Value Is Not In The Eyes Of The Beholder 24. November 2011 Rahul value investing (0) When financial markets go through large dislocations, people buy and sell (mostly sell) for a wide variety of reasons. Most of the time, these reasons have nothing to do with the underlying fundamentals of the asset but everything to do with the fundamentals of the owner of the asset. Examples include redemptions, margin calls, regulatory trouble, change in leadership etc. Many times these dislocations throw up fantastic opportunities. Obviously, there are companies that have large funding requirements (debt and equity) and dislocations in the price of their securities (externally driven albeit) can itself cause a change/damage to the fundamentals of the company. The company could then be forced to raise capital in the most unfavorable circumstances. At a larger level, a severe dislocation in financial markets can cause an economic downturn (local and global) that can impact the business of the underlying company adverseley. However, often in such severe situations, the price of the company's security falls substantially more than the deterioration in its business warrants. Notwithstanding the above, exaggerated price falls in fundamentally sound companies are opportunities to buy. Most investors seldom take advantage of these dislocations (which is what allows them to propogate in the first place). The reason is that in the middle of a financial storm, buying requires tremendous conviction and courage ... and of course CASH. The other big reason that investors don't buy is because people hate to be wrong almost as much as they hate to lose money. And when they manage other people's money, the only thing they care about is being right or wrong. And to them, when the price of a stock falls after they've purchased it, they consider themselves wrong. People will often quote maxims like "never try to catch a falling knife." Such maxims do huge disservice to investors. It is an acquired ability to buy when a security is falling for wrong reasons and to hold fort as it continues falling. As they say the only people who buy bottoms and sell tops consistently are called liars.