Big Data Versus a Gut Feel

“Are you near a large body of water?”

That was the first question my mom asked when she called me, before 8 a.m., only one month into my freshman year of college.

After forcing myself awake, I replied: “No. What? Wait… why?”

She continued: “I woke up with a feeling in my gut. It feels bad… and I think it has to do with you and a large body of water.”

Interestingly, I was scheduled to go on a field trip with my biology class that day. We were going to collect water samples from a nearby lake. (I did not tell my mom as much).

“I’ll be fine mom. I’m going back to bed now… love you!”

Gut feelings… a sixth sense… by whatever name, intuitions can be informative. My mom swears by them!

But in the investment world, mysteriously-generated feelings more often than not lead investors to make wealth-destroying decisions.

There is a better way…

I’m talking about data-driven decision-making.

Nate Silver, statistics-wonk extraordinaire, put a face on the value of data and — when astutely analyzed — its ability to guide decision-makers toward the most desirable outcome.

His CNN blog was widely followed during the 2012 presidential election, because his statistical models proved more accurate than anyone else’s.

A year early, the Hollywood hit, Moneyball,introduced the world to a unique idea: A data-driven, decision-making model can successfully overcome a lack of financial resources… allowing a stats-geek baseball recruiter to beat out deep-pocketed rivals who continued to rely on subjective intuition and gut feel.

To me, the writing’s been on the walls for years.

The availability of troves of data — and the computer power needed to process it — has greatly increased over the last decade.

Yet, to some, the Big Data trend is scary.

The National Security Administration (NSA) spooked the world when Edward Snowden revealed the agency’s collection of massive quantities of our personal data. (Scary!)

Target stores reportedly have the ability to predict when a woman is pregnant — based on her spending patterns — even before she knows she is. (Scarier!)

And Twitter has analyzed billions of data points to determine which days of the week, and months of the year, we’re more likely to be happy. (Odd!) Here’s a graphic showing the analysis:

Twitter, Target, and the NSA aside, financial markets are chock-full of data and, therefore, the ultimate playground for investors with a bent toward quantitative analysis.

If you’ve read my work for any length of time, you know I’m one of those investors.

I ONLY invest when my number-crunching shows I have an edge…

I NEVER invest on a gut feel.

Never.

I attribute my passion for the research, design, and implementation of data-driven investment strategies to two experiences…

First, as a premed Biology major, I spent four years immersed in the scientific method, which involves making observations about the real world, forming hypotheses (educated guesses) as to why the observations are so, and designing experiments to determine whether or not the hypothesis holds true. This method works equally well in the research of financial markets.

Second, as a consultant for TradeStation Securities, a brokerage firm that required clients make all their own investment decisions, I became immersed in rules-based trading (the company’s unique value).

After making observations about the market, investors can use the company’s software to create rules that determine when various securities are bought, held, or sold.

They can then test these rules on historical data to determine whether or not they’re useful in creating profits and mitigating risks. If the trading rules prove useless, the investor has saved countless hours and dollars in learning the hard way.

Both of those experiences have entrenched in me the value of big data and objective, quantitative research…

Now, I’m not suggesting every investor should pursue a Ph.D. in mathematics before taking to the markets. But I will challenge you to embrace the idea that objective, data-driven research trumps gut-feel when it comes to growing wealth for the long haul.

Remember, in the financial markets… everyone’s got a story to tell and everyone’s got an opinion.

It’s your job to determine if that story/opinion is backed by data or intuition.


Adam

P.S. That’s what I do for my Cycle 9 Alert members. Not only do I help them determine whether or not a story or opinion is worth anything, but I also apply strict, scientific analysis and rules-based trading. That’s how I’ve achieved a 77% hit rate over the last year. That’s why Cycle 9 Alert is in the top echelons of the industry. That’s why you should join.

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Categories: Investing

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.