Wall Street is “Bizarro World,” and Peter Lynch’s buy-what-you-know investing strategy is “profoundly dumb advice.” These are the — safe to say — irreverent viewpoints of psychologist and asset manager Daniel Crosby, who has taken a deep dive into “investor misbehavior.” AARP touts him as “a financial blogger you should be reading.”
The frequent industry speaker has sound reasons behind his surprising opinions, and he discusses them in an interview with ThinkAdvisor.
Founder of Nocturne Capital, Crosby’s investing approach is grounded in behavioral finance. As a self-described “evangelist,” he urges clients and advisors to apply that discipline’s concepts to daily life.
In the interview, Crosby, 38, focuses on a theme that can best be described by the opening verse to Paul Simon’s classic, “Feelin’ Groovy” (aka “The 59th Street Bridge Song”): “Slow down, you move too fast.” The doctor’s point is that investors should “pause, slow down” and be guided by the old saying, “This too shall pass,” because mean reversion in the stock market is a fact of life.
FAs are invaluable to keeping clients from making potentially costly investing errors, Crosby holds. He even suggests that they have clients sign a “Behavioral Policy Statement” promising to behave in a way that maximizes wealth growth.
The RIA’s niche is ultra-high net worth clients, for whom he constructs highly customized portfolios. “Money, Mind and Meaning” is his popular podcast. For financial advisors, he offers an online Behavioral Finance Certificate program, in which they can earn 5.5 continuing education credits.
ThinkAdvisor recently interviewed Crosby, on the phone from Atlanta, where Nocturne is based. Among other aspects of behavioral finance, he explored the four most significant biases out of a total 117. The CNBC contributor presents at more than 50 industry events annually and has given three TEDx talks. Topics include “Influence and Persuasion for Financial Advisors” and “Bear Necessities: Keeping Your Clients Calm When Markets are Volatile.”
Here are highlights of our interview:
THINKADVISOR: You write that if someone feels passionate about an investment idea, they probably haven’t thought hard enough about it. Please explain.
DANIEL CROSBY: If you’re excited about it, it’s a bad idea. I try to get advisors to come up with “pre-commitments” with their clients because there’ll be a day when a client comes in excited about some investment, and that excitement is almost a dead giveaway that it’s a dumb idea.
What sort of “pre-commitment”?
Just like advisors and investment managers sign an Investment Policy Statement that [essentially] says, “I’ll adhere to the following standards in the management of your money. That’s my promise to you,” my suggestion is to solicit a reciprocal promise in writing from clients: a Behavioral Policy Statement that says: “Our success is going to be a two-way street. It will depend on my doing wise things and being a good steward of your money. But it will be equally dependent on your behaving in a way that maximizes our ability to compound your wealth.”
Why do you call Wall Street “Bizarro World”?
Because the rules of the day and the rules of Wall Street deviate from each other pretty systematically. All the things that make sense in everyday life are turned on their head in Wall Street. In everyday life, we think in terms of the present more than the future, but that’s flipped in Wall Street. In the everyday world, if, for example, you want to be smarter, you read more books. But in Wall Street, if you want to make more money, you need to do less.
The brain leads us to exercise low levels of risk when risk is actually quite high, you write. What’s the solution?
We think that because the economy may be good right now, it will be good in the future; or if things are bad, they’re never going to get better. But given the market’s tendency to mean-reverse, the exact opposite tends to be true. The [best attitude for] in investing is “This too shall pass.”
Why is that a good mantra?
It’s heartening in bad times and chastening in good times. Anything that cause you to pause and slow down is good.
“Emotion appears to be the enemy of great investing,” you say in the book.
Yes. Emotion undergirds every decision we make, most of all, decisions about money. It’s a conundrum. But we’ve learned from studies that if we’re able to suppress that emotion, we make better decisions.
The average investor loses 13% of their IQ “in times of financial duress,” you write. That’s terrible!
We tend to be our dumbest when we need to have our wits about us. That’s why financial advisors are important.