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The right-brain investor

As technology advancement over the past few decades allow us to peer into our brain to gain better insights, this has delivered a far-reaching benefits onto fields such as behavioural economics and spirituality, fields which seems unrelated at first sight.

In A Whole New Mind, Daniel Pink wrote:

“Scientists were curious about what was going on in the brains of people who have developed an almost superhuman capacity for meditation and spiritual transcendence…they began sliding monks into MRI machines to capture images of their meditating brains and to make new insights into emotion, attention, mental imagery, and other cognitive capacities.”

How the brain works require the endeavor of many books however we will focus on the left and right brain for this post. In simplest term, our left brain process the academic side of our thinking such as logic, analytical, systematic, detachment, exactness, attention to detail, fixed rules independent of context. While right brain looks after creativity, empathy, holism, attunement, synthesise and etc. So we always heard how artist are more of a right thinker, whereas someone who works in the profession of accounting is more of a left thinker.

I use the word ‘more of a’ because we cannot be an either/or person, unless we have injuries that impaired one side of the brain. Our left brain relies on the right to comprehend a humour as much as the right brain relies on the left to carry out a set of rules systematically. Our mind are constantly relying on both sides of the brain to work together and making sense of things.

When it comes to investing, we tend to think that being a left thinker can give us an edge compare to a right thinker. And it isn’t hard to see why. Since the left side governs logic, analytic, systematise and other thought processes, they are vital to tasks such as analysing numbers in the annual reports; uncover investment opportunities through attention to details; systematizing decision-making process and the ability to think rationally & detach oneself from any potential psychological bias.

In saying that, as more scientific research gave us insight into how both sides of our brain works together, we begin to appreciate more how our right brain can complement the left side and play its role in helping us to become a better investor.

Investing is part art and part science.                                                                   Investing is inherently difficult because we are dealing with a complex system in nature – the stock market. It is a system that involves many players interacting with one another. These players are constantly being influenced by all sorts of emotions such as fear and greed that creates uncertainty.

This applies to the context of trying to value a business as well. It is nearly impossible to assign an exact price tag to a business due to the complexities of macro and micro forces affecting the business. On a personal level, investors have to deal with the nature of incomplete information. And this is when we need the art of being inexact. A right brain trait.

The art of being inexact means it pays to know you are roughly right than precisely wrong. Instead of coming up with a precise figure, come up with a range, take the lower bound and apply a margin of safety to it.  Being precise can sometime lead us into having a false sense of security that results in us taking on more risk. As it is sometimes the case with financial modelling. This also reminds me of Jon Krakauer’s Into Thin Air. He explains that as mountaineering equipments improves in reliability, it entice more amateurish climbers to push for more risk thinking that they have all these oxygen canisters and equipments to fall back on when disaster strikes.

The big picture                                                                                                          Instead of spending too much time analysing and crunching numbers, one can better understand a business by looking at the big picture and differentiate the important from the irrelevant.

Moreover, more information and knowledge does not necessary lead to better decision-making. Shane Parrish from Farnam Street wrote a post on how process is more important than analysis. And again, gathering more information can lead to an increase in confidence without necessary improving your odds of winning.

William Thorndike explains in The Outsiders how these unconventional CEOs focus on a few key variables, taking a big picture approach when making decisions.

“The outsider CEOs believed that the value of financial projections was determined by the quality of the assumptions, not by the number of pages in the presentation, and many developed succinct, single-page analytical templates that focused employees on key variables.”

“This single-minded cash focus was the foundation of their iconoclasm, and it invariably led to a laser-like focus on a few select variables that shaped each firm’s strategy…they disdained the false precision of detailed financial models, focusing instead on a handful of key variables: market growth, competition, potential operating improvements, and, always, cash generation.”

Taking a holistic view forces us to questions what are the few key variables that are vital and ignore irrelevant data that does not add value to our decisions. Peter Bevelin in Seeking Wisdom stresses the wisdom of simplifying things and always think with a purpose in mind – “What do I want to achieve or avoid?”.

Sanjay Bakshi, a professor at MDI and a long time investor, recently wrote a short post on how empathy can help investors gain more insight into a business. Empathy is the reflection of holism. By practicing empathy, we tried to understand and view things as a whole. Taking a synthesizing approach rather than reductionism.  Not to mention that empathy is a vital relationship skills that can improve other areas of our life as well. So how can we be more empathetic? Listen to other, be more attentive; Be curious, get interested; Stepping into others’ shoes. You can read more in Roman Krznaric’s Empathy: Why it matters, and how to get it.

Draw to think differently                                                                                                  Betty Edwards who authored Drawing with the right side of your brain, teaches people how to draw, but that’s just the surface.

Drawing engaged our creative side and teaches us how to see things and perceive.  Creativity and imagination starts with perception. Perception has a great influence on our thinking, thus you can say that drawing indirectly teaches us to see things from multiple perspectives, which is an essential skills to become a critical thinker. Or having a second level thinking as Howard Marks puts it. Second level thinking goes beyond the obvious and question conventional wisdom and our own assumptions. It is through this process of thinking that lead us towards asking the right questions and question what matters.

Make no mistake, we still need our left brain to perform plenty of important stuff not mentioned in here. Nonetheless, if we are able to appreciate what our right brain can achieve and come away with the idea that the whole (left x right) is greater than the sum of parts, I believe it will give you an edge over others, be it in investing or in life.