Stock Picks and Fake Smiles

What if I told you there’s a way to pick stocks that is so reliable you’ll do better than the experts? But in order for it to work, you’d have to give up something:  Your access to information.

Ignorance is power.

In 2000, an investment magazine held a stock picking contest.  More than 10,000 people submitted portfolios, some of them professionals with access to loads of data. One portfolio in the contest stood out:  it was based on collective ignorance. Researchers asked fifty people to pick stocks based solely on whether they recognized the name of the company. What happened? The stocks picked by people who knew little gained in value by 2.5 percent.  The stocks picked by the editor in chief of the magazine, who knew a lot, lost 18.5 percent.

Experts like Jim Cramer are ready to help you become a market expert.  Will you make any money?  Well, too much information (and too much Jim Cramer) can be a bad thing.

“There’s a limit to the information a human mind can digest, a limit that often corresponds to the magical number seven, plus or minus two, the capacity of short term memory.” — Gut Feelings, by Gerd Gigerenzer

Your short term memory is good for about seven things. You’ve experienced this in Whole Foods if you attempt to shop without a shopping list.  You wind up standing in front of the cheese display trying to remember the eighth thing you meant to buy.

If you go with intuition, on the other hand, you tap into something much deeper. Many believe that intuition comes from higher powers. If you listen to it, you will be guided by God, by a universal energy source, or if you are trying to pick stocks, by Warren Buffett.

That may be true, but scientists are learning that intuition accesses the unconscious mind, and that part of the mind is really smart.

A research study has suggested that gamblers who trust their gut instincts are more likely to pick up subtle visual cues from the dealer and other players. To make winning decisions they let the unconscious drive for a while.  Less information turns out to be more – especially when things turn unpredictable.

When you are working with an unstable system, like the stock market or a gun battle or both (“How was work today, honey?”) having too much on your mind will slow you down. The noise between your ears blocks the wisdom of the subconscious.

This was explored in Malcolm Gladwell’s book Blink. If a police officer in jeopardy has to think too much, the bad guy shoots him first. If a baseball player performs differential equations in his head to calculate the trajectory and velocity of an incoming fly ball, he’d never catch it.  (I think this is the Mets’ problem.)

“Woman’s intuition, as everyone knows, is a true faculty that most women possess in a form far more highly developed than anything the random male ever acquires.”

Ashley Montagu, The Natural Superiority of Women

Women are good at intuition and men are bad at it. You think so?  Not so.

In another study, Dr. Richard Wiseman showed 50,000 people photographs of a person smiling. Only one was of a real smile. The other was of a fake smile. Using their intuition, men were able to guess which smile was real 72 percent of the time. The women guessed right 71 percent of the time.

I’m going to sell some stock soon, but I think I’ll wait until Warren Buffett is smiling.

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