Practical analysis for investment professionals
12 August 2014

Seven Essential Steps in Portfolio Management

Larry Cao, CFA, is the editor of The Handbook of Artificial Intelligence and Big Data Applications in Investments, from the CFA Institute Research Foundation.

What skills does an analyst need to become a portfolio manager? No doubt this question is something that is in the back of most analysts’ minds. It popped back into my mind at the CFA Institute China Investment Conference in Shanghai.

“Even if you are an excellent financial analyst, this alone is insufficient to make you a successful fund manager,” Dato’ Seri Cheah Cheng Hye, co-chairman and co-chief investment officer of Value Partners Group, an asset management firm headquartered in Hong Kong, said at the conference. He went on to talk about the seven steps aspiring portfolio managers must learn to master. Starting out as a financial journalist in Hong Kong in the 1970s, he later joined the asset management industry as an analyst and eventually co-founded Value Partners in the 1990s.

Having worked both as an analyst and a portfolio manager myself, I found this list (which I paraphrased below) rather handy.

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1. Originating Ideas

Where does a portfolio manager start in their quest to beat the market? Fresh ideas.

There are more than 7,000 listed companies in the world, and a portfolio manager needs to know where to look. Cheah prefers to look beyond the index and the obvious, especially the ones shopped around by sell-side analysts. Admittedly, this could be hard in such cases as the internet bubble period in the United States and the policy-driven market in China. Looking in the right direction, however, has strategic importance in achieving the objective of adding alpha as well as improving manager efficiency.

My take-away: Adding value starts from idea generation, the first step in the investment process. This point is particularly important for value managers, who by default invest in companies that the market shies away from.

Dato’ Cheah Cheng Hye

2. Conducting Research

Research is not the exclusive realm of research analysts — far from it.

Cheah believes that managers need to be able to shorten the list from a few thousand companies to a few hundred. These companies are then ranked and analyzed. He focuses on finding the right business run by the right people that can be bought at the right price. As a value manager, Cheah adopts a bottom-up approach to research, building up knowledge about a firm from bits and pieces, in addition to analyzing financial statements to get a holistic understanding.

Analysts and managers often perform fundamental analysis on these companies together to assess their potentials. The difference, in my opinion, is that managers are responsible for the ranking and analysis process and ensure that the investment philosophy is consistently carried out. Value managers usually place more emphasis on such valuation variables as intrinsic value arrived at using discount cash flow models or price multiples, whereas growth managers tend to put more weight on sales and profit growth, pricing power, and market share, etc.

My take-away: Consistent investment results depend on discipline and not on serendipity. How to rank the short-listed companies clearly reflects a manager’s investment philosophy.

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3. Making Decisions

Cheah thinks decision making is tough. Investors are often better at investigating investment opportunities than making investment decisions because they are afraid of making mistakes that they’ll regret. (Behavioral finance lessons, anyone?) It is critical, however, for a portfolio manager to be able to pull the trigger when presented with a killer opportunity. (Read a related post by my colleague Jason Voss, CFA, on the topic.)

Making decisions is also hard because it requires that we project into the future based on past facts. As much as we may hope otherwise, there is no way of knowing for sure whether any of our projections will turn out to be accurate. Nobel Laureate Myron Scholes and I discussed this very subject recently and we concluded: “It’s what makes investing fun.” Maybe so for the gifted few?

Even the talented complain that investing is a lonely business. The decision to buy or not to buy often comes down to gut feeling and is often a close call, as many seasoned and successful investment managers have told me over the years.

My take-away: Decision-making authority is the single most important distinction between an analyst and a portfolio manager. The talented are particularly good at pulling the trigger although the instinct does not come easy, even to them.

4. Structuring Transactions

There are many ways of investing in a company. Buying shares in the open market is only one of them.

Cheah emphasizes that portfolio managers need to invest in ways that benefit investors the most. Given the firm’s size and the liquidity of some Asian markets, this is not surprising. Although open markets remain the benchmark, buying directly from the company, where possible, could make more sense. A manager needs to familiarize herself with the intricacies of these transactions, including accounting, legal, and tax implications.

