Monday, September 10, 2018

Is There a Place for Intuition in Investing?

We're constantly on the lookout for patterns.

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.

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