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Welcome to Profit Confidential • Wednesday, May 23, 2012

Why a Gut Feeling is Often Better Than a PhD

Thursday, February 15th, 2007
By Mitchell Clark, B.Comm. for Profit Confidential

It’s just a delight being an investment analyst during earnings season. You get a company’s most up-to-date numbers, you get its forecast for the future, and you get the stock market’s immediate judgment on the results.

One of my favorite companies, New Oriental Education (NYSE/EDU) isn’t reporting dramatic earnings growth, but it’s a China stock that the market thinks is a great opportunity. No matter what the raw numbers say, it’s always important to factor in what sentiment is like in the broader investment community.

New Oriental Education just makes so much sense to investors. It’s not surprising then that the stock just broke through to a new 52- week high over $42 per share. When I first wrote about this company in this column, it was trading just below $25 per share. Like Gordon Gekko said in the movie Wall Street, “.the illusion has become real and the more real it becomes, the greater they want it.”

Is New Oriental Education worth almost double its value of just four months ago? My answer is that I have absolutely no idea. The fact of the matter is, it was a good trade.

So, you can analyze the raw numbers and invest purely on financial logic. Or, you can take it a step further and recognize how investor psychology affects the value of a stock.

If I ran a proprietary equity trading desk at an investment bank, and I had to chose between hiring a trader with a PhD in economics and a CFA designation, or a person with an undergraduate degree who’s been following the stock market intimately for five or 10 years, I’d definitely choose the latter.

You can slice and dice the numbers as much as you want, but this won’t make you a great investor. What you need to develop is that “gut” feeling that says this particular stock is going to make a lot of money. This is the most important attribute you can have in the investment business. The bad news is that nobody can teach it to you. But, with hard work and dedication, you can get it yourself.

 

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Profit Confidential AuthorMitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.

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