Gut feel

“Good luck making investment decisions on gut feel,” writes Barry Ritholtz and I couldn’t agree more. But I also couldn’t agree less. Because I could flip that statement around and say good luck making investments without your gut feel.

We all know that a systematic, well thought approach to the market is far more effective than the seat-of-the-pants-let-me-see-how-this-goes-method that many of us employ. In fact, there is absolutely no dispute that a simple dollar cost averaging long only investment into the S&P index is the only assured way of making money in the market. This strategy beats 90% of all Masters of Universe hedge fund managers including Ray Dalio, Paul Tudor Jones, David Einhorn, Bill Ackman and anyone else you can think of with the exception of Warren Buffett and George Soros. 

But knowing something is true and feeling it true are two very different things. And although we like to think of ourselves as thinking organisms  that feel, we are actually feeling organisms that think. As a colleague of mine remarked this week in his typical sardonic East European way, “we are just animals with bigger brains.”
 
So the intellectual truth of an idea is not enough. It must be emotionally true as well if we are to accept it.

I fully comprehend the power of indexing - yet I have avoided it all my life because I had the misfortune of starting my “savings career” at the peak of the dot com boom only to have to cash out the money for my son’s education around 2010 when the S&P basically made two round trips to the same place. The disappointment of seeing my money produce zero return for more than a decade colored my attitude towards indexing for the rest of my life. That was a very dumb decision in retrospect. I would have saved tens of thousands of hours of work achieving the very same results that I did by day trading - but history couldn’t have gone any other way. Although I knew intellectually that indexing worked, I didn’t accept it emotionally and therefore for me it would have never worked no matter how many times I would have tried it. I would have inevitably sold at the bottom and bought at the top and never achieved even remotely close results of the passive  index.