The Tycoon Report

Learn To Trust Your Gut!

In the world of investing, just as in other areas of life, a person often gets an intuitive feeling about something. We don't know how we know something is going to happen, but we just do. We say things to each other like, "I just have a hunch that Gamestop is going to turn out to be a great growth stock." Or we say, "I knew General Motors was going lower. Why did I listen to that idiot on television who liked it, when I should have sold my GM stock last fall!"

Call it intuition, or hunch, or feeling, we all hear our own strong inner voice about investments at times, and then we have to decide whether or not to act on them.

But what exactly is this intuition? Is it some clairvoyant skills that people possess? Well, perhaps some do, but for most of us it is more likely a subjective feeling that is based upon objective measures about the investment itself.

Perhaps your "gut" tells you to do something because you see something in a chart or an earnings report that is similar to a previous situation that you remember. Then you pull that experience from your memory, although you may not remember the actual specific details of the previous investment.

We need to learn to trust our gut feelings more. The gut feeling is often based upon solid investing experience and wisdom that we have attained over time. And yet often we allow someone on CNBC or the Wall Street Journal to dissuade us from acting on our gut feeling, because we figure they are the expert, and know more than we do.

That is bad enough. But worse than that is allowing the dopey guy in the next office cubicle to talk you out of an investment decision that your gut tells you is a winner. You know the guy I mean. Everybody has one. In 2002 after Cisco Systems had fallen from 80 to 10, and you wanted to buy some shares, he said, "Buy Cisco? Are you crazy, it is going to 5!" Of course 12 months later, it was at 20, and later rose to 30.

Another killer of the strong intuitive feeling is the phrase "it's different this time". Your stock went up really fast and you wanted to take some profits, and you knew you should, but what happened? "Oh, maybe it will be different this time. The stock will keep going straight up" Yeah, sure it will. And maybe this is the year the Cubs will win the World Series after 100 years. So you watch in horror as your stock gives back half of the profit you would have made. Learn to trust your gut.

Here is a similar scenario. I had a stock that was losing money, and I was trying to decide whether to cut my loss or hold on. One day it jumped up 7% in the first 15 minutes of trading. There wasn't even any news that would explain the substantial rise in price. This was the exact moment I had been waiting for, the opportunity to substantially reduce the loss and get out of a bad position. The daily technical indicators were grossly overbought. My instinctive gut told me "now is your chance. Sell that darn stock."

Well, I didn't sell. The doubts took over. "Maybe this time would be different. Maybe this time it was going higher, and I would not only make my money back, I would make a profit as well. If I sell now and it goes higher, blah blah blah..."

Guess what? It didn't happen. I let greed overcome my strong gut feeling. In essence, I became the dopey guy in the next cubicle! The stock sold off, and finished the day up less than 1%. I didn't listen to what I knew inside and gave up more than 6% as a result. Live and learn.

Now there is a human tendency to remember all the hunches that proved to be right in the past and to forget or minimize all the ones that were wrong. But I suspect that most of the time, the gut feelings of a successful investor will turn out to be accurate.

So the key is to have confidence in yourself and those occasional intuitive feelings. Do not let the talking heads on CNBC change your mind, just because you think they know more than you. Do not let your dopey office colleague dissuade you from what you know is the right decision. Never let your own doubts or "this time will be different" take over your decision making.

In fact, start to use the opinion of the dopey guy in the next cubicle as the contrarian indicator. When you have that intuitive feeling about something, go ask him for his opinion. Then whatever he says, do the opposite! As Dave Ramsey, TV and radio financial advisor (www.daveramsey.com) says, "Do not take financial advice from broke people! What do they know?"

To become a Tycoon, learn to trust your gut!