Reason – The Power of investing sensibly

Investing sensible or as Benjamin Graham says, investing intelligently is a central aspect for value investors. The power of reason is huge and using it well, can increase your success tremendously.

Many people believe, investing successfully has a lot to do with luck. Especially many average private investors are convinced about the great influence of luck when investing. That’s why they rather invest in ETFs than doing the necessary work. They believe that some brilliant guys like Warren Buffett were able to beat the market over a long period of time. But investing successfully is not about brilliance or luck. It is about investing with reason and building a fortune over time, based on the right decisions and avoiding the wrong ones.

chess reasonSure, that’s a truism and it’s easier said than done. But it sounds quite easy because it is. The greatest problem for many people is that investing with reason and patience take longer. But it is safer and more successful in the end. You don’t need a high IQ for being successful. Even Warren Buffett says that you need no superior intelligence to succeed as an investor. In contrary. Excessive intelligence could rather be a hindrance.


Well, people who have an above-average intelligence are usually aware of it. This knowledge can lead to making unnecessary mistakes. Superior intelligence leads too often to excessive self-confidence which ultimately leads to arrogance which prevents a decision based on reason. Unfortunately, having a high IQ doesn’t guarantee rational decisions.

However, successful investing is about rationality. When your investment decision is based on emotions, it usually leads to considerable losses. That’s why my intention is to help you to get your emotions under control and to learn to decide rationally about your investments.

In my today’s blog post, I want to talk about two aspects of rational investing. The first one is

Long-term orientation

Long-term orientation doesn’t mean blocking your money for many years without accessibility. It means choosing an investment wisely and keeping it for many years because it’s so incredible. That’s why you want to hold it for years. Warren Buffett and Charlie Munger talk about outstanding companies. These companies are so great that you would be an idiot to sell them just because the short-term stock price rises or falls one day or another.

Everyone knows about the long-term orientation of Warren Buffett, but only a few do it like him. Many people are driven by their emotions and these emotions force them to act every day. They don’t understand the power of doing nothing. They don’t understand that being active all the time only costs them a lot of money.

Reducing short-term risksreason puzzle sense

Short-term price changes are of little relevance to long-term investors. They know that investing with a long-term orientation is simply more successful and very helpful to build a fortune because the longtime orientation reduces many short-term risks. In addition, you must not underestimate the immense importance of compound interests. The great thing about compound interest is that without doing anything, each year you get more interest than the year before. So, compound interest is the interest on the capitalized interest of past periods. Those who are long-term oriented investors use the compound interest and at the same time, they save enormous costs avoiding continuous action.

Risk Aversion

As we have seen above, long-term orientation reduces short-term risks. That’s why the aversion to risk is closely linked to the long-term orientation. The longer I am oriented in my investment, the lower the risk. The problem of risk is that it can’t be eliminated completely unless you invest in long-term government bonds of economically strong nations where you only have to expect low interest rates.

Another problem of risk is that you can’t clearly quantify it, too. Charlie Munger describes risk as

1)  the risk of a permanent loss of capital;

2)  the risk of insufficient return.

The emphasis is on the word „permanent”. Certainly, each investor must reckon short-term capital losses. Munger is of the opinion that you are not suitable as an investor if you cannot withstand an occasional 50% loss of your investment.

What does this mean?

Well, many investment professionals measure the risk of a share at the level of its volatility. According to their opinion, the more volatile a share, the riskier it is. However, these short-term fluctuations have hardly any significance for any value investor. That’s why Charlie Munger also says:

“Using volatility as a measure of risk is nuts.”

reason riskWhy?

Even if a share tends to intense volatility in the short-term, its real value and also the increase in value depends on the underlying company. The long-term value of a company is independent of the short-term volatility of its share price. If the intrinsic value of a company is missing, an investor is not hedged against a capital loss even if there is hardly any volatility.

Thus volatility is only a short-term, but not a long-term measure of risk. That’s the reason why volatility is a high risk for many investment professionals. Their customers expect short-term success and are very afraid of short-term losses. However, high volatility makes the first one more difficult and facilitates the second one. As a consequence, investment professionals lose their customers when they don’t offer them what they are looking for. And don’t forget that it’s easier for fund managers to justifying their high charges by quantifying the risk.

Measuring risk

If the risk isn’t measured by the volatility of the share price, we have to find another measure of risk.  For value investors, risk means, as Warren Buffett says, not knowing what you’re doing. That’s why we speak of smart investing, which means knowing what to do. On the basis of this knowledge and by using special tools, we attempt to keep risk as low as possible.

At the same time, value investors try to avoid any behavior that increases their risk unnecessarily. The following questions could give you a first clue as to whether you are investing reasonably or not:

On what informations do you act?

Who has done the work to obtain the information?

Who else is acting in the same area?

How often do you control the prices of the stock market?

What investment classes do you invest in and why?

How much do you diversify your assets and why?

At what price do you buy your investment?

How secure is your investment?

This list of questions isn’t completed. But it gives you an insight into which direction you have to orientate yourself. There are certainly more aspects of reasonable investing. And if you read my blog you will find a lot more. In contrary to speculation, value investing is all about investing with reason or as Benjamin Graham calls it: Intelligent Investing.

If you want to learn more about Intelligent Investing, visit my Investment Academy Bridge2Fortune® and learn to Invest like the Best! And don’t miss out to join me on social media and share my blog with everyone.

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