Being Rational

“You are so rational and unemotional!” my wife Kerstin said to me at dinner the other night. “Thank you, that's really a nice compliment,” was my response. Somehow, though, my response was not what she had expected. For a compliment, her tone was suspiciously unkind.

Ruthlessness with sugar coating

Rationality is an incredible advantage in life. Okay, maybe not in those moments when our counterpart wants an emotional involvement in the situation. Yet, apart from that, a sober and rational assessment is helpful in all areas of life. Being realistic sometimes requires a certain ruthlessness. Through tact and empathy, it can be sugarcoated a little, but reality remains what it is.

Charlie Munger - Warren Buffett's business partner - is not only an excellent investor, but also one of the great thinkers of our time. After all, he has been on this earth for 97 years and is still practicing rationality:

<<Rationality is something that you get slowly and it has a variable result. But it's better than not having it.>>

For example, if someone says something to us that we do not want to hear at all and which makes us uncomfortable, we automatically react with antipathy. Munger recommends training ourselves out of it. Otherwise, we tend to stay this way. If we react rationally, we can hear and absorb what we do not like. This perhaps broadens our view and desire to learn. Decades ago, Charlie Munger was specifically asked by his seatmate at a dinner party for his secret to success:

<<In the late 1980s, he recalled in a magazine interview, a guest at a dinner party asked him, “Tell me, what one quality accounts for your enormous success?“ Mr. Munger's reply: “I'm rational. That's the answer. I'm rational.”>>

Five years in three months

Rationality brings great advantages in the investment field. Because in the competitive world of business, everything is always in flux. Admittedly, this is a cliché. It becomes more tangible when - as in 2020 - developments happen in fast motion. We now order fresh and locally grown organic vegetables online and they are delivered to our door. Our children sit in virtual classrooms - mostly enabled by Microsoft Teams. We keep in touch with our loved ones via Zoom video calls. We pay contactless at the supermarket with Apple Pay via our mobile devices.

All these developments were already on the way to us. Suddenly the next five years came upon us in three months. Some of these developments would have continued to fail for a long time due to the resistance of the status quo. These noted changes have an impact on social structures, business models and share prices - whether we like it or not. Regardless of whether it fits into our ideological worldview.

The rational investor always lives in the area of conflict between a strong opinion and the rapid change of opinion. “A strong opinion, weakly held,” is the English expression. Giving up a strong opinion when conditions change sounds like a major challenge. However, the British economist and excellent investor Lord Maynard Keynes put it in a simple equation:

<<When the facts change, I change my mind. What do you do, sir?>>

You will have noticed yourself that others hardly change their minds just because the facts change (it is always easier to see in others than in ourselves). That is why it is important to remember: Everyone has a right to their own opinion but no one has a right to their own facts.

Mosaic and opinions

In the USA, the earnings season of the last quarter of 2020 is just ending. Bank Gutmann's investment horizon is measured in years; nevertheless, we analyze the sales, profit figures and margins every quarter. All it takes is one stone in the mosaic where the facts change and we have to rethink our opinion and adjust positions.

In asset management, this is done without consultation, as our mandate is agreed with the clients. In our independent investment advice, on the other hand, we inform our clients about our findings, assessments and resulting recommendations. So that, if the facts change, they can adjust their opinion too. You decide, we implement.

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