Investment Matters

1. Overcoming the 'value-trap'

Anyone who has been to one of our CIO Dinners (First Samuel client events where investment updates and discussion are provided) will likely be familiar with how we avoid the 'value-trap'.

The value-trap is where companies have a low P/E for a good reason.  That is, the current share price reflects latent circumstances that mean that future earnings growth is not promising.  Latent circumstances might be upcoming regulatory changes; an upcoming industrial cyclical downturn; expected competition changes; demographic changes, etc).  So buying a company that has a low P/E is not a guarantee of a strong share-price growth.

The value-trap is avoided by looking at the dividend and earnings outlook for a company for at least three years.  So those latent circumstances can be considered.  

What is obviously value today may not be value in two years' time.  And vice-versa.  And often it is difficult to predict when latent circumstances will emerge.  This is obviously a part of investing that requires patience.