Contributed by: Aneek Saha, CFA
The IAIP Bangalore Chapter hosted Jason Voss, CFA Content Director, CFA Institute (previously portfolio manager, Davis Appreciation Fund) for a session on the role of creativity and intuition (right brain activities) in generating above average return on assets. Jason has explained his theory and understanding in his book ‘The Intuitive Investor’.
The discussion was divided into three main parts:
- Right Brain Thinking And Its Importance
According to Jason, the term ‘future fact’ is absurd. A fact is something in the past such as the results of an autopsy of a dead body or Financial Statement analysis that studies the historical results of a company.
Investing, however, requires one to predict the future. Hence, basing an investment decision on mere facts (past information) may not be appropriate and always yield the best result. Investing, to him, is much more than fact-based analysis. It involves the right brain activity. What he found surprising is that very few investors use creativity and intuition and hence are able to consistently generate alpha.
Most fact-basis analysis are performed using mathematical and financial tools and the left brain is adept of dealing with using such tools. On the flipside, using just the left brain activities can lead to analysis-paralysis i.e Inability to take decisions in situations that are complex or that have excessive or inaccurate information because of the inability of the left brain to differentiate between the essential and the non-essential information. Jason opined that the right brain can be used to creatively formulate the Investor Policy Statement and to invest intuitively.
So what is the right brain good at? The right brain possesses the following attributes:
- Ability to understand non-linear relationships.
- Holism and Wholism: Holism refers to seeing interconnections between different data sets while analysing large amount of information and Wholism refers to the ability to see the bigger picture and hence, enables one to ask the right questions.
- Creativity: which essentially means formulating a strategy that is unique, a pre-requisite for generating alpha.
- Generate new ideas
- Ability to identify information that is relevant and that is not.
- Quantifying risks amidst high levels of subjectivity.
- A Model of The Human Mind
Human cognition is a function of two main components: Intelligence and Wisdom.
Intelligence is the intellectual maturity in dealing with situations and it has three aspects: Knowledge, Memory and Creativity. Knowledge and memory are the foundation for effective thinking. Creativity enables one to identify facts to focus on, and to ask the right questions.
Wisdom can also be sub-divided into three major components: Sensation,Non-attachment and Intuition.
Sensation is the ability to connect with reality. Sensation is the starting point for thinking as if one doesn’t feel things, one doesn’t think further. Non-attachment is being unbiased i.e. seeing the world as it is and not having a blurred or a biased vision. Intuition is something flashes to the brain when one connects the dots. When sensation is coupled with intuition, it equips one with the ability to identify when something is new, different or weird i.e. notice anomalies.
- Accessing the right brain.
The right brain can be accessed through the following ways:
- Practicing meditation: Meditation helps one tap ones sub conscious brain. There are three types of meditation: Focussed Meditation (4-8 Hz) theta waves, which is accessed by chanting mantras, Open Awareness (4-8 Hz) which is achieved by having no focus on thoughts and Visualization (30-70 Hz) gamma waves.
- Doing what rejuvenates you or bring to mind an occasion one felt awe.
- To maintain a diary of the decisions one made. In general, the analyst is left in a situation to decide and act amidst numerous choices. Generally these decisions are made and forgotten. Jason recommended recording these decisions and then tracking how these decision play-out in reality on a periodic basis. This exercise would give the analyst valuable practical feedback and experience.
To summarize, mastering right brain thinking is critical to gain competitive advantage and generate alpha.