How not to use intuition in stock market decisions?
Simple algorithms are invariably better at predictions than humans, whether it is health diagnosis, the weather or workplace performance. Would it be any different for stock investment analysis?
A percentage of professional investors find it hard to believe that an algorithmic system can be a better predictor than years of investing experience. Sometimes this may seem true, but in the long run, the intuition system will have more fails than the algorithm system.
Of course, investors will have to make decisions along the way, as algorithms cannot predict the changes in circumstances or events outside the stock market that may influence investor or even company decisions.
The biggest plus for not using intuition in stock market decisions is that using an algorithm-based approach takes all the emotion out of the equation. Emotions play a part in every aspect of our lives, so why should investing be any different? It is no different when it comes to investing in the stock market, but if you take a rule-based approach using computer models and algorithms then you relieve yourself from the making decisions under stressful situations.
Taking emotions or intuition out of the process of stock market investing will always be the correct approach because most of the time it is hard to see past our inbuilt biases. This would be idealistic but unfortunately, as humans, we bring emotion into everything we do. The best advice that can be offered in this argument would be to look at the model predictions and then look at the information that your intuition is telling you and try to decide somewhere logically in the middle.
Misplaced priorities can be the biggest downside of using intuition in stock market decisions. Humans invariably put more time and effort into making small decisions and less time and effort in the big decisions. Don’t buy shares just because a friend or relative has made a lot of money on those shares in the past. Humans are overconfident and tend to place too much bearing on the value of our opinions compared to friends and acquaintances. This is a form of intuition which at best is misguided. You may be lucky and have a win on the stock market this way but in the long term, it will be a costly exercise. You should have simple rules that you use for investing, for example, buy when the stock price is low, not because I like the company or sell the stock when it exceeds a price that I think is above its value.
Quite a lot has been written about the intuitive powers of investment experts. The intuition of experts is useless. Most of the time the expert’s intuition is just plain expensive guesswork, but backed by years of experience can be successful, but not as often as a computer model. If you want to invest in the stock market, you should simply invest in index fund stocks rather than follow the intuition of an expert.
The stock market just by its very nature is unpredictable. Algorithmic models can usually be correct, but even a computer model will get things wrong occasionally. Intuition can be just as fickle because as humans we can only look to the past for guidance and then guess what may happen given a certain set of circumstances. It is the same for an algorithm, if this happens, then do that is the simplest form of this. The difference is that algorithms perform these tasks without the emotion. In the long term, this will save you money and hopefully make you money as well, but who knows, it is all guesswork.
State examples where you have used intuitions to pick stocks in comments below.