Logic vs. Intuition
Last week we talked about the investment performance of an “average investor”.
We talked about the ability of a smart investor willing to take action when others are waiting.
I’d like to share another aspect of an “average investor” for you to consider.
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I see a lot of investors like to focus on the “logic” part of an investment.
They want to see projection numbers.
They want to see data.
They want to see the 3 fancy letter - R.O.I. printed all over a spreadsheet.
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While I understand the desire of wanting to evaluate each investment logically, many of the best investors I study and follow go beyond “logic”.
What did I mean by that?
Logic is important.
Understanding the fundamentals of any investment helps anyone properly manage the risk they are taking on.
But, if logic is the ONLY thing that mattered, we would expect computers to outperform humans in investing.
Yet, that hasn’t been the case.
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Most professional investors (human) consistently outperform algorithms (computer programming codes based on logic).
For example, the US real estate valuation company Zillow thought it could use it’s algorithm and make money from real estate deals.
The result is they shut down the $6 Billion dollar operation and laid off 2,000 employees after losing a boat load of money.
From this article on Fortune…
“The company lost $528 million in the midst of one of the hottest real estate markets the country has ever seen”
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Here’s another one:
Robo-advisor was all the rage few years ago.
A financial advisor that is powered by AI to manage people’s money based on logic and rules.
There are many studies out there on this topic.
Here’s one posted on Reddit titled “Let's talk about Wealthsimple's crappy performance...“
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If investing is all about logic, then yes, it would make sense any algorithm can do a great job and humans are no longer needed.
Except, what makes a seasoned investor a professional, is their experience.
The experience is less about logic.
Logic is based on rules.
Logic says based on the ABC data you see, then you should do XYZ.
Experience goes beyond logic.
Experience gives these seasoned investors a “sixth sense” if you will.
Experience results in intuition.
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It’s the experience that makes these seasoned investors say:
This feels like the 70s.
Or:
The market feels like the dot com bubble.
One can use logic and data to try to pin point where the market is.
The challenge is:
History doesn't repeat itself, but it often rhymes
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Logic shows the past.
Intuition leads to the future.
Most of the best investors I know have developoed their intuition.
This is what enables them to “skate to where the puck is going”.
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Try to develop your intuition in investing.
Or find someone who has developed that sixth sense.
That’s exactly what my investors pay me to do:
Logic AND Intuition.
P.s. This is also why AI doesn’t threaten me. AI doesn’t have intuitions. Until then, my job is safe.
Any intuitions you’ve followed in the past that has served you well in investing?
Reply to this email and share with us your story
Eric Chang
Calgary, AB
September 17, 2024
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