“I’ve just got a good feeling about it.”
“No you don’t. You just think it looks cute.”
We were looking a potential investment for Jenny.
To me, the numbers weren’t stacking up. It was an older house, and it looked like it needed a fair bit of work. It seemed over-priced given what else was going in the area, and the owners weren’t in a rush to sell either.
I thought the rooms were also a bit small, and with one only bathroom, I wasn’t convinced it was going to secure the rental returns she needed to make it work.
But Jenny wasn’t deterred. “I’ve got a good feeling about it. I can feel it in my gut.”
Intuition is a tricky thing. The road to the success requires you to learn when to listen to your gut. But what most people don’t understand is, it also requires you to learn when NOT to listen to you gut.
We seem to pack a whole range of different emotional and psychic states into the concept of ‘intuition’.
First up, there’s a kind of paranormal sixth-sense that people talk about. Like you just plug into some sort of super-consciousness and get a download of what the right thing to do is.
A friend of mine was driving late a night one time, and then suddenly, for no reason, found her self stopping at a set of traffic lights, even though the lights were green. Just then, a car doing like 180kph came storming through the lights.
Her strange decision to stop saved her life. All she could put it down to was some sort of divine intervention.
But we also use intuition to describe ‘associative’ thinking. This is where we come up with an answer, without stepping through a logical train of thought. Our brains just take all the relevant information and just kind of process it all at once, in a kind of blender of thought.
It’s like the way when you’re doing Sudoku or a cross-word, and you just ‘know’ the answer.
It seems that this kind of intuition only comes with experience. If a fire-fighter with 30 years experience just has a ‘feeling’ that the floor is about to collapse, they’re probably right.
But you need to have the knowledge and the experience to begin with before your brain can associatively pull it all together. There’s no short-cut to this kind of intuition.
We also use intuition as a catch-all for any non-cerebral process. If it seems to come more from our body than our heads, we call it intuition.
Like the saying, ‘trust your instincts.’
I was once talking to a plumber about how to solve a tricky problem, and I told him to just go with his instincts. Big mistake. He took a poo on the carpet and climbed into a tree.
“Instincts” don’t always serve us. In fact, growing up and becoming a functional member of society involves learning how to control our pure biological instincts.
And as investors we need to watch out. Our instincts will tell us very different things, depending on how we’re feeling. If we’re confident, we’ll act one way. If we’re fearful, we’ll act another.
If a project starts going badly, and we start to panic, we can reach for ‘parachute’ solutions.
“These renovations are running way over budget. I know, I’ll put USB ports in the Jacuzzi and rent it out to Bill Gates.”
We’re much more attracted to long-shots in a time of crisis.
There’s another dangerous trap in the ‘intuition’ bundle. That’s what the psychologists call ‘substitution’.
What they’ve found is that if you ask your brain a question it can’t answer, it will just subtly slip in a question it can answer – generally without you noticing.
Say, you’re thinking about choosing between two models of new car. You ask your brain which one is better. Your brain has no idea. It’s not a car expert. And so it substitutes in another question – which car do I ‘like’ more?
That question it has answers to. And this is why advertisers spend so much money on building positive brand associations.
They really need you to ‘like’ them.
We think we’re making rational decisions, but really we’re just going with whichever option ‘feels’ the nicest.
(Most people say advertising doesn’t affect them, but advertisers spend billions of dollars a year communicating with us. Who do you think is right?)
Anyway, there’s at least four different types of intuition (maybe more). But of those, only one is unambiguously helpful (though divine intervention is difficult to build an investment strategy around!) One is possibly helpful (providing you have a wealth of experience to draw on), and two are self-deception dressed up as insight.
If you’re going to turn your back on the numbers, you want to be very clear that you’re drawing on the right intuition.
And that was my advice to Jenny. What this house lacked in yield and prospects for growth it made up in charm. Baby-blue and white, stained-glass windows, a mango tree out the back – all that.
Jenny had been sold on how cute it was. She was totally gushy about it.
That was the feeling in her gut. Not some instinct about how suitable the place would be as an investment property.
In her case, “going with her gut” would have been the worst thing she could have done.