Beyond The Headlines

How Does It Feel?

Warren Buffett and Charlie Munger were asked about emotions at the last Berkshire Hathaway Annual Meeting. You’d think it’s an unlikely question to ask two investing legends at the shareholder meeting, is it though?

When I was in business school, we didn’t talk much about emotions. How does it feel when the market plummets by a third within weeks? No spreadsheet or chart can capture that sensation, but the pit of your stomach certainly can. In March 2020, I fielded numerous calls from both clients and fellow investors, granting me a firsthand experience of the profound emotional turmoil many were grappling with. This experience taught me more about emotions than any investment manual I’ve ever read.

As investment advisors to affluent families and individuals, we offer experience and knowledge. However, we believe what truly distinguishes an advisor is empathy. There are times when the numbers align, the strategy seems perfect, but the plan doesn’t resonate emotionally. We don’t dismiss this feeling. We pay attention. We refer to it as the “quality of sleep” factor.

Many argue that bear markets are the most challenging due to plummeting stock prices and pervasive gloom. I’d contend that bull markets are trickier. Watching neighbors accumulate wealth at a pace faster than you can be daunting. Charlie Munger himself argues that markets are driven not by greed but by envy. Perhaps it’s a tomato, to-mah-to debate, or maybe greed and envy are inextricably linked. Either way, these emotions can lure even the most disciplined investors into treacherous territory, leading them to take undue risks and overlook potential pitfalls.

Whether in a rising, falling, or stagnant market, in my experience, emotions inevitably surface. Regardless of how foolproof a plan appears, it’s crucial to gauge how our investors feel. A hypothetical portfolio crafted with an elegant formula remains theoretical. We believe that a real-world stock portfolio demands empathy and understanding, not just numerical data.

Another arena where emotions play a pivotal role is where practice confronts principles. Fundamental monetary and investment concepts aren’t intricate: saving, investing with patience, avoiding pitfalls, maintaining discipline, and steering clear of fleeting trends are principles championed by many.Many claim to be a “long-term investor” until the market takes a nosedive. That’s when we discern who can endure transient setbacks.

I’m reminded of Warren Buffett’s introduction to Benjamin Graham’s The Intelligent Investor. Buffett emphasizes that while the book offers a “sound intellectual framework,” we must provide emotional discipline. I’ve found that this notion is even more pertinent today. Our emotional equilibrium is constantly challenged by an incessant deluge of news ranging from the stocks we hold to global affairs.

Previously, we’d await the evening broadcast or the morning newspaper. Now, instantaneous buzzes from our pockets or wrists deliver headlines incessantly.

One facet of emotions largely omitted in my education is intuition. In the quantifiable realm of investing, intuition often seems out of place. Some opine that intuition aggregates our amassed knowledge and experiences, assisting us when facts and logic remain ambiguous. Consider times when something felt right or wrong without a discernible reason. I’ve attended meetings where company narratives seemed too idyllic, and though no explicit fact or figure raised concerns immediately, an innate hesitancy stopped me from proceeding.

While contemporary business school curricula encompass emotional intelligence, behavioral economics, and psychology, perhaps the emotional side of investing can’t be taught in a conventional sense. Maybe it’s more akin to learning to cycle, requiring more than just classroom instruction.

At the Annual Meeting, Warren Buffett explained how they have made plenty of bad investment decisions but never made an emotional investment decision. He added that you don’t want to be a no-emotion person all your life, but you want to be a no-emotion person making investment decisions. That’s something we can all aspire toward.

Cultivating empathy is a journey. Managing emotions demands continuous effort, and intuition sometimes proves to be a valuable ally. I love numbers and spreadsheets, but recognizing and sometimes trusting our emotions can offer an edge in our investment journey. Isn’t it worth delving deeper, occasionally pausing to inquire: how does it feel?

Happy Investing!

Bogumil Baranowski

Published: 8/29/2023

Disclosure:

The information provided in this article represents the opinions of Sicart Associates, LLC (”Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.

This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.