The Intuitive Investor: Why Intuition Is Important
Over the course of my investment career, I used several unconventional tools to improve the results of the fund I co-managed, but none was more powerful than intuition. In fact, there is a growing regard for intuition as many successful investors, including George Soros, attribute their success to intuition. A recent Wall Street Journal article said of executive decision making, “The potential conclusion is that people who are good at strategy are better at sensing or feeling their way through strategies, rather than relying only on logic and being rational.” Even the author of My Life as a Quant, Emanuel Derman, has a deep-seated research interest in intuition.
In this, the first in a regular series on the importance of intuition in investing, I will weigh in on the burgeoning discussion about intuition.
Why Intuition Is Important
As I discuss in my book, The Intuitive Investor, it is intuition that allows investors to identify what unique data are relevant from a nearly infinite sea of information. Likewise, intuition helps to identify nonstandard risks when evaluating a business for possible investment. Intuition allows for an evaluation of perennially difficult factors that are used to inform our buy and sell decisions, including: future competitiveness of businesses; the likely success of new product offerings; the character or personality nuances of executives; and even the choices made in financial modeling, such as next year’s gross margins.
Furthermore, in an age in which many active investors fret that computer trading algorithms are poised to bleed all alpha away from human beings and turn investing into adventures in beta, it is important to remember what human beings can do that machines cannot do. Take the following as an example of the unassailable powers of the human over the machine, courtesy of intuition, creativity, curiosity, and of course, intellect.
The Power of Intuition
Here is an example of intuition in action, drawn from my own experience:
Arriving at the single gate airport in Santa Fe in late summer 1999, I see a 20-something Adonis clad in a bespoke suit and wearing dress shoes with square toes.
I take a moment to assess the situation. I do this to allow the powers of my intellect to assess the overwhelming sense my intuition is providing me: “This guy is unique.”
I then walk up to the young man and ask, “How was that drive up from Albuquerque?” He looks at me quizzically and replies of the 59.7 mile drive, “Windy.”
Without hesitation I say to him, “You are a health care investment banker for UBS Warburg,” and then ask, “What Genzyme deal are you working on?”
Shocked, the nearly speechless young man mumbles, “Er, uh, how did you know that? And who the hell are you?”
Shortly after this encounter there is, in fact, an investment banking deal led by UBS Warburg between Genzyme and Genesys announced on 18 October 1999.
This is the power of intuition when combined with the intellect — namely, the ability to see in the world what no one else is seeing. Keep reading to hear how I did what I did on that day in 1999.
Intuition Is the Partner of Intellect
Intuition is the hidden and more powerful partner of the intellect in investing. I want to emphasize the word “partner,” because what I really advocate is that investors use the entirety of their information-discovery apparatus — their consciousness — which includes both the intellect and intuition. But because financial analysis is typically thought of as, well, analytical and rational, and intuition is thought of as the opposite, irrational, most investors do not look to their intuition’s power for solutions. Worse still, they actively try and eliminate intuition from their processes. This is why I think intuition is more powerful than the intellect: Neglect of intuition by most leads to opportunity for those who use it.
What Is Intuition?
I think intuition’s power is further underappreciated because it is conceived of incorrectly. Intuition is not about being female. Intuition is not the same thing as gut instinct. Nor is intuition an uninformed guess. So what is it?
According to the Oxford English Dictionary, intuition is:
a. The immediate apprehension of an object by the mind without the intervention of any reasoning process; a particular act of such apprehension.
b. Immediate apprehension by the intellect alone; a particular act of such apprehension.
c. Immediate apprehension by sense; a particular act of such apprehension.
I agree with all the above definitions and believe that taken as a whole, they capture the essence of intuition. In a companion piece that accompanies this post, I discuss the definition of intuition very thoroughly. In particular, I counter the growing tendency of behavioral economists to slight intuition. Daniel Kahneman, for example, incorrectly associates his System 1 thinking with intuition, when in reality, I think he means instinct.
Intuition in Action
So in answer to the UBS Warburg investment banker’s question (“Er, uh, how did you know that?”), let me explain how my intuition and intellect worked together to reveal a piece of information that would have remained otherwise hidden were it not for intuition and creativity.
- I was in Santa Fe, New Mexico, USA, a small town of around 60,000 people. This is a factual piece of knowledge, and I therefore attribute this to my intellect.
- People in Santa Fe hardly ever wear suits — and never wear bespoke suits. This is an anecdotal piece of observational evidence, as I did not quiz Santa Fe residents about their dress. I attribute this to my intuition, which had highlighted for me years earlier the contrast between how people dress in other cities relative to how they dress in Santa Fe.
