Learn From My Mistakes And Avoid These 3 Value Traps

by: John Kingham
Summary

Most investors found 2018 to be a bumpy ride and I was no exception.

The market price of my portfolio declined by more than 10% during the year, which was mildly annoying. But that’s not really what I’m talking about.

I’m not saying 2018 was a complete disaster, because it wasn’t, but it was bad enough to make me take a step back and review my investments and my investment.

Most investors found 2018 to be a bumpy ride and I was no exception.

The market price of my portfolio declined by more than 10% during the year, which was mildly annoying. But that’s not really what I’m talking about.

When I talk about a bumpy ride, I mean bumpy in terms of the performance of the companies I’m invested in rather than the performance of their shares. And in that regard, 2018 was too bumpy for my liking.

I’m not saying 2018 was a complete disaster because it wasn’t, but it was bad enough to make me take a step back and review my investments and my investment process from the ground up.

What I found was that several of my current holdings (and several of my past holdings) fell into one or more of three classes of value trap:

  1. Companies with large recurring ‘exceptional’ costs (e.g. Centrica (OTCPK:CPYYF) or N Brown (OTCPK:NBRNF)).
  2. Companies with wafer-thin profit margins (e.g. Mitie (OTC:MITFF) or Interserve (OTCPK:ISVJF)).
  3. Companies undergoing business transformations (e.g. N Brown).

Having uncovered these value traps, I then came up with a handful of strategy tweaks designed to stop me from falling into the same traps again.

I thought some of this would be useful for other investors, so I summarised the whole lot into an article for Master Investor magazine:

Disclosure: I own shares in Mitie and N Brown and they’re both holdings in the UK Value Investor model portfolio.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.