analysts and institutional salesmen on whom he must depend. *
Solving the dollar overhang concluded from page 23
relatively underpriced, as a group. Thus the mar- ket should fairly quickly bring relative prices of individual stocks back into what the market as a whole regards as a proper set of relationships. The relationships would not be the same ones that had prevailed before, but they probably would not be very much different.
Not all the adjustment in prices would be borne by stocks listed on the New York Stock Exchange. Some of the adjustment would be made by stocks on other exchanges and by bond prices and prices of other assets as well, even if all of the Funds' own purchases were limited to securities listed on the New York Stock Exchange.
Besides, what motivation would any foreign
Solving the dollar overhang concluded from page 23
relatively underpriced, as a group. Thus the mar- ket should fairly quickly bring relative prices of individual stocks back into what the market as a whole regards as a proper set of relationships. The relationships would not be the same ones that had prevailed before, but they probably would not be very much different.
Not all the adjustment in prices would be borne by stocks listed on the New York Stock Exchange. Some of the adjustment would be made by stocks on other exchanges and by bond prices and prices of other assets as well, even if all of the Funds' own purchases were limited to securities listed on the New York Stock Exchange.
Besides, what motivation would any foreign
fund have to bid up the price of any stock to a level unsupported by the company's earnings pros- pects? Even if there were a desire to gain a sig- nificant voice in the management of a company, common-sense would dictate a spreading out of the stock purchases over a long enough time to prevent sharp run-ups in its price.
Thus, the issue is reduced to one of whether the assets markets as a whole could accommodate the transfer of Treasury debt from foreign central banks to U. S. investors, and the accompanying transfer of corporate shares from U. S. investors to the central banks, without significant downward pressure on bond prices and significant upward pressure on share prices. The size of the financial markets in the United States, and their historical performance, create a presumption that the change in portfolio composition could be achieved with- out major impact on securities prices.
For the sake of argument, however, let us sup- pose that the purchases of shares by the Funds did drive up the level of prices of shares by some appreciable amount. What would be the implica- tions? First, the existing holders of shares would have made a windfall gain. Second, the Funds would have paid a higher price, and hence would get a lower yield, than would have been the case had the price of shares not risen. Neither of these consequences makes the plan less desirable than any of the alternative proposals that have been advanced in public discussions of the problem of the dollar overhang.
Over an extended period of time might the pur- chases of central banks be so concentrated among a handful of leading U. S. companies that those companies would end up being foreign-owned or controlled? This is unlikely, simply because of the size of the expenditure that would be required in each instance. But even if a few American com- panies should become foreign controlled as a con- sequence of the plan, this would not be adverse to American interests. Besides, Americans could hardly object, in view of the number of foreign companies now owned by American firms.
Finally, it should be stressed once again that implementation of the plan would not remove the need for the United States to bring its balance of payments under control, nor would it reduce the related need for other countries to undergo the readjustments in their trade balances that this re- quires. But the plan can provide a constructive solution to the "dollar overhang" problem. A solu- tion to that problem would create a more har- monious environment for negotiations over the many other international financial and trade issues confronting the industrial nations today. *
fund have to bid up the price of any stock to a level unsupported by the company's earnings pros- pects? Even if there were a desire to gain a sig- nificant voice in the management of a company, common-sense would dictate a spreading out of the stock purchases over a long enough time to prevent sharp run-ups in its price.
Thus, the issue is reduced to one of whether the assets markets as a whole could accommodate the transfer of Treasury debt from foreign central banks to U. S. investors, and the accompanying transfer of corporate shares from U. S. investors to the central banks, without significant downward pressure on bond prices and significant upward pressure on share prices. The size of the financial markets in the United States, and their historical performance, create a presumption that the change in portfolio composition could be achieved with- out major impact on securities prices.
For the sake of argument, however, let us sup- pose that the purchases of shares by the Funds did drive up the level of prices of shares by some appreciable amount. What would be the implica- tions? First, the existing holders of shares would have made a windfall gain. Second, the Funds would have paid a higher price, and hence would get a lower yield, than would have been the case had the price of shares not risen. Neither of these consequences makes the plan less desirable than any of the alternative proposals that have been advanced in public discussions of the problem of the dollar overhang.
Over an extended period of time might the pur- chases of central banks be so concentrated among a handful of leading U. S. companies that those companies would end up being foreign-owned or controlled? This is unlikely, simply because of the size of the expenditure that would be required in each instance. But even if a few American com- panies should become foreign controlled as a con- sequence of the plan, this would not be adverse to American interests. Besides, Americans could hardly object, in view of the number of foreign companies now owned by American firms.
Finally, it should be stressed once again that implementation of the plan would not remove the need for the United States to bring its balance of payments under control, nor would it reduce the related need for other countries to undergo the readjustments in their trade balances that this re- quires. But the plan can provide a constructive solution to the "dollar overhang" problem. A solu- tion to that problem would create a more har- monious environment for negotiations over the many other international financial and trade issues confronting the industrial nations today. *
FINANCIAL ANALYSTS JOURNAL / MARCH-APRIL 1973 a 33 FINANCIAL ANALYSTS JOURNAL / MARCH-APRIL 1973 a 33
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