April – June 2007

July 26, 2007

Whilst at this level of the market, it is difficult to come across a gem of an investment idea, I did come across a gem of a book, “The Psychology of Intelligence Analysis” by Dick Heuer. It is available freely on the net, thus having the most important attribute for a value investor (even if it was priced, it would have been of immense value!). Whilst the book is written for CIA intelligence analysts, it is equally valid for market analysts.

Dick Heuer writes about the cognitive challenges that analysts face:

1. The mind is poorly “wired” to deal effectively with both inherent uncertainty (the natural fog surrounding complex, indeterminate intelligence issues) and induced uncertainty (the man made fog fabricated by management statements and corporate governance issues).
   
   
2. Even increased awareness of cognitive and other “unmotivated” biases, such as the tendency to see information confirming an already-held judgement more vividly than one sees “disconfirming” information, does little to help analysts deal effectively with uncertainty.
   
   
3. Tools and techniques that gear the analysts mind to apply higher levels of critical thinking can substantially improve analysis on complex issues on which information is incomplete, ambiguous and often deliberately distorted. Key examples of such intellectual devices include techniques for structuring information, challenging assumptions, and exploring alternative assumptions.

Throughout the book, Heuer is critical of the prescription of “more and better information”. He believes that greater attention be paid instead to more intensive exploitation of information already on hand, and that in so doing, analysts continuously challenge and revise their mental models. It is hard not to quote Voltaire here: “Doubt is not a pleasant state, but certainty is a ridiculous one.”

Another book, a biography of Albeit Einstein by Walter Isaacson (which was recommended by Mr. Munger at the recent Wesco AGM, which I had the privilege of attending) and which I’m currently reading, discusses some of his traits – “his casual willingness to question authority, his sassy attitude in the face of regimentation, and his lack of reverence for received wisdom” – traits that I believe are necessary to be a good investor.

The valuation discrepancy between the top tier stocks and their smaller brethren is widening – the usual answers seem to be the gushing liquidity and the behavioral propensity of fund managers to herd. At Jeetay, we continue to look for the unloved and the cheap. We are not seduced by the immediate expectations of profit growth, but by the solidity of the asset values and the asking price – the lower, the better! We believe that these are not propitious buying conditions and we are exercising due caution.

Should there by any questions or clarifications that you seek, please do let me know.
  
Thanking you,

Warm Regards,

Chetan Parikh