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In the past year, gold has been steadily climbing, central banks have been buying at record levels, and the macro setup could be pointing to its biggest move in decades. But, it doesn't seem like investors aren’t paying attention. Stocks dominate the headlines, and gold still carries
Every time the market rallies to new highs, people start asking the same question: Are we in a bubble? And every time, the answer is basically the same: maybe, but we won’t know until it pops. That’s how bubbles work. They never feel obvious in real-time. The 1999
Markets are trying to recover after last week’s selloff, but the gains are small. As of this morning, the S&P 500 and Russell 2000 are both up just 0.03%, the Dow is up 0.11%, and crude oil is climbing 0.2%. Meanwhile, the Nasdaq 100
The market’s winning streak just hit a roadblock. Trump’s latest tariff threats, floating a 25% tax on auto, semiconductor, and pharmaceutical imports are shaking stocks today. With growing inflation concerns, market's are guessing whether this could push back Fed rate cuts in 2025. Here’s what’
I used to think I could outsmart the market by buying at rock-bottom and selling at the peak. I’d try to pinpoint those perfect days when stocks were at their lowest, and then cash out before the next downturn. But over time I learned that chasing those 'magic&
I used to chase low P/E stocks thinking they were bargains, until I learned that cheap usually means broken. Sometimes a stock looks like a steal on paper, but that low number might be hiding a lot of problems.
Let me break down what I've seen and learned about these value traps, and share a little wisdom from Warren Buffett on what to do if you already own a wonderful business.
A company's Price/Earnings ratio is its stock price divided by its earnings per share, showing how much investors pay for each dollar earned.
Recognizing a Value Trap
First off, a low P/E ratio isn't automatically a green light. Take Verizon for example. Its P/E is about 9.6, which is way lower than the S&P 500 average of 20, yet its stock price has dropped 33 percent over the last five years.
That got me wondering if that low number really meant a bargain or just a warning sign.
Then there's the issue of earnings. Even if a stock appears cheap, falling or stagnant earnings are a big red flag. I noticed that Verizon's quarterly earnings-per-share (EPS) dropped from $1.25 in 2019 to $0.78 in the most recent quarter. A business with declining profits justifies its' cheap valuation.
Sometimes it isn't just about one company—the whole industry can be crap. In the communications space, not only Verizon but also AT&T and Charter have been underperforming. Meanwhile, innovative players like Nvidia have posted impressive earnings (They're last quarter had 110% YoY growth).
And don’t be fooled by a high dividend yield. Take Walgreens, for example: it once was offering a 9 percent dividend, but recently suspended payments because of funding issues. A high yield might look attractive, but it can hide deeper problems that cause the stock to fall:
Lastly, management matters a lot. I learned that a shift in leadership style can change the game. Look at Apple: under Steve Jobs, it was all about breakthrough innovation and growth. Now, under Tim Cook, the focus has shifted more to preserving cash and buying back shares. When a company switches from a visionary founder to a caretaker mode, it’s a sign that its growth engine might be slowing down.
Hold on to Wonderful Businesses
Now here’s where Buffett’s advice really hits home. He once said, "If you own a wonderful business, the best thing to do is keep it. All you're going to do is trade your wonderful business for a whole bunch of cash, which isn't as good as the business, and you got the problem of investing in other businesses, and you probably paid a tax in between."
For me, that means if you already have a business that’s fundamentally strong and growing, don't sell it just to chase a stock that looks cheap or flashy.
The temptation of a low P/E should never override the value of a great business that has solid fundamentals.
Final Thoughts
What I've learned is that a low valuation doesn't always signal a bargain. Usually, those low numbers hide weak earnings, an out-of-favor industry, or management that’s lost its spark.
Before jumping in, dig deeper into the company’s fundamentals. And if you already own a wonderful business with solid growth, take Buffett’s advice and hold onto it instead of swapping it for a so-called bargain that might end up being a trap.