Logic: The Investor’s Greatest Adversary

Logic is the art of going wrong with confidence

Every investor has their moment of revelation - mine came during a recent U.K. heatwave, where few homes have air-conditioning. My family was struggling to sleep through the sweltering nights.

My young son, ever logical, believed he’d found the solution. He noticed that turning on his fan made him feel cooler, so he reasoned that if he left it running all day, his bedroom would be cool by bedtime. It was a perfectly logical plan, delivered with childlike confidence and the certainty of someone who believed they had cracked the code. If minded to do so, I am sure he would have staked a large bet on its success.

"So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for everything one has a mind to do."

Benjamin Franklin

His logic was sound, but his science was off. The result, sadly, was a very warm room and a very disappointed boy. Lucky he didn’t make that bet!

I explained that the fan doesn’t cool the air itself. It cools us by moving air across our skin, which in combination with drawing heat from our body, helps us to sweat. This process removes body heat and so we feel cooler. Without someone in the room to benefit from this effect, the fan is just circulating hot air.

That moment, small and domestic as it was, stayed with me. Because in its simplicity, it mirrors one of the most common and costly traps in investing: mistaking good logic for good outcomes.

Logic is a systematic method of coming to the wrong conclusion with confidence. This is arguably why so much money is lost by so many well intentioned investors.

For instance, a company’s revenues and customer numbers are growing rapidly, quarter after quarter. It seems logical to assume that the stock price will follow the same trajectory. After all, more sales mean more success, right? But what if the business is spending heavily to acquire those sales? What if it loses money on every transaction? What if, despite the growth, the path to profitability is uncertain or nonexistent? Logic says growth equals value, but the market eventually demands cash flow. Investors who rely solely on surface-level logic often overlook these nuances, and they pay the price when the bubble bursts.

Or take the case of dividend investing. It’s logical to think that a high dividend yield is a good thing, it means more income for less capital. But dig a little deeper, and you might find a business in distress, forced to maintain unsustainable payouts to prop up its share price. The high yield is often not a reward, but a red flag. And when the inevitable dividend cut comes, both income and capital evaporate.

One of the most beguiling forms of logic is the “this time it’s different” argument. A hot new technology, a visionary founder, a rapidly changing world: surely the rules no longer apply. Investors pile in, often with great conviction, fueled by intelligent-sounding explanations and persuasive forecasts. But markets have a way of humbling those who believe their logic can outpace reality. Just as a fan can't cool an empty room, no narrative, however elegant, can defy the laws of financial gravity forever.

The deeper truth is that logic, while necessary, is not sufficient. It must be paired with understanding, experience and an appreciation for complexity. Investing is not an engineering problem where inputs always produce predictable outputs. It’s a probabilistic, dynamic environment influenced by psychology, incentives, and uncertainty.

My son learned that even well-reasoned plans can fail when the mechanism behind them is misunderstood. Investors, too, must move beyond surface-level logic. They must interrogate assumptions, test for hidden flaws and understand that the market doesn’t reward what sounds right, it rewards what is right.

In this way, logic - unexamined and overconfident - becomes the investor’s arch nemesis. But paired with humility and insight, it can still be a powerful ally.

Logic becomes a powerful ally when it’s grounded in reality and guided by discipline.

Take valuation, for instance, in times of market stress. When fear dominates headlines and prices disconnect from fundamentals, the investor who can calmly assess the facts, challenge prevailing narratives, and act on reason rather than emotion, gains an enormous edge. They can ask: has the business changed, or just the mood around it? Is this a temporary disruption or a structural shift? Logic provides the foundation to make decisions others shy away from, not because it feels good, but because it makes sense.

“The most important quality for an investor is temperament, not intellect.”

Warren Buffett

It’s logic that anchors that temperament: it keeps the long-term investor from chasing fads or panicking in downturns. It creates the framework for thinking probabilistically, weighing risks and rewards, and knowing when to act or when to do nothing.

Importantly, logic used properly doesn’t mean clinging stubbornly to an idea just because it once made sense. It means constantly re-evaluating your thesis as new information emerges. It means knowing that conviction is earned through evidence, not enthusiasm.

In the end, logic is like the fan in my son’s room. It works brilliantly when applied in the right context. When used with insight and discipline, it can keep an investor cool-headed while others overheat.

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