My take-away: Portfolio managers need to have a total return perspective to investing. This is particularly important if you are managing an outsized portfolio or invest in alternatives.

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5. Executing Transactions

A portfolio manager also needs to work with traders and ensure that ideas become investments.

Traders are ultimately responsible for trading. Portfolio managers, however, need to have an appreciation for how their investment decision may affect the market. In my days as a portfolio manager, our traders were early pioneers in breaking trades into smaller ones and executing them on electronic trading platforms to minimize price impact. Trading techniques and technologies have progressed by leaps and bounds over the last decade. Electronic trading has become prevalent and is no longer considered an edge. Still, not keeping up with the industry can cost investors dearly, not to mention may introduce trading errors.

My take-away: Trading remains an area that affects portfolio performance and cannot be ignored.

6. Maintaining Investments

Adding an investment to the portfolio is not the end of the story. Cheah emphasizes that portfolio managers need to continue paying attention to portfolio companies once initial investments are made. This is a continuation of the research process.

I was struck by his choice of words. “Maintain” has much richer meanings than “monitor,” which feels a bit cold-hearted, distant, or at least matter of fact. To maintain is to show affection and care, which is the right attitude for portfolio managers to take toward their investments.

My take-away: Maintain, not monitor, your investments.

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7. Exiting Investments

Conventional wisdom seems to hold that exiting an investment is almost more important than entering one. And it could be right.

Chuck McQuaid, chief investment officer at Columbia Wanger Management, once joked, “We have two [exit strategies]: selling too high and selling too low.” Cheah made the same point in a more plain-spoken way: When it comes to selling, whether at a profit or loss, portfolio managers need to make a quick decision and get it done.

If portfolio managers hesitate when they exit positions, they often run the risk of letting small losses balloon into major headaches. Similarly, if portfolio managers do not lock in profits when they should, it could be equally damaging to their performance.

My take-away: Don’t be afraid of selling too high or too low. Exit quickly once you’ve made the decision, especially when cutting losses.

This list of seven steps is obviously not rocket science. For me, it served as a handy refresher. Aspiring analysts, are you ready to take on the challenge? Experienced portfolio managers, what has been your secret sauce? Feel free to leave your comments below and share your thoughts with us.

For more from Larry Cao, CFA, sign up to receive The Handbook of Artificial Intelligence and Big Data Applications in Investments from the CFA Institute Research Foundation.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©Getty Images/lingqi xie

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About the Author(s)
Larry Cao, CFA

Larry Cao, CFA, senior director of industry research, CFA Institute, conducts original research with a focus on the investment industry trends and investment expertise. His current research interests include multi-asset strategies and FinTech (including AI, big data, and blockchain). He has led the development of such popular publications as FinTech 2017: China, Asia and Beyond, FinTech 2018: The Asia Pacific Edition, Multi-Asset Strategies: The Future of Investment Management and AI Pioneers in Investment management. He is also a frequent speaker at industry conferences on these topics. During his time in Boston pursuing graduate studies at Harvard and as a visiting scholar at MIT, he also co-authored a research paper with Nobel laureate Franco Modigliani that was published in the Journal of Economic Literature by American Economic Association. Larry has more than 20 years of experience in the investment industry. Prior to joining CFA Institute, Larry worked at HSBC as senior manager for the Asia Pacific region. He started his career at the People’s Bank of China as a USD fixed-income portfolio manager. He also worked for US asset managers Munder Capital Management, managing US and international equity portfolios, and Morningstar/Ibbotson Associates, managing multi-asset investment programs for a global financial institution clientele. Larry has been interviewed by a wide range of business media, such as Bloomberg, CNN, the Financial Times, South China Morning Post and the Wall Street Journal.

31 thoughts on “Seven Essential Steps in Portfolio Management”

  1. Excellent post and insights

    1. Larry Cao, CFA says:

      Dear Biharilal,

      Thanks for your kind words. I am glad that you find it helpful.

