Tipping Point: What is a value trap?

A lot of times, when the markets are falling, investors think that valuations of some stocks have become more attractive, and they proceed to invest in them. However, many such stocks remain at low levels for a very long time, or do not recover at all even when the markets do. This could be because the fundamentals of those stocks have got permanently damaged. When you invest in such stocks, you are said to have fallen into a value trap

 

What should investors do?

It is not enough to use simplistic filters to pick stocks. You can't buy a stock just because it has fallen 20 or 30 odd per cent, or because it is close to its 52-week low. You also need to assess a stock's fundamentals. Only when you find the fundamentals to be sound should you invest in a stock whose value is declining in a falling market.