Once Again With Emotion

Gutmann is an outsider in private banking. Does this phrase worry you? Reflecting the fact that we think differently than the competition? Just a few months ago, the following economic rationale for investing was echoed more often: “The probability of recession has risen sharply, that is why we are lowering the equity ratio.”

Not from Gutmann, we actually increased the equity component in September. My thesis for many years has been: First, the markets move, then the explanations follow. However, this unsettles most financial market experts and is a good time to talk shop about economic developments. Justifying asset allocation based on economic figures simply sounds good. Economic growth, inflation, unemployment rates, purchasing manager indices and other indicators are strung together to underscore one's own expertise. Does it make sense to proceed in this way?

If you superimpose the historical economic development and the fever curve of share prices, one seems to imply the other. However, one of the two curves only exists with a time delay of months. Officials often declare the beginning of a recession only after it has already ended! Therefore, economists have no choice but to try to forecast a recession based on leading indicators (in German, to "guess" it). The best of them (or are they the luckiest?) predicted 9 of the last 5 recessions*. 

Complex, contradictory and fast

At Gutmann, we also keep a close eye on the economy and the various indicators. If only to understand what moves other market participants. Of course, this gives us a framework to better understand the world. Yet, the most important indicator remains the financial markets themselves. A complex, constantly adjusting system that results in traded prices. It anticipates economic developments, sometimes errs, and then quickly marches in the other direction without a guilty conscience. 

For us, this system of rapidly changing data is crucial. How are the other market participants positioned? Is their mood exuberantly optimistic, or are they saddened to death? Where are the most motivated buyers and sellers and which potential developments are not on anyone's radar? 

Investing is not just science, but has a lot to do with emotions. The second part of the equation is often bashfully concealed. After all, financial experts want to appear as competent as possible and not to show their face. Do emotions play a role? Many do not want this association. For us, however, they are an important factor in asset allocation - in other words, the distribution of stocks and bonds. 

When selecting individual securities, it is the underlying business model that counts for us. The quality of the business model and the ability of the management prevail over the economic cycle. That is why Gutmann's investment teams focus precisely on this. We do not leave the thinking to the market; we invest in companies with conviction.

* Paul Anthony Samuelson (1915-2009), the economist and first American Nobel Laureate in Economics (1970), coined an old Wall Street joke. He quipped that the stock market has predicted 9 of the last 5 recessions and, thus, the anticipated recession does not always happen.