A period of financial distress occurs when the price of a company or an asset or an index of a set of assets in a market is declining with the danger of a sudden crash of value occurring, either because the company is experiencing increasing problems of cash flow or a deteriorating credit balance or because the price had become too high as a result of a speculative bubble that has now peaked.
In this regard, investors such as Buffett who have successfully used the Graham approach should expect to spend extra resources to have better information about the companies or assets they purchase compared to most agents in the market.
A study that shows that the Graham approach may well do better than various other alternatives (such as the “three-factor theory” that Fama and French, 1996, have argued performs better than the EMH), is Xiao and Arnold (2008).
This idea can be related to the earlier issue in that presumably why the Graham approach might not do as well as such alternatives as MPT or EMH is that it does not satisfactorily account for the risk of such bankruptcies.
This analysis was adopted by Charles P. Kindleberger, who in Appendix B of the 4th edition of his book, Manias, Panics, and Crashes (2000) identified 37 out of 47 historical bubbles as exhibiting such a pattern, including most of the more famous ones.