What is a value trap?

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#16
(08-07-2023, 03:03 PM)ghchua Wrote: Hi thefarside,

(07-07-2023, 08:43 PM)thefarside Wrote: However there are more often than not the discounts are due to type of business and place these companies operate in which may mean those discounts exist forever because of real or perceived of structural handicaps.  In this case, those discounts lasts forever - long enough for it to be not worth the trouble if you have better options on the table

The discount can last forever, but will the share price track the latest NAV of the stock? Let me give you an example. You bought at stock with a NAV of $1 trading at 70% discount to NAV at 30c per share. 15 years later, the stock NAV had increased to let's say $3, and applying the same discount of 70%, your stock is now trading at 90c.

Yes, the discount did not narrow for the stock above, in fact, it had remained the same at 70% from NAV. But share price had increased from 30c to 90c. Is it worth the trouble? I think it is.
If I go by my definition, you have determined that intrinsic value to be $ 1 and the stock is trading at a 30% discount to the intrinsic value. It is a value stock. 15 years later the intrinsic value had increased and the market price had increased as well. From an investment perspective, you made money. It is not a value trap. A value trap is when you thought there is an opportunity to make money but you were wrong about the cheapness. Imagine the case where in 15 years time the intrinsic value is $0.90. You were wrong about its cheapness and as such it is a value trap.

Why are we talking about this? Because all value investing is about looking for bargains that are not value traps. If you are not clear, you will end up with wrong stocks
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Messages In This Thread
What is a value trap? - by i4value - 02-07-2023, 04:45 PM
RE: What is a value trap? - by Shiyi - 06-07-2023, 12:13 AM
RE: What is a value trap? - by i4value - 06-07-2023, 07:17 AM
RE: What is a value trap? - by weijian - 06-07-2023, 12:24 PM
RE: What is a value trap? - by Wildreamz - 06-07-2023, 03:50 PM
RE: What is a value trap? - by i4value - 07-07-2023, 07:43 AM
RE: What is a value trap? - by weijian - 07-07-2023, 03:52 PM
RE: What is a value trap? - by Shiyi - 07-07-2023, 12:56 PM
RE: What is a value trap? - by weijian - 07-07-2023, 03:44 PM
RE: What is a value trap? - by i4value - 07-07-2023, 05:27 PM
RE: What is a value trap? - by CY09 - 07-07-2023, 06:30 PM
RE: What is a value trap? - by thefarside - 07-07-2023, 08:43 PM
RE: What is a value trap? - by ghchua - 08-07-2023, 03:03 PM
RE: What is a value trap? - by i4value - 08-07-2023, 05:30 PM
RE: What is a value trap? - by weijian - 09-07-2023, 08:20 AM
RE: What is a value trap? - by ghchua - 09-07-2023, 11:23 AM
RE: What is a value trap? - by donmihaihai - 09-07-2023, 12:25 PM
RE: What is a value trap? - by donmihaihai - 07-07-2023, 08:54 PM
RE: What is a value trap? - by i4value - 08-07-2023, 01:01 PM
RE: What is a value trap? - by i4value - 09-07-2023, 02:36 PM
RE: What is a value trap? - by Shiyi - 10-07-2023, 12:23 PM
RE: What is a value trap? - by i4value - 11-07-2023, 07:13 AM

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