Away With Old Vases And Bad Stocks

Every Easter, I retrieve our lead crystal vase from the basement. A family heirloom passed down through generations from some aunt.. It's not exactly a thing of beauty, but it goes so well with the tulips. Says my wife. Truth be told, I probably wouldn't even buy it for a few euros at a flea market. Yet, simply because it's in our possession, we wouldn’t part with it even for 100 euros.

The US economist Richard Thaler gave this phenomenon a name: the endowment effect. This hypothesis from behavioral economics states “that people are more likely to retain an object they own than acquire that same object when they do not own it.” (Wikipedia)

In their prospect theory, Daniel Kahneman and Amos Tversky also established that “people conclude their utility from gains and losses relative to a certain reference point.” 

The late Nobel laureate and psychologist Daniel Kahnemann, who died on March 27th, conducted several experiments in 1990. The astonishing result: the owner of a mug or a basketball ticket would only have sold the object for a higher price than a potential buyer would have been willing to pay. Armed with this knowledge, the old vase in the cellar suddenly appears to me in a completely different light. 

Discipline built in

It is very similar with stocks in our portfolio. Once we have bought a company in the form of shares, we are reluctant to let them go. We take a benevolent and lenient view of the position. As a result, we often hold onto losing positions longer than is good for our financial health. 

We have discipline built into our Gutmann Core Equities strategy that counteracts the endowment effect. Four times a year, we must actively decide to increase a losing position counter-cyclically. Easier said than done. Counter-cyclical always sounds so smart. But how smart is it really to keep buying into a position that is losing value quarter after quarter?

That’s why every purchase also involves a revaluation of the position. It’s not just one’s own two eyes assessing the position. Team members not yet immersed in the business model often provide valuable input.

Daniel Kahneman said many wise things in his lifetime. I’d like to share one quote with you at the end. It aligns well with the Gutmann Viewpoint and is also my tribute to a great thinker.

“If owning stocks is a long-term project for you, following their changes constantly is a very, very bad idea. It's the worst possible thing you can do because people are so sensitive to short-term losses. If you count your money every day, you'll be miserable.”