Skills That Separate You as an Investment Manager: Intuition
On the heels of the success of my blog post on how to become a research analyst, I have been writing a monthly series on the skills that truly separate you from the crowd once you have your coveted research analyst position. Thus far I’ve written about introspection and creativity. This month we’ll take a look at a skill I believe is highly undervalued: intuition.
Intuition
I think Daniel Kahneman sets intuition up as a straw man for his behavioral economics theories. In his well-received book Thinking, Fast and Slow, of which I am a fan, he associates intuition with “System 1” thinking which, he says, is “fast thinking,” characterized by snap assessments of situations, subconscious thinking, and thoughts processed in the brain’s amygdala. Kahneman holds up “System 2” thinking as the opposite. It is “slow thinking,” characterized by deep analysis and processed in the prefrontal cortex.
I submit, however, that he associates the wrong word with System 1 thinking. It should not be intuition but instinct that is Kahneman’s descriptor for System 1 thinking. In fact, no less an authority on the meaning of words than the Oxford English Dictionary* defines intuition as:
Direct perception of truth, fact, etc., independent of any reasoning process; immediate apprehension.
An alternative definition, also from the OED, is:
Pure, untaught, noninferential knowledge.
Note the words “apprehension” and “noninferential knowledge,” which suggest, not a gut-level response, but a flash of brilliance.
But it is not just dictionaries that view intuition differently. In a 2013 presentation at the Battle of the Quants, Emanuel Derman, whom many consider the grandfather of quantitative finance, pointed out that the foundations of science itself are the result of intuitive processes. He specifically pointed to Johannes Kepler, Sir Isaac Newton, André-Marie Ampère, James Clerk Maxwell, Albert Einstein, and Paul Adrien Maurice Dirac as scientists that had experienced immediate apprehensions and flashes of noninferential knowledge that advanced science in meaningful ways. These flashes of brilliance stand in stark contrast to both Kahneman’s System 1 and System 2 thinking.
I describe intuition in my book, The Intuitive Investor, as tuning into the cosmic radio station. In similar language, Derman says of intuition, “The observer becomes so close to the object (or person) observed that he begins to experience their existence from both outside and inside them. Intuition is a merging of the observer with the observed.” In both cases, intuition requires deliberation, despite the ultimate “eureka moment.”
But why is any of this important to investment management?
One of the conditions of intuitive insight is an unbiased, unattached mind — one free from the preferences, prejudices, and emotional constraints associated with the amygdala. It turns out that the ability to apprehend, comprehend, and resonate with the truth of the universe as closely as is possible is exactly the discounting process that every analyst is charged with fulfilling.
Remedy
The key to developing intuition is stripping away autonomic emotional responses and attuning oneself to a state of no-mind. Again, these are the very fruits of a healthy introspective and mindfulness/meditation practice.
Application
Intuition is a skill with endless applications. It was my intuition that led me to publicly call the 9 March 2009 S&P 500 market low on 12 March 2009. Using meditation, I felt that most market participants were no longer anxious to the point of nausea, and instead were exhausted and spent. This was at a time of high emotional paranoia and forecasts of the end times. But using the power of my mind, I was able to strip away the autonomic emotional responses of the amygdala and attune to a state of no-mind. In that deep meditative state, I was able to see the world differently and to make a very different call from many other market participants.
*The Compact Oxford English Dictionary New Edition, 1992.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
Photo credit: ©iStockphoto.com/CSA-Images
I totally understand the importance of intuition as a valuable skill for an investment manager. Some say it is actually luck more than intuitive! I’m not sure how to really argue that! When I read the blog post, I immediately thought about Michael Burry and his Scion Capital story of anticipating very clearly the 2008 housing market crash! He had such a strong belief in his intuition, logic, and numbers homework! His natural state as an outsider mostly helped him to get this “state of no mind” you mentioned! However, I’m very interested to know if this intuition is teachable! I believe that some of us are born with it! But i also believe that it becomes sharper with experience in the field. It is related to recognizing patterns in life. Repeated patterns help enhancing personal intuition. What do you think?
Thank you for the article! Do you have other posts about the technical skills that differentiate investment managers from each other?
Hello Toufik,
Thank you very much for your comments and for sharing your thoughts about intuition. I can tell that this is an important subject to you!
In answer to your question, yes, I think intuition can be taught. However, it is not easy to become better. There are many reasons for this, but I think that most of them are cultural. Namely, there is a deeply embedded preference in modern culture, and in the West in particular, to: increase the amount of knowledge you have, to think endlessly about that knowledge, and to endlessly evaluate your experiences. This last characteristic – endless evaluation/categorization of your experiences – is the most difficult to overcome. Some examples: your thoughts, even fleeting, about the last stranger you saw or met; your opinion about today’s weather; your thoughts about the management team you are evaluating; and so forth. Evaluation relies upon comparison, and by definition, to make a comparison you must reference something from your memory/past. That takes you out of the present moment, and hence out of the realm where intuition is possible. I will be writing about this much more in future months. In the meantime, so that I do not front-run my own discussion, this will have to suffice.
With a big smile!
Jason
Intuition is more hocus than pocus. How many divorced people intially fell in love after following their so called intuition..I am sticking with measurements and ratios. buffet would agree with me.
Hi Jamai,
Thank you for your comment. I am aware of some of the skepticism about intuition. Consequently, you may find my forthcoming series on intuition written for The Enterprising Investor interesting and informative.
