Value Trap – Cut Your Stock Losses

How many of us have been caught in a “value trap”?

Prior to making stock selections, I pour over lots of fundamental variables.
I’m a value investor. I’m looking for undervalued stocks, or stocks that have fallen out of favour.

Back in 2011, I purchased Research in Motion (RIMM, RIM.TO), with the conviction that it had fallen too far and still held lots of value. However, the price of RIMM stock continued to fall. I suffered losses.

Stock Value Trap Ackbar
RIMM stock looks so cheap. It’s a Trap!

But just like Admiral Ackbar, I was able to recognize the “trap” and escape. I only held onto this stock for a few months, so the losses weren’t too bad.

Before you make a stock selection,

Research beyond the fundamentals.

– Has this company’s business changed?
– Are the company’s products still strong?
– Does this company have a moat? Is it still ahead of it’s competition?

In the case of RIMM, in hindsight, I should have realized that their products/services weren’t keeping up with the competition. I was only looking at the fundamental variables.

RIMM isn’t the only stock that I’ve fallen into a trap with.

Even if you’ve done your research, a stock can still languish for long periods of time.
The most important lesson that I’ve learned is,

“Cut your losses”

Sometimes Mr. Market doesn’t agree with you. A stock price can stay “undervalued” for quite a while. Don’t hold onto this stock forever. Sell the stock. Move on to another investment opportunity.

Eventually your research will pay off.

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