- I knew how to spot a bespoke suit. This is a factual piece of evidence, and I attribute this to my intellect.
- I knew that bespoke suits were very expensive. Intellect.
- I observed years prior that many investment bankers seem to look like male models. Again, this is an anecdotal piece of evidence, so, yes, I attribute this to intellect but more so to my intuition.
- I observed that New Yorkers are among the trendiest people on the planet, concerned about this season’s latest fashion as few other cultures are. Ditto the above.
- When I had been in New York City earlier in 1999, I had noticed that the “in” thing for men was square-toed dress shoes. Ditto the above.
- Thus, when I found myself “arriving at the single gate airport in Santa Fe in late summer 1999 [and saw] a 20-something Adonis clad in a bespoke suit and wearing dress shoes with square toes,” I said to myself, that is an investment banker from New York City. How else to explain someone so young, handsome, ignorant of local dress norms, and with a high income in the hamlet of Santa Fe?
- So now I knew I was seeing an investment banker. My intuition told me I was right. This felt like alignment with the truth — a feeling I believe most of us have felt.
- But why was the investment banker in Santa Fe? Was he on vacation or here working? Using my intellect and my intuitive sense of appropriateness, I concluded that the probability was that he was in Santa Fe working and not on vacation. Otherwise, he would know that people in Santa Fe do not wear suits, or he would prefer not to be wearing a suit at all.
- But how did I know he worked for UBS Warburg and not some other firm? Did I guess? Absolutely not. I knew that New Mexico only had two firms in the entire state that were publicly traded and both were health care companies, one in Albuquerque and the other in Santa Fe. Intellect.
- I knew that in a famous mutiny Smith Barney’s Benjamin Lorello had taken Wall Street’s largest health care banking team to UBS Warburg earlier in 1999 for a reported three-year contract worth a whopping $70 million. Only UBS Warburg could afford to cover such remote territory as New Mexico. Again, a combo of intellect and intuition. Once more I got that tingly “you’ve got it right” feeling associated with coming into accord with reality.
- I now knew that he was likely an investment banker for UBS Warburg, but from which of the two companies was a deal likely forthcoming? I surmised using a combination of intellect and intuition that it was the company he had spent more time with on his visit.
- Next, I knew that it would be too expensive even for UBS Warburg to pay for a car service to take the banker from Albuquerque the 60 miles up to Santa Fe. So the banker had probably driven a rental car. That was when my intuition and creativity led to a question that would help me resolve the dilemma: “How was that drive up from Albuquerque?”
- See, I knew it had been very windy the afternoon of the day prior, whereas today it was summer-comfortable. That suggested to me that he had likely flown in the day before and spent time in Albuquerque making a “Hey, we are now UBS Warburg, not Salomon Brothers”-type of check-in with a health care company. This guy wanted to finish his trip with his real interest: Genzyme.
- Most importantly, this entire process was guided by my creative and intuitive faculties. Put another way, I believe my intellect was in service to a higher form of consciousness.
Although this is a dramatic story of intuition’s power, when coupled appropriately with intellect, it is not unique. Better still, in the coming months I will share with you some of the secrets of how to tap your intuition and to deploy it as you see fit, whether it is to uncover an investment banking deal simply from momentary observation of an out-of-place character in Santa Fe or how much top-line revenue growth to assume in your discounted cash flow model.
I would love to hear from you about your stories and thoughts about intuition. Feel free to leave a comment below, or reach out to me at [email protected] and please put the word “intuition” in your subject line.
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/retrorocket
15 thoughts on “The Intuitive Investor: Why Intuition Is Important”
Excellent article on combination of intellect and intuition.
Thank you very much for your feedback on the post. I will be continuing a discussion about intuition going forward so stay tuned for more intuition in the near future.
To me Intuition seems like a combination of Intellect and Past experiences which is stored in our memory. I think same as you mentioned above. We try to rationalize things on the basis of our past experiences..
Thank you so much for your comment. I think this is a frequent confusion with intuition. Namely, we recognize it, not when it happens, but when we have translated an intuitive insight into the thing we pay attention to most: words and numbers. Intuition, as a phenomenon, and as a tool, exists independently of our ability to describe it (usually with words and numbers, both linear, both left-brained). In other words, it is possible to have intuition about something and yet, never be able to describe it. How does this relate to the ‘past experiences’ or memories you describe? Memories are nothing more than a suite of contexts used to contextualize/understand new experiences. Yet, intuition frequently is a unique insight that, in some cases takes years to relate in the way you describe above. Take Newton’s discovery of ‘the calculus,’ for example. He is said to have had a flash of insight or direct knowing, but it took him several years more to translate that knowing into words and mathematics that were congruent with his intuition. Does this make sense?
