“Every investor has an alarm clock that goes off around the same time every day. The secret is to know when and to adjust yours accordingly.” – Bill Gross
Like most in the world of finance, I was eagerly awaiting the Bill Gross interview with Barry Ritholtz on Bloomberg’s Masters in Business podcast series. The Bond King’s fallout with PIMCO and new role at Janus Capital has been one of the most interesting developments in the fund industry in some time.
But in the first of a two-part interview, the two mainly covered Gross’ background and how he formed PIMCO and his own investing ideas. There was one theory that Gross laid out that I had never heard before that I found interesting. He called it his investment alarm clock theory. After listening to the podcast I looked up the theory in Bill’s book Everything You’ve Heard About Investing is Wrong. Here’s his description:
If you can’t kick the “you” out of investing, make sure you know who that “you” is and how he or she reacts to varying circumstances. If you get emotional at bull market peaks or bear market bottoms, write yourself a note and stick it on the wall in your den, kitchen, or office, enjoining yourself to act, during critical times, like Mr. Spock instead of the average investor.
Better yet, make yourself an investment alarm clock. Let me explain. Perhaps the best way to work your own psychological tendencies to practical benefit in the markets is to determine when your investment alarm clock goes off and act accordingly. Almost all investors have an investment alarm clock that wakes them up, gets them out of bed, and stimulates investment decisions. Each of our clocks, however, is set at a different time.
A lot of investors, for instance, will not sell at the market top but at the very bottom, when fear finally flushes them out of the market. That’s what creates market bottoms of course. In alarm-clock terms, though, you’ve just woken up at 9:00 or 10:00 A.M. You’ve sold way too late to be successful – the smart money has already been up and at ‘em and sold as the markets were beginning to go down.
Other investors, instead of being too late, will either buy or sell too early. Their alarm clock goes off at 3:00 A.M., and although you could claim that they’re still going to make money, I would suggest to that those last three hours of missing sleep will take their toll as they try to wind their way through the investment world later in the day.
I love this idea because it starts with the assumption that all investors are different, which is something not enough people giving advice today take into consideration. Portfolio strategies and investment rules of thumb make no difference if the investor doesn’t have the emotional capabilities to implement them.
The point here is not to find that inner alarm clock that permits you to be able to wake up and go to sleep at the perfect times — sell at the top and buy at the bottom — but to understand yourself and your own personality enough to be able to design a process around your own potential pit falls. Certain parts of the market cycle and the emotions that come along with it can have a huge impact on potential unforced errors.
The best way to determine your own alarm clock settings is to simply look back at your past actions? Did you sell after the market crashed in 2008? Were you too scared to buy in 2009 and 2010? Do you change your portfolio every time the market changes or a new investing fad grabs everyone’s attention?
Understanding yourself and your own tendencies can be much more helpful to the investment process than knowing exactly what’s going on in the markets. You have no control over what’s going to happen in the markets, but you have complete control over your reactions to them.
Everything You’ve heard About Investing is Wrong
Listen to the podcast with Gross & Ritholtz here:
MiB: Bill Gross (Big Picture)
Did Bill Gross Tip the Pop Machine Over?
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