Bill Hortz's picture

[The COVID-19 pandemic has further accelerated our entry into what has been previously termed by strategic business and military leaders as a VUCA world – a business and social environment driven by volatility, uncertainty, complexity, and ambiguity. The term is meant to put us on alert as to the critical new skills needed in managing risk, making decisions, accelerating change and planning for the future. It forces us to recognize that we will need to now live in a state of perpetual beta. This operating environment necessitates a deeper, well organized thinking process beyond just relying on traditional expertise and past experience. This enhanced “Critical Thinking” has been defined as the objective analysis and evaluation of an issue in order to form a judgement or course of action. It promotes challenging established norms, rooting out biases, digging for root causes and developing independent thinking. Unfortunately, it has been acknowledged that few business owners are true critical thinkers due to the lack of training and extensive nature of the thinking process that critical thinking represents.

A recent article I read on Harvest Exchange entitled “Critical Thinking or Sardines” by Colin Symons, Chief Investment Officer and Portfolio Manager of Symons Capital Management, provides an excellent example of applying critical thinking to the investment process. To further explore this topic, we reached out to Institute member Colin Symons whose Pittsburgh-based firm manages a tactical asset allocation & 2 value strategies - one being a mutual fund - and characterizes itself as an intellectually independent investment management firm.  We discussed his perspectives on the issue of applying critical thinking to investing and how important this thinking process can be in navigating our current business environment and the investment markets.]

Hortz: How would you define critical thinking and why do you think it is so important, especially now? How is it different from logic or just being logical?

Symons: I think it is a question of being objective, unbiased, open, and skeptical. There is a great deal of volatility, uncertainty, complexity, and ambiguity out there. Most people seem to hate the idea of not having the answer to something. The tendency is to try to arrive at a conclusion quickly, then cling to it and look at all further information through that lens. I think it is much more helpful, particularly in times like these, to say you do not know the answer and stay open-minded. The basic questions are, does this make sense? Could other things make sense? In contrast, in logical thinking, you are constructing an argument. A is true, thus B should be true, thus C is the answer. That is fine in a strictly logical world, but our world is not made up of unemotional Vulcans from Star Trek, plus there are even more unknowns out there now than usual. I think logic struggles with unknowns.

Hortz: As an investment manager, how do you apply that specific type of thinking process to investing?

Symons: I think my basis is to ask a lot of questions. Are my assumptions right? What else could happen? I also think it is good to reevaluate. Has something happened that changes the probabilities?

Let us say the market keeps going up while you think it should go down. Why is that happening? What is the other side of the trade saying? Does that make sense and can it continue? How I write my investment and market commentaries is a reflection of that. I am not trying to show how I am right; I am trying to find the right answer - that is an important difference. It does not bother me for a second if somebody says I am wrong about something. I just look at their viewpoint and see if there is merit in it.

A good broad example of critical thinking would be the Austrian economics school of thought. Instead of the Keynesian desire to treat the economy as a large math problem, they look at things like marginal utility and second-order effects. In a lot of ways, we have the same contrast in markets, where some strategies treat markets as a math problem and others treat it as a puzzle of different actors with different philosophies. Critical thinking in investing is about how you treat opportunities in the market. 

Hortz: Would you consider this type of thinking as part of a risk management process? What does it offer or lead to as a possible end result?

Symons: In some ways, I think it is the risk management process. For instance, in the simplest terms, how can you describe what can happen in a company's financial statements? For me, the basic changes are in revenue, margins, asset turnover, and cost of capital. Thus, critical thinking tells me that if I expect an improvement in fundamentals it has to come from one or more of those places. 

What factor in your assumptions is most likely to break, and how much can that hurt? I also think it is an iterative process. Review and an ongoing challenging of assumptions is unpleasant, but incredibly useful. This is what I thought a week ago. What was right and wrong about that and how could I have done better? I think it can allow you to keep improving. I think you can ultimately make better decisions, and even improve on those decisions.

Hortz: Don’t most investment managers and serious investors apply some form of critical thinking to their investment decision making? Why not?

Symons: Certainly some of them do but many managers stake a claim to a specific logical process. For instance, some use algorithmic or quantitative investing, which could be looking at things like how different assets have performed under similar situations and plug in the appropriate assets at the appropriate time. Others may have an exclusively computer-based system where they may not even know exactly what the computer is going to do at a given time. Technical analysis and momentum have been popular lately, which is largely a question of deciding on and following a set of rules. Plenty of people have a 'hold your winners, sell your losers' philosophy, which is essentially a technical strategy. Replacing critical thinking with a 'scientific' approach has been increasingly popular, where computing power replaces critical thinking.

I am not a big believer that there is one holy grail of investing. I have the attitude that different things work in different seasons. In the late nineties, momentum did quite well, then value did quite well. We can fight that, but I do not see the point. There are other ways to invest. I like critical thinking because it is a very durable and flexible thinking process. I think it is possible to do well investing without critical thinking, but I am pretty comfortable using it.

Hortz: What does your critical thinking tell you about the current market environment and how is it guiding your investment decisions for your clients?

Symons: In the past few months, we have seen a bit of everything. I think that our current environment is going to stick around for a while. Is the fear and concern gone? From reading around, it is still very much present, just masked a bit by higher prices. What is pushing this market up? I think a lot of people would say government action, but I think it is more about the sentiment surrounding that action. If people think the Fed has their back, they will start investing. When they start winning doing that, they get more aggressive. I think there are limits to how far that can go.

At this point, I have seen Goldman Sachs justify stock prices based on 2023 earnings. Does that imply we just do not worry about what can happen between now and then? I do not think that is a good idea. Given the situation in the back-half of March we were much more constructive. But since then, the market has jumped and now we are cautious. And that changing environment is likely to happen again. 

It is also useful to admit you just don't know. What could make the market go down? Technical levels? A cessation of momentum? Is there enough stimulus in the market to soothe price action for the rest of the year? It is impossible to say with great confidence just what happens. All you can do is continually analyze what is there and what comes next.

Hortz: Are there any other final thoughts you would like to share or recommend to advisors about developing critical thinking skills to be better able to navigate our current environment?

Symons: Be open to the possibilities. Consider the other side. Look at facts and numbers. Ask a lot of questions. Perhaps most importantly in this business, always stay humble.


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