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Value Trap – Cut Your Stock Losses

Value Trap – Cut Your Stock Losses

by Avrex on October 5, 2012

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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{ 1 comment… read it below or add one }

Derek - Freeat33 October 17, 2012 at 4:52 PM

I also got caught on the TSX version of RIM.
I own Call Options at 13, 14 , and 15 dollars for January 2014.
Hopefully it surpasses that by then, but I bought them when the price was $14.
So I have sustained heavy losses.
Now its such a large loss , I might as well wait it out.


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