• 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