Wayman explains value traps and how you can save yourself from making critical mistakes in our latest blog.

by | Nov 14, 2023 | Insights

Three Ways to Avoid Value Investing Traps

Value investing is an ideal method of seeing returns on your money, but — like any other investing strategy — it can be done imperfectly. When you fall for a so-called undervalued asset that turns out to just be a poor performer that never sees the light of day, this is called a value trap.

Avoiding value traps is a necessary defense in value investing. Here are three high-level ways to avoid them when making investment decisions:

Make your fundamental analysis all-inclusive

One of the biggest risks of value investing is encountering undetected red flags that prevent stocks from reaching the potential you envisioned for them. This can result from overlooking fundamental issues (specific to the company, industry, or economy) or misinterpreting metrics or sentiment. 

You can avoid these risks by developing an all-inclusive fundamental analysis that eliminates bias resulting from your own optimism.

Actively manage asset-specific risk

Risk management is an obvious part of the value investing framework, but it’s not a one-size-fits-all affair. Downturns can be more specific than the overall economy, and it’s important to be flexible in your strategy.

Stay alert to changes in market sentiment or financial conditions that occur for whatever reason and adjust your plans for your portfolio accordingly. Value traps are dangerous because they can result in substantial losses by not recovering as anticipated, making it even more crucial to be aware of risk associated with any asset you intend to invest in.

Scrutinize your sources of information

Whenever you’re getting your information around potential value assets, ask yourself the following questions as a form of due diligence:

  • Where is this source getting its information? Does the person behind this content have first-hand knowledge or are they simply capitalizing on the news of the moment?
  • Does your own research back up these claims?

Avoiding value traps is just one part of the process. For specific value assets of the moment, including explanations of their viability, subscribe to the Wayman Value Investing Newsletter.