The Investor's Paradox: The Power of Simplicity in a World of Overwhelming Choice

by Brian Portnoy

Investors are in a jam . A troubled global economy, unpredictable markets, and a bewildering number of investment choices create a dangerous landscape for individual and institutional investors alike. To meet this challenge, most of us rely on a portfolio of fund managers to take risk on our behalves. Here, investment expert Brian Portnoy delivers a powerful framework for choosing the right ones – and avoiding the losers.

Portnoy reveals that the right answers are found by confronting our own subconscious biases and behavioral quirks. A paradox we all face is the natural desire for more choice in our lives, yet the more we have, the less satisfied we become – whether we're at the grocery store, choosing doctors, or flipping through hundreds of TV channels. So, too, with investing, where there are literally tens of thousands of funds from which to choose. Hence "the investor's paradox": We crave abundant investment choices to conquer volatile markets, yet with greater flexibility, the more overwhelmed and less empowered we become.

Leveraging the fresh insights of behavioral economics, Portnoy demystifies the opaque world of elite hedge funds, addresses the limits of mass market mutual funds, and discards the false dichotomy between "traditional" and "alternative" investments. He also explores why hedge funds have recently become such a controversial and disruptive force. Turns out it's not the splashy headlines – spectacular trades, newly minted billionaires, aggressive tactics – but something much more fundamental. The stratospheric rise to prominence and availability of alternative strategies represents a further explosion in the size and complexity of the choice set in a market already saturated with products. It constitutes something we all both crave and detest.

The Investor's Paradox lights a path toward simplicity in a world of dangerous markets and overwhelming choice. Written in accessible, jargon-free language, with a healthy skepticism of today's money management industry, it offers not only practical tools for investment success but also a message of empowerment for investors drowning in possibility.

Genres: Business, Finance, Nonfiction, Money, Economics, Personal Finance

256 pages, Hardcover

First published January 7, 2014

Reviews

[Sven · Rating 3 out of 5]

The Investor's Paradox is a book about selecting hedge funds, although the dust jacket synopsis suggests a broader investment scope. Once you crack it open, however, Portnoy makes it clear he's focused on hedge funds. He spends the first part of the book describing hedge funds, their origin and purpose. The second part outlines various hedge fund selection criteria and questions to ask while evaluating funds.

At times, Portnoy strays into the broader realm of stock and mutual fund selection, but those are few and far between. If you are looking for a book on stock or market analysis, you will likely be disappointed. I'd recommend Ben Graham's The Intelligent Investor or Ken Fisher's The Only Three Questions That Count instead.

If you are interested in hedge funds, this book is a well written and easy to read introduction.

I'd like to thank Goodreads and Palgrave Macmillan for the free copy of the book through Goodreads First Reads.

[Chris Esposo · Rating 2 out of 5]

This book was interesting, but not all that useful for a practitioner. The Investor's Paradox refers to the mushrooming of fund strategies in recent years (the book was written circa 2012-13), and how an investor would go about building a portfolio of hedge-funds vs. constructing portfolios via diversifying asset classes a la the modern portfolio theory (MPT). This later theory is almost entirely "decided", that is the theory of MPT is well-understood and the allocation principles per asset-class and/or security is automatic, with very little room for discretion.

The organization and choice of topics is a bit confusing. On one hand, one would presume that only the most experienced hands at traditional portfolio management and/or investing, either personal or in occupation, would attempt to engage in a much more uncertain strategy of investing in a set of hedge funds, which as the author points out, are not asset-classes, and currently do not have a well-defined or well-understood mathematical theory to inform one's judgement. Yet, despite this presumed experience, the author spends a good amount of time going through the history of the investment industry, it's various trends, as well as doing little vignettes on companies like Fidelity, and Vanguard, as well as defunct, but infamous companies like LTCM.

The author's apparent conceit is that it may be better to invest into hedge funds and leverage one's discretion more, and bring in tools of psychology as well as the traditional accounting tools to sieve out the wheat from the chaff in these 'bounty' of funds. Seems very risky if you ask me, and it doesn't help that since the publication of this book, data from the past few years indicate hedge-funds have performed less well than broad-market funds with far less discretion.

The book has some good sections on the history of (modern) investment in practice, and as pure information, it is interesting commentary on the industry. However, as a manual of application, I believe this book is severely mismatched. The idea is probably best suited for a professional institutional investor. Yet, I can't see why such an individual would read such a basic book on he subject. Conditional recommend for those who just want to gain more general information on investing, do not recommend for anyone else, especially basic retail investors.

[Cody Ray · Rating 3 out of 5]

Interesting book but a little higher level than I expected (or hoped for). The premise sets itself up to tell you how to evaluate fund managers. It talks about this purely from an active management perspective, with a focus on hedge funds and mutual funds. The author presents a "unified system" for evaluation that works across investments.

