Don’t get trapped as I did
Value traps with Mustang.
Value trap, according to Investopedia, are investments that are trading at such low levels and present as buying opportunities for investors but are misleading. In other words, these are the investments/ companies which don’t require whole a lot to invest in them, a few bucks, and you are in, and it is a hell of a ride. Usually, it is a company that has very high dividend payout ratios and high dividend yields.
This topic will be mainly for dividend investors. Consider a home seller who is offering to sell the house for significantly cheaper than the market price. If the discount is too big, you begin to question the motives of the home seller and start wondering whether you’re being tricked into believing it is a good offer. There might be thousands of problems, and the seller is giving the offer to get rid of the place. That is why a buyer should always be aware of what they invest their money. A seller’s entire ordeal is to get rid of the house no matter what.
A practical or an experienced dividend investor finds the company, and analyze to figure out if it is a good fit for his portfolio. He will run the numbers through different analytics and come up with the decision to weather hold it or not invest in it. He doesn’t need to be amazing with numbers as long as he understands how to analyze investments or do thorough research, then he can be in for long-term growth.
Like all the common mistakes in the world regarding investing, I made one mistake. I was in a value trap, and I still in one. I have a high conviction in Ford only because of their mustang cars. However, I am a victim of Ford’s high dividend yield. 6.49% (See historical dividend yield)
Reminder: A “good dividend yield” is a relative thing because the market can crash that can result in a drop in share prices and an increase in dividend yields.
In Ford’s case, the stock price was falling, and the dividend yield was increasing. As a noob, I enjoyed those sweet dividends coming from Ford, mainly because they were returning more to me than any other companies I’ve invested at the time.
As a classic value trap, the share price continued to drop, and I bought 10 more shares, still playing safe yet reckless with my limited money. I am still holding onto my 15 shares in hopes to breakeven and probably sell. The stock is 27% down, which is $50 from what I paid, and it is quick saddening that the management team is screwing their product launches and is unable to assure people that they can save the company and make a massive investment in electric car future.
Note to self: Analyze the company and do not buy just because of the dividend yield.
To add insult to the injury, Ford decided to cut the dividend they effectively lost my trust as they promised me “scary good” yields hand then they took it away with my initial principal.
I am effectively stuck until I recover my $50. I love ford’s Mustang line, and I hope they can finish their restructuring plan sooner and hope that electric transformation can revitalize their business.
Until then, catch you in the next one.
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