Tuesday, June 2, 2009

Best of Breed – Bad Breed

Often, you will hear investment advisors touting a company/stock/mutual fund as "best in breed." Assuming their evaluation is accurate, one would expect to make money following their advice. Unfortunately, it is not so simple. What if the breed is bad? Before they all went out of business, I am sure there was a "best" buggy whip manufacturer. Below, I have listed the "bad breeds" that I believe all investors should avoid.

Bad Breeds:

  1. Landline Telephone Carriers: They face a horrible combination of high fixed cost, competition from other technology, and a dying technology. With the exception of business use, I expect residential landlines to be a rarity within 10 years.
  2. Airlines: Over the past 40+ years, I doubt any industry has destroyed more capital than the airline industry. This industry has a horrible combination of high fixed costs (union contracts, terminals, airplanes) and exposure to price spikes (fuel costs) and low margins. For that reason, the "best" carrier, Southwest Airlines, should be avoided.

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