This column was originally published on RealMoney on Nov. 7 at 8:53 a.m. EST. It's being republished as a bonus for TheStreet.com readers.
If you read many of the columns on RealMoney, you'll note several writers voice a reliance on their feel for the market. From fundies like Jim Cramer to technicians like Rev Shark, "the gut" seems to be an important aspect of trading. This approach is summed up by a recent email I received from long-time reader C.I.:
Gary, I believe picking stocks is as intuitive as it is analytical. With 20 years investment experience, I have learned to trust my "gut" and it usually does not let me down. When my gut feel is wrong, I have a greater degree of comfort in my decisions, even though they may be wrong, because I listened to myself and acted accordingly. If I am going to lose a football game, it won't be because my best running back did not have 20 carries and someone else was calling plays. C.I.
First, let me state I agree with C.I. Relying on your intuition and feel does work in the market. Let me also say I believe it is inferior to a pure statistical method. I make that statement for two reasons.
One, if you rely a lot on intuition and are objective about testing it, I believe you will find it is accurate no more than 50% of the time. In my experience, most people are biased when remembering how right their gut was and tend to ignore all the times they were wrong. An accurate accounting will usually prove sobering.In addition, even if one's intuition is helpful, it is still inferior to a raw statistical approach because while a gut-feel player may be right more than he is wrong, that advantage is mitigated by the fact he doesn't take as many trades as pure-data man. As an example, gut feel may look at 100 trades, take only 20 that look great, and be right on 15 of them. Pure data, however, might take all 100 trades, and be right on 50 of them. So while his batting average is lower, the sheer number of his attempts can result in overall higher profits. Finally, I've found the intuitive approach hard to pin down. If my trades didn't work that day, was my feel off? Was it the market? Or did I simply have an upset stomach? Without pure data to test, it's difficult to say. Of course, one has to always do what's best, and if that requires you to use your gut, so be it. Over time, though, I believe that approach will cost you profits. Today, the Nasdaq, Apple Computer (AAPL - Get Report), EnCana (ECA - Get Report), Sirius (SIRI - Get Report), Golden West Financial (GDW) and Kohl's (KSS - Get Report).
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And that is the final word from Cameron Indoor Stadium, where everyone is loving my Blue Devils to take the NCAA hoop title. Like I said last year, though, I think they'll come up just a bit short, this time to Michigan State. P.S. from TheStreet.com Editor-in-Chief, Dave Morrow:
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