A big part of investing is knowing what NOT to invest in. For me, I like to invest in companies with a solid plan to profitability, that even a monkey could run, like utility stocks. However, it is essential to avoid companies that have no solid profitability plans, like Best Buy.
Here is what I’m talking about (BTW, this is one of my favorite video clips on business):
[youtube id=”tO5sxLapAts” alt=”South Park Gnome Underpants Profit Plan”]
Companies With No Profit Fail – Period
The only goal of a publicly traded company is to generate profits for their shareholders. Sometimes companies will go public before turning a profit – but they usually have a solid plan to profitability that investors like (this is the case with many tech stocks).
However, companies that have no plan to get to profitability are the ones you want to avoid. For example, Best Buy was supposedly the biggest winner for customer traffic on Black Friday. But it doesn’t matter how many cheap TVs they sold because they LOSE money on every TV. That is a terrible profit plan.
The same is true with airline stocks. Way back in 1989, Warren Buffett remarked:
If a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money. But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.
I have an 800 number now that I call if I get the urge to buy an airline stock. I call at 2 in the morning and I say: ‘My name is Warren, and I’m an aeroholic.’ And then they talk me down.
The point is, the airline market is so fiercely competitive that it is nearly impossible to consistently turn a profit. Investors should be leery of these stocks.
What companies or sectors do you avoid because of poor profitability?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.