August 1, 2022 by Dymphna

T-Bomb: Why investors shouldn’t trust intuition

Truth Bomb Tuesday: I use my intuition. You shouldn’t.

“Listen Dymphna, 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.

And sure. I think that’s totally a thing. All I’d say is that if a 9th dimensional angelic being shows up in your life for the first time, it’s probably not when you’re looking through listings on realestate.com.au.

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 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.

Again, useful if you have as much experience with property investing as I have. Probably not so useful your first time out.

But the big trap – and the trap Jenny fell into – is something 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?

We think we’re making rational decisions, but really we’re just going with whichever option ‘feels’ the nicest.

Anyway, my only point is that while I’m all about opening up to the magic of life, you need to be very, very careful if you’re just turning your back on the numbers.

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.

But all the good vibes in the world were not going to turn that deal into a winner.

DB.