      Warm regards

    2. David Readerman, CFA says:

      Larry: Well done! Your insights bridge an often over-looked career progression for many. For myself, I am now 3 1/2 years Portfolio Manager of my own tech-focused long/short tech fund following +10 years as sell-side analyst. An added personal point: STRUCTURING the portfolio is critical!! + managing thru market volatility vs. capital inflows / outflows.

  2. Michal Stupavsky says:

    Dear Larry,

    thanks for this interesting note. I have one remark regarding the last 7th point “Exiting investments”. From my portfolio management experience, some formal/mechanical/automatic rule should be a part of decision-making process regarding exiting. It pertains also long-term value investors and regarding positions with paper losses in particular. For example some predetermined stop-loss, e.g. based on the share’s volatility and market volatility overall, should have at least 50% decision weight within decision-making about exiting positions. Otherwise behavioral biases such as confirmation bias, hindsight bias, myopic loss-aversion bias, regret aversion bias will overhaul your thinking potentially leading to a total decision paralysis, not being able to make any decision, resulting e.g. in holding loss-making investments much longer than warranted (see Shefrin’s disposition effect based on Kahneman and Tversky research in prospect theory and value function).

    Kind regards,

    1. Larry Cao, CFA says:

      Dear Michael,

      You made a good point about the behavioral biases. I like your automatic decision-making rule as well. Ultimately we all have to find something that works for our own investment style and personality. I am glad that you seemed to have found yours.Thanks for sharing.

      Warm regards,

  3. sonali kaushal says:

    Yes I agree with Michael. With my experience in portfolio management, I also follow some stop loss strategy or strategy based on overall market direction. Most of the time it is notional loss than the actual loss. directional it would be wise to use a mix of exit strategies depending on the situation. At the same time if there is no clarity then it would be just better to exit with small profit or loss & then re enter when wise.

    1. Larry Cao, CFA says:

      Dear Sonali,

      Thanks for sharing your thoughts.

      Warm regards,

  4. George Bullock says:

    I think this is an excellent article packed with great advice for aspiring portfolio managers (PM). Thank you, Larry.

    However, one point I take issue with is the premise that analysts aspiring to be PMs should try to become them. I think it’s rather unfortunate that so many analysts aspire to be portfolio mangers, in many cases just because PMs get to pull the trigger with respect to making buy and sell decisions, PMs typically get all the glory for a funds success in the press, and PMs tend to make more money.

    I think the roles of analyst and PM are distinct enough that the best analysts should probably remain analysts and try to work with the best PMs, not try and become a PM because it seems like a logical progression or will enhance their prestige and power.

    For example, this article focused on the investment decision making process and executing transactions. There are numerous non-investment-decision making and non-transaction-related hats that PMs must also wear (e.g. fund raising). Not every analyst, even those with the right investment-decision making or transaction execution acumens are also fit for the expanded roles of say fundraiser, group leader, and face of the fund. In such cases, I think it would be foolish for a good analysts to try and force fit themselves into the PM role and end up realizing the hard way that they don’t have what it takes. It’s probably better to be self aware to begin with and make the decision to be, or not to be, a PM based on ones total fitness for the role and nothing more.

    1. Larry Cao, CFA says:

      Dear George,

      Thanks for sharing your thoughts. You made two very interesting observations:

      1. Some very established fund houses have been making the argument that analysts do not need to become managers. Their rationale is usually that the two roles are very different, as you suggested. And I have come across some very talented analysts who do not want to become portfolio managers. The fact that the argument is usually made by firms with an established army of portfolio managers does make one wonder if it is at least in part self-serving.

      2. Indeed many fund houses do have other business requirements for investment managers in addition to managing money. At the same time, there are organizations that would rather their investment teams focus on investments and shield them from the media and consultants, etc.

      Exploring these could make an interesting post in and out of itself and we hope to get to it on another day. Thanks again for contributing to the discussion.

