Do You Invest Based On Intuition?

By: ispeculatornew
Date posted: 12.12.2011 (5:00 am) | Write a Comment  (3 Comments)

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Recently, I’ve been spending an increased amount of time studying investing psychology and that is bringing up several questions. Yesterday, I was reading about intuition and how it influences the ways that we act. I started wondering about what role (if any) intuition plays in my trading, especially the long & short technology picks but even in dividend investing.  The reality is that it plays a big role.

Intuition provides us with beliefs that we cannot necessarily justify” – Wikipedia

Intuition Is A Big Part Of Investing

As much as I think we try to always be rational, to invest based on numbers, on P/E ratios, growth rates, dividend rates, etc. In the end, when I do filtering, the result is never just one stock. There are usually several trade possibilities. What makes me go one way rather than the other? You could probably include several factors:

-My feelings about these stocks/companies
-My past experience trading these names
-Trading momentum
-etc

Intuition Comes Into Play

At some point, we gather all of the numbers, feelings and we end up making a decision. Even deciding not to buy a specific stock is a decision in a way, so yes there is always a decision involved. My question thus becomes: What triggers these decisions? I think intuition plays a big part. I tend to be a strong believer in Google (GOOG) for example and if you showed me two companies that have exactly the same profile, chances are that I would end up picking the one named Google simply because I feel like I will be better off in most cases being long Google.

The Limits Of Intuition

I think we end up getting to know ourselves better over time and knowing when to trust our intuition. Personally, one of the ways I try to improve my analysis is using stop limits. Why? Because when a trade reaches the stop loss point, I force myself out of the trade, to rethink the trade and see if the numbers truly make sense or if I was wrong. In most cases, I do choose to not re-open the trade. The day that you admit to using some intuition, it also opens you up to several possible issues such as being over-optimistic, stubborn, etc. Of course, very few investors to not use intuition at all and those would be trading strictly on technical factors. You can read an interesting piece from one such frame of mind on why intuition is not a good trading tool here.

I Stay Away From Short Term Intuition Plays

Generally, as most of you know, I do stay away from day trading so no I do not trust my intuition on telling where Amazon will end up on Monday. In the same way, I try to stay away from opening new positions just before earnings because it seems like those taking such bets are doing so solely on intuition and luck (except for those that have access to inside information).

What are your thoughts on intuition in trading/investing?

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3 Comments

  1. Comment by awake — December 12, 2011 @ 5:59 pm

    @IS you frequently mention being interested in IPO’s like Zynga and FB but never really discuss your strategy for getting in at the price you want.

    IPO’s generally spike ridiculously when they launch and it’s pretty hard to get them at the price the open at when they become available to the public.

    Do you have a strategy you use for this? limit orders maybe?

  2. Comment by Intelligent Speculator — December 12, 2011 @ 7:40 pm

    @awake – Thanks for the question, I will be discussing this on Friday:)

  3. Comment by awake — December 14, 2011 @ 1:59 pm

    Thanks!

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