The value trap
One day you decided that you will find your own multibagger stock instead of taking tips from bloggers like this one :). You did your study on how to identify value investment based on earnings, stock P/E, sector P/E, peer comparison, dividend policy, quality management, quality products and several other parameters. Then you went through thousands of listed stock to identify the one that stands true on all these parameters and still offers great value. After lot of hard work and time finally you found "The One" great stock available at great bargain price. This is it ! this is going to be your discovery, your find, your gateway to success. You account for all the money you can invest and then pick up a huge stake in this gem discovered by you but hidden from the market. Now all you have to do is wait. Wait for the market to realize that they have missed this great gem all along until you discovered it, that it is grossly mis-priced and needs to be re-rated to much higher multiples than what it currently enjoys. After few weeks the stock is still trading in the same price range. Maybe it will take some time. Anyways you do your part of the deal by advocating the stock and its virtues on all possible message boards and stock forums hoping others will also join you in this great journey. After few months the stock is still trading in the same price range. Maybe it will take some more time. All you need to do is wait patiently, after all you are a "long term" value investor. After few years the stock is still trading in the same price range. And now you have lost all your patience. How can this be? This was the perfect find. Nothing wrong with it and yet it refuses to reward you even after being so patient with it. In-fact it has destroyed your wealth. In so many years money would have doubled even in fixed deposit, and here it is still the same in this stock. What is happening?
One day you decided that you will find your own multibagger stock instead of taking tips from bloggers like this one :). You did your study on how to identify value investment based on earnings, stock P/E, sector P/E, peer comparison, dividend policy, quality management, quality products and several other parameters. Then you went through thousands of listed stock to identify the one that stands true on all these parameters and still offers great value. After lot of hard work and time finally you found "The One" great stock available at great bargain price. This is it ! this is going to be your discovery, your find, your gateway to success. You account for all the money you can invest and then pick up a huge stake in this gem discovered by you but hidden from the market. Now all you have to do is wait. Wait for the market to realize that they have missed this great gem all along until you discovered it, that it is grossly mis-priced and needs to be re-rated to much higher multiples than what it currently enjoys. After few weeks the stock is still trading in the same price range. Maybe it will take some time. Anyways you do your part of the deal by advocating the stock and its virtues on all possible message boards and stock forums hoping others will also join you in this great journey. After few months the stock is still trading in the same price range. Maybe it will take some more time. All you need to do is wait patiently, after all you are a "long term" value investor. After few years the stock is still trading in the same price range. And now you have lost all your patience. How can this be? This was the perfect find. Nothing wrong with it and yet it refuses to reward you even after being so patient with it. In-fact it has destroyed your wealth. In so many years money would have doubled even in fixed deposit, and here it is still the same in this stock. What is happening?
My friend, you are a victim of value trap. Yes it is a rare case, but remember .. you went looking for it .. a rare discovery :) You went through thousands of stock to find that one stock that wouldn't grow in price inspite of great fundamentals and that is exactly what you got! Only difference is that now even you are stuck in it.
S*** happens
Value trap is often seen in cases where company management is not dynamic. They are doing the same thing for years and fortunately have retained the same revenue, market share and profits for years. Whatever they earn, they pay it out as dividend and they lack a desire to grow the company beyond its current capacity and capabilities. They are happy and content with what they have. Consider a local grocery store. The owners of this store have setup a small shop selling groceries and they know that this shop is going to take good care of their family for their lifetime and they don't need to do anything more in life now. They just need to keep this shop running and are happy and content with it. Now think about similar listed businesses, these are your classic value trap stories. Once you get trapped in such investments the only thing you can do is wait endlessly or get out and relieve yourself from this stagnancy. If you keep thinking that it is underpriced and market will one day discover it, your wait is never going to be over. Market pays premium for possibilities and discounts what is well known. Everything about this business is known so the market will not show any interest in it. It is paying some dividend and has some known value so it will settle down at some price and will always be in the same range just like the business it is running. In-fact market is discounting the fact that eventually one day this business will become obsolete and wind up since anything that is not growing is ultimately dead. You see, market is very wise and always thinks forward. If you are in the stock market, you are here for growth and not stability so you need to avoid such traps or atleast get out once you realize it. And that brings us to the second investing trap "the growth trap"
The growth trap
Unlike value trap, you don't need to go hunting for a growth trap. The growth trap hunts for you. Unlike value trap these are not undiscovered but over-discovered or marketed stocks through punters, promoters and manipulators. So what is a growth trap? Here you get a stock that is just flying away. The only way to grab it is to chase it. There are great things being talked about the stock everyday, there are great announcements being made, new orders, new ventures, new products, new markets, great results, great future projections, all good all around. You are completely convinced of the growth potential in this stock after reading so many news and articles about it and it's future plans. After waiting for some time for the stock price to correct to reasonable levels, you realize that the stock is just zooming away and there is no way you are going to get it at lower values. Enough, you finally decide to stop waiting and take the plunge at whatever price market offers it to you. This is a one way rocket stock and no point waiting for it to come back to the station, just jump on it. Congratulations you are now on-board the rocket. Now you are feeling relaxed, no more waiting on the side hearing from everyone how they have doubled, tripled their money in this counter and soon it is going to multiply several times more. Now you are also part of this winning group and you will let the rocket take you to new heights, so you close your eyes to rest a bit. After all it has been a tough journey to get on this rocket. When you open your eyes you realize that the rocket is nosediving .. faster than it went up. Much of your investments have already evaporated like jet fuel. Welcome to the growth trap and yes your investment was used to fuel the rocket in the final round before nosediving. All the great things about the stock suddenly disappeared. Suddenly the business environment is tough and it will take few years to recover. While you are still recovering with the shock trying to figure out what just happened, some days later you hear in the news how a big/marquee investor sold all his holding at the top and got out of this stock aka rocket.
S*** happens!
Self explanatory :) Happy new year, don't fall into a trap .. say cheese !
No comments:
Post a Comment