With smiles,
Jason
Interesting point of discussion. I couldn’t help but extend your thought of love and marriage to an opposite and opposing cause and effect. Just as Buffett speaks about the differences in buying a stock and buying a company, perhaps the divorce is rather an effect of a misperception of love than it is of a failed intuition. It’s hard to differentiate the term love in the English language when dictating love for an In-N-Out double cheeseburger animal style with chopped chilis and x toast from, say, romantic love for your spouse. Perhaps the Greeks had it right by having 6 separate words to describe the different types of “love”.
My point being that instead of viewing love as an emotion (buying an attractive stock), I see it as more of a commitment (buying an attractive company) where the love feeling is simply a byproduct of the work you put into the investment (relationship). Under this light, the love feeling is a variable dependent upon your own personal emotion and independent of the actual marriage. While a bad marriage may cause a loss in the love feeling, it does not necessarily go the other way.
Hi Randolph,
What an excellent context break from the normal tenor of investment speak. Thanks for taking the conversation into a bigger context than we normally allow ourselves in investing.
With smiles,
Jason
Interesting point, my view is we need to apply both, the process and also intuition, it will only work if you have been sharpening the saw consistently which gives accuracy to your intuition. I speak based on my years of experience using this skills. This does not mean we cant make mistakes, just for this case, i would say estimated ratio – out of 10 times – 7 you get it right, 3 times you get wrong. My point is more right and less wrong.
This is only my views based on true life experience, not to proves other view are wrong. Thank You
Guna
Wealth Street
Malaysia
Hello Guna,
Thank you for relating your experience with intuition in your years of experience. Also thank you for pointing out that intuition is not a perfect tool, but that it is a tool nonetheless. Many of the valid tools we use as investors, such as P/E ratios, for example, are only good approximations of reality 7 out of 10 times, too.
With smiles!
Jason
Nice article. Interesting point about “becoming so close to the subject… “. This is passion for the subject that we begin to identify with it. Intuition, though, needs to be continually fed or it can misled, don’t you think? Intuition is about recognizing patterns, but without continual search and understanding of the patterns that exist around the subject then how can we trust these flashes insight?
Hi Maria,
Thank you for your feedback, comments, and question. Intellect can be misled, too, so that is not appropriate criteria for evaluation. I’ll give you an example from finance: what is the best valuation tool? This cannot be permanently, empirically evaluated. You might use p/e ratios because an academic research paper has indicated it is superior to discounted cash flow analysis. Then it turns out that another research paper argues an entirely different point of view. At the root of both intellect and intuition is human choice. So discussing how we can be misled when making choices is an interesting subject.
I would characterize ‘recognizing patterns’ or ‘pattern recognition’ as a subset of creativity. ‘Pattern recognition’ cannot explain radical context breaks such as Newton’s ‘calculus’ or Kepler’s laws. Look at the long history of scientific breakthrough, as well as comparison to the experience of non-scientists that have radical breakthroughs, and they do not attribute their success to instinct, but to intuition.
More on this to come in future posts. One about my own experiences with intuition, and another that takes issue with Kahneman’s naming of System 1. I do not take issue with his work, or of his description of system 1, just its name. As you will see, even he recognizes the importance of getting nomenclature correct in order to hold meaningful discussions.
Again thanks for your engagement!
With smiles,
Jason
Ah, your comments about intellect misleading is when we make intellect inelastic. Does not intuition assure that our intellect is more elastic to guide us when discounted cash flow versus vs p/e is more appropriate…. Is it not only about the vehicle, but about other factors, e.g. time (where we are in the cycle)that determines which evaluation method will be closer to the truth. Thank you for your engagement and the articles as well. Lots of food for thought.
Hi Maria,
I agree entirely with your thoughts above. I have written previously about the power of intuition to inform choice; which financial model and when, for example. Again, thanks for your enthusiasm for the post and for the topic!
With smiles,
Jason
Jason,
Love the series!
Intuition: to be able to judge the truth of a matter absolutely and not relatively. From my own experience, if one is not conscious of the power of intuition, then it becomes much easier to dismiss any such “Eureka!” moment or to chalk up a decision or action to mere luck (if hindsight proves that one’s feeling of a situation, matter, stock, management team, etc., was ultimately right). My advice to those that are of this mindset is to carefully track the performance of all of their investment ideas (not just the ones that become part of one’s portfolio) and record those seemingly amorphous feelings about each one, beyond financial characteristics and other “hard” data. I believe there’s a high probability of a positive correlation between performance and one’s intuited response to each.
For those that are still skeptical, I would only underscore that intuition and right-brained processes are only half of the equation; no one is advocating abandoning financial analysis, accounting, etc. It may be symptomatic of Western education to only consider the extremes of the spectrum, but investing is a field that requires innate balance in all aspects. If numbers were all that mattered, then a whole lot of investment professionals will be replaced by machines in short order.
Looking forward to the next article 🙂
Regards,
Ben
Hi Ben,
Thanks very much for the praise; I am pleased that you “love the series!” But thank you even more for your insights on intuition…in fact, I don’t have a single quibble with anything you wrote and I think you have added meaningfully to the discussion. You may also be interested in an article I wrote (featured in Barron’s no less) that is very similar to your suggestion of recording one’s “seemingly amorphous feelings about each” possible investment. Here is a link to that article, How to Measure Your Success as an Investor: http://blogs.cfainstitute.org/investor/2014/05/26/how-to-measure-your-success-as-an-investor/
With smiles,
Jason