I lean heavily toward the value side of the investment world and it has served me well. It is also the most successful and proven method of investing in the stock market. However, Barron's (subscription required) Market Watch section last week printed an excerpt from a newsletter titled "Beware 'Value Traps" which I thought was worth sharing with our readers.
The Stock Market, by Russ Kaplan's Heartland Adviser (December 2006): "We have always thought the distinction between growth and value is an artificial distinction. A lot of stocks we have recommended have been classified for a long time as growth stocks, but they have fallen in price to such an extent that they meet our criteria for value. In addition, a company that has no prospect for growth in its earnings, no matter how undervalued, is not a stock that we would recommend, and has often been termed a value trap."
Value Trap Defined (courtesy of thefreedictionary.com): A stock that has experienced a large price depreciation and is mistaken to be a value stock. Notes: When a company's stock seems undervalued, investors are sometimes drawn into purchasing it in hopes of stock price appreciation. If stock price is the only factor an investor looks at before buying a stock, he or she could end up with a stock whose value is likely to decline even further.There is one type of investor that is a value investor and impatient: the corporate raider. They move in on what they perceive to be an under-performing asset (company), buying up large blocks of stock, and want to see changes immediately. Their role is to be a catalyst for change. They will redirect management's allocation of capital, sell off businesses and merge others, change business plans, often increase debt, sometimes reduce debt or push for large share buy-backs, and attempt to raise the share price rapidly for huge returns, and move on.
Interested in reading more? Tomorrow my seven stock picks for 2007 and beyond will be published. Check out my other posts for Blogging Stocks here.
Sheldon Liber is the CEO of a small private investment company and the vice president for design and research at an architecture & planning firm.
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