PODCAST

Hot Topic: The Behaviour Behind Bad Investing with Dr. Daniel Crosby

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PODCAST July 2, 2020

 

Show Summary:

CEO John Nicola, interviews Dr. Daniel Crosby; a Psychologist, behavioral finance expert, and New York Times best-selling author who helps organizations understand the intersection of the mind and markets.

In their discussion today, they talk about the markets so far this year; it’s effect on investor behavior, including the perversity of risk; and the psychology behind success. Dr. Crosby explains the four consistent types of behavioral risk, the three pieces we need to have in place to be able to make real changes in our behavior, what cognitive dissonance is and how it applies to the way investment decisions get made, and how someone can objectively measure how successful they are as a behavioral investor.
 

Key Takeaways:

[:48] Dr. Daniel Crosby gives his read on the 2020 market from a behavioral finance perspective.

[2:37] If investors behaved rationally or were on their best behavior, would markets always be rational and appropriately priced? i.e. if only AI programs were allowed to buy and sell stocks and had no skin in the game, would the markets be rationally priced?

[3:58] In Dr. Crosby’s experience, does he believe that having greater wealth tends to make you a better or worst investor?

[5:55] Dr. Crosby explains what ‘the perversity of risk’ refers to.

[9:08] Why is doing ‘nothing’ most of the time, important to investment results?

[11:46] What does Daniel mean when he says, “Success in investing begets failure”?

[13:58] The four consistent types of behavioral risk and why they are important.

[16:40] Dr. Crosby elaborates on how regardless of how self-aware we are, the hardest part is actually changing your behavior.

[18:27] The three pieces we need to have in place to be able to make real changes in our behavior.

[19:08] How and where financial advisors provide the most value for their clients.

[23:49] Dr. Crosby explains what cognitive dissonance is and how it applies to the way investment decisions get made.

[26:48] Why cognitive dissonance isn’t the problem; our discomfort with it is.

[28:58] Is there a benefit in uncertainty?

[29:35] Dr. Crosby describes the second of the four types of behavioral risk: loss aversion.

[31:58] Does Dr. Crosby feel that this specific methodology still applies today?

[35:51] When Dr. Crosby looks approximately 10 years into the future, what are his expectations for returns in various asset classes considering where we currently are?

[38:54] Do private assets fit into the multi-asset class model?

[39:50] Dr. Crosby and John discuss diversification and the importance of not overcomplicating a simple model that works.

[42:36] Dr. Crosby shares where he currently stands regarding active and passive investing.

[44:54] Dr. Crosby describes his active approach.

[46:40] Is there a connection between the emotional instability of the investor population at large and Dr. Crosby’s ability to maneuver through it in a better way?

[50:15] Dr. Crosby highlights some of the pieces at play that can account for smart investors making wrong predictions about the future.

[53:03] With home bias being a bigger sensitivity in Canada than in the US, does that mean that a Canadian investor shouldn’t have more than 3% of his equity portfolio in Canadian stocks?

[54:52] How much is the Canadian economy being tied to commodities/Canadian stocks being a lot like owning commodities, is driven by where advisors are coming from as opposed to where the clients are coming from?

[56:29] Dr. Crosby’s thoughts on Canada’s economy.

[57:44] Is rebalancing a portfolio important? And if so, how and when should that be done?

[58:40] John shares why Nicola Wealth is a big fan of rebalancing.

[1:00:15] Can individual investors realistically master the five common themes regarding investing that Dr. Crosby mentions in his book, Personal Benchmark?

[1:02:05] What happens if 90% of the marketplace is controlled through passive or algorithmic strategies?

[1:04:12] Does Dr. Crosby think that market ‘bubbles’ are predictable if you take a rational approach to them? Or are they just happenstance?

[1:06:05] How can oneself objectively measure how good they are as a behavioral investor?

 

Mentioned in this Episode:

Personal Benchmark: Integrating Behavioral Finance and Investment Management, by Daniel Crosby and Charles Widger

Howard Marks: The Perversity of Risk

The Hour Between Dog and Wolf: How Risk Taking Transforms Us, Body and Mind, by John Coates

The Undoing Project: A Friendship That Changed Our Minds, by Michael Lewis

Robert Shiller’s CAPE Index

The Behavioral Investor, by Daniel Crosby

 

Guest Bio

Dr. Daniel Crosby

Educated at Brigham Young and Emory Universities, Dr. Daniel Crosby is a psychologist and behavioral finance expert who helps organizations understand the intersection of mind and markets. Dr. Crosby recently co-authored a New York Times Best-Selling book titled, Personal Benchmark: Integrating Behavioral Finance and Investment Management.

For his full bio, visit: LinkedIn.com/in/DanielCrosby

 

About Your Host

John Nicola

John is the CEO and Chairman of Nicola Wealth Management. He provides strategic leadership to Nicola Wealth Management — exercising his passion for providing innovative solutions to clients’ complex problems.

John has been a veteran of the financial services industry since 1974. His areas of expertise include investment management, estate and financial planning, as well as business planning with a focus on best practices for wealth building, exit strategies, and shareholder agreements.

For his full bio, visit: nicolawealth.com/our-team/john-nicola

 

Disclaimer:

This presentation contains the current opinions of the presenter and such opinions are subject to change without notice. This material is distributed for informational purposes only and is not intended to provide legal, accounting, tax or specific investment advice. Please speak to your NWM advisor regarding your unique situation. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. NWM Fund returns are quoted net of fund-level expenses. Past performance is not indicative of future results. All investments contain risk and may gain or lose value. Projected returns are estimates only. Returns are not guaranteed. NWM is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions in Canada.

At the time of recording, the following securities are held by Nicola Wealth:

–   Coca Cola

Mention of these securities is not a recommendation to buy or to sell.