Common traps
- The melting ice cube. Profits falling every year because the business is being disrupted. Cheap on today's earnings, expensive on next year's.
- The cash burner. Lots of cash on the balance sheet, but losing it fast. Common among today's net-nets.
- Hidden debt. Leases, pensions or off-balance-sheet obligations that make the equity worth less than it looks.
- The one-time mirage. A gain from selling a division makes the P/E look like 3. Next year it's 30.
- The unfriendly steward. Assets are real, but management will never return them to shareholders.
Checks built into our screens
- Solvency — total assets exceed total liabilities.
- Positive free cash flow — the business funds itself (Dividend Quality).
- Interest coverage — operating cash flow covers interest at least 3×.
- Consistent profits — every recent quarter positive (Graham Defensive).
- Insider buying — management confirming the value case with its own money (Insider Conviction).
Checks you still need to do
- Read the last annual report's "risk factors" and management's discussion.
- Look at five or more years of revenue and profit, not just the last four quarters.
- Ask what would close the gap between price and value: a recovery, a buyback, a sale?
- Diversify. Graham, Schloss and every net-net study owned many positions because some traps are unavoidable.
Educational content, not investment advice. Past performance — of people, papers, or backtests — doesn't guarantee future results. Do your own homework before buying anything.