Six Potential Metrics to Help Limit Value Traps

Excess Returns

Deep value investing is about buying companies that other investors don’t want. It is about investing in companies where the current situation doesn’t look great – actually in many cases it looks horrible. On average, investors tend to overestimate the problems in these types of businesses and as a result, stocks of these companies get cheap. But for some of these cheap companies, the situation is actually worse than what the market has priced in. These types of stocks are typically referred to as value traps. Although value traps come with the territory in value investing, the ability to limit them can have a positive impact on a value strategy. In this episode, we discuss some of the metrics we use to try to do that.

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Excess Returns is an investing podcast hosted by Jack Forehand (@practicalquant) and Justin Carbonneau (@jjcarbonneau), partners at Validea. Justin and Jack discuss a wide range of investing topics including factor investing, value investing, momentum investing, multi-factor investing, trend following, market valuation and more with the goal of helping those who watch and listen become better long term investors.

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