Personal Wealth Management / Expert Commentary

Fisher Investments Founder, Ken Fisher, Debunks “Trust Your Gut”

Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer, Ken Fisher debunks the common myth that investors should “trust their gut.” According to Ken, trusting your instincts can be dangerous for long-term investors. As Ken explains, the temptation to make investment decisions based on a “gut instinct” is driven by the natural human tendency to seek what’s comfortable—or less risky—at any given time.

Ken notes how studies in behavioral psychology show that humans feel the pain of loss about 2.5x more than the joy from a comparable gain, which can drive us to make decisions based on emotion. As Ken explains, these emotions and “comfort-seeking” tendencies can cause investors to make mistakes—like selling during negative volatility and missing critical market recovery periods—which can have costly long-term implications. Ken encourages investors to write down their gut instincts over a long period of time to see how many times they were correct. By doing so, he says how investors can see how these trusting these instincts may hinder their returns over time.

Transcript

Ken Fisher:

I just had a gut feeling that that stock was going to go up, and then it just went through the roof. Now there's a lot of behavioral research that's been done that shows that people think that kind of thing all the time, or the reverse. I just knew there was going to be a terrible bust. I told everybody and then there was, see, I was right. Mostly not perfectly, but mostly you, when you do that, are fooling yourself. So every month I do a chapter out of this old book of mine, debunkery, to talk about something that is commonly done. That's bunk and kind of how, you know, it's bunk.

This month I'm going to focus on. I labeled at the time. Bunk number seven. Trust your gut. And seven is supposed to be a lucky number. I guess you know that, right? And when you trust your gut, you got to be lucky. That's the reality. The chapter says it well, because it starts off talking about notions like. I just had a gut feeling that that stock was going to go up, and then it just went through the roof. Now there's a lot of behavioral research that's been done. That shows that people think that kind of thing all the time or the reverse.

I just knew there was going to be a terrible bust. I told everybody and then there was, see, I was right. Mostly not perfectly, but mostly you, when you do that, are fooling yourself because the way the human brain works, it tends to remember that we had an inkling that that might happen, but we also had lots of other inklings that were contradictory. We may have actually thought that would happen. But we forget all the other things we thought at the same time that ended up being wrong where we had gut instincts. And

I challenge you whenever you get a gut instinct to write it down and document it, and then see if three years later you are right or wrong, or you're going to find that most of the time you were wrong. Because gut instincts tend to be about what's comfortable at the time. And there's an age old saying that in capital markets, comfort is a very expensive thing to achieve. The fact is. That mostly the way our brain works, it encourages us. To think we were right. So the next time we take a risk. On a gut. While feeling comfortable. But in fact, forget about the times that we're wrong and in in. Behavioral psychology.

This is what's known as accumulating pride and shunning regret. I bought it, it went up. I'm smart. When I see me do it again, I bought it, it went down. That wasn't my fault. No, no, no, I didn't buy it. I think you just thought I bought it. No, no, no, I wouldn't have bought it if my wife hadn't been grumping at me that morning. The broker cheated me. The other thing is. And again, the chapter on trusting your gut goes into this at great length. The, I want to say, great length. I mean, the chapter is only got long, so it can't be great length. I've got a chart and everything.

The fact is. People hate losses more than they love comparable gains. This has been documented in Behavioralism for a long time. The average American Bernardini and Thaler documented a long time ago hates a loss about two and a half times as much as they love a gain, meaning that a 10% loss feels about as bad to them as a 25% gain. Feels good to them. And when we get to scary times and drops, there's a tremendous tendency to have your gut say, I better cut and run somehow, some way.

And that gut instinct, which I've seen over and over again in people in my 50 plus years of running money, is categorically a backwards instinct. Categorically backwards to cut and run after you've seen a drop, thinking that you've got a gut instinct that there's going to be more drop ahead. There's no basis for doing that. But people do it all the time because they hate the loss.

The pain of the loss makes them say, I got to cut the loss to not feel more pain ahead. And they can't quite anticipate, as the chapter says, the degree to which when you get the bounce back, the bounce back is going to compensate for the drop. That future benefit is hard for people to get the book because it's an old book, spends a time on this graphic that shows you how that played in 1998, which was a great year in the stock market with a lot of volatility in it.

And at the time, it takes you to the chronology, a little bit of what happened in that year, 1998, as you had the market up 20 something percent, then fall 20%, then rally even more and end the year up 28%. And in that a great year overall, but an awful lot of opportunity for people to cut and run at the wrong time because of gut instincts.

And the gut instincts at the time were because of headline risk associated with a series of topics that ended up pretty much all being false. But they gave an awful lot of people, gut instincts, and people remember. The gut instinct that they think they had when they were right. I cannot tell you how many times in my career we have had people say to us, but I told you this was going to happen.

And in reality, you go back and you go through their file and there's no indication that they ever said that at all. Mostly they kind of thought it a little bit, or they raised it as a question like, maybe this could happen. When you say maybe this could happen, that doesn't mean that you really had conviction in it. And there's all kinds of things we can wonder about. But the fact is, gut instincts are mostly aimed at your comfort zone comforts very expensive to achieve. It's mostly aimed at trying to either. When things are complacent and doing well.

Try to do what everybody else seems to think will do well, or to fear that that won't work and think about going the other way. But you don't actually do it. Because if you actually really knew which, of course we don't. No one does. But if you actually really knew, you would take the action.

The fact is that the gut instinct is something that if you do take the action on again, I encourage you, as I said earlier, every time you think you have a gut instinct, write it down. And don't don't say you had a gut instinct if you didn't write it down. Do that for three years and you'll learn a lot about how gut instincts really work. The fact is, gut instincts usually hurt you if you act on them, and I encourage you not to act on them. And I encourage you to think about a gut instinct as a form of where your desire for comfort gets you into trouble.

Thank you very much for listening to me, and I hope this was useful. I very much hope you enjoyed this video as part of my series on debunking Common Market Myths. To watch more videos like this, click the link on the screen and make sure to subscribe to Fisher Investment's YouTube channel. Thanks so much for listening to me.

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