Short notes on investments.

There are 'great' businesses that 'will' make you big money in the long term. There are 'good' businesses that 'may' make you good money in the long term. And then, there are 'terrible investments' that 'will' definitely lose you money in the long term. It is this third category that you must stay clear of.

Buffett describes such terrible businesses as ones that 'grow rapidly, require significant capital to fuel the growth, and then earn little or no money for shareholders'. His topmost example of such a business is airlines. But there are several others such terrible businesses existing in India that you must stay clear of. And this is despite the fact that some of these businesses promise a bright growth opportunity in terms of growing their revenues and profits. But it is not just revenues and profit growth that matter. What also counts is shareholder returns.

The ones that come to our mind exist in sectors like retailing, power, textiles, and oil marketing. We see businesses in power and oil marketing continue to get hurt by wide regulations that restrict returns for companies. As for the ones in retailing, continuous expansion of mall space will consistently eat into their cash flows.

We do not think that investing large amounts of capital into such businesses is a bad thing in itself. But you as an investor need to make sure that there is a good chance that such capital investments will actually translate into healthy shareholder returns in the future. If you see such chances as minimal, stay clear of investing in these businesses!