Companies to Avoid Investing In

The type of business that Warren Buffett avoids like a plague is what is called ‘commodity’ type businesses. These businesses often have these characteristics:

• They tend to sell the same product as many other companies.
• They have low profit margins.
• They have low returns on shareholders’ equity (equity = the company’s total assets minus total liabilities).
• They have trouble keeping people’s loyalty to their brand.
• There is excess production capacity in the industry.
• They have erratic profits and those profits depend heavily on management’s ability to efficiently use assets like machinery and equipment.

Commodity type businesses tend to rely heavily on selling at low prices to keep business running smoothly. These types of companies don’t usually deliver more than average results over the long term and have difficulty recovering from major setbacks.