Morningstar ran an article by American Century Investments on value traps and behavioural biases:
The authors also discuss the following behavioural biases:
A value trap may be more likely when:I am not entirely sure I agree with point #6, which usually leads to persistent excess returns. Perhaps the authors mean that substantial barriers to entry combined with below-market or simply average returns would be a sign of a value trap?In a broader scope, geopolitical factors that influence global demand and evolving consumer tastes and spending patterns, etc., need to be explored and considered in the context of the candidate stock. All of the above are important telltale signs that help determine whether a company represents a value trap or not.
- The asset and capital base (both physical and human) of the company is low,
- The company’s business model is fundamentally flawed,
- Excessive debt is on the books,
- Aggressive accounting is employed,
- Excessive earnings-estimate revisions are commonplace, and
- Substantial market barriers to entry are present.
The authors also discuss the following behavioural biases:
- Mental accounting
- Asymmetric loss aversion
- Random anchoring
- Overconfidence
- Hindsight bias
