Use Your Intuition Wisely
Key Takeaways
When uncertainty hits, it is natural to seek safety. From an investment context - that is usually cash or something familiar. Whilst that seems like a logical response, studies show that trusting your intuition may not be the best way to make such decisions especially if it is made under stress.
This tale unfolds time and again. Whenever markets are near a bottom i.e. whenever fear and pessimism is at a peak, investor flows to cash is at a maximum.
This means when markets recover their losses, investors are playing the catch-up game.
Having a well thought out game plan can help you increase the odds of having a successful investment experience. It’ll be far less stressful too.
The most important quality for an investor is temperament, not intellect.
— Warren Buffett
Investors do not like uncertainty; whenever prices of investments fall, you may see headlines such as “markets fall due to uncertainty.” It is true — if you do not know the expected return or outcome of something you bought, it is very likely that you would want to hold back, wait, and see what could happen.
So it is no surprise that during times of uncertainty, investors pull back and seek the safety of cash. For e.g. Google search data showed that the interest in MAS T-bills spiked in Oct 2022, around the same time when markets hit their low.
This is an intuitive reaction. The problem with this is that once you start looking for the shelter, it is high chance that you might have overestimated the likelihood of the storm.
A Harvard Business Review article on decision making and problem solving noted that using intuition effectively required the problem to be unstructured — i.e. one that lacked clear decision rules or had few objective criteria. Something like resolving a fight between two friends or choosing a new car — and while data on fuel consumption and efficiency may sway your decision, ultimately its whether you like the look or the feel of it.
The study showed that intuition did not work well for complex problems with objective criteria, clear rules, and abundant data that required analysis. Unfortunately, investing is one such problem. There can be a multitude of factors which interact with each other in complex ways. For example, the state of the economy depended on how interest rates were moving, how the local currency was moving versus others, wages, employment, consumer spending, government spending, high or low inflation, trade, exports, imports, and the list goes on. In addition, given that markets and data move at such high speed these days, the window of time for decision making is very small. As a result, our brain cannot handle this overload and would revert to using heuristics — which are mental shortcuts to decision making — which can be flawed.
As such, don’t make hasty decisions. In investing, one of the more interesting lessons you can learn is actually not about whether that disaster you were fearing would really come to pass; it’s more about the investors around the world, aggregating all the available information, acting on their own interpretation of “that disaster”, pushing prices to an approximation of where it could be. So when the event actually happens, prices of assets would have reflected it and would be moving in a different direction already.
The chart below shows how flows to money market assets typically increase as fear increases (corresponding to a ‘flight to safety’ reaction) and tend to coincide nicely with stock market bottoms.
We have recently hit a peak in cash assets. Could this signify that we are at high levels of fear and that the market would continue its rally? We don’t know and it is hard to predict. However, we do know that acting on your intuition, especially in fear, does not help. The market never does what you think it will, and as we have seen far too often, sitting on the sidelines can be detrimental.
Whenever you feel that markets are a little too volatile for your liking, and you are unsure of what is happening, then it is a good reminder that you need an investment game plan to help you focus on the long-term. Relying on your feelings and intuition is not the way to go.
Setting up an investment plan is an easy and methodical process. Come and speak to us for more info.
