Garrett, Tom and Tom (Pittsburgh) are cranking on Cognizant Technologies (CTSH) and have landed on a question of epistemology - what can we know. I promise I won't go all philosophical on y'all and crank up my Bachelors in Western Philosophy ... wait a sec ... maybe I will.
There are two fundamentally opposed schools of philosophy about what we can know. One says that the whole world is an illusion and that knowing the real things requires a state of enlightenment which you most definitely are not in. That's Plato and the Hindus. The other one says the world is real and can be known but only if you get real rational about when you know something and when you don't. That's Aristotle and Ayn Rand. Since experimental physics and logic have been so successful in determining the truth of physical things in the world, the idea that you can figure out what you know about the world by just thinking about a thing has been left in the dust bin of history. Except for investing.
Investors are constantly looking for a short cut to true knowledge. Does 'I had a feeling about that stock" sound familiar? It should. When I ask people why they invested in something I hear it all the time. Feelings about a thing are so much easier to come by than actual knowledge.
President Obama gave us a great example of the victory of feelings over reality during the campaign. He was shown the evidence that whenever the capital gains tax on investment has been lowered, tax revenue on the rich went up and whenever it is raised, tax revenue went down, and then he was asked point blank why he supported raising capital gains taxes if he wants more tax revenue. His answer was that it was more fair. Can you see his emotions about what's 'fair' overwhelm his rationality? He wants more revenue and he wants to make the rich provide it because in his mind its more 'fair'. An seemingly obvious target is to raise taxes on long term capital gains since its the rich who benefit from the low capital gains tax rate. But experience shows that the tax revenues go down and the rich pay less, not more. He locked himself into a point of view that is irrational. (Maybe he got real with this and gave up on it because his new proposal is to simply add a 5% tax on all income over $1 million.)
The point of this is that people can get committed to a world view that isn't about the facts, its about what we want to believe will happen. What should happen. We can only prevent that by sticking to our Aristotelian guns and demanding of ourselves that we be rational and, most importantly, know when we do not know.
The problem with CTSH for me is that I don't know the industry very well. I can tell you they must have a good moat from looking at their numbers but what the heck is it? Brand? Scary niche in tech. Its very easy to find brands in tech that were not durable. Secrets? Not likely. Toll Bridge? Too much competition. Price. Likely. But that can't be all.
They have to have a Switching moat, no? They get in there, do stuff at a price, do a good job and get invited back. When they come back they do a good job and get invited back again. Pretty soon, there are a bunch of IT things going on that they know about better than anyone. And now, the company is hooked. It will be very painful to cut CTSH off and go with Accenture because the new guys will have to figure out what the old guys were doing and that is going to waste a lot of time and money. I think they may have a good moat. But I'm not that sure about it. This is me doing the Plato thing and trying to think about the world instead of doing the Aristotle thing and go out there in the real world and find out.
To get right about CTSH I'd suggest you ask their customers why they like them. Ask their competition why they can't beat them. Go visit their offices and find out if they work like you think they work. I can do that at a grocery store like Whole Foods or at a tech company like Apple. And I have to. And if you really do want to not have a major screwup on a stockpile, you have to do it on CTSH, too.
What are you looking for? Same-o, same-o; do you really understand the industry, are you sure they are durable, do you love the CEO, what's it worth. 4Ms.
Now go play.
