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:
- Trend ‘extrapolators’
- Not good at normalizing earnings.
- 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”.
March 30th, 2012