 Good day fellow investor. Now, we have been talking a lot about value investing on this channel and something very related to value investing are value traps. So what does a value investor look at? Low price earnings ratios, high dividend yields and low price to book values. So when we look at some investments that have such characteristics, we try to find an investment with low risk, a margin of safety and high potential. However, 90% of stocks with low price earnings ratio, high dividends and low price to book values are really value traps. Meaning that the low price earnings ratios are there for a reason. The high dividends are there for a reason. And today I'll discuss six steps how to avoid or at least try to avoid value traps. There will always be mistakes and you have to invest in a way that allows for a few mistakes here and there. So let's see an example of what can be a potential value trap. I don't know, but just as an analysis. Kroger, the grocery stock dropped from 34 to the current 22 and they have said that they will lower their prices in order to retain customers. Now many were attracted by the price earnings ratio of around 13 in comparison to the market is less than half, but what's the issue with Kroger? Its net margin is 2.6%. So if you lower your prices by just 1.3%, your net margin is halfed. So from 2.6% to 1.3%. When you do that, your price earnings ratio isn't 13 anymore, but it's already 26. And then you're not looking at value anymore. Just an indication of a potential value trap in Kroger. I don't know what will happen. I'm not invested in Kroger. So what are the six steps for avoiding a value trap? The first thing to look at or that can lead to a value trap is lack of future catalysts. Now you might find the stock with a low valuation, good fundamentals, but if there aren't any future catalysts to turn it around, to turn the stock price around to make it recognizable by the market, then it's very probable that the stock price might stay depressed for a very long period. So you have to look at future catalysts. If you take a look at my videos about Amira, we know that the catalyst or something that's already happened is higher basmati prices. We know that the earnings will be positive by the end of the year. So we expect positive guidance. So we have positive catalysts that are expected for the market to recognize the value, the low price earnings ratio and the low price to book value. Now some resources, supply gap in copper, supply gap in zinc, pre-feasibility study on the TMock project, new drilling reports, new drilling targets. So a lot of potential catalysts that might lead the market to recognize the value in the company. Another example, if we look at the iPhone's sexuality with Apple, when Apple shows slower growth, the stock price really gets depressed. However, we know that there will be future catalysts in the form of new products. So Apple is a very interesting cycle cow play. Now the new iPhone 8, okay, the stock price has dropped since I have made this figure, but the new iPhone 8 has really led to a new cycle in the stock price. If iPhone 8 sales are not meeting expectation, then the stock will drop again. But then in the future, there will be new product that might take the stock up again. So it's very interesting to play the iPhone's sexuality. And there are catalysts. So that's one, look for future catalysts. They have to be. If not, the stock price might stay low forever. Number two, we have to analyze the sector. If the sector is bad, if the sector is terrible, even if there is huge value in the book value, you can expect impairments in the futures, you can expect lower earnings and the stock price might never recover. One great example of such a thing is the shipping in the industry. If we look here at the stock price chart for Diana shipping, the stock price was around 30 in 2008, 2009, and then it went straight down to prices below five now. And many, many value investors got trapped in the shipping sector because they thought, okay, now it's too cheap. Now it's too cheap. Now it's too cheap. And it has been too cheap for the past 10 years. So it's very important to look at the sector. If the sector is in a negative trend, the stock, even if it has value, can stay down for a long, long term. Similar issue with oil. Stock oil prices have gone from above 102 below 50 and many, many companies are still suffering and the stock price, their stock prices didn't recover and perhaps won't even recover, especially if their producing costs are above $50. So if the sector is in a downtrend, it might be very, very risky to invest in a value stock. So that's also something to look at. Number three, look at what are insiders doing, especially the middle management, vice presidents and so. The CEO, he might be buying just on purpose stocks, but what's the middle management doing because those are normal people like us, they have a mortgage, a family and everything. They don't have huge salaries. And if they are betting on the company, then it might be an indication, okay, this is real value. For example, Nevsons insiders vice presidents have been buying stock with their own cash, which leads to believe that there is really positive catalyst coming up. On the other hand, Snapchat, the founders cashed out almost $1 billion on their IPO. So they sold their stock, got their money and don't care anymore what happens to the stock. The result was a terrible stock price performance after the IPO. Number four, check the sustainability of a dividend. As a value investor, you like high dividends, but you have to check whether the company will be able to pay those dividends for a long term. For example, ExxonMobile, as I already mentioned, oil has been constantly increasing dividends in the last 10 years. But what also increased is the payout ratio. And the payout ratio in 2016 has been 138% of earnings. And it's trailing payout ratio is 125% of earnings. The problem is that you cannot pay more than you earn for a longer period of time. So if oil prices remain depressed, ExxonMobile will have to slash its dividend eventually. So also calculate that into analyzing a value stock. Number five, you have to see if the value, the bargain, the opportunity is just due to investor's pessimism. Sometimes, beer markets or specific countries, nobody wants to invest in stocks anymore, but the fundamentals remain stable. And if the case is just pessimism, then it's a great opportunity to invest in stocks. Just think of 2009, everything was cheap because the complete environment was pessimistic. Those who took the advantage have made great returns. Another example is China. In 2015, the stock market bubble went bust. And since then, everybody is very scared about investing in China. However, the economy is still growing very fastly. Earnings are very high. So there are plenty of opportunities in China and we are discussing them in our China video series. Number six, you have to look at the quality of the assets on the balance sheet. The price to book value might be low, but if the company is expected to impair their balance sheet, their assets, because okay, we invested there, it was a stupid investment, then you have one billion, two billion, five billion impairment. The price to book value can change abruptly in the next earnings report. For example, Shell, Royal Dutch Shell has spent more than seven billion on exploring the Arctic for oil. That's seven billion on their balance sheet. As reserves and capitalized expenses, however, those reserves in the Arctic and capitalized expenses are now worthless because you need an all price of above 80 to develop the project. So Shell has done lots of impairments in the last few years, which deteriorated its book value. So that's also something very important to look at. So to conclude, the six steps help, but you have to always be very careful and look at what is it that I don't know, what can happen, and when you find the stock where there are positive catalysts, negative sentiment, so everything looks good, then it's smart to invest in a few of those stocks. Some of it will always go wrong. I'm always ready to lose a lot of money on my investments, but if I lose on one, two, do well, and one does extraordinarily well, my returns are very, very good as a value investor. So I always accept the fact that I can be wrong. These six steps help me into limiting the amount of times I am wrong, the lower the times I'm wrong, the higher my returns. Thank you for watching. Hope you enjoyed the video. Please subscribe for more content, and I'll see you in the next video. And don't forget to leave your comments, ask questions, share your knowledge. Thank you.