Reviews of Malcolm Gladwell's new book,
Blink: The Power of Thinking Without Thinking , have almost universally focused on the somewhat less than eye-opening claim that going with a hunch sometimes beats taking more time to think and decide. Decisions made in a "blink" can be better than decisions made after pondering piles of evidence and sifting through conflicting scenarios. In sports, investing, even dating, sometimes the first instinct is the best answer. But what most reviewers have missed, perhaps because of the book's upbeat subtitle, is that the most important conclusions in the book actually warn against relying on intuitive decision-making. Read carefully, Blink is more a cautionary tale than a call to arms. And in that way, it's unlike Gladwell's previous bestseller, The Tipping Point , which offered positive insights about how fads are born and trends spread. Two important lessons for investors leap to mind, though Gladwell himself doesn't discuss finance much beyond a brief anecdote about George Soros. First, be wary of people explaining their success. And second, while intuition is a snap judgment, the basis for such accurate quick decisions often comes from years of experience and hard work. An anecdote in a chapter called "The Locked Door: The Secret Life of Snap Decisions" provides the first lesson for market players. People with the ability to make intuitive decisions with great accuracy in a particular context -- such as a top-notch bond trader or fighter pilot -- cannot truly explain how they are making those decisions. The subconscious, where intuition lives, is just that -- below the level of conscious thought. Gladwell provides the example of professional tennis coach Vic Braden, who realized while watching tennis matches on television that he could predict with uncanny accuracy when a player was about to double fault. "I would lie in bed at night thinking, 'How did I do this?' I don't know," he tells Gladwell. "It drove me crazy."
Of course not everyone shares Braden's sense of humility, and hence we get the spectacle of successful traders and fund managers explaining their strategies. Somehow, following their advice doesn't always seem to work out as well for the rest of us. In the Soros story provided by Gladwell, for example, the legendary hedge fund manager's son Robert says that his dad always had an explanation for all his trades. But in truth, the genesis of many trades was a severe backache. "The reason he changes his position on the market or whatever is because his back starts killing him," the younger Soros says. "He literally goes into a spasm, and it's this early warning sign." It's an experience I can relate to after having interviewed dozens and dozens of fund managers over the years. Last spring, I was interviewing former ( FMAGX) Magellan fund manager Peter Lynch at his modest office just down the street from Fidelity's equity operations. Lynch still invests for himself and coaches new Fido analysts and managers. He explained some of his research-oriented investment strategies that involved company-specific, industry and macro factors. And yet one anecdote seemed far more revealing. Some years ago, when he still ran Magellan, Lynch was visiting with the management of Sears ( S) and was told that carpets were selling quite well. Did he go back to his office and do a four-day work-up on the carpet industry? Nope, he excused himself to go to the bathroom, called Fidelity's trading desk and had them buy positions in the retailer's seven biggest carpet suppliers. "Before sunset, I was in carpets," he said. Lynch may know that acting on instinct alone, even with great long-term results, isn't enough in the investment business, where customers -- especially big pension funds and endowments -- want to hear some intellectual backing.
For example, ( LMVTX) Legg Mason Value Trust manager Bill Miller, whose long-term record is among the very best, has said he had trouble getting institutional investors on board until he developed a concise explanation of his style -- it's all about behavioral finance theory and the market's misgauging of some companies, he now says. That style led Miller to buy beaten-down stocks like Tyco ( TYC) alongside fast-growers like eBay ( EBAY) and Amazon.com ( AMZN). To help explain his unorthodox strategy, Miller even went so far as to hire Michael Mauboussin from CS First Boston as "chief investment strategist." But Mauboussin doesn't tell Miller how to invest. Asked at a press conference at the time of the hiring what would happen if his view on a stock conflicted with Mauboussin's, Miller quipped: "I didn't hire that kind of strategist." Instead, Mauboussin writes lengthy think pieces that seek to illuminate the way in which Miller and his team make decisions with plenty of statistical and academic evidence. The fact that the essays come out long after Miller has already taken positions might make a cynic wonder if Mauboussin's role as "strategist" is mainly to provide intellectual hand-holding to the fund's more traditional investors and prospective ones. The second cautionary theme for investors comes from chapters in Gladwell's book about subconscious biases that can deeply mar intuitive decision making. Warren G. Harding, generally reckoned to be one of the worst U.S. presidents, was elected because he looked and sounded "presidential," not because he possessed the actual qualities needed to run the country, Gladwell notes. Helping Harding was the American prejudice in favor of tall men. Before Bush beat Kerry last year, the taller candidate had won the popular vote in all but two presidential elections since 1888. This is exactly the kind of subconscious bias that investors sometimes suffer. People sometimes avoid selling losing stocks because they don't want to concede an error or feel regret, as University of California professor Terrance Odean has
written. People also do a terrible job estimating probabilities.
How to counter these biases? That's not a focus of Gladwell's book. Investors with a behavioral slant try to ferret out where biases are affecting stocks. Princeton professor Daniel Kahneman won a Nobel prize for his research in this area and has links to interesting papers on his
Web site. Keeping accurate records of trades made and trades considered but rejected ought to be a mandatory part of any investor's self-training as well. On a final note, even though Blink is a scant 265 pages, it has the feeling of being stretched a bit too thin in places. What might have been two or three fascinating articles in The New Yorker can get a bit tedious and repetitive at book length, especially the final couple of chapters on the flaws of consumer preference surveys and police shootings. But on the whole, Gladwell has compiled again a largely fascinating if anecdotal series of essays that are nothing if not thought-provoking -- at least if you can get beyond your first impressions.