Awareness, Investing Strategies, and Following Your Gut

As the United States teeters on the edge of a recession (and perhaps we're already there), more and more investors are looking at how to adjust their investment strategy. But one of the most important actions you can take isn't crunching the numbers.

What Peter Lynch calls "investing the familiar" and what I would call "awareness" deserves more credit.

Back when I worked in the financial industry in New York, there were three skills you needed to be truly successful:

• Reading upside down on someone's desk.
• Tracking and understanding different conversations at the same time.
• Knowing the phone number someone dialed by the individual number tones.

This was, of course, the 1980s.Outside of shiny new technology, not much has probably changed. Currency among brokers, banks, and traders is information, not dollars and cents. No matter where I went, I kept my ears to the ground, always ready to make a move.

That's how I avoided a significant loss to my portfolio in 1986. Often I ended up at a bar with friends or coworkers after work. A group of IBM warehouse guys lounged near my group, most jovial. Their good spirits stemmed from easier shifts. Only half of their trucks were loaded with goods, reducing gas costs and saving time on transits.

Only one man had a complaint. The forklift driver groaned about how crowded the warehouse had become. The lack of space made it difficult, if not impossible, for him to do his job safely and properly.

At that moment, I knew there was an underlying issue at IBM, no matter how high their asset rating was. Half-full shipments and crowded warehouses translated to decreased demand. So I went home shortly after and sold my IBM stock.

Months later, IBM's stock value dropped dramatically, with losses stretching into the mid-1990s.

Luck was indeed involved—I happened to be at the right bar, at the right time, with the ability to listen to my friends and eavesdrop on adjacent conversations.

But that awareness offered insight no prospectus or company valuation could.

So, when I read about America’s largest warehouse running out of room, I thought of this story. After two years of product shortages, is demand now decreasing?  

It’s true that there have been supply chain shortages due to the Russian-Ukrainian conflict, Sudan closing its key port in the Red Sea, regional pandemic lockdowns, general inflation, pandemic-driven merchant buying, and general labor shortages have all created bottlenecks in the supply chain.

But we’re now talking about distribution centers for stores and direct-to-consumer shipping.

If we stop looking at stock market fluctuations, we can see that the market is tightening in real-time.

So, should you invest in what you know?

The answer to this is tricky. It depends.

I believe I once heard a story about Peter Lynch choosing to invest in Cabbage Patch Dolls just before the height of the company’s valuation. How did he choose this toy out of hundreds? All his daughters could talk about was the doll.

At the same time, One Up On Wall Street, Peter Lynch states:

“Peter Lynch doesn’t advise you to buy stock in your favorite store just because you like shopping in the store, nor should you buy stock in a manufacturer because it makes your favorite product or a restaurant because you like the food. Liking a store, a product, or a restaurant is a good reason to get interested in a company and put it on your research list, but it’s not enough of a reason to own the stock! Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, expansion plans, and so forth.”

Awareness is step one to mapping out the market. Lynch’s awareness of how people genuinely react to a product cuts through the hype. However, before making an investment decision, you should still review the company information.

Let’s consider applying awareness to the common investing advice of “buying the dip.”

Since the deal between Elon Musk and Twitter failed, Tesla stock has been tanking. So, is it a good time to buy?

Well, that depends. Some things we know just from browsing the headlines are:

• Tesla car sales have slowed since the pandemic.
• The company has been dealing with numerous lawsuits, including claims of racial discrimination, autopilot defects, sexual harassment, and the use of illegal workers.  
• That the CEO and board have been recently investigated by the SEC for failing their fiduciary duty.  
• That Musk is potentially seen as “uninsurable” and given significantly higher premiums due to past lawsuits.  

In addition, you may want to ask yourself whether not there are resources available to change or charge batteries for electric cars and whether the car’s design functions well for all or most drivers.

Finally, you may want to review the company financials. For example, even a year ago, two-thirds of analysts believed the stock to be overvalued. To meet its $1 trillion market valuation, Tesla must sell 47 million cars by 2030. But to date, they’ve only sold less than 2 million.

When do you know you’ve heard something worthwhile?

The main struggle an investor typically faces when relying on awareness gauging authentic situations. For example, when I overheard the IBM workers at the bar, that was off-the-cuff information. The workers had nothing to gain by celebrating or complaining about their workloads. It was just general conversation, but in terms of one-the-ground perspectives on IBM shipping volume, it was invaluable.

If your friend comes to you with a “spectacular” investment idea, it’s likely worth it be wary. But if you overhear two professionals talking about a new product that is flying off the shelves—before it’s certified bestseller— you might have something.

Let me give you another example.

On one routine commuter train trip from Westport, Connecticut, to New York City in 1985, I was sitting alone on the train traveling from Westport, I discovered a soon-to-be popular IPO. Behind me, two investment bankers were chitchatting about their shoes.

“Boy, those are the coolest shoes,” said one of the bankers.

“Yeah, they’re samples from a company we’re taking public. They feel and look great,” said the other.

As soon as I left the train, I called an advisor and told them to preorder the public offering immediately.

That company was Reebok.

And while the initial IPO launch was rocky, within a year, it was trading 303% above average.

There was no guarantee in that conversation that Reebok would be successful. Since the IPO launched during a market correction, it took months for the investment to pan out. However, focusing on what consumers were saying about the product rather than PR hype made it easy to follow a gut feeling.  

Adding awareness to your investing strategy

Today there is more noise about the market than ever. Every finance guru and extended family want to give you investing advice. Between news channels, online signals, brokerage reports, finance articles, press releases, and several other options, it can be tempting to bury ourselves in books and algorithms.

But it’s also important to look around for more insight.

What are people actually buying? Or not buying? What companies are going under, even if their stock is overperforming? How do employees talk about management?

Staying aware of the world around us may not help us predict which investments will be winners or losers—but it gives us a sound place to start looking.