Value Traps

A Week in Singapore 3

Image by Ronald HN Tan via Flickr

One of the fundamental strategies we had discussed before was value investing. While looking for value plays, it is important to understand the stage at which the rest of the market is with regard to the specific stock. While you may recognize value in a stock (value opportunity) and decide to invest in it, it might take a while for the market to recognize value and bid up its stock price (value in action). Sometimes, you may just be too early and get trapped in a long position while the rest of the market continues to hammer the stock price down, a la, value trap.

INFOSYSTECH

For example, let us take a look at Infosys. Given its strong cash position, professional management and brand, a typical value investor could be easily drawn to the stock. However, investing at any point since the beginning of this year would’ve trapped the investor in a dog stock, with every single pop turning out to be an opportunity for the market to sell.

To take another example, this time of Cisco.

CSCO

There is no doubt that there is a good value opportunity. It has a ton of overseas profits, it is paying out dividends and buying back its stock, it is a market leader in most of its product categories and has an M&A track-record like you hear about. However, the market has yet to recognize it and just like Infosys, buying the stock at any point since the beginning of the year would’ve been a trap.

As the John Maynard Keynes once said, the markets can be irrational longer than you can remain solvent. Value investors will do good to heed that advise.

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