In our view, opportunities are created by emotional investors who are more concerned with market risk than business risk. We believe that short-term price movements are typically driven by hope or hype — reactions to recent news or events that are irrelevant to a company’s long-term prospects. As typical investors react — or overreact — to news, a company’s stock price becomes disconnected from its underlying fundamentals. By focusing strictly on the fundamentals, we identify companies with inherent value. Buying the stocks of these companies is value investing in the most classic sense.

We believe that the value opportunity is best explained by practitioners in the field of behavioral finance, who have shown over and over again that human beings are emotional creatures who tend to:

• overreact to near-term events
• misjudge probabilities of what will happen in the future
• have misplaced confidence in their own ability to predict outcomes