THE PERFECT STORM 81After all, if you had all the information, you wouldn’t need
an intelligence service; a smart college kid could do the job.
The reason you have intelligence analysts is to fill in the blanks
and try to make sense of the puzzle even when a number of the
pieces are missing.
The CIA is divided into two main branches — the clandes-
tine service and the analytical branch. The clandestine service
is the “collector.” They recruit spies and gather information
from hard-to-get places. The analytical branch takes the infor-
mation provided by the collectors and tries to connect the dots
and draw actionable conclusions to deliver to policymakers up
to and including the president.
The same is true in financial analysis. You may have a lot
of information, but you always need more. Some of the most
important information is buried inside company management
or the Federal Reserve boardroom and not easy to get to. As an
investor, you can’t afford to just throw up your hands. Guessing
is usually a bad idea. You need an analytical method just as we
do at the CIA.
One of the most powerful tools we use in the intelligence
community goes by technical sounding names like “causal in-
ference” or “inverse probability.” These are methods based on
a mathematical equation known as “Bayes’ theorem.”
Basically, you form a hypothesis based on experience, com-
mon sense and whatever data are available. Then you test
the hypothesis not by what has happened before, but by what
comes after.
Instead of reasoning from cause to effect, you reverse the
process. You watch the effects to determine the cause. This will
validate or invalidate the “cause” you have hypothesized.
Sometimes the effects contradict the hypothesis, in which
case you modify or abandon it and adopt another. Often, the
effects confirm the hypothesis, in which case you know you’re
on the right track and keep going.