The brain has a amazing ability
to contemplate based on the sensory stimuli that it receives which it then
matches with the memories that it has stored to arrive at a suitable
response to the stimuli. This is common across all species and with us homo
sapiens. The human mind however differentiates itself with other species in its
ability to contemplate itself contemplating over something. This particular
repetitive quality or as we popularly call it second order thinking, is to
quote Prof Ramchandran’s talk on Ted the “Holy grail of Neuroscience”
One of the interesting aspects of
second order thinking is its ability to have a slightly more rational approach
as it analyses the relatively emotional reaction of the first order
thinking. But to quote Yogi Berra “In
theory there is no difference between theory and practise. In practise there
is”.
So let me come to a practical experience
that I went through last month. I had bought Hero Honda about a year and half
back at around Rs 1400 . This was the phase post the break up with its
erstwhile partner Honda and the market had turned bearish on the stock with the
outlook for the company appearing bleak. I had at that point tried to sit back
through the clutter, think through what were the key success variables in the
two wheeler business and what value did Hero bring to the table. Though the
market was focussing on the technology front, my thoughts led me to believe
that the key differentiator ( beyond the brand/ positioning etc) that Hero
bought on the table was the distribution strength that it had and the
associated mindshare. Having looked at the past instances and examples of
Bajaj & TVS, technology was
available off the shelf, maybe costing 400-500 crores which could be acquired
and a product portfolio built in 2-3 year horizon. But building distribution
especially rural distribution was a challenging task.
Fast forwarding and having
collected about Rs 150 ( 70+35+45) of dividend along the way and missed
opportunities to sell the stock at 2200 ( I got greedy :-)), I started pondering
last month over how the business environment had evolved over the last one
year. The company had moved forward on executing the technology gap by acquisition/
tie-ups and has progressed on taping the export markets. Couple of things have
happened which made me start looking at a exit. The domestic market had slowed
down and Hero was finding it difficult to grow on the large base that it had,
coupled with slowdown in the export markets resulting in a relatively delayed
launch in the export markets. But most importantly its erstwhile partner Honda
has been making progress and gaining marketshare at a pace which to be honest I
had not anticipated.
This is where something
interesting happened. As my brain started formulating this line of thought, I
began to notice from my comforts of my car that more and more newer bikes and
scooters that appeared on the road were largely from Honda and to a certain
extent Bajaj. My scanning eyes would rarely notice a Hero bike or scooter.
My second order thinking was
telling me that this was clearly availability bias coupled with reinforcement
bias playing out where the brain was scanning for data to confirm a decision
that was already taking shape in my mind. It knew that Hero’s strength was
largely in 100 cc segment and it never had a strong foothold in the urban
landscape where the competition was stronger. So logically the second order
thinking should have prevented the first order thinking from garnering any
fresh data points. But to the surprise of my second order brain, I was still
not able to stop looking out of the car window trying to notice the increasing
number of Honda vehicles on the road. Though I was rationally able to think
that I was being irrational, it didn’t help take away the irrationality.
I did finally sell Hero Motocorp
around the 1950 levels and exited the position. Till date my third order
thinking is not able to reconcile the inability of the first and the second
order thinking to merge together. If all this sounds confusing, well it
reflects the confused state of my mind :-).
