Brain Feel vs. Gut Feel

Stock market analysis is a brain-power business. It’s not at all touchy-feely. At least, that’s what the analysts would like us to believe.

They love to grind the facts and figures of the latest news stories through the discipline of logic. Right now, the main focus of analysts is on Europe. A cloud of volcanic ash has played havoc with the tourist industry and a sovereign debt crisis is rocking the credit markets. Logically, none of this news is good for the world’s complex economy: the financial world is a riskier place than we had thought. On the other hand, the once bankrupt General Motors recently announced refits for several of its factories. Corporate profits seem to have rebounded from the depressed levels of one year ago. Logically, this is good news for the stock market: the economy is not as sick as we had thought. To what investment conclusion would our logical brains come, based on this analysis of current economic events?

Right now just over 70% of investment managers are bullish on the stock market. That’s the conclusion they came to. (The other 30% are either bearish or neutral.)

What should we do?
For every good-news story, there is an equally compelling bad-news story. And the Canadian stock market has gone sideways for the past month, reflecting the inconclusiveness of logical stock market analysis. So what should we do? Should we invest in the stock market right now? Logic doesn’t help much, does it? Instead of relying exclusively on our intellectual brain for guidance, let’s try another faculty: our instinctive gut feel.

Remember how we felt in the winter of 2008-2009? The market had utterly collapsed, down almost 50% in nine months. Our guts were in knots, growling over the losses. That’s the mysterious thing about gut feel: in the investment world, it’s a contrary indicator. When we feel least confident (as we did in the winter of 2008-2009), it’s the best time to buy. Contrarily, when we collectively feel most confident, it’s the best time to sell.

Determine your gut feel ― and act against it
In my investment book, Beyond the Bull, I explain how the Theory of Contrary Opinion works: the best time to buy is when everyone is negative and the best time to sell is when the crowd is optimistic. This is the irony of using gut feel to make our investment decisions. Once we determine what our gut feel is, we should act against it. When we feel most bullish about the market, we should sell. When we feel most bearish, we should buy. No wonder so few successful investors use gut feel in their buy-sell decisions. It’s like betting against ourselves.

How do you feel about investing in the stock market right now? Remember, about 70% of investors believe the market will be higher in six months than it is now. Logically, this is a time to be thinking ‘sell,’ not ‘buy’. But logic is not what we are being asked to use right now. The question is: How do you feel about investing in the stock market? Feel ― not think. In the investment world, it is difficult to separate our feelings from our thoughts. It is hard to separate our brains from our guts.

Let the Computer Do the Thinking
In the stock market, money is made by buying and selling, not by thinking and feeling. To assist in the buying and selling process, we use objective investment models ― an objective way of determining whether the stock market is going up or down. Once we have found that objective model, we let the computer do the thinking and feeling. We do the buying and selling.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.