Intelligent Decision Making: Thinking Beyond Emotion

Michael Goldberg

Collins St Value Fund

There is no escaping it. Every decision we make in life is influenced by a combination of emotion, intellect and circumstance.

Whether it is the flavour of ice cream we order on a sunny summer day, or an investment decision pertaining to your super fund. Each decision will be influenced by these three factors.

When ordering an ice-cream, the implications of ordering a double scoop of chocolate instead of a single scoop of low-fat vanilla is unlikely to have a meaningful impact on ones long term outcomes (so long as it’s only the occasional double scoop - with chocolate chips). The cost of a poor decision in ice-cream decision making is non-substantial, and so, most people don’t give it more than a second thought.

In fact, most choices that people make on a day to day basis don’t have a high cost, and so many people get comfortable with ‘going with their gut’ (pardon the pun).

The same should not be expected in more important choices such as relationships, rearing children, investing, and selecting a job or career. But sadly, for many they have become so accustomed to ’going with their gut’ that when the time comes to think with their head, they have made a choice before it’s even registered.

We have no special expertise as it relates to relationships, rearing children, or selecting a career path (though each of our team is married, have children, and enjoy our jobs), but we like to think we know a thing or two about investing.

Recognising Our Limitations:

As Warren Buffet has famously said, an investors job is to “be fearful when others are greedy, and greedy when others are fearful.” That is to say, recognise that emotions play a part in decision making, and use them to your benefit.

We can’t expect to disconnect ourselves entirely from the impact of emotions when making investment decisions, but we can put in place a process that ensures that we are not driven by them.

Practical Steps:

Know the Value - In past publications we have spoken and written at lengths about our process of establishing intrinsic value. In the drama and mystery of it all, it’s easy to forget why it’s so important to have ’intrinsic value’ as a starting point.

The reason it’s so important is because it allows us to move forward. In a world (market) so dominated by emotion, fads, and talking heads, the only factor we can truly control is the price we are prepared to pay or sell at. To establish those points, the starting point must always be ‘what’s it actually worth’.

Today as we read the latest news from the financial media all the talk of growth vs. value, momentum vs fundamental analysis, quantitative vs qualitative analysis, all the talking and distraction simply distances investors from the only questions that matter; 1). What is this company’s earnings? 2). What am I prepared to pay for those earnings?

Ignoring either of those fundamental questions leads to some interesting, and often scary situations.

Tech stocks that have never made a cent of profit are trading at nose bleed heights; speculative companies with little hope of a profit in the foreseeable future trade as if the sky is the limit.

This isn't healthy, and its unlikely to be sustainable.

Even with companies like Xero and Afterpay, which may at some point become worth the market cap they now demand, investors really need to ask themselves if they are investing in the businesses or speculating on the share price. 

Understanding the difference between the two and being able to identify which you are doing is absolutely essential for long term peace of mind (and fortunes).

Have a sounding board - Be it a process that ensures you are being honest, or (more practically) a friend who isn't afraid to tell you when you are acting outside of your best interests.

Being able to avoid the trappings of falling in love with an idea, a company, or a way of thinking is absolutely essential to long term results.

If you aren't constantly and independently challenging your assumptions, chances are you’ve already fallen into the trap of group think or bias.

Without Charlie Munger, there may not have been a Warren Buffett
Without Charlie Munger, there may not have been a Warren Buffett

Ignore the market - The market is just noise.

Too much value is ascribed to the machinations of the index as if it were some all-knowing being, capable of prophesising the future.

It is not. It is simply the whim of some 5 million investors, each of whom are making decisions on individual companies based on how they felt when they woke up that morning.

The magnitude of the misplaced value ascribed to the ‘all powerful’ ‘all knowing’ market is highlighted by the significant differences of the companies that make up the indices.

We prefer to think of it as ‘a market of stocks’ rather than ‘The Stock Market’.

After all, to suggest that a company like Telstra, CBA and BHP are somehow intrinsically connected is patently silly. Each is driven by distinctly different factors, and very few (if any) intersect. Yet, when we quote ‘The Market’, we do so as if it were a singularity, connecting each of the companies that make up the index as if they were all driven in the same direction by the same drivers.

Be brave - Once you’ve come to a conclusion and are ready to make a decision, act with conviction.

Once the hard work is done, putting it into action is the final and most important step.

This is especially so in times of extreme conditions. Extreme conditions create the most attractive investing opportunities, with some 90% of market returns being earned over just 5% of trading days.

To quote Eric Thomas (Minister, Author, and American motivational speaker), “Everyone wants to be a beast until it’s time to do what beasts do”.

Everyone wants to invest successfully until it’s time to do what successful investors do.

Being uncomfortable is part and parcel of the process. It’s in recognising that discomfort and realising that therein lies the opportunities that the greatest investors make the most spectacular returns.

It’s precisely during those times that all those around you think you are crazy, when even your ‘gut’ insists that you’re making a mistake that true long term profits are established.

“Be fearful when others are greedy, and greedy when others are fearful”.

The Covid-19 test

Not every person is a good investor. If that were un-true, then funds such as ours would be of no value.

We’ve seen through history that some of our brightest minds have proven to be pretty terrible at investing. Digging into why that is the case is the subject for another time, but when push comes to shove, the proof of the pudding is in the eating.

How does one react in times of distress, when the markets move against them. When all the research they’ve done says one thing, yet the markets are moving in the opposite direction?

Most investors panic. Most investors panic at the bottom and are motivated to action near tops. It’s not their fault, it is the pull of the crowd, and it is an incredibly powerful force.

Recognising one’s limits and the risk of ignoring them is an essential skill in every aspect of life.

The other day I met with a friend of mine (a doctor) and asked him what he thought of a legal matter that had come up. Rightfully, he told me not to be stupid, and to go ask a lawyer.

It’s unclear to me why so many people feel that they must be experts in every field. If I have a leaky pipe, I call a plumber. If I need a legal advice, I call a lawyer. And, if I need medical advice I call a doctor.

For many the Covid crash and recovery was a lesson in limitations. For some it was an extremely expensive lesson. Nevertheless, a lesson well learned is invaluable.

Most people are capable of training themselves to become better investors, but for most people it’s simply too much effort, or not a priority.

That’s fair enough. Whether an investor has worked a lifetime to accumulate capital, or are too busy earning their fortune today, for most investors their goal is to become more available as a spouse, a parent, or even a hobbyist.

Spending the hours necessary to comb through announcements and financial reports is not everyone's cup of tea, and it doesn't need to be.

At Collins St Value Fund, we had the same internal debates as most other investors would have during the crash:

· Is now a good time to invest?

· Could things get more out of hand?

· Should we sell in anticipation of worse?

Inevitably, by applying the above tools the answer always came to the same resolution:

It’s not our job as investors (distinct from speculators) to guess whether markets will rise or fall. Our job as investors is to simply understand the businesses we are considering, identify if they are cheap or expensive, and on that basis buy or sell.

Everything else is a distraction.

Collins St Value Fund may own some of the companies it discusses.

Managing Director and Portfolio Manager
Collins St Value Fund

Michael is the MD and one of the founding partners of the Collins St Value Fund. The Collins St Value Fund is one of the best performing Funds in Australia - having ranked among the top 10 performing funds across all Australian Equity mandates by...

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