Maybe you’ve heard of Bill Gross. He’s a well-known investor and fund manager who founded investment manager PIMCO. Worth a few billion. Done very well for himself.
Gross left PIMCO in 2014 and moved to Janus Henderson Group. Last week the news came out that Gross’s new fund had been suffering as of late.
June marked the fourth straight month of withdrawals for Gross’s Janus Henderson Global Unconstrained Bond Fund and the outflows dragged assets down to $US1.48 billion, according to Bloomberg estimates. The go-anywhere fund declined 6.3 per cent this year through June.
The problem?
Gross blamed the setback on a bet that the gap between US Treasury and German bond rates would narrow, which didn’t happen.
“The strategy has been to be short the German bund and long U.S. Treasuries,” Gross said June 1 on Bloomberg Television. “That was the basis for the bad day and the bad trade.”
Mr Gross aside, this is nothing new. In the financial press there is plenty of space for active fund managers or those running hedge funds to talk about what they think will happen and what their ‘bets’ will be over the course of the next 12 months.
When they are right they will be profiled again to bask in the glory. The reporter will include adjectives that paint the manager as some form of genius and they’ll have a satisfied looking portrait to accompany the story.
When they are wrong, the accompanying profile picture will feature them with a furrowed brow that sets the tone for the story. Here the accommodating reporter gives them further space to explain the reasons for their poor results. Often avoiding language that the manager may have been wrong or made a mistake. Instead more of a suggestion they’d been dealt a bad hand.
Note in the above report where Gross’s mistake was categorized as a ‘setback’ and the outcome of his bet ‘didn’t happen’. Gross, like anyone else, deserves respect, but it would be much more insightful for investors if poor results from financial managers weren’t explained away as setbacks that may have dragged the rest of their good decisions down.
Who cares about the reason? The results are the final arbiter.
Investors often find themselves overly focused on the outcome of one or two errors that cost them a better return instead of why they made those errors in the first place. Why? Because it’s much more palatable to focus on the ‘if only’ of a situation than drilling down to focus on their own poor judgement or the holes in their investment strategy (if they have one).
It also tends to provoke wrongheaded thinking about the results. R.L. Reid in his paper “The Psychology of the Near Miss” published in the Journal of Gambling Behavior, notes that “the occurrence of a near miss may be taken as an encouraging sign, confirming the player’s strategy and raising hopes for future success.”
Reid points out this is why poker machines will often be programmed so that a result very close to a jackpot will appear on the screen. Almost hitting the jackpot increases the probability the gambler will keep playing.
While Reid’s paper relates to gambling, it plays into the same decision-making process where investors find themselves waiting on a black or white outcome. Earnings report, drill results or the direction of German Bonds. Investors punished in these situations will often comb through the results for excuses to soothe themselves on how close they came or look for a glimmer of hope for next time.
Brutal honesty would be better. Take the risk. Own the outcome. Good or bad.
Otherwise find an investment strategy that needs no excuses.
This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.
