Nassim Taleb popularised the phrase "via negativa" (lit. "negative way"). As the old joke goes, I want to know where I'll die so that I don't go there.
In other words, it got me thinking of investment mistakes to avoid, rather than selecting what to invest in.
All this was prompted by Paul's discussion on Anexo (LON:ANX) a few days ago.
A simple rule is to avoid companies that Paul rates as "red".
I think another guideline is to be sceptical of shares that Stockopedia has a low momentum score in red. Maybe that's not something that should be written in stone, but it is often an indicator that the market is perceiving something about the share that may not be obvious at first flush.
ANX has a low PE of 4.4, and has been increasing EPS by about 8%pa over the last 6 years. Sounds a bargain. But look at the freecashflow per shares figure. You can work out a freecashflow yield: divide the FCF per share (Stockopedia gives you that figure) by the share price. Be suspicious of a figure that looks much lower than the earnings yield (reciprocal of PE).
You'll see, in fact, that ANX didn't generate any free cashflow for at least 6 years.
So even if you are extremely lazy like me, and aren't good at qualitative analysis, you could have quickly nixed this share.
Some other "don't" that spring to mind offhand:
- Don't invest in Indian, Chinese or Israeli companies
- Don't invest in companies where the share count is more that say 3% growth pa (although you may have to exercise discretion on this. There can be legit reasons why a share count increases)
- Don't invest in companies with excessive debt
- Don't buy AIM shares that don't pay a dividend.
- Don't invest in AIM companies that have been listed for less than 7 years
A couple more
- don't invest in companies with dodgy management. It's hard to assess, but when you hear about some dodgy management dealings, iffy related-party transactions, you should probably stay clear
- avoid "bottom-feeders" - companies that operate in businesses that are a bit dodgy. Ambulance chasers, debt for the elderly, stuff like that. They usually get their comeuppance, usually shortly after buying them, if my luck is anything to go by.…
