10 investments we avoid (Value Investing FM) – Investment Academy – Learn value investing from scratch

When investing in the stock market, our main objective is to find companies that offer us a good return with a controlled risk. That is beyond question. However, it is just as important to avoid investing money in companies and sectors that can make us lose money in the long term. In this chapter of Value Investing FM we are going to look at 10 examples of companies and sectors that we try to avoid, along with their exceptions.

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List of investments we avoid

Aerolíneas

Causes: all of the world

-Intensive in capital

-no differentiation

-the most powerful unions

-deflationary prices

-cyclicality by demand

-cyclicality of the price of crude oil….

Exceptions: niche and low cost routes

Examples: Ryanair, Wizz or Alaska Air

Fashion Products

Examples:

  • Binary options
  • CFDs
  • warrants
  • Turbowarrants

Causes:

  • They are sold as alternatives to earn a lot of money in a short time
  • High leverage
  • High risk
  • They are designed to get money from whom savers

exceptions:

  • Options and CFDs for specific cases with catalysts
  • Even so, with little portfolio weighting

Argentine companies

Causes: Argentina has been in crisis for 70 years

Inflation unleashed (55% year-on-year), repeated tendency to control capital (corralito), the peso is a joke, there are taxes even on exports, Kirchnerism has returned….

Examples:

  • Galicia Financial Group
  • In 5 years he made a 5-bagger up and another down

South African companies

South Africa may be the Venezuela of Africa, Zuma was a disaster, without Mandela the country has lost a symbol, gold production falling steadily with high AISC, almost all trying to sell assets, a minister saying that to end poverty there is than printing bills, they have changed the constitution to be able to expropriate whites without compensation, unemployment of almost 30%

Exceptions: none

Banks and insurers

Typical of the Spanish investor: Santander, BBVA, Bankia, Popular ...

Causes:

  • Outside my circle of competence
  • Impossibility of knowing the company's risk
  • Sector with disruptive threats

The only exception, that meet 2 conditions:

  • Exemplary risk management
  • Stock market crash in the sector
  • Example: Wells Fargo

Examples:

  • BBVA from € 19,5 to 4 something
  • Santander from € 14,5 to 3 something
  • Bankia from € 180 to € 1,8
  • Banco Popular de más de 30 € a 0 €

Companies with poor managers

Causes:

-If the company goes well they will win and maybe you will have the leftovers, if it goes bad they will get money and you all the brown

-lies

-possibly accounting traps

Exceptions: perhaps if the business is spectacular, it is cheap and the manager is not so bad or steals

Example: ¿Norlisk Nickel?

IPOs

Causes:

  • Normally high price (interest to sell at a good price)
  • Few data for analysis (behavior in cycles, compliance with forecasts, etc.)

Examples:

  • Uber, Lift, SmileDirectClub, Slack, WeWork

exceptions:

  • State companies è Price. Example: Aena
  • Exceptional companies. Example: Google

Southern Italian companies

Causes: bananalandia

Stories: the FIAT company controlled by the mafia, laptop in Palermo and dog in Naples, wife of the mobster in Milan….

Exceptions: none, the company is not yours

Examples: La Doria

Automotive

Causes:

  • Problematic, competitive and unprofitable sector
    • Capital intensive
    • Little differentiation
      • Ejemplos SUV gama media: Peugeot 2008, Citroën C3 Aircross, Fiat 500X, Ford B-Max, Honda Jazz, Hyundai ix20, Mini Mini Clubman, Renault Captur.
    • Powerful unions
    • Poco pricing power
  • Threats of disruption in the sector

exceptions:

  • Premium or luxury brands. Example: Ferrari
  • Extraordinarily low price in cycle valley
  • Beware of value traps

Fashion sectors

Examples: Cannabis, 3D printers, Graphene, Renewables, ICOs, cryptocurrencies

Causes:

  • Prices are often prohibitive
  • New competition keeps coming

Example:

  • Renewable Bubble: RENIXX Index
  • Between 2003 and 2007: + 500% Up to 1918 points
  • The next 5 years: -90%, below 190 points
  • RENIXX today: 600 points

exceptions:

  • Know how to distinguish the grain from the chaff
  • Not: Amazon in 2000
  • Bitcoin today?

Debate

  • Chinese companies?
  • Companies outside the circle of competition? Up to what point?
  • Tech companies?
  • Heavily indebted companies?
  • Companies that trade at high multiples?