Much more on this subject to come; and most of all, thank you for taking the time to share your views!
I love this story! Reminds me of the book Blink.
It seems to me that when an intelligent person is highly interested in a subject and as a result of hard work has accumulated a wealth of knowledge about that subject something happens in his brain that starts making links between his brain cells which can activate and reorganise instantly when confronted with new data.
I assume this happens particularly with analytical and critical thinkers, because they are brave enough and happy to explore the vastness of the unknown and that builds all sorts of tentative links in the brain that are ready to be activated when the right trigger arises. The strong interest in the subject further brings alertness to the mind.
I am not excluding the existence of some mystical element in the whole mix. I guess meditation and mindfulness also help in addition to the rest. And some people are just more intuitive by nature.
I do agree this is a very important element in the mix of qualities that make a successful investor. Though thinking out of the box and resisting the influence of the market sentiment (the animal spirits) is even more important.
Thank you for your comments about intuition; they raise many of the issues that this subject tends to raise for people.
I think one of the big confusions about intuition is the misidentification of it with mental models and intellect. My experience with intuition tells me that it is a sensory apparatus, like hearing. In a sensory experience there are two major components: the stimulus (sensory sensation) and the interpretation of that stimulus. I strongly believe that both are separate functions. When someone has an intuition (a stimulus) and they can relate that thing easily to their memory (i.e. knowledge), then their intuition tends to be insightful and accurate. This would jibe with your description of intuition above. Yet, if the intuition is about something they are unfamiliar with then their intuition is often misinterpreted. This does not mean that intuition is not real or that it is unreliable. What it means is that interpretation of intuition can be difficult for those that ignore it.
Thank you again for contributing to the ongoing dialogue.
It is indeed puzzling how intuition got such a bad rap with the investment community. Ask any discretionary intraday trader and they’ll tell you it’s an absolutely critical skill to possess, which is developed through tons of repetition WITHIN an already existing analytical framework. I think that is the key point that most in the “anti-intuition” crowd miss– you must develop the rigid, analytical framework (“a system”) to contain the intuitive when it comes to trading/investing. Only then does intuition become a truly irreplaceable asset.
Thank you for your comments about intuition. Yes, intuition does have a bad reputation. I think one of the keys is what I described above in my response to Misho. I will add to that comment that in Western societies where the left-brain and analytical processes completely dominate education, there is no effort to acknowledge intuition, or to train the mind to interpret its signals.
What amazes me when I hear the Santa Fe airport story is how all of those disparate pieces of information coalesced so rapidly to form that conclusion. I imagine it was something like thirty seconds to a minute…but it’s a great example of what the unfettered mind is capable of accomplishing.
From reading comments on this article – and others related to intuition – the biggest barrier for a lot of people appears to be not wanting to innately trust one’s intuition, but rather feeling the need to empirically prove those “Eureka!” moments with hard data – usually numbers, sometimes information that’s more qualitative in nature. As Jason points out above, the root cause for this is likely tied to the Western education system, in which empiricism, providing supporting evidence beyond a feeling, etc., is pounded into students to the point that the intuitive voice within is completely squelched.
When those moments do arrive, I believe it’s important to embrace them and recognize that feeling of acknowledging the absolute truth of a matter. As with all activities, being able to do so requires consistent practice. But once you can break through that mental barrier, the sky is the limit.
Thanks as always for your comments. In the Santa Fe airport story it took me about 2 minutes to figure everything out. However, the initial recognition that he was an investment banker was instantaneous. It then took about 30 seconds more to figure out that he worked for UBS. What took the most time was applying my creativity to come up with a contextless question that would allow me to figure out for what company he was working on a deal.
I agree with you about the need to ‘prove’ the Eurkea moments with hard data. I think this is understandable given the scant amount of time most people have ever spent trying to learn to listen to their intuition, and even more importantly how to translate the sensory data that comes from intuition. It’s nice to read that you agree that the Western education system and its over-emphasis (to my mind) on empiricism is a likely culprit. When I used to experience intuition, and here I am talking up until my early 30s, I thought I was crazy. I couldn’t explain what was happening in my consciousness and I deployed the powers of the pre-frontal cortex to rationalize my intuitive sense of things. Ouch!
Thank you for sharing your tips for how to better embrace intuition!
I’m glad you found success in your endeavors by mixing intuition with intellect. I have a burger business in town, and I’m looking for ways to increase my sales. That being said, I’ll take upon your advice while I try to find the best IVRM analysis in town.