How Biases Creep In

Call it a crazy bad habit, I watch the financial news channels a fair amount. And being a financial news junkie I have noticed some market commentator tendencies that I believe can go a fair way in explaining how biases creep into the system by which stocks are valued. As a case in point, all through the financial crisis from October of 2008 until October of 2010, I heard commentators recommending that investors stick with shares of companies having strong balance sheets. To me, this seemed crazy. Sure, everything else being equal, picking strong balance‑sheet firms is a good idea. But everything else is not equal. Because balance‑sheet information is publically available to all, and because it is universally recognized that a strong balance sheet is better than a weak one, companies with strong balance sheets command stock price premiums. So the question is: is the premium too high or too low or exactly right? The answer could be completely different for two different strong balance‑sheet companies. A blanket statement to purchase companies with strong balance sheets, without any consideration for determining the size of the premium relative to the advantage conferred, makes about as much sense as recommending companies having ticker symbols that begin with the letter "B". But I'm not imagining it, I heard it many times.

Source: http://blogs.forbes.com/timothysiegel/2011/04/01/how-biases-creep-in/

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