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?