Logic makes me think, emotions make me act

When I was playing hockey for the Australian u21 team, I wrote down this quote from our many cultural sessions.

It has always stuck with me.

Logic makes me think, emotions make me act.

In the context of a high performing sporting team, it was all about separating the logic - understanding the game plan intimately, knowing how we were going to expose the opposition’s weaknesses, what my role in the team was. With the emotions that might arise in big games – if you’re up by one goal late in the second half, do you retreat in fear and go into your shell to protect a lead? If you make a mistake on the pitch and get mad at yourself, does that spill over into your next action? 

The game plan was always the easy part (at least for me, a logical deep thinker). It was written down, rehearsed and agreed on before we ran out. What decided the game though was whether it survived the emotion of the moment.

12 years on from this culture meeting, it’s funny it's still relevant to everything we do at Lugarno Partners.  

On the investing side, separating logic and emotions is a daily battle. Feelings of FOMO, regret, frustration, elation, optimism, pessimism… they all hit at different points, especially with the diverse types of assets we own. At the same time, there’s almost always an investment causing friction and an investment to be excited about.

We've found that rules, plans and frameworks help us and our clients hold onto logic - not by suppressing the emotion, but by locking in the decision before the emotion turns up. Some recent examples that come to mind:

• A client has committed to investing $20,000 into an ETF portfolio each month, for the next 2 years. This discipline is enabling them to not overthink the daily moves in the market as they are averaging their way in.

• Another client has pre-committed to a dollar amount they are willing to deploy if the market falls 15%. If it falls further, there is a secondary and third pre-agreed tranche. The strategy will include buying ETFs, for broad based exposure to a recovery, and Bluechip holdings that may have fallen even further and present better opportunities. It's easy to say "be greedy when others are fearful", but it's much harder to act when feelings of fear arise. The decision is far easier to make in a calm market than in a falling one - so we make it in a calm market.

• We have a rule that any investment that's fallen either 15% from cost, or if held for longer than a year, 20% from highs, requires a re-underwriting and thesis check. As naturally contrarian investors, this helps challenge the reflex to read a falling price as an opportunity rather than as information. Sometimes humility is required to admit you might have something wrong.

Looking more broadly at the work we do for families, we see this tension play out even more so in the wealth planning space. The difference is that in markets you usually get another chance - another opportunity to buy, another cycle. In a family, some decisions only get made once.

Issues in generational wealth transfers commonly arise. Logic might dictate that a child working in the family business or family farm should be compensated differently to a child that isn't. Emotion might demand that all children are treated equally.

Or for succession planning events. Logic would suggest that leadership be passed onto the most qualified heir to ensure business continuity and protection of the family asset. Emotion may drive a founder to hang around longer for fear of a loss of identity or relevance.

The principle is the same as it is in markets - agree the logic while everyone is calm.

One family we work with agreed to a written family charter years before it may be needed. This covered things like what their children can use their inheritance for and on what terms. None of this will remove the likely emotions when the time comes. But it means the emotion arrives at a decision that had already been made, rather than in the middle of making one.

We shouldn’t suppress these emotions – as the quote suggests, its these feelings that make us act. But we should recognise and acknowledge them, because doing so is what lets us return to the logic we set when we were thinking clearly, and make better decisions.

Ollie

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Acknowledgements: Brian Fitzpatrick