You should explore them. You should try to figure out where they are coming from, what they mean.
Hunches are not the product of logic. In that sense they are irrational.
But some hunches represent a sort of super-logic. There are circumstances in which a hunch can permit you to jump over the limits of pseudo-logic to something better and more financially rewarding, a healthy, emotionally balanced logic.
At the root of the paradox is the human capacity for self-deception. Logic alone can never get us to where we want to go for so long as we are so prone to tell lies to ourselves. Lie-inspired logic can take you over a cliff by insisting that you continuine to move in a straight line no matter what your eyes tells you about the dangers just up ahead. There are cases in which a hunch can serve as a veto over the mad logic that if not questioned could ruin you.
Say that you’ve bought into the Passive Investing idea. It’s worked well for a good number of years. The logic says that you must never change your stock allocation no matter how wrong it comes to feel not to do so. Yet a hunch tells you that the Passive Investing idea was yesterday’s hot investing strategy, that the smart money is moving to a new understanding of what it means to “Stay the Course.”
Listen to that hunch!
In all seriousness, that’s a good hunch. That’s just common sense. The idea that you should stick with a stock allocation chosen at a time of reasonable prices when prices have gone to la-la land is obviously the product of a wild bull-market psychology. When the bull market goes bye-bye, so should the bull-market “logic.”
The problem is that you’ve adopted an irrational idea as the core principle of your investing mindset. You’ve left no means for common sense to persuade you through ordinary channels. So it takes a different route. In this case, common sense appears to you in the form of a hunch. It dresses up in irrational clothing to bring a rational message to a guy or gal who tried to abandon rationality for good but who is a bit too smart to stick with the program once the emotional pull toward doing so has disappeared. That hunch is the better part of you, the smart side of you. Let that good-looking fellow in the door! Give that clever gal a hand with her coat!
Not all hunches are like that, unfortunately. Hunches have a bad reputation in the investing realm because hunches cause a lot of trouble in the investing realm. You don’t want to let just any good-looking fellow in the door. You don’t want to be jumping up to help just any clever gal with her coat. You need to be discriminating.
You lower your stock allocation to bring it to where it should be at a time of sky-high prices. And prices really do come down. You feel like a genius. You feel like so much of a genius for anticipating the price drop that you begin to feel uncomfortable with even the small stock allocation you are now going with. The newspapers are now saying that stocks are for losers. They sure changed their tune! Maybe you should sell it all? Selling worked for you before. There must be a reason why the newspapers, which have in your experience always been biased in favor of stocks, are now urging you to dump them.
No, no, no. no, no.
In this case the hunch represents not common sense, but common fear. The newspapers are consistent enough. They are consistently emotional, consistently irrational. They reflect our own irrationality back at us. We should pay about as much attention to the newspapers when they are pushing us to get out of stocks for emotional reasons as we do when they are pushing us to stay overinvested in stocks for irrational reasons.
This is a hunch that comes from a bad place. This is a hunch that I would try hard not to listen to.
Some hunches are good. Some hunches are bad. How the heck are we supposed to know the difference?
Lift your hunch up in your hands and examine it. Study it. Check its history — where did it come from? Hold it up next to your other investing beliefs. Does it fit in? If it doesn’t fit in, is it because your other investing beliefs don’t get out enough, that you have become too insular, too dogmatic?
There is no one rule on investing hunches. Hunches can be of great positive value or of great negative value. I can say that you do not want to ignore hunches. Even the ones that you do not want to listen to can make you aware of weaknesses in your understanding of how stock investing works (if you were confident in your beliefs, bad hunches would not trouble you). So don’t be dismissive of hunches. Try to gain a sense of why you are experiencing them.
The person who says that he or she never experiences a hunch is like the person who says that he or she never gets annoyed with his or her spouse. I mean, come on. Hunches are a sign that you do not know it all. And you don’t. So it is not necessarily a bad thing to see this sign of the obvious reality appearing before you.
Don’t kick your hunches out as if they were unworthy, irrational things. And don’t embrace them casually. The appearance of a hunch is a sign that you have not thought things through carefully enough. It’s better to have a hunch getting you back to work than to experience a poor investment result.
Don’t automatically resist hunches and don’t automatically yield to hunches. View them as an reminder of the need to continue looking at things from different angles, to continue learning. Hunches are frightening only to the overly dogmatic.
Today’s Passion: I have a funny feeling that we will talk more about hunches as we continue boldly into The Future of Behavioral Finance.