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A value trap is a stock that while it looks like a great price, just keeps falling. A lot of these are companies with negative news or a missed earnings report and after that big initial drop, the valuation measures look too good to pass up. And the real danger is that investors see the stock continue to fall and push more money into it to lower their average cost. The thinking goes, if you bought one share at $100 each and it falls tot $75 then you need a 33% gain in the shares just to get back to your price and break even. But if you buy another share at $75 then your average cost for the two shares is just $87 and you only need a 16% bounce to break even.
They keep pushing money into the stock, buying in at each lower price until they have so much in the stock, upwards of thirty- and forty-percent of their money or more and it never recovers. They’ve sat for years in a dead stock, lost tens of thousands and finally just sell out in despair. Spotting a value trap before you invest can be very difficult, especially if you get it in your head that it’s a good company. Nation, you have got to stay unemotional with your investments. Invest with your head, not with your heart.
The problem here is, investors fall in love with a company and lose the ability to see the other side of the story. They get confirmation bias where they only look for articles or analysis that confirms their view and anything contrary is minimized or ignored.
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0:00 How to Avoid Value Trap Stocks
0:14 What is a Value Trap Stock
0:30 Value Trap Stocks Explained
1:23 Dangers of a Value Trap
2:30 How to Know if the Stock Price will Keep Falling
2:58 Why is the Stock Price Falling?
5:13 Value Trap Stock Examples
7:31 When to Sell Bad Stocks
Joseph Hogue, CFA spent nearly a decade as an investment analyst for institutional firms and banks. He now helps people understand their financial lives through dividend stocks, investing and ways to make more money. He has appeared on Bloomberg and on sites like CNBC and Morningstar. He holds the Chartered Financial Analyst (CFA) designation and is a veteran of the Marine Corps.
#valueinvesting #valuestocks #investingforbeginners
