Actionable Information

They call him Jesus. He must be a God to win five World Series of Poker bracelets with his live tournament winnings exceeding 7.3 million dollars. You would expect him to be an astute reader of faces who can look at your face and tell if you are holding an ace. But he is very different.

Chris Ferguson(Jesus), is a PHD in computer science(on virtual network algorithms). His game is purely mathematical and strongly based on game theory. That must have made his dad, a game theory professor, a proud father. He is not to leave his mom unimpressed for he can cut bananas, carrots and water melon with playing cards!.

I’m telling you about Chris due one very important difference in his game. All good poker players(counting myself in!) know how to make an intelligent guess on the cards their opponents are holding. They can read situations, thoughts and yes, faces. At the same time, their own face doesn’t give any clue on what’s going on in their mind. They have what you call a poker face. Chris, however, doesn’t like to look at his opponents. He wears a big hat, keeps his head down and watches only the cards and bets.

That’s surprising because one would think he is missing out on an important source of information. But his record speaks for him. He says that at the highest level of poker, no player would give you a reliable tell. (A tell in poker is a subtle but detectable change in a player's behavior or demeanor that gives clues to that player's assessment of his hand. Examples include leaning forward or back, placing chips with more or less force, fidgeting, direction of gaze etc). Most of the times, the opponent is deliberately giving a tell to confuse you. Chris relies solely on mathematics and his game theoretic analysis of the game. What he is essentially saying is that although you can try to guess, the information you get from the tell is not actionable.

Let’s come back to investing.

May 14th 2009. Most exit polls in India are predicting a hung parliament and weeks of uncertainty while political parties cobble together a weak coalition. You know that such a thing will be a sure disaster for the markets reeling under constant flow of bad news on economic front.

You know that the markets have been extremely volatile in recent past and all the gains of past 3 months can be wiped out in few days. What do you about the stocks you are holding? Why not sell now and wait for clear picture to emerge. After all, the markets don’t look that cheap at this juncture as they were few months ago?

Many analysts suggested this course of action. Many investors sold in a hope to buy back later at half the price. I would never think along these lines. The reason is that the information coming out from the exit polls is not actionable.

Figuring out which information is actionable and which is not, is a key part in decision making under uncertainty. Investing in stocks is a problem that involves decision making under uncertainty and investors will do well to understand this concept.

Actionable information means that you have got an information which has (a) reasonably high chance of being true and (b) reasonably high chance of affecting your interest if it turns out to be true. There is a cost involved in taking action in a hurry and that cost plays an important role in deciding what to act upon and what to ignore.

To give you an example, I ignored the news from exit polls completely because

  1. The information was unreliable. I’ve seen more exit polls going wrong about the results than those hitting the bulls eye.
  2. Even if the information is correct and there is a hung parliament, there is no direct impact on the worth of businesses I’m invested in.

There are many scenarios where the exit poll results, even when they turn out to be true, may not affect me. For example

  1. Given the era of political opportunism we live in, there can be unlikely alliances which can result in a majority government.
  2. Even if a minority government is in place, it may remain stable until some parties are willing to go to the polls again.
  3. Even if government is weak, it may still be good for the economy by letting the free markets decide the right course of action.
  4. Even if the economy is hit, my business may not suffer that much.
  5. Even if my business is hit in short term, the stock price of my companies may not fall because the investors see the bright long term prospects.

As you can see, there is a long and uncertain casual chain between the hung parliament and my stocks falling in value. At each step there is an uncertainty whether the cause will have the effect you are worried about. This reasoning has a mathematical basis. If a fact p implies another fact q and q implies r and r implies s, then you can deduce that s is true if you know the fact p is true. This information is actionable.

However if the causality is uncertain, you have to put a confidence factor. For example, suppose I’m planning to host an event, outdoors, on an evening in July. My friend who works at Indian Met department tells "You know that in any given day in July, there is 60% chance that it would rain in Bangalore. And in a rainy day, there is 40% chance that it will rain the evening. Are you sure you want to do it outdoors?"

I know that hosting the event indoors will be costlier but I’m scared of rain playing a party pooper. Are my fears justified? Think about it.

I don’t need to tell you about reliability of the Met department. On top of that my friend may not be having correct data or may just be spicing up his advice with data to show of his knowledge. Even if he’s correct, there is only 24% chance that it will rain on the same evening that I plan to host the event.

His information is not actionable given the cost of acting upon it. I’ll ignore the rains.

Coming back to elections. Results are out. We are heading for another stable government. It’s business as usual. I own the same stocks that I have been owning for years. For those, who sold their stocks, there may not be another chance on Monday to catch the same bus again.


Anonymous said...


Sir I am a regular at your blog and had also written a email to you about my queries which you also have posted on this blog for other ppl's benefit. However, I am still stuck on the part about where you get the authentic financial info abt cos. and how you go about valuing those! I believe if I don't get off with these things than I will never be able to build a sort of a mental library over the time to help me in my decisions about investing.

Pls. look into my request and I would be more than happy to hear from you and appreciate if you mail me on

Hoping to hear from you.

Ankit Shah

Kamlesh Pandey said...

The best source of authentic financial information about a company is their annual reports. You can find them at company websites or at NSE website. For analyzing a large number of companies, you can get the preliminary data from finance portals like ICICIDirect,,, economictimes etc.

Valuation isn't easy because there are no mathematical formulas. You can read about what various financial parameters and slowly you will learn how to measure the value.

You can check online resources such as one given below
Investing basicsor read books on value investing(you can find reviews of some here at UV).
I would recommend the following books by Graham
1. Interpretation Of Financial Statements
2. The Intelligent Investor Blog Search Engine blog catalog EatonWeb Blog Directory Bloggapedia, Blog Directory - Find It! Blog Directory Directory of Investing Blogs Blog Listings Superblog Directory