"Financial Planning ... it's not always about money."

Why Your Wild Trading Ideas Feel So Right

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David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
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If only financial markets came with traffic signals: indisputable indicators of when it is safe to keep going, when you need to slow down, when you must stop. Imagine how much easier investing would be if you could rely on such green, yellow or red lights.


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Alex Nabaum


Unfortunately, these unambiguous signals don’t exist. Investors fill much of the absence with anecdotes and gut feelings, which can be more powerful than you realize. Such soft indicators can help you make hard decisions, but only if you rely on them in the right ways.

Consider the anecdotal feel of today’s markets.

Bitcoin’s price rose above $50,000 this week. Dogecoin, a digital currency intended as a joke, is up more than 1,000% in 2021. Margin debt, borrowed money that brokerage customers use to juice their trading, is up 42% from a year ago, according to the Financial Industry Regulatory Authority. For the week ending Feb. 12, bullish options bets by small traders ran at a near-record 16 times the average for the past two decades, calculates Jason Goepfert of Sundial Capital Research, a Minneapolis firm that tracks market sentiment.

On the other hand, the Federal Reserve expects to keep firehosing money into the economy and to hold interest rates near zero for the foreseeable future. That pushes the return on safe assets so low that they feel worthless to hold, shoving investors into riskier choices. Vaccines are reaching millions of people, and new coronavirus cases are falling fast, fueling hopes for a quicker and stronger economic recovery.

Those are two opposing narratives. Depending on which feels more compelling, your gut may be telling you to be cravenly bearish or gung-ho bullish.

And you wouldn’t be alone in heeding your gut feelings.

The late Jack Welch, former chief executive of General Electric Co., and the late Chrysler Corp. CEO Lee Iacocca often justified decisions by saying they were guided by their gut.

Robert Soros, son of hedge-fund titan George Soros, once remarked: “The reason [my father] changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s this early warning sign.”

So, gut feelings don’t arise only from your gastrointestinal tract. Evolution finely tuned our bodies to potential changes in risk and reward, preparing our ancestors for fight or flight in the presence of prey or predators.

In today’s world, the same mechanisms make our hearts race, palms sweat and muscles tense up when we expect our portfolios to take a sharp rise or fall.

“What we’re really talking about [with] gut feelings is how people sense their internal milieu, which encompasses a multitude of different signals, coming from all over the place within the body,” says Sahib Khalsa, a neuroscientist at the Laureate Institute for Brain Research in Tulsa, Okla. “The brain is constantly sampling and receiving all these signals, even if you’re not consciously aware of that.”

A recent experiment in Prof. Khalsa’s lab found that such signals from the stomach activate regions of the brain that monitor arousal and motivate people to orient their attention. Such gut feelings—which scientists call interoception—can shape our decisions even when we believe we are relying on data and logic.

These intuitions are most reliable when they arise in stable environments where you get prompt, accurate and unambiguous feedback.

Veteran athletes, for example, can “feel” what will happen next because they have vast experience on playing fields where the laws of physics don’t waver. That’s what Robin Hogarth, a psychologist at Universitat Pompeu Fabra in Barcelona, calls a “kind” learning environment.

Financial markets, however, offer what he calls a “wicked” feedback structure. You buy a stock at $10. It immediately goes to $11 as a famous investor discloses she bought it. You were right! Then it sags to $9, and another noted investor says he dumped it. Now you’re wrong!

With such erratic feedback, it’s hard to educate your intuitions as professional athletes and other skilled performers do in stable environments. But your gut feelings will still feel powerful—precisely because the information you’re getting is in such flux.

That’s especially true at a time like this, when most financial assets are overvalued by traditional measures and when nightmare and nirvana scenarios are both plausible.

The solution is to adopt rules and procedures that enable you to listen to your gut without being ruled by it.

Don’t just heave a hunk of money at (say) bitcoin because it’s “going to the moon.” Write down how likely, in a percentage range, you think it is to reach your target price by a certain date. List, in as much factual detail as you can, three reasons why. (If all you’re going on is a hunch, then write something like “I have a gut feeling” three times.) Finally, use your estimate of the probability you are right to determine how much you invest.

When the target date arrives, check the outcome against your original forecast and reasoning and see if what you wrote down at the start can teach you anything about how to make your next investment. Did the asset end up near your predicted price roughly when you expected? How much of your rationale was right? If all you went on was intuition, did it turn out to be reliable?

A gut check just might keep your gut from hijacking your brain.

Write to Jason Zweig at intelligentinvestor@wsj.com

David M. Brenner profile photo

David M. Brenner, ChFC®, CLU®

D. M. Brenner, Inc.
Phone : (858) 345-1001
Schedule a Meeting