Reason vs Rationalism

Just consider the most challenging of all sports – golf. The other day, I had a chat with Retief Goosen, who won the US Open twice. I asked him how he handles the pressure experienced by top golfers. Rationally speaking, the expectation would be that top golfers around the globe want to win every tournament.

However, his response was surprisingly realistic. He said his aim was to finish among the top ten in every tournament. This takes off a lot of pressure and if he manages to do this often enough, he will have a very good year on tour. Furthermore, it enables him to extend his golf career, as it is so much easier for him to cope with the stress.

So, what is a realistic expectation? It’s something that is realistically feasible and meeting your expectations in the long run. Compare this to a rational expectation, where you want to achieve every little bit of return available in the investment world.

Contrasting the concept of realistic expectations with rational expectations of outcomes, I’d like to tell this story. I recently arranged a feedback session with a client and she decided to bring her son Pieter along. That was all very well, but in this case my client was quite upset and stressed out about the performance of her investment portfolio over the last year.

So, from the outset, Pieter bombarded me with questions about the portfolio composition and whether his mom’s specific circumstances had been taken into account in the construction of her portfolio. Pieter felt there were too many shares and too much offshore exposure in the portfolio, and it was not appropriate for his 75-year-old mother.

I had to scramble to explain the underlying strategy. Pieter was upset about the performance, which was negative in absolute terms.

Pieter was rational, comparing the return with inflation, and the return was lower than inflation. He indicated that if we failed to achieve inflation-related returns for his mom, it amounted to negligence on our part. In addition, if the portfolio continued on this downward trend, in eight years’ time there wouldn’t be sufficient funds left for her to survive.

I explained that we constructed a portfolio that was based on his mom’s need for income and a high offshore exposure. And let’s face it, offshore investments suffered in 2022, so from a short-term point of view and taking a rational look at it, this portfolio composition was ‘wrong’. Pieter’s judgement was based on a spreadsheet serving as the charge sheet. That was rational, especially when assessed with the benefit of hindsight.

But, was it realistic or reasonable? In 2022, it would have been rational to rather achieve returns in the local market, but was this a realistic expectation? In the preceding 10 years, mom Johanna’s portfolio performed well (notably supported by offshore exposure), and then the 2022 shocks hit the markets. However, adopting a realistic approach to assessing an investment would substantially reduce the investor’s stress levels.

But back to our discussion – at the end of our conversation, when the mood was more relaxed, I asked Pieter what he did for a living. To which he replied, he’s an engineer working for a chartered accountant firm!