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.
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.
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.
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.
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