Red Flags in the Indian Context: Low promoter holding (say less than 26%) Sharp rise or drop

in sales or profits over the last 5 years Auditor qualifications Late payment of TDS Low tax payments High or Rising debt despite high reported profitability Excessive management compensation

Value Traps Earnings have doubled while stock has halved! Could be a trap if growth rates have come down especially in technology related areas; past p/e ratios may not return for many companies or industries Look into cyclicals as their p/e expand Be careful with high growth small caps (high growth is often not sustainable) Too high dividend yield (investors expect a big drop in earnings or a cut in dividend) Book value needs to be adjusted especially during recessions

Looking for great, simple to understand businesses at good prices is the easiest way to avoid stepping into value traps. Share price history does not mean much (has the intrinsic value also fallen a lot?) In times of severe economic distress, low multiples can signal danger. 3 signs of a value trap: Inconsistent earnings power Lots of debt Weak competitive positions

Value trap signals: Falling gross margins

Falling sales Rising inventories vs sales/ receivables vs sales

Value trap signals (by Jim Channos!): Cyclical or overly dependent on one product Hindsight drives expectations Marquis management or famous investor Appears cheap using management metrics Accounting issues