Sometimes the best thoughts on investing are ones that involve what to avoid. Here are a few of my thoughts on sectors to avoid, and their respective stocks.
First, when I look at companies to avoid, I look at the economy. The first thing most financial advisers tell people who need to cutback is to cut their cable. Not only is this a frivolous expense, but most shows can be watched online. Therefore, I stay away from cable companies such as Time Warner and Cox Communications. This does NOT include all communications companies, as I do like Frontier Communications. This company has a great dividend and its access lines are franchised, which essentially gives it a government sanctioned monopoly.
Next, a good rule of thumb is to stay far away from airline stocks. There is way too much competition in this sector, which just pushes prices down. That in-turn makes it very difficult to be profitable. We have seen this for years, but people still keep investing in airlines. The only time I would buy an airlines stock is if several, and I mean several, US carriers went under to eliminate the competition.
Companies I Don’t Understand
Finally, I stay away from companies I don’t understand. Warren Buffett has expanded on this thought many times, but it is very valid. The best example of stocks I don’t understand are tech start-ups. When Google first started, I would never have invested. I wasn’t until it had a proven revenue model that I became interested in the company. Selling ads is something I understand, search is something I don’t understand. The same holds true with many new companies. Twitter, for example. If they go public, my question would be how are they going to make money? If they say selling ads, I would stay away because it has been done with Google.
As you look at companies to invest in, use common sense. My motto is, be the best at something, be the worst at nothing, and be above average at everything else. If a company does not fit that criteria, don’t invest!
Readers, what other stocks and sectors do you avoid?