It probably seems obvious that investors should avoid declining businesses, but sometimes the share prices can seem so low, as compared to the cash they are giving out in dividends, that it can lure in investors none the less. As a whole, trying to find some remaining life in a dying business is not a strategy Warren Buffett recommends, even though he began his career searching for “cigar butt” businesses. He notes that “the same amount of energy and intelligence brought to other types of businesses is just going to work out better.”
“Generally speaking, it pays to stay away from declining businesses,” Warren Buffett said at the 2012 Berkshire Hathaway Annual Meeting. “It’s very hard. You’d be amazed at the offerings of businesses we get where they say, you know, it’s — I don’t want to upset Charlie, but they say, you know, it’s only six times EBITDA, and then they project some future that doesn’t have any meaning whatsoever. If you really think a business is declining, most of the time you should avoid it. . . . The real money is going to be made by being in growing businesses, and that’s where the focus should be.”
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© 2022 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.