You probably agree that making investment decisions rationally is better than emotional investing. But what about intuition? Is it just a form of emotional investing?
Let’s start by understanding it.
Intuition is just pattern recognition, but pattern recognition lies on a continuum.
On one end, visual or logical pattern recognition could be thought of as a gross form.1, 2, 1, 2, 1, 2…it's easy to guess the next number.
At the other end, pattern recognition is much more subtle. All your senses and mental facilities can play a part in uncovering a pattern and because there are so many inputs and no clear path to discovery, it can seem as though it arose spontaneously. That's why it can seem mysterious, or even untrustworthy.
Let’s talk for a moment about how the brain works.
Every moment of your life, your five senses are pulling in massive amounts of data. A ten second walk down the street and your nose has smelt a thousand odors. Your eyes have seen every individual blade of grass, every cloud, the details of dress of everyone you passed. Your skin has noted temperature, humidity, barometric pressure…you get the idea.
But your brain almost immediately discards most of it. It only holds on to what is important, or more specifically, what you’ve decided is important.
If you are hunting for your dinner, wind patterns, tracks and water sources are important and your brain will hold on to those details.
While you are in the process of learning, you'll be conscious of gathering information. As you become more proficient you won't need to think about it anymore. Your brain still gathers the information, but on a subconscious level. You've become what's known as an unconscious competent (to be discussed more in a future email).
So rather than a logical, conscious process that adds up information: ”I’m upwind of the water source and I can see tracks over there and it’s the middle of the day…”, you just know.
This knowing is a form of pattern recognition called intuition.
Extending this line of thought to investing, by consciously choosing to learn your brain starts to turn that barrage of data into information and that information into knowledge. Given enough time, patience and the willingness to learn from failure, knowledge turns into wisdom.
As you journey this road, you may have moments when a pattern suddenly clicks into place. This is an intuitive moment.
So the answer to the question is yes, there most definitely is a place for intuition in investing. But it’s earned, you must put the time and work in before hand - educating yourself, reading, listening, thinking critically, doing analysis. Only then will your hunches be more than whimsy. They’ll be actual, valuable instances of pattern recognition.
If you work with your own investment models you likely use excel to build them, but excel
isn’t ideal for many reasons and it costs you in other ways.
First, you need good data and it isn’t just lying around in
an easy to import format.You’re either
keying it in yourself or paying money for excel downloads.
When you need data from numerous sources – price
information, data from different statements and across multiple years - you
must merge it from multiple sheets. It's an inefficient process which can lead to data corruption.
After all this data is collected and merged, models built
and tested, the net result is one statistic for one company.A stand-alone number without context has
limited use.To be meaningful, you need
to compare it to similar companies.
This is just a sample of the challenges. You need software that overcomes
these problems and is designed for investment model creation.
Surprise! This software exists, it's INVRS. You can get a free analysis report on …
NextEra had good results relative to a group of peers in a factor-based analysis.NextEra has an appealing profitability and income profile.Its price momentum looks decent, with a caveat.Its relatively small size (a small mid-cap) coupled with its industry (renewable energy) further weight the odds that this company could be a strong performer in the future.
The Analysis Overview
I created a portfolio of stocks in the alternative energy sector, looking specifically for companies with a market cap over $1B but less than $4B. This is a sweet spot that offers strong potential for growth but is also substantial enough not to be too speculative.
It's my believe that alternative energy is on the ascendance, where as fossil fuels will inevitably decline (NextEra isn't a pure play in this regard however, natural gas assets are part of its portfolio). If you share this belief and you want exposure to this market, NextEra looks like a good bet.