{"id":5386,"date":"2014-06-24T08:32:19","date_gmt":"2014-06-24T12:32:19","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=5386"},"modified":"2018-09-21T02:03:52","modified_gmt":"2018-09-21T06:03:52","slug":"the-intuitive-investor-why-intuition-is-important","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2014\/06\/24\/the-intuitive-investor-why-intuition-is-important\/","title":{"rendered":"The Intuitive Investor: Why Intuition Is Important"},"content":{"rendered":"

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<\/a> as many successful investors, including George Soros, attribute their success to intuition<\/a>. A recent Wall Street Journal<\/em> article said of executive decision making, \u201cThe potential conclusion is that people who are good at strategy are better at sensing or feeling their way through strategies<\/a>, rather than relying only on logic and being rational.\u201d Even the author of My Life as a Quant<\/em>, Emanuel Derman, has a deep-seated research interest in intuition<\/a>.<\/span><\/p>\n

In this, the first in a\u00a0regular series on the importance of intuition in investing, I will weigh in on the burgeoning discussion about intuition.<\/span><\/p>\n

Why Intuition Is Important<\/strong><\/span><\/p>\n

As I discuss in my book, The Intuitive Investor<\/em><\/a>, 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.<\/span><\/p>\n

Furthermore, in an age in which many active investors fret that computer trading algorithms are poised to bleed all alpha away from human beings<\/a> 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.<\/span><\/p>\n

The Power of Intuition<\/strong><\/span><\/p>\n

Here is an example of intuition in action, drawn from my own experience:<\/span><\/p>\n

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.<\/span><\/p>\n

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: \u201cThis guy is unique.\u201d<\/span><\/p>\n

I then walk up to the young man and ask, \u201cHow was that drive up from Albuquerque?\u201d He looks at me quizzically and replies of the 59.7 mile drive, \u201cWindy.\u201d<\/span><\/p>\n

Without hesitation I say to him, \u201cYou are a health care investment banker for UBS Warburg,\u201d and then ask, \u201cWhat Genzyme deal are you working on?\u201d<\/span><\/p>\n

Shocked, the nearly speechless young man mumbles, \u201cEr, uh, how did you know that? And who the hell are you?\u201d<\/span><\/p>\n

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<\/a>.<\/span><\/p>\n

This is the power of intuition when combined with the intellect \u2014 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.<\/span><\/p>\n

Intuition Is the Partner of Intellect<\/strong><\/span><\/p>\n

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 \u2014 their consciousness \u2014 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.<\/span><\/p>\n

What Is Intuition?<\/strong><\/span><\/p>\n

I think intuition\u2019s 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?<\/span><\/p>\n

According to the Oxford English Dictionary<\/em>, intuition is:<\/span><\/p>\n

a. The immediate apprehension of an object by the mind without the intervention of any reasoning process; a particular act of such apprehension.<\/span><\/p>\n

b. Immediate apprehension by the intellect alone; a particular act of such apprehension.<\/span><\/p>\n

c. Immediate apprehension by sense; a particular act of such apprehension.<\/span><\/p>\n

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<\/a> 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<\/em><\/a>, when in reality, I think he means instinct<\/em>.<\/span><\/p>\n

Intuition in Action<\/strong><\/span><\/p>\n

So in answer to the UBS Warburg investment banker\u2019s question (“Er, uh, how did you know that?\u201d), 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.<\/span><\/p>\n