What is “Counter-Intuitive Investing”? What does the term really mean as it relates to investing in the stock market? Is a counter-intuitive investor less or more likely generally, to be successful than an investor using “intuitive” thinking, to decide what stock market actions to take? Intuitively, we would think the intuitive investor to be the more successful, right? After all, intuitive, according to Merriam-Webster Dictionary, is an adjective meaning, to agree “with what seems naturally right”. Wikipedia, on the other hand, defines a counter-intuitive proposition as “one that does not seem likely to be true when assessed using intuition, common sense, or gut feelings. Wait a minute. “Does not seem likely to be true”? How can actions based on that kind of discouraging probability help an investor to successfully invest in the stock market? Unless… we ask, how appropriate, or valid is the word “seem” in the middle of all those words? An interesting fact is that what seems to be true in the stock market often is not. Examples will follow.
Both definitions sound to me like actions different investors will often take concurrently in the stock market. The basic strategy of Strategic Stock Accumulation, as explained in my book, “How to Make a Fortune During Future Stock Market Crashes with Strategic Stock Accumulation” is based on the second definition (counter-intuitive thinking). More on this strategy later.
If we go with our gut feelings, we are being ‘intuitive’. Actions investors take in the stock market frequently involve these intuitive gut feelings, which many times seem to be, but ultimately are not based on rational conclusions. For example, if the stock market is dropping quickly and investors are losing a lot of money (on paper), they intuitively want to stop the bleeding and many sell out quickly. This selling during a stock market crash, or even into a correction, is supported by many stock market “authorities”, who recommend such actions as placement of routine stop-loss orders and/or never taking a loss greater than some pre-determined percentage before getting out of a stock- or even just getting out of the stock market altogether.
Stop-loss orders are short sighted as a routine strategy for the long-term investor, because they only serve to lock in a loss at the level of the sale. When the stock market retraces it’s drop back up to pre-crash levels and beyond, that money is lost forever. However, since this is a common reaction among investors, this action, by definition, must be intuitive.
By the way, investors should not sell stock during a crash, in my opinion. Let me emphasize, I’m speaking of index funds when I advise against selling into a crash, not individual stocks. Investors should stick with index funds only (if you own individual stocks during a market crash, you could legitimately sell them) An index fund will not go bankrupt; an individual stock can go bankrupt. Hopefully, investors are using these index funds instead of managed mutual funds or individual stocks. That is always my first recommendation. To me it is intuitive. Others may find it counter-intuitive, but hopefully most investors will not. I give my reasons for this ‘index funds only’ strategy in another blog post specifically devoted to this proposition.
Counter-intuitive thinking, and the resulting counter-intuitive investor action, on the other hand, as it relates to such crashes and more severe corrections, would require an investor to go against his gut feelings, intuition, and even common sense. This is emotionally difficult to do. To hold on and not sell stock during a crash can be nerve-racking if basic knowledge of the stock market, and even more important, it’s history, is lacking. To actually continue buying stock during this time can be so counterintuitive (without such knowledge) as to seem almost insane. On the other hand, a sufficient knowledge of the stock market and it’s history can actually turn such a counterintuitive investment proposition into intuitively normal thinking in the mind of such an educated investor.
What stock market history am I referring to? All of it! History clearly shows us that the stock market ‘always comes back’; always has and always will. This is a market truth which is so hard for many investors to get their arms (and heads) around. Even during the worst financial disaster in U.S.history (yes, greater than the “Great Recession” of 2008-9), the Great Depression, an investor who held on and did not sell during this time, was made whole again within approximately four to five years. This is a far cry from the oft repeated time of 1954 for full stock market retracing to pre-crash levels. Why the difference? Because, when analyzing the “Depression”, few take into consideration, dividends (over twice as high as now), and deflation. Yes, deflation, not inflation! Between 1929 and 1934, the consumer price index (CPI) dropped over 25%! Assuming, the investor at that time did not use borrowed money to buy his stock on margin (a big assumption), he was back to even in terms of spending power by 1934, at the latest, not 1954!
But this fact that the stock market eventually always returns to its previous high after a crash or severe correction, I will call Stock Market Theorem #1. It then follows that Stock Market Theorem #2 states that the average bear market (market continues to decline) over the last eighty years has lasted eighteen months. This is a known fact I will call a theorem. Memorize these two “theorems”. They will save you countless sleepless nights once you understand and accept them as true.
There are good reasons to assume this eighteen month average for bear markets will continue into the foreseeable future, with little significant change, not the least of which is the U. S. Federal Reserve’s strong bias against long bear markets and their usually accompanying recessions. They make this bias very clear with almost immediate effective interest lowering activity, through their so-called “open market operations” These lower interest rates (as well as greater Fed created liquidity through the printing of large amounts of extra dollars and the injection of these dollars into the economy), in most cases, limit the time a bear market can thrive. The understanding and internalizing of theses two facts (my ‘theorems’ ) by the investor should allow him or her to turn original counter-intuitive thinking to subsequent intuitive thinking regarding future actions he or she takes in the stock market.
In light of the above, what are these actions an investor should take? If the investor now knows intuitively, based on experience and valid historical background stock market knowledge, that buying when others are selling, and selling when others are buying, is the correct action, then counter-intuitive becomes intuitive. As investors begin to realize and internalize this new-found knowledge along with a personal and definitional transformation, it all leads to conforming action with the new definition as the investor realizes greater potential for stock market profit. This is the concept I’ll discuss among different aspects of investing in future posts, Hence the blog name: The Counter-Intuitive Investor.