This book focuses on "soft skills" of identifying managers but doesn't provide enough concrete guidance to make it an actionable "system". For example, the author spent quite a few pages talking about how manager skills is a social construct, in that it's more related to setting and meeting expectations than technical performance, without walking through examples or action steps.

There are a couple pages that are a bit more action oriented, such as those that outline how he does interviews with fund managers...

Probably my favorite mental model was the "risk prism" the author presented. He described any "outperformance" as a matter of taking on one or more of these five general risk vectors: concentration, directionality, complexity, illiquidity, leverage.

In this way, he skirted denying the efficient market hypothesis outright. But I do wish there was a direct response to the math of active management (from Sharpe) as someone focused explicitly on finding active managers. Instead, he does say explicitly that it's impossible to find someone who can beat the market without explicitly talking about why you'd pay more for active management if you expect to underperform. Or maybe he does, when he talks about aligning assets and liabilities for pension funds... just not a "why" for retail investors (the audience of the book?)

Anyway, I'm glad this book exists and I'm glad to have read this. It's the first book I've read that talks about manager selection rather than security selection.

[Chris Boutté · Rating 5 out of 5]

I can’t express how much I enjoyed this book. For some reason, I started with Portnoy’s most recent book and worked my way back to this one. This book is hands-down one of the must-read books for people thinking about investing, people who are new, but most of all, people who have experience. Brian Portnoy breaks down the psychology of investing and uses some of the best evidence-based research when it comes to cognitive biases and other thinking errors we run into. Not only that, but he covers the work of Philip Tetlock and why so-called “experts” aren’t nearly as accurate at predicting as most people believe. Throughout the book, I also learned a lot about different aspects of the market that I hadn’t learned about before, and even though he doesn’t dive super deep into topics like hedge funds, I was able to gain a basic understanding of them.

If anyone asks me to recommend a book on investing, I guarantee this one will always be on my list. There are some other fantastic books like The Behavioral Investor and The Psychology of Money, but this one is definitely one of my new favorites.

[Sarah Shiang · Rating 5 out of 5]

Tying in Schwartz’s famous paradox of choice, his thesis: we want more choices esp in volatile markets, 24/7 News, geopolitical turmoil but increasing choice set (size, complexity) can be overwhelming and therefore result in less successful investing

Portnoy’s five dimensions of risk:
Concentration, directionality, leverage, illiquidity, complexities

Game theory aspect of skill being both objective ($/stats/#s) and subjective (social phenomena / expectations management) but finding equilibrium bc want to find the right PMs, think abt switching costs, etc.
Defines skill as “ability to meet expectations/fulfill promises” (but with PM, constantly moving target)

Don’t mix up skill and investment style or mistake / bad outcome

< TLDR: satisfice + simplify!!!! >

PM of PMs ultimately bottles down to:
- can I trust you
- what do you do/edge/best idea
- Are you good at your job
- right fit for me? {portfolio objectives}

“Sometimes what’s good enough is just perfect”

[Jef · Rating 3 out of 5]

While there was nothing wrong with this book, I skimmed it and it wasn't jumping out at me.

It felt like many books I'd read before and not sure I was that "invested" in it.

The key benefit is that it wasn't particularly long so it was a smooth and easy read. 👍

[Chenjiazi Zhong · Rating 5 out of 5]

"We crave abundant investment choices to meet daunting portfolio problems in a world of volatile markets, manic news flow and shifting geopolitical rhythms. But the more choices we are afforded, the more overwhelmed, less empowered, and ultimately less successful investors we potentially become."

[Paul Davidson · Rating 3 out of 5]

This book was interesting, well-researched and information-dense. I am moderately interested in learning about personal finance and investment, however the information at times was over-whelming. There generally seemed to be a lack of focus or clear objective, it took me about half-way through to understand the purpose of the book. Mr Portnoy did incorporate some popular culture analogies that spiced it up a bit thankfully. I do not regret reading the book, and I did learn things about hedge funds, the evolution of investment choices, and the pitfalls of too much choice; however it was difficult to read and stay interested at times. I would like to add that I received a free copy from the publisher through Goodreads giveaway.

[Bill Kasakoff · Rating 3 out of 5]

While I enjoyed reading this book, I am suspicious about the concept that some hedge fund managers can consistently provide above average returns. The author provides guidance to investors on the selection hedge fund managers in his profession.

[Tom · Rating 2 out of 5]

The title suggests straightforward advice, simple even perhaps. However, while the book has a lot of interesting trails, it never delivers much bottom line advice. I finished feeling annoyed.

[Frank Donoghue · Rating 1 out of 5]

Pop psychology/common sense applied to investing. Not worth the time.

[Major Doug · Rating 2 out of 5]

Listened to this book: how to pick fund managers; geared towards those who have memorized every ticker symbol