In buying low PE stocks, beware of value trap

[Temperament]

There are actually so many ways to pick a good stock that the more ways you know the more confuse you may be.
So now for me is the NO. 1 thing is WB's Rules No. 1; Rule No.2 refer to Rule No 1.
Even trying to follow these 2 rules, we may use different criteria or variations.

[pianist]

for me, i will avoid counters with 'dbs' being their principal banker - another personalised way of picking stock.

[CityFarmer]

for me, i will avoid counters with 'dbs' being their principal banker - another personalised way of picking stock.

That is rare, any specific reason?

Personally if i want to chose a bank for loan/business, i will always chose OCBC. It has been a family tradition...

[Temperament]

A magic formula to select stocks? Reminds me of the 'The Little Book That Still Beats the Market' by Joel Greenblatt. IIRC, uses P/B + Yield to screen, very much like what Ms Teh is doing with PE. Interesting read but never did get down to trying it out as too lazy...

PS. Available in the library and very easy to read as it was written so that even kids can understand.

Main point- our markets may still be (or were, in the case of Teh Hooi Ling's data) at an early stage such that these worked but if it catches on (and you know how these things are once it's published in the newspapers) then expect its effectiveness to decrease alot. Especially for those with short-term horizons.

And he did mention why his magic formula can still beat the market 5 years after his first book on the little book that beats the amrket

"Unfortunately, those great long-term returns came with plenty of bumps, including some not so short periods of losses and underperformance. But once again, if the formula worked every day, every month and every year, everyone would follow it and it would be ruined. Fortunately, it's not so great, and as a result I strongly believe that long-term investors should continue to benefit from the magic formula for many years to come."

"That’s why we’re so lucky the magic formula isn’t that great. It doesn’t work all the time. In fact, it might not work for years. Most people just won’t wait that long.Their investment time horizon is too short. If a strategy works in the long run (meaning it sometimes takes three, four, or even five years to show its stuff), most people won’t stick with it. After a year or two of performing worse than the market averages (or earning lower returns than their friends), most people look for a new strategy— usually one that has done well over the past few years!" pg 74

Without the appropriate investment timeframe, temperament and emotion control, the magic formula will still be useless

Ms Teh's backtest is done over 22 years

i think i can understand what you are saying or trying to say. i have been staying in the market for 24 years already; not doing too bad & not doing too good either. Or else i can leave the market and laugh all the way to the banks.
May be you can also say or think i am still hungry or greedy. Greedy if you think unkindly of me?
Shalom & Amen.

[corydorus]

I tend to agreed that Magic formula works better when people isn't looking and such model aren't easy to follow so it will stay true for long time. Most people are busy chasing after HOT stocks till they are over-valued and subject to extremities.

[weijian]

Value traps are probably the curse of value investing. In a way, they are part and parcel of value investing, ie. they are a feature, not a bug... If one looks for value, one inevitably dwell into the unknown mine of value traps. It takes some serious skepticism and street smarts to learn how to minimize contact.

Taking (slight) issue with Graham's "weighing machine"; and unpacking "intrinsic value"

However, a problem emerges when there is no such connection/transmission mechanism between intrinsic business value and the underlying stock price because there are no distributed cash flows, nor any reasonable likelihood of them. This is a problem that has manifested in many value stocks in markets such as HK, Japan, and South Korea, where many family run companies have had a tendency to stockpile cash on balance sheet for years or even decades on end, rather than paying it out or buying back shares. In such cases, stock prices remains forever dependent on the whims of investors' voting behaviour, because there is no causal mechanism by which the share price can interconnect with its underlying business value. And many value investors in such markets have discovered, to their dismay, that the promised weighing machine never seemed to arrive, even after a decade or more.

https://lt3000.blogspot.com/2022/01/taki...ahams.html

[CY09]

Besides family run companies, there is another group called "very fraud like but regulators don't want to conduct special investigations".

Singapore has a number of them which has been dwindling as we don't admit these S-chips anymore. Some notable names I am aware of are Luxking, Fuxing China and Hu an cable

[donmihaihai]

Besides family run companies, there is another group called "very fraud like but regulators don't want to conduct special investigations".

Singapore has a number of them which has been dwindling as we don't admit these S-chips anymore. Some notable names I am aware of are Luxking, Fuxing China and Hu an cable

Are you suggesting that regulator know something and don't act. Borrow from somewhere. This is some serious stuffs.... if true.

As for value trap. I totally disagree with it. And I think anyone who talk about value trap refuse to admit that he or she made or could make a mistake in investing.

There are all kind of listed companies and one need to pick the so called right one or another way of looking at it is avoid the wrong ones. Now people are saying that the wrong ones are value trap because they look value like in the first place.

I do not like to use WB and CM. But as far as I know, both never talk about value trap. They talk alot on their mistakes.

[BRT]

"Are you suggesting that regulator know something and don't act. Borrow from somewhere. This is some serious stuffs.... if true."
>>> not targeting any regulator specifically, but enforcement is always selective. on the extreme, i am suggesting the police/lta knows that thousands of people jaywalk everyday but choose not to act on it.

"As for value trap. I totally disagree with it. And I think anyone who talk about value trap refuse to admit that he or she made or could make a mistake in investing."
>> can a trap be a trap even if you dont fall for it? i have made numerous investment mistakes that are traps. use whichever term works n avoid mistakes/traps!

[donmihaihai]

I will put the regulation part to an end with the following. I am not talking about enforcement or selective enforcement. When someone put up a statement like that, it is better to back up with evidence else some day it will backfire.

Mistake committed by myself. Trap is set up by other to harm someone. That why I have made lot of mistakes in the past and will make more in the future. But I will never label them as trap. Yes that include fraudulent co.