Trying something new and turning an old post into a video. You can also find it on YouTube.
Quality traps are the most dangerous investments because they disguise themselves as safe bets. Learn to spot declining ROIC, shrinking margins, and eroding competitive advantages before they destroy your portfolio returns.
In this video, I break down the concept of quality traps. Companies that appear to be high-quality businesses with strong returns on invested capital (ROIC) but are actually losing their competitive advantage.
You’ll learn:
What quality traps are and why they’re so dangerous
How to calculate ROIIC (Return on Incremental Invested Capital) as an early warning system
Why declining gross margins signal trouble ahead
Research from Michael Mauboussin and Dan Callahan shows that companies with declining ROICs produce poor returns over three-year periods. The market is usually slow to recognize when a quality company is losing its edge, which creates the perfect storm for investor losses.
Video is based on my previous post What a Quality Trap is and How to Avoid Them
