In his new book, Anurag Sharma seeks to bridge the challenges in institutional investment management between a decision-making framework of rationality and systematic biases, between an assumption of efficient markets and a tendency for abnormalities in pricing, and between complex mathematical portfolio engineering and behavioral influences on markets.
In his “Book of Value: The Fine Art of Investing Wisely” — to be published Sept. 6 by Columbia University Press, New York — Mr. Sharma upends the prevailing overly quantitative modern portfolio infrastructure of investment management to embrace an orientation toward qualitative analysis.
An associate professor of management at the Eugene M. Isenberg School of Management, University of Massachusetts, Amherst, Mr. Sharma addresses the challenges institutional investors face to invest on a large scale because of their vast sums of assets.
“Defining risk mathematically … allowed investment theory to be delivered on an industrial scale,” Mr. Sharma writes in his book, according to an uncorrected proof, advanced copy. Investing billions of dollars in retirement and other funds “successfully would have been difficult if investors had to handpick one company at a time, based only on subjective assessments of risk.”
A revolution started by Harry Markowitz institutionalized challenges of large-scale investing by overcoming the lack of “sure-shot formulae to solve the problem of selecting” thousands of stocks and bonds for portfolios, Mr. Sharma writes.
Mr. Sharma said in an e-mail that the key takeaway in the book from an institutional investment management perspective “is that there is another way to build substantial wealth over time: careful evaluation and well-constructed portfolios comprising what are really ’compounding engines.’”
In his book, Mr. Sharma writes that Mr. Markowitz and other academics who followed “put in motion a movement that made investing less about business judgment and almost entirely about mathematical rules.”
“Anchored in Markowitz’s work … modern investment theory now operates under a well-established paradigm of efficient markets — but one that is increasingly under stress,” Mr. Sharma writes in his book. “The search for objective measures of risk and ‘efficient frontiers’ has produced increasingly complicated symbol shunting; but most of us remain woefully short of grasping what risk really means.”
Confronting entrenched investment beliefs, Mr. Sharma writes in the book that Fischer Black, a pioneering financial economist, “once noted not symmetry and efficiency but asymmetries and inefficiencies are at the very root of how markets work.” With that idea in mind, Mr. Sharma seeks to alter the focus to one “grounded in a current state-of-the-art understanding about how we really think and reason and how companies create wealth and value.”