      Warm regards,

  5. Shoaib says:

    Dear Cao,
    I recently finished my under grad studies. During my studies i was managing my family portfolio of USD 20grands and often i face the situation of exiting the investment. Though my guts told me to exit it but i was too hesitate to exit the position which affected my portfolio performance.
    Thank you for sharing your knowledge. I will surely take your advice next time.

  6. Sushant Singh says:

    Its an awesome article !
    Its very useful

    I am Chartered Accountant & aspires to become Portfolio Manager & also wants to pursue CFA.

    1. Larry Cao, CFA says:


      Many thanks for your interest and your kind words. Best wishes for your career aspirations in investments.

      Warm regards,

      1. Ramji says:

        This is so clear and near to practice that one can relate to each of these points.

        I have often come across the examples of people researched/ liked a company but not bought it. As they lack the courage to face the “What if market goes the other way”. Bridging that gap is the main challenge in transition from Analyst to PM.

        Thanks for sharing!

  7. Irfan Ullah Buneri says:

    Dear Larry

    nice notes

    very much informative

  8. Shiv Mehta says:

    The article is very insightful as everyone mentioned above. I would be looking forward to read more of your articles in the future.

  9. Joseph says:

    I love how it’s simple and straight to the point. When to sell is always tuff. I’m currently a sophomore and aspire to go on to a financial management program. I dabble with stocks and options and have sat on major gains, only to let them dissipate into to thin air. But hey, the best lessons are the ones you pay for.

  10. Raman says:

    It’s realy helpful for me … Thanks a lot

  11. Delores Lyon says:

    Wow, I had no idea that portfolio managers need to have such a wide range of skills. It seems to me that having original ideas and then making investments require completely different skills. At the least, I know I wouldn’t be able to handle a portfolio on my own. Having a professional handle these seven steps would help make my life a lot less stressful.

    1. Larry Cao, CFA says:


      Indeed it’s not easy. That said, common sense is always important too, even if you work with an advisor.

      Thanks for visiting our blog and happy investing!


  12. rajeev gupta says:

    Excellent article showing that one must be disciplined while managing portfolio and it is basically a hunch or gut to pull the trigger based on your research and calculations which lot of analyst lacks and that attribute decides the total return

  13. naveen says:

    Larry sir,

    I am pursuing C.A (final) but during this course I found my talant in research area, because in research financial area every day is new activity in market unlike other auditing & accounts filled in commerce, So currently I am working in accounting firm so Should I join share broking firm for experience as well as study C.A. (FINAL)after completing chartered accountant.

    1. Larry Cao, CFA says:


      The market is never boring, isn’t it? Accounting is an important skill to have for research analysts, so there is really no conflict in your goal of pursuing a career in investment research and your current studies in accounting. Good luck to you in both areas!

      Warm regards,

  14. Mike Liu says:

    Thanks for sharing, Larry, This is great and did inspire me to become a portfolio manager in the future. Hopefully I could step into the area to pull the trigger with the right gun.

  15. I’m a student of chartered accountancy from Pakistan. can I work with in investment management firms nd companies being as an financial analyst or portfolio manager with CA qualification? sir

  16. Larry Cao, CFA says:

    Dear Salahuddin Shah,

    I have certainly come across many accountants working at investment firms as analysts or portfolio managers so the short answer is it is certainly possible. Without sounding too biased though, I’d say there are many more CFA charterholders working in the business making investment decisions day in day out. The reason is probably simple – in addition to accounting, CFA candidates have also to be trained in valuing securities and other core competencies required for the job.

    Warm regards

    At the end of the day, opportunities are hard to come by .

  17. tejas joshi says:


  18. Vanshika Bhardwaj says:

    A compendious article and very informative.

  19. Sakshi says:

    Very informative post. Thanks for sharing your views. I came across this blog a few days back which outlines some real nice ideas and information on Portfolio Management. Please have a look. Thanks

  20. Kapil Mehra says:

    Very well written Larry…it’s quite comprehensive

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