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Value Traps in Elements of Value “Value trap” is a common epithet for stocks that disappoint or are expected to disappoint. It implies that some investing shortcut has indicated that a security is undervalued, yet it hasn’t performed well. What I dislike about the term is that it suggests that mistakes were made, but not by me. It doesn’t tell me how I screwed up, so I can avoid repeating my mistakes. Shortcuts and DCF analyses fail because of a weak link in one of the four elements of value—(1) profitability, (2) life span (3) growth, and (4) certainty.
Big Money Thinks Small
Joel Tillinghast
When I teach this concept to my MBA students, at this point in the discussion I always ask them the following questions: What happens if we are trying to value a company and we’re having a hard time estimating future earnings and growth rates? What if the industry is very competitive and we’re just not sure if current earnings are sustainable? Maybe we have a question about whether some of their new products will be successful. Sometimes we’re not sure how new technologies will affect a company’s main service or product. What are we supposed to do then? My answer is always simple: skip that company and find one that’s easier to evaluate. If you don’t have a good idea about what’s going to happen in the industry, with the company’s new products or services, or the effects of new technology on the company, then you can’t really make good estimates for future earnings or growth rates. If you can’t do that, you have no business investing in that company in the first place!
The Big Secret for the Small Investor
Joel Greenblatt
Again and again, with short forms and with long, you’ll find that writers structure their work not on the basis of some abstract, predetermined scheme but practically, to solve problems their materials present.
How to Write
Richard Rhodes
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