Trap is a device that is used for catching animal or humans and preventing their escape. Being in a trap is an unpleasant experience and is difficult and impossible to get out of it. I’ve been seeing the word “value trap” pretty often and I decided to read up more about it. To my surprise, there’s more than one trap in the stock market!!
Let’s start with the most commonly heard trap:
Everyone love to buy things at a discount don’t they? Doesn’t it feels awesome to buy the all new iPhone X at $300 without any contract? This beautiful piece of iPhone X is trading way below it’s book value! You realize that you’re able to sell this iPhone to a second-hand dealer at $800! Now..you see the opportunity. For stocks, value opportunity is identified by certain metrics, such as low P/E of the sector, trading below book value …