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There is no universal way to invest, and different investment styles all have their relative merits and weaknesses. However, it is crucial for every wealth manager to have a clear philosophy and a core set of values that they adhere to. This not only helps investors keep their long-term view but helps curb irrational responses and manage risk.

The market is made of human beliefs and emotions

While investing may seem like a numbers game, an important reason why investors make poor decisions is human emotion. One of the most prevalent biases in investing is short term loss aversion, which is when investors make rash decisions because of a fear of losing. This tends to lead investors to be overly cautious rather than cautiously optimistic. In practice, especially when markets are volatile, private investors are prone to make forecasts based on their gut feeling, often concluding that equities will go down sooner rather than later.

As Daniel Kahneman explained in his famous book Thinking, Fast and Slow, our brains have two modes of operation, a fast one that is wired for survival in the hostile natural environment of the Stone Age, and a slow one that allows for analytical reasoning. The fast brain built for survival is a very poor evaluator when it comes to financial outcomes.

Much better conclusions, and therefore investment performance over time, can be achieved by using our slow brain, i.e. the one we also use for calculations when we settle a restaurant bill. Having a solid investment framework allows investors to use their slow brain when making investment decisions.

When managing money, it helps to understand the emotions, the thought process and the reaction functions of market participants. “As the late Charlie Munger once stated in a conversation with Warren Buffet, managing money is about psychology,” explains Bonzon. “The market is made of human beliefs and emotions. We invest in companies, we invest in entities that are managed by people. Understanding them is crucial.”

Having an investment framework is key

Apart from understanding market psychology, Bonzon highlights another important ingredient to successful investing: your own behaviour. “We have a strong belief that managing money successfully starts with avoiding mistakes, avoiding counterproductive decisions. And to avoid those counterproductive decisions, for instance, reacting emotionally, you need to have a framework. This is what our investment process is all about.”

According to Bonzon, the process is not necessarily about avoiding risks, it is about taking “good” risks. “Our jobs require a deep understanding of the sources of return in capital markets and how to produce good risk-adjusted returns in a portfolio. Lots of people believe that managing money is about trading a lot, or watching finance channels on television all day. However, you need to understand how the market works and how to make good decisions.”

Bonzon highlights that “You really have to have a disciplined approach, 100%.”  This is because performance is not only an objective but also always the consequence of a well-designed investment process. Sometimes a strategy goes through a period of negative performance for exactly the right reasons. Performance is a combination of passive (market-dependent) and active (non-market-dependent) returns, that are constantly fluctuating. “In many ways, the less frequently you look at your portfolio, the potentially better the performance.” says Bonzon.

Being in the market enables you to become a better investor

At Julius Baer, the CIO is managing money himself, directly putting the investment approach to practice. Questioned about this, Bonzon, having worked in investment management for over three decades, describes the importance of rolling up his sleeves as a CIO and taking a role in managing money, comparing it to car racing. “It’s fun to race a car on a PlayStation, but it’s not like the real experience on a track with a proper car. When you make a mistake, the car goes off track. It’s the same with theoretical asset allocations on spreadsheets. What really matters is the actual way a portfolio performs. You need to practice, you need to be in the market, you need to experience good and not so good performance. That’s how you eventually grow and become a better investor.”