Many value stocks are cheap because they deserve to be. Some of them no longer have sustainable businesses, and as a result their current discounted multiple will look really expensive relative to where their business is headed. These types of stocks are often referred to as “value traps” and value investors do everything they can to avoid them. In this episode, we talk about value traps, why they are impossible to avoid completely, and some rules that can help minimize them.
We discuss:
- Why trying to avoid value traps completely can lead to less than optimal results
- Why focusing on firms where past fundamentals do not reflect the current reality of their businesses can be helpful in avoiding value traps
- The criteria of our negative quality screening system we use to reduce value traps
Jack’s article on avoiding value traps
Tobias Carlisle’s The Acquirer’s Multiple site and research
Improving the Performance of Deep Value Strategies
Focused Value research study
