The primacy of gut instinct

How to see beyond the data and generate outsized returns

I’ll never forget the first time I sat in on a client meeting with one of my candidates. The client was a multi-billion dollar private equity fund with an office above the clouds. The candidate was an executive in his late-50s whose down-to-Earth demeanor belied a killer instinct.

The meeting was set to discuss an investment thesis the executive had crafted in an industry the client was eager to invest in.

He spent the prior 25 years building value-added distribution businesses across life sciences sectors. Calling him an industry expert wouldn’t do him any justice. The man’s understanding of the markets he operated in was DNA level.

The executive had seen it all. He had the scars (and bank account) to prove it. And now he saw an opportunity to build something new. The investors listened with rapt attention as he outlined his vision.

It wasn’t something you’d glean from reading research reports, the client had plenty of those. It was born from something deeper. It came from the gut.

Information proliferates faster and farther than ever before. It gives us a sense of omniscience. That the more data we gather, the better we’ll be able to predict the future.

Entire industries exist because of this notion. Data brokers sell payment processor info to hedge funds that trade in retail stocks. Market research shops will tell you exactly how big the corrugated packaging market will be in five years. (This is real.)

What’s more, the ubiquity of social media has led to the standardization of groupthink. If you have a viewpoint that runs counter to the Great Proliferation, prepare to be a sore thumb. It’s increasingly difficult to go against the grain.

But our omniscience is an illusion based on the false idea that the future can be extrapolated from existing trends.

For instance, back in the dial-up days surfing the net was viewed as a strange hobby. In 1998, Paul Krugman stated that the internet’s impact on the economy would be no greater than the fax machine. When’s the last time you saw a copy of the NYTimes in print?

Faxing the latest edition - DALL-E

This is not to say that predictions can’t be made. Nor does it mean that market research has no use. It means that in a world flooded by information, you need to look beyond data to generate a meaningful view of the future.

This is where gut instinct comes into play.

But people put so much faith in data that they scoff at the idea. The gut is meant to be extinct, drowned in the information deluge.

In reality, there’s a great misunderstanding of what gut instinct really is. It’s not an ignorant rejection of information. It’s the confluence of data, hard-earned experience, and an inclination to act despite the potential that you could be wrong.

Gut instinct is the ability to see where the puck is going and a willingness to be there before it arrives. An effective gut is built through battle-hardened experience. The stronger the gut, the more confidence you’ll have in your view of the future. The ultimate professional beach body.

It’s not an oracle, but that’s ok. The magic of a strong gut instinct is not just in its predictive insights, but in its ability to give confidence to act. You embrace uncertainty, knowing that you have the tools to effectively navigate through it.

It gives you the wisdom to understand that the future is not set. That possibilities outside existing data can emerge. And that by taking meaningful action that aligns with your gut, you can play a role in influencing the direction it takes. No fate but what we make.

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When my candidate walked through his thesis, he served as the living embodiment of gut instinct.

He brought hard data to the discussion. But he used his decades of experience in the trenches to develop a thoughtful opinion on where his industry was headed. His was a view not readily apparent to the broader market.

Could he have been wrong? Sure! But as any great investor knows, it’s in this territory that the outsized returns live. If the future was obvious, there’d be nothing to gain – like buying a stock after it announces an earnings beat.

Though this unassuming man had built a career to be proud of along with some serious (stealth) wealth, he wasn’t driven by money. It was something deeper. A desire to follow his gut and build something great. This is what it looks like to have the right stuff.

While it goes without saying that not all gut instincts are created equal, it’s something that can and should be developed through the crucible of real-world experience.

And as the tidal wave of information becomes a tsunami, the primacy of gut instinct will only continue to grow.