Value Traps

As any seasoned value investor knows, the specter of value traps haunts every investment decision. A value trap is essentially a stock that seems cheap, enticing the investor with visions of untapped potential and significant returns, but the anticipated appreciation never materializes. The stock, cheap for a reason, might even depreciate, leading to losses. Understanding these value traps is critical for value investors. The Academic Perspective on Value Traps Value investing generally works on two premises. First, value stocks offer excess returns due to the inherent risk associated with them….