Last Updated on December 2, 2024
Overview – When Do I Resort to My Investment Intuition?
Whenever we start any sort of endeavour, in the beginning, we’re usually only equipped with our theoretical knowledge. There’s no such thing as an “experienced beginner”, so it’s impossible to make decisions or to discern what’s right or wrong at this stage based on what we’ve previously encountered – because we have no such experience.
Over time, our decision-making starts to include elements of theoretical knowledge, experience, and all of the lessons we’ve learned (both hard and easy) along the way. Decisions that once took careful analysis and consideration to make now seem to be made more quickly and confidently.
No matter what endeavour we pursue, we eventually start to get an intuitive feel of how to act based on what we’ve studied, learned, and seen before. Even if the information we have to work with isn’t as much as we’d like, effective decisions can still be made.
Likewise, as investors advance in their careers, they slowly but surely connect the dots faster and more efficiently than before without giving it much conscious thought, even when working with a relatively small amount of information. This is their investment intuition at work.
Investment intuition, if utilized properly, can be a very powerful tool that investors can consistently and reliably turn to.
What is Investment Intuition?
Before defining what investment intuition is, let’s first start by looking at the definition of “intuition”. The Merriam-Webster dictionary gives the following definition:
“The power or faculty of attaining to direct knowledge or cognition without evident rational thought and inference.”
Put another way, intuition is when we react to certain situations without much conscious thought. In this state, we perform actions by subconsciously connecting the dots.
So, if we add investing to this definition, then investment intuition is when an investor performs certain actions or makes decisions seemingly automatically, even if there’s not much information or careful thinking to justify their choices.
Now, performing investment actions without putting much thought into them sounds like a terrible idea. After all, investing is all about making informed decisions based on facts, data, and analysis, so why would investors want to make decisions based entirely on a gut feeling?
It’s important to understand that investment intuition isn’t based entirely on an investor’s emotions. Investment intuition is something that is developed over time and is the synthesis of a few distinct elements.
Investment Intuition Is NOT the Same as Instinct
Let’s first dispel the notion that “intuition” and “instinct” mean the same thing. The definition of instinct, according to the Merriam-Webster dictionary, is:
“A largely inheritable and unalterable tendency of an organism to make a complex and specific response to environmental stimuli without involving reason.”
An instinctual response is something we do because it is essentially “hardwired” into our minds as a result of our evolution.
For example, when we sense that our lives are in danger, the first thing we do is find safety because it’s been instilled into our minds through countless generations of psychological evolution that not performing this action will likely result in our death, or at least some kind of injury.
Instincts are mostly a natural phenomenon, so as a result, it’s impossible for us to have “investment instincts”. Nobody is born with some sort of biologically ingrained investment knowledge or know-how because it’s simply not part of our mental hardwiring. Investing (at least in its current form) didn’t exist thousands of years ago, but dangers to our lives certainly did.
On the other hand, investment intuition is something an investor slowly develops over time as they accumulate a repository of investment knowledge, lessons learned, and experiences. As an investor continues to expand and refine this repository, then their investment intuition will change over time as well.
Because of this, not every investor will have the same level of investment intuition. The intuition of a new investor will vary greatly from that of an investor with decades of experience.
What seems like a complex problem to the new investor may be trivial in the eyes of the experienced investor because they subconsciously connect the dots differently based on their respective mental repositories.
As an investor’s intuition develops, they will eventually realize that there are instances where trusting their intuition may be the sensible thing to do.
Investment Intuition Is Developed
As we briefly touched on in the preceding section, investment intuition is not some innate trait but instead something that can be developed and refined. Every investor, regardless of how inexperienced or unknowledgeable they start, has the potential to one day have a highly refined investment intuition.
If that’s the case, what can investors do to develop their intuitions?
Assuming an investor continues to expand their investment knowledge, constantly accumulates more investment experience, and is always learning new lessons (whether from their own mistakes or by observing others), then their intuition will naturally develop over time – usually over many years.
Because investment intuition is a synthesis of an investor’s collective knowledge, experience, and lessons learned, this is a never-ending process of constant improvement and fine-tuning. The investing world constantly changes, which means an investor’s intuition must constantly be fine-tuned to adapt to these changes as well.
