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Similarities between investing, intelligence analysis

We’ve talked before about how the analytic techniques and critical thinking that serve as the foundation of intelligence analysis are the same used by many of us in our daily tasks and across a range of professions. In particular, I am always struck by the similarities between intelligence analysis and investing.

Investing uses standard analytic techniques and critical thinking to calculate risks, organize and analyze imperfect data, and identify alternative hypotheses, information gaps, and contrary evidence. Those who invest must be forward thinking and predictive of future events when considering information and circumstances within and outside of their control. While the goal is to make money, the process is similar to an analyst analyzing emerging trends and threats or the evolution in intent and capability of a group or country.

Consider the recent announcement by Hewlett Packard that the company is planning to spin off its personal computer business unit. The stock was hammered on Friday after downgrades and doubts about its future strategy followed. Without a clear vision forward, some investors may decide to avoid investing in HPQ altogether. Others may see an opportunity to consider whether investing in this down-but-maybe-not-out company presents a potentially lucrative upside.

An investor could use an intelligence analyst’s toolbox to calculate the risk and opportunity of an investment in HPQ, crunch numbers, gather data, analyze imperfect information, and develop an analytic product of where HPQ may be in a set time frame. Could the company survive without a third of its profits from a unit that had a low operating margin? How should the statements and outlook of the company’s leaders be interpreted? Is this an oversell, or is the company heading for more trouble and the selling is justified and likely to continue?

I read a book recently that said the best traders on Wall Street only make money on fifty-three percent of their trades. It’s in their analytic techniques and risk calculation that they maximize their chances for success and, perhaps more importantly, minimize their losses. They push themselves to think smarter and act on information that indicates a favorable risk-reward. News and global events that affect the market will come and go, but tried and tested analytic techniques and critical thinking methods are constants. Intelligence analysts take note.