In buying low PE stocks, beware of value trap

[LionFlyer]

Trap is set up by other to harm someone.

The "trap" in the word value trap doesn't mean it was something deliberately setup by the company to entrap investors.

There are some companies that are simply unappreciated by Mr Market. Their low PE makes them attractive if we used that valuation measure but they are also thinly traded. An investment in them on the thesis that they will reach their intrinsic value within a reasonable period in time does not pan out and you are stuck until a GO or you take a hit and move on.

Along the investment journey, there are potholes along the road. Some potholes are dug deliberately, some potholes appear because of poor management/business practices and others form naturally. Avoiding them is the best we can do, while trying to find a good exit ramp.

[donmihaihai]

Trap is set up by other to harm someone.

The "trap" in the word value trap doesn't mean it was something deliberately setup by the company to entrap investors.

So value trap is a nice way of saying I made mistakes but is not my faults because I have done everything I possible could before buying a stock.

When someone say stock ABC is a value trap and after looking at the co. Financial and share price over the past few years, I would always find that, 1)either he over paid initially, 2) or poor management. If management is fine and the company is doing ok then this stock actually become interesting

[weijian]

hi donmihaihai,

It is public lexicon that "value traps" has been used by value investors to describe companies that are cheap (and then stay cheap) or even continue to engage in actions that make it valued cheaper by public markets. Unfortunately for OPMIs, we generally do not have collective power to agitate for any actions unlock "the trap".

There is no need to debate on how "trap" actually means to each person personally, or whether the usage is right or not. It's fine if WB/CM do not use these words. I use this word and I take ownership of my mistakes. Of course, I do believe many use the word "trap" to minimize their personal liability as you have described. It is their personal journey to overcome this hurdle. All of us have our own unique hurdles to overcome

[LionFlyer]

I see it is an investment that did not pan out even if all the due diligence has been done and it checks all the boxes.

One can argue that if it didn't pan out, it is the fault of the investor for missing something out, if it is not the management's failure, but stuff happens. I just deal with it and move on.