Debunkery: Learn It, Do It, and Profit From It—Seeing Through Wall Street's Money-Killing Myths

BUNK 7

TRUST YOUR GUT

Ever had a gut feeling? You just knew you should buy XYZ stock but didn’t—whatever reason—then it skyrocketed 300 percent. Or you knew to sell ABC stock—but ignored your instinct—then it plummeted 80 percent. You have these feelings all the time, and they’re usually right—as you recall. But that’s also almost certainly your mind being your worst enemy and playing tricks on you.

There’s a major school of behavioral psychology now, called behavioral finance, dedicated to understanding how our brains evolved—to deal with basic problems of human survival—and why that leads to serious investing errors. Whole books have been and will be written on the topic, and it was the basis for my third question in my 2006 book, The Only Three Questions That Count.

Selective Memory and Other Messy Biases

Our brains produce some very basic bunk, making it difficult to deal with counterintuitive problems like publicly traded markets. And one major bit of bunk is the notion you should trust your gut. First, I’d ask if you really knew XYZ would rise so much. Or did you have a passing thought and built up your conviction only much later, after the fact? (Usually, it’s the latter.) Or do you suffer from hindsight bias? You were convinced in your gut that fully 20 different stocks were surefire winners, but in the end, they were all losers except XYZ. But you conveniently forget the ones you were wrong about, and remember the one that lets you crow about being a genius. That ...