Hunches - an investor's friend or foe?
fsc137 wrote the following in a preceeding blog thread, but I found the topic so interesting I thought it best captured in a thread of it's own. Here's what fsc13 wrote (referring to my King of the Hill message at the time about my having learned to never underestimate the power of a good hunch):
"About hunches---those who win because they are lucky often come to believe that luck is with them, and that fortune always smiles upon the deserving, or worse yet they begin to confuse luck and skill. This is a "selection effect". Your hunches, if indeed that is what they are, will likely regress to the mean in future. If, however, they are actually some sort of unconscious calculation then you may continue to succeed. We'll see."
While it may be self-delusion on my part, I like to believe my hunches are unconcious calculations. As an example, my underperform calls on Whole Foods Market I considered 'hunches'. I didn't do a whole lot of research other than look at the trailing P/E and scratch my head in amazement as I said to myself, "For a grocery store chain?! You must be kidding me!"
While that might not seem like much research (and it isn't), there's more to such a thought, I think, that it at first appears. It includes the knowledge that I've seen the organic food trend come and go before in my lifetime. It includes the knowledge that existing traditional grocers have the size, scale, and logistical infrastructure to easily enter the organic food fray should they choose to (and the fact that they have begun to). It includes the knowledge that people very often overpay for growth, especially with regard to things they personally 'believe in'.
Is that a true hunch? On one hand, I didn't pour through the SEC filings, evaluate management's track record, or even walk into a Whole Foods store to check for myself. On the other hand, when I honestly look at it, my hunch was indeed based on a foundation of at least some knowledge and experience.
That's what I meant when I said 'never underestimate the power of a good hunch'. Intuition is a powerful tool, and while it shouldn't be an investor's only tool, I think many investors will do themselves a disservice if they ignore it.