5 Things to Avoid (not losing money)
When searching for stocks I avoid those with the following traits.
- High debt - Generally, I do not hold companies with a debt to operating profit ratio of more than two but it depends on the company. I consider other balance sheet items and earnings volatility to decide how much debt I am comfortable with. Too much debt can cause a business to fail.
- Not self-funded - If a company is not cash flow positive or does not have enough cash to get there then it is beholden to the market to raise funds. Such businesses often never reach profitability and even if they do early shareholders are diluted in the process. I want investments that generate positive returns.
- Opaque accounts - I need to fully understand the balance sheet and profit adjustments should be minimal. I have found that when the accounts don't make sense it often indicates problems with the company.
- Unsustainable business models - I have often fallen into the trap of buying "cheap" stocks with weak or faddish business models. Such businesses only last a few years and so are rarely cheap.
- Over-promotional companies - Share price performance follows business performance over the longterm so the only correct way to manage the share price is to manage the business well. Companies that make lots of meaningless announcements to the market are often trying to disguise poor business performance.