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An interview with behavior Gap's Carl Richards

March 25, 2014
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Even if you haven’t heard of Carl Richards, there’s a good chance you’ve seen his work. Carl, a financial adviser from Utah, uses simple illustrations to convey important but complex messages about investing. The creator of the weekly Sketch Guy column for the New York Times, he’s an international author and speaker, and Director of Investor Education at Buckingham Asset Management.

Carl believes strongly in the importance of investor behaviour. “The best investment strategy,” he said in a recent article is “getting out of your own way.” His website, Behavior Gap, aims to help advisers keep their clients on track by sticking to their chosen investment strategy when their gut instinct tells them to change course.

Carl was recently in the UK and kindly gave us an interview at the Forest of Arden Hotel outside Birmingham, where he was speaking at a conference for Nucleus Financial, the Edinburgh-based investment platform. 

SITV: How early in your career as a financial adviser did you identify investor behaviour as such a key issue?

Carl: Not as early as I would have liked. I worked at a big Wall Street firm and felt as though I’d had the best training in the industry. I got a professional designation. We built these really formal spreadsheets to find the right manager. We’d build the perfect portfolio for people, and despite that, we’d see people get scared when the market was low or get greedy when the market was high, and make crazy decisions. I learned that the investment process only mattered to the degree that it influenced people’s behaviour positively.

SITV: Why is it that humans make such poor investors?

Carl: We’re hard-wired. If you designed something to be a bad investor you would design a human. We are hard-wired to get more of those things that give us pleasure or security - especially in the short term or right now - and to get away as fast as we can from anything that’s causing us pain. And that’s great at keeping us alive, but it works terribly when it comes to our investments. We want more of the things that have gone up, and we want to get away from the things that have gone down. That means buying high and selling low.

SITV: Is it possible to override these in-built behavioural flaws?

Carl: I think it is possible. If you read (Daniel) Kahneman’s book, Thinking Fast and Slow, you’ll know when you’re doing something dumb. But just knowing isn’t necessarily going to make you behave any better, because we’re so hard-wired. Sure, knowing about it, and having experience of it, can help you get a little better. But ultimately I think it’s a lot easier to see mistakes in someone else. That’s the value of good advice - as an objective third party. I could manage my own money except for the “I” part.

SITV: Investor behaviour has certainly played a key part in recent years, hasn’t it?

Carl: Right. In 2007 markets were at a high. We asked people then what they thought about risk and they’d say, what risk? Then, of course, we had this huge decline until March 2009. Then nobody felt like buying. There were some smart people who saw it as the opportunity of a lifetime, but most people were selling. The credit crisis was a traumatic experience for a lot of people. So they sold and went into cash and they’d say, I’m going to wait until things get better, or until the dust settles. So I’d ask them to define what that would be like, and they’d say, the news would be better, the economy would be better, my friends wouldn’t be losing their jobs and houses wouldn’t be falling in value. And I’d point out to them that if all those things happened, the markets would already be higher. In 2012 and 2013 there were surveys that said people thought it was a good time to get back into the market - after a 100% rebound. This is nothing new. We’ve done it since the tulip bulbs, and probably long before.

SITV: As well as the need to manage investor behaviour, you’re also a strong believer in passive investing. Here in the UK, and especially in continental Europe, passive is still long way off where it is in the US, but it’s growing in popularity. Is the world moving away from active investing?

Carl: I’d like to hope so. My editor at the New York Times says he thinks the case is settled, that passive is the best way to invest. But I think those of us in the passive community live in an intellectual bubble. When I talk to real people, there are still many of them who don’t even know the difference between active and passive. There are more people talking about passive, and we clearly know the data’s on our side. But the idea of settling for an average is un-American. Looking for the best thing is so ingrained. Hard work, effort and energy - all of that stuff we do at work - is useful in every other area of our lives, but not in investing. To get people to buy into that, I still think we have an uphill fight.

We would like to thank Carl Richards, and also Nucleus Financial and the Forest of Arden Hotel and Country Club for making this interview happen.

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