Value Trap

I obtained several meaningful insights upon reading your cover story in the previous issue on value investing. It was meticulous and stands fairly relevant in the current market scenario. Can you shed some light on value traps and how an investor can avoid them?

- Rohit Jamdade

Editor Responds: We whole-heartedly appreciate your positive feedback. Value trap is an illusion for investors and hence one has to stay away from it. A value trap generally happens when investors look at the fundamentals and the market price of a stock which seems to show that the stock is valued at a discount, also known as cheap stock in simple terms. But in reality, this is not the case as the stocks are not as cheap as they appear and actually offer little hope for growth. The illusion causes investors who are looking for a bargain to bet on such stocks, thereby taking a very risky stance wherein they believe that the stock will beat the market. However, it ends up providing either negative or unattractive returns. Investors can steer clear from such value traps by conducting thorough 360-degree fundamental analysis before making any investing decision. Hope this answers your query. Keep writing!