ValueTraps and How to Avoid Them

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In your quest to gain financial independence and knowledge, you have to face the term “value trap” to describe some stocks, industries or situations. What is the price trap? How can you see one? How can you save it or can you save it completely? What is the reason for its development? These are all great questions! In this article I will take you with them so that you can understand why the value of the net trap is important. Being aware of their existence can help you manage the risk of your portfolio better, to avoid situations that might otherwise attract you to do something stupid.

What Is a Value Trap?

In the world of money management, the term “value trap” refers to the situation, which gives the investor an opportunity to earn significant revenue and / or market related income, which provides a very high price. Compared to the average profit on the broader stock market, but it results in confusion due to any factor.

What Causes a Value Trap to Develop?

Think about Horse and Buggy manufacturers to start production on T automobile after a model by Henry Ford – a permanent change that uses a generation or power of the cash industry to produce a permanent change. Their days were numbered; Families have traditionally traded their stables for the cyclical decline because their production lines are devastating, pollen and oats for gasoline were discarded. If you have not seen the decrease in the value, the previous net income, and the idea, “Oh boy, it is cheaper than the default!”, You were very wrong. In order to determine its internal value, the business’s previous operating results were limited in use.

The so-called Calling Earning Trap – Cyclical Occupations An Extraordinary Event That Can Affect Niche Investors Great Financial Damages “Known as Top Earning Trap.” It happens when men and women buy cyclical businesses who experience the top of the bull market and experience the hustle and bustle – Hombilders, chemicals, mining, refining – a earning cycle; While the situation has improved in the decade, even decades, the cash-seeking statement was acquired and the companies are flooded in the balance sheet which they owned. This is a significant difference in cost-to-income ratio. Contradictory, some cyclic enterprises offer that when the most expensive their P / E ratio appears to be less and cheaper when their P / E ratio appears to be high. In such situations, you better understand the PEG ratio or dividend-adjusted PEG ratio.

The issue of cash flow is more serious than an income statement – If you have ever studied courses at college level, you have studied the famous examples of profitable businesses that were good at that time bankruptcy. This can happen for many reasons. Since 2008-2009 the Great Depression, along with many attractive financial institutions, holds the current assets including a handful of world business major investment banks, their long-term liabilities have earned their general Stokholderon; A mistake in capital structure that separates the world, prevents economic deaths, but every generation is forgotten by the repeated past. In other cases retail shops are known as high operating profits; The fixed cost structure means that going to fall below the absolute threshold ending sale of the sea with falling down profits almost all over this amount as never below the loss line. For example, if analysts expect sales in this category for some reason or another, the income of 20% of the revenues could turn into a reduction of 80% reduction. Still in other cases, the firm might work fine, but there is a huge corporate bond issue of maturity and suspicion about the capital’s difficult market situation or firm ability to refinance. Alternatively, due to the increase in business capital cost, significant interest costs will be required to reduce profits during the future period. Perhaps a major competitor has entered the scene and the main customers have been acquired in the Snatch Market, and the product or service delivery capabilities that are a serious competitive disadvantage to the business, in this case the price of a specified low share is not actually low in terms of revenue per share, the stock market Values ​​are coming to a reasonable level.

How You Can Avoid Value Traps or Protect Against Them

For most investors, the answer to avoid the value trap should be completely avoided by the individual stock because there is a shortage of financial, accounting and managerial skills needed to evaluate these companies; Rather than buying an index fund, regularly spending average dollars, especially like Roth IRA, tax haven, otherwise you can get an answer to find the answer – why – other bosses are dumping their equity. Announce bad news; Expectations that make everyone unsatisfied with the business.

Then, if you try and find that 1.) you think their negative expectations are likely to pass, 2.) Are they more – or less hypothetical, and 3.) Which degree

In rare cases, you will come on a gem. You will find a wonderful business that is practically free. Your homework is a great example to find out what a cost-fap looks, actually, the value-net American Express is not a salad oil scam in the 1960’s. A young Warren Buffett would have faced a lot of money – the money that his Berkshire Hathaway had to serve as a fortune – to calculate the maximum potential loss, if possible, would face a credit card company by everything went wrong, the investors became pessimistic in the concept.

The business will be good.

Recently, disciplined investors are buying a lot of shares in high quality, financially strong blue chip stocks during 2008-2009, when they found that other investors are not part because they are not being sold because they are owned, but because they lack liquidity They were facing and need to increase the cash they want to pay their bills! Coffee Giant Starbucks is a great case study. Prior to the meltdown, the enterprise had a rock-solid balance sheet and subsequent tax profits, which were in the blast.

When a cloudy economic storm appears, the family pumps lost their homes, investment banks began to fall and the Dow Jones Industrial Average began to fall, it was incredibly attractive, profits and cash flows were huge, dropped from high $ 20.00 . Suspended in 2006 at the bottom of $ 3.50 in 2008; A figure that represents less than 8x income on its pre-year data and 12.5% ​​tax-tax earnings. This is a company that has a lot of expansion room, it is growing at 20% + and without any equity shares for decades; With the spread of China and India, the whole world is left to win.

This was the time to become master on the main coffee seller on the planet. Those who have benefited from it have not only collected cash dividends for years, but have seen shares at $ 50 + per share. After the decision of the director, the Honors with a $ 1 per-share dividend rate (September 2017), which means that any gathering anywhere out of now 18% + cash dividend yields can cost very well to send money through the stocks purchased on the full floor (Remember – every transaction should be a buyer and seller; it is the nature of the auction).

How to avoid value traps : Video

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