If investment intuition is developed through time and effort, then the opposite is also true – it can also deteriorate if insufficient effort is put towards it. Investors who become complacent with their personal improvement may one day find that their intuitions aren’t as sharp as they’d hoped.
When Should an Investor Go With Their Intuition?
Now that we understand what investment intuition is, we are left with the big question of “When should investors apply their intuitions?”
There are no explicit criteria that, when met, give investors the go-ahead to use their intuitions. Knowing when to use it comes down to a matter of judgment. When it comes to specific applications of where it can be used, then the possibilities are theoretically limitless – the only limit is an investor’s imagination.
For example, imagine you hear about a new hot stock in an industry that you already have money in. Investors are scrambling to buy it, and the only direction the price seems to go is up.
However, despite the frenzy, you have your reservations. You can’t quite put a finger on what’s causing you to worry, but based on what you’ve experienced so far in this industry and what your gut is telling you, you decide not to pursue this hot stock.
This situation may sound strictly hypothetical, but this is most likely how some investors felt the same way in the years leading up to the 2007-2008 Global Financial Crisis, specifically concerning the infamous Mortgage-Backed Securities (MBS) that precipitated the crisis.
Even without looking too much at the details, an investor with a very refined intuition would’ve sensed that the mortgage-backed securities being pushed on them weren’t as spectacular as many people made them out to be. Their theoretical knowledge of what an MBS is, as well as understanding the lessons of recent crises like the Dot-Com Bubble and the Asian Financial Crisis may have led to this intuitive conclusion.
Not only can an investor turn to their intuition to help them avoid potential investment pitfalls, but it can also help them get a decent grasp of certain investments much faster without needing to look at lots of data.
When looking at a company from a certain industry for the first time, chances are you’re doing your best to understand what exactly is going on. After all, you have no prior experience with or knowledge of this industry, so you have no way of telling if things aren’t adding up.
However, as you continue to study different companies from the same industry, and as your understanding of the industry itself improves, eventually you reach a point where you can approximately gauge how a company is doing just by looking at a handful of key statistics/figures.
Analyzing a bank for the first time can prove to be very daunting, but after analyzing several banks, of different types, and even across various countries, investors can reach a point where they can intuitively tell what a bank’s prospects are based on their deep understanding of the industry and abundance of experience without having to pore over lots of data.
Now, this isn’t to say that investment intuition is a replacement for thorough investment analysis, but rather serves as a complement to it.
No matter how investors decide to apply their intuition, its purpose will always remain the same: to help investors quickly and efficiently take action and make decisions without much conscious thought, even when working with just a modicum of information.
When Possible, Validate Your Investment Intuition
Although investors will find themselves turning to their intuitions now and then, this doesn’t mean they should completely trust what their gut says.
An investor’s intuition is based on their subconscious collection of knowledge, experience, and lessons learned, but this does not guarantee that the dots will always connect correctly. That is, an investor’s intuition is still prone to error, no matter how refined it may be.
That’s why an investor should still take the time to ascertain if their investment intuition is correct or not.
Knowing when to listen to your investment intuition is important, yes, but it never hurts to verify that the decision you made or the action you took was the correct one.
Going back to our examples from earlier, your investment intuition may be telling you that a certain hot stock is most likely to be speculative, but it’s still worth looking into it further and understanding why exactly this stock is receiving so much attention. Perhaps there’s some merit to the hype surrounding it.
Similarly, just because you have a deep understanding of certain industries and can intuitively discern the trajectory of individual companies doesn’t mean in-depth analysis is no longer needed.
Investment intuition can be trusted, but that doesn’t make it infallible. A “trust but verify” approach will never be a waste of time.
Wrapping Up
As investors continue to gain more knowledge, experience, and lessons, over time these elements help shape their intuition. Investment intuition, if properly used, can help investors make decisions or take action without the need for lots of conscious thought or an abundance of information.
No matter how investors start their careers, all of them have the potential to one day have very refined intuitions. This is because investment intuition is not an innate trait, but is something that can be developed and improved.
In terms of when it can be used, investors can turn to their intuitions in all types of circumstances – the only limit to how intuition can be applied is an investor’s imagination.
Despite its effectiveness, an investor’s intuition is not infallible. Because of this, investors will still want to validate whether their intuitive actions or decisions were correct.
