Of Discards & Bargains

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2 fundamental reasons why a Bargain gets created :

  • Human Emotions/Biases affecting the market to create a bargain.
  • Man-made constraints or the Institutional Imperatives affecting the market(the institutions in particular) to create a bargain.

Specifically, the two biggest biases which affect both individuals and institutions are:

  • Social proof, herd-behaviour bias.
  • Short Time Horizons and the Recency Bias.

As a result, institutions are:

  1. Trend ‘extrapolators’
  2. Not good at normalizing earnings.

Always ask:

  • why are the same biases not affecting me?
  • why are the same imperatives not affecting my institution?

Here is a short list of instances which can cause a company to becoming a discard.

  • Hit a Market Cycle – Trough. Pessimism and fear all around. Think q4 2008 financial crash, 2000 tech crash.
  • Trough of a cyclical industry – Wrong time in cycle to buy this kind of business : advertising, credit, homes, autos
  • A Dip or a Trough in a company’s path. Huge, one-time problem (think American Express Salad Oil scandal)
  • No analyst coverage. Ignored by the big boys, the Institutions. Ugly, too small.
  • Goodwill write-downs and restructurings cause reported losses when actually making money.
  • “Too much uncertainty”.

Husain Kothari
March 30th, 2012

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