Stocks That Are Guaranteed To Lose You Money Long Term
Peter Sayles |
Stocks That Are Guaranteed To Lose You Money Long Term
Investing doesn’t have to be hard.
Just don’t invest in shitty companies. Simple. Watch your portfolio grow much faster after putting that filter on your portfolio.
All joking aside, there are companies that you should never invest a large percentage of your money into. If at all.
Yet that’s an almost impossible to ask amongst us humans. It’s what leads to financial bubbles across all assets.
Tulips. Beanie babies. Tech stocks. Houses. Cryptocurrencies. Commodities. And so on.
It’s okay to speculate. But “we” – the everyday investor – never seem to know how to do it without betting the farm.
But there’s an element to “not investing in shitty companies” that will 100% insulate your portfolio from devastating losses.
Let’s start with the golden rule in avoiding companies that will wreck your portfolio.
1) Don’t invest in companies who give you everything for nothing
This is one of the easiest “spells” investors fall for.
If a company offers consumers something too good to be true… run for the hills.
There’s no better poster boy than Helios and Matheson Analytics (HMNY).
Helios and Matheson owns a majority stake in MoviePass – a movie subscription model that lets users see one movie per day for $10/month.
Think about that for a second.
MoviePass offered consumers a chance to see pretty much unlimited movies for $10/month when the average movie ticket was $9.16.
What could possibly go wrong?
Yet it didn’t matter to thousands of investors who bought up the thousands of shares of HMNY’s stock.
Take sorry Ken here. He kept doubling down. And doubling down. And then doubled down again for good fun.
All while the stock dropped 98%. He lost half his retirement savings.
Why? Not sure. Partly because investment analysts kept “Buy” ratings on the stock (dumb. Don’t trust those ratings for much else besides noise).
And partly because it’s one of the most common investor mistakes… doubling down on a loser.
A stock needs to double (up 100%) for an investor to break even if it first falls by 50%.
It needs to recover 150% if the stock falls 60%. 233% if it drops 70%. 400% if it drops 80%. 900% if it drops 90%. And 4,900% if it drops 98%.
Average investors never think this through. Their impulse connects them straight to the blackjack table. “I just need to double down to make my money back.”
Those people almost always walk out of the casino with their heads down. And their wallets empty.
Turns out, millions of people likely made this mistake. More than 74,000 Robinhood investors – the “peoples’” brokerage firm – owned HMNY.
Who knows how many others owned shares of HMNY in Fidelity, Charles Schwab, E-Trade, and so on.
We have one thing to say to people like Ken.
What are you doing investing half your portfolio into one stock? Let alone your retirement portfolio.
That is insane. Don’t ever do it. You’ll almost always regret it.
2) Don’t invest in companies who try to “make it up on volume”
Here’s another common investor mistake.
Yet millions of people just don’t seem to get it. (If you’re reading this, you’re now smarter than 99% of investors.)
If a company loses money on every product they sell… then tell you they plan to make it up on volume… get the hell away from that stock.
Take Blue Apron (APRN) as our guinea pig for Mistake #2.
Blue Apron had the first mover advantage in the meal delivery industry. It delivered 8 million meals within the first four years of its founding.
It came on to the scene fast. Raised $200 million over 6 rounds. Then raised another $300 million during its initial public offering (IPO) on June 29, 2017.
Investors valued it at $2.1 billion.
But what’s happened after Blue Apron reached the top of the mountain?
The food delivery industry exploded. Now they have hundreds of competitors. Some report there are now over 150 meal kit companies.
From HelloFresh to SunBasket to HomeFresh to Purple Carrot. To smoothie deliveries. Snack deliveries. Protein deliveries. You name it.
There’s a delivery service for any type of food. With almost no real differentiation between them.
Blue Apron doesn’t have anything that protects its business from competitors?
Some analysis showed Blue Apron could lose 72% of its customers within the first six months.
Its customer acquisition costs are massive at $400/customer. Yet it only brings in an average of $236/customer.
That’s right. It costs $400 to bring in that customer. Then they lose $164 on that customer. Then that customer has a 72% chance of dropping off within six months.
Doesn’t sound like a sustainable business model, does it?
Many investors continue to punish Blue Apron for it. Its stock is down 80% since its IPO. And there are no signs things are getting any better.
There’s almost no chance at surviving unless they get bailed out (we mean acquired).
But who the hell owned this stock on the way down (hint: most institutional funds). And why did they own it in the first place?
Run when you see businesses try to make up their losses by volume. It will never end well if you’re losing that much money per subscriber.
(Side Note: Blue Apron dropping 80% might perk up some people’s ears. But this stock continues to get crushed every quarter for a reason. It will hit $0 if it doesn’t get bought out. Plus, this article is for the everyday investor.)
3) Stay away from one-trick pony tech companies
We’ve got a couple notable mentions here.
We’ll point out GoPro and Fitbit as companies who fit this bill.
What is Fitbit outside a wearable watch company? What’s preventing anyone from creating a smartwatch that tracks your health?
What about GoPro?
Isn’t it just a video camera company with really good quality?
Investors seem to think so…
The point we’re making is that behind all the “new age” tech is just another company.
Investors in Fitbit and GoPro have found this out the hard way. We hope they learned from it.
Honorable Mentions Of Companies To Avoid
Here are some other stocks we think investors should steer clear from:
- Snapchat (SNAP): We think this falls under #3 – a one trick pony. Snapchat went down in flames trying to sell its “Spectacle” glasses. Yet CEO and founder Evan Spiegel doubled down and tried selling the Spectacles v2. Yeah, nobody bought those either. Worst of all, Spiegel has 100% voting rights. So even if investors wanted the company to change, he could laugh in their face.
- Tesla (TSLA): it loses billions of dollars per year. It continues to have to raise money from outside investors – both from stock issuance and debt issuance. You can read our write ups here, here, and here.
- Uber: Uber is a privately held company. But when it eventually IPOs, don’t come close to touching it. Uber is currently valued at around $80+ billion. Yet it lost $891 million in the Q2 2018 (“better” than the same quarter last year when it lost $1.1 billion.) If you had $80 billion lying around to buy the entire company, would you really want it knowing it loses nearly $4 billion per year? Didn’t think so
- Bed Bath & Beyond (BBBY): How many coupons do you receive in the mail every day from them? They accept expired coupons from six months ago. We love their stuff. Love their coupon policy. Hate their stock.