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Don’t Fall Into The First Conclusion” Bias

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Abstract from “Value Investing, the Sanjay Bakshi Way” by Safal Niveshak

Let’s look at this hypothetical stock. It has substantial cash on its balance sheet. It has no debt or other liabilities which have a prior claim on that cash. It also has an operating business. But the market value of the
company is less than cash assets alone. This is a “cash bargain”.

Many of my students when they look at this thing, they say, “My God, this is not possible! How is it possible that in a market that is supposed to be efficient, you are seeing a stock selling below cash?” They want to buy it based on their first conclusions.

But under what circumstances would that first conclusion be wrong? You see, the mind does not automatically think in those terms. The mind, instead, latches on to the first conclusion, which, in this case, is that the stock is ridiculously cheap, so it must be bought.

Now, I tell my students, “Let’s force ourselves to think of three reasons why buying such a stock would be a mistake.”

The idea is to force yourself to come up with multiple reasons that go contrary to your first conclusion and only when you force your mind to
come up with three, will it generate three very good reasons.

Reason 1 – Cash burn: Maybe the operating business is losing money and cash will be dissipated away in just a few quarters. The operating businesses were burning cash at a rapid pace and it was only a matter of time when the cash would disappear. 

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Reason 2 – Corporate mis-governance: They pay no dividends, and will never liquidate the company. What’s such a company worth? This company is what Graham once called the “frozen corporation” which will
never be liquidated and will never pay a dividend. 

Reason 3 – Bubble market: When the markets are frothy, people desperately looking for value gravitate towards “cash bargains” because they are evidently cheap.

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