The consensus opinion on Wall Street and on Main Street is that investing success comes from blocking out emotions and making purely rational decisions. In this short article, I will try to convince you that this view is flawed. While there are many emotional biases that lead to investing error, tapping into certain feelings can very often also be beneficial. Instead of blocking out all feelings, Warren Buffett actually heavily relies upon at least two helpful emotional brain processes: intuition and empathy.
Intuition is not some sort of magical sixth sense. Instead, it is a complex feeling that arises from pattern recognition. Chess grandmasters usually know their next move within a few seconds. Instead of suppressing their emotions, they first utilize gut feelings regarding their best possible move depending on how the pieces are laid out on the board. The intuition is the result of years of study and practice. These grandmasters then use their reason to make sure the move is safe. If the initial gut instinct is found to be flawed, they start the cycle again with another intuitive feeling.[i] There are too many possible moves for chess to be played any other way. Many of the best investors seem to do something similar. For example, Warren Buffett does not start his investment process by comparing a bunch of possible investment alternatives. He does not heavily depend on quantitative screening tools. Instead, Buffett intuitively gravitates towards a company he finds interesting and understands. He then analyzes the company, its industry, and its valuation to determine if the investment makes sense. If it does not, he moves on to the next company his intuition leads him to analyze. If the potential investment seems safe or attractive, Buffett refers back again to his intuition regarding the management’s competency and trustworthiness. He also utilizes gut instincts with position sizing, overall market exposure, and in sensing danger. For example, he doesn’t completely analytically decide that one investment should be $1 billion while another one should be $300 million. A significant part of that decision is based on intuition.
Buffett famously advises “to be fearful when others are greedy and to be greedy when others are fearful.” This statement implies a reliance on empathy. Empathy is the ability to put oneself in another person’s shoes and feel what they are going through. Buffett’s investment choices are directed towards companies and industries where he senses others’ fear. Buffett knows that every buying decision he makes is associated with someone else choosing to sell. While it is true that feelings like fear, sadness, shame and regret can lead to behavioral biases, which negatively impact decision-making, successful investing also involves utilizing empathy to take advantage of others making these common mistakes.
In summary, Buffett shows us that investment success does NOT come from blocking out emotions. Rather, it comes through having the self-awareness to know which feelings are helpful and which are hurtful to your decision-making process. It also requires the deliberate cultivation of relevant intuition. Just like a chess grandmaster, Buffett’s intuition did not develop overnight. It is the result of years of experience and study. Finally, success depends upon developing the social awareness to be able to recognize when others ARE making mistakes because of some of their emotions.
There is much more on how to successfully develop and safely utilize intuition and empathy in my book titled, The Emotionally Intelligent Investor: How Self-Awareness, Empathy and Intuition Drive Performance.
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[i] Garry Kasparov, How Life Imitates Chess: Making the Right Moves – from the Board to the Boardroom (Bloomsbury USA, Reprint Edition 2010).
Note: Please see the Disclaimer associated with this Blog. I have never met Warren Buffett. The above text is my own opinion.