Why do people invest in lousy companies?


Why do people invest in companies that are not financially healthy? I recently received this question from a reader, and today I'll answer that question.

What makes a company financially healthy?
A financially healthy company is one that is consistently profitable, has low debt, consistently increases shareholder value, sells a great product or service, and a number of other factors. To keep things simple, I created the 12 Rules of Simply Investing to help you determine if a company is a quality (financially healthy) company. Also included in the 12 Rules are rules to make sure you are looking at a company (or stock) that is priced low (undervalued). You should only invest in quality companies that are also undervalued.

The 12 Rules of Simply Investing

Here are the 12 Rules of Simply Investing, the same rules I have used over the last 20+ years to invest successfully.

  1. Do you understand the product or service offered by the company?
  2. Will people still be using this product or service in 20 years?
  3. Does the company have a low-cost durable (lasting) competitive advantage?
  4. Is the company recession proof?
  5. Has the company had consistent earnings growth? The EPS growth must be at least 8%
  6. Has the company had consistent dividend growth? The dividend growth must be at least 8%
  7. Does the company have a low payout ratio? Payout ratio must be 75% or less (and above 0).
  8. Does the company have low debt? Debt must be 70% or less (and above 0).
  9. Does the company have a good credit rating? Company must have a minimum S&P Credit Rating of “BBB+”.
  10. Does the company actively buy back its shares?
  11.  Is the stock undervalued?
    a. The P/E Ratio must be 25 or below (and above 0).
    b. Is the current dividend yield higher than the average dividend yield?
    c. The P/B Ratio should be 3 or less (and above 0).
  12. Keep your emotions out of investing.
    A reminder to keep emotion out of the selection process. Discipline and patience are the keys to successful investing.

In the Simply Investing online Course, I cover the 12 Rules in greater detail with real-life examples, and show you how easy it is to apply the 12 Rules, and become a successful investor.

Reminder: A company must pass all the 12 Rules of Simply Investing, in order to be a quality-undervalued stock, and only then must you consider investing in it.

Why do people invest in companies that are not financially healthy?
A reader (who had taken the SI Course, and understood the 12 Rules) asked "I'm confused why do people keep buying stocks when the debt is over 800%, and the P/E Ratio is over 500?"

Here is my answer:
It's the same reason why people keep buying stocks that:
  • have a P/E ratio of over 25, Tesla's P/E is 600 today
  • have very high debt, KMB debt is over 1703%
  • are not recession proof
  • have a payout ratio of over 100%
  • are overvalued
  • are not financially healthy
  • fail the 12 Rules of Simply Investing
People buy shares, even when they fail the 12 Rules, for the following reasons:
  • they think the stock price will keep going up, they think they can make money quickly
  • they think they can time the market, and they'll know exactly when to buy and when to sell
  • they don't know about the 12 Rules of Simply Investing
  • they don't know or care about what they are investing in
  • they buy stocks because a friend, family member, or co-worker told them to buy it
  • they don't understand the importance of doing a proper evaluation
  • they don't want to spend time doing research
  • they buy stocks because someone online or a news article recommended a specific stock
  • they have never experienced a market crash, and they think stock prices will continue to rise forever
  • a number of stocks are automatically bought because they are included in a Mutual/Index fund or ETF

What's the solution?
Ignore the hype, ignore the media, ignore your friends (I know they mean well), and apply the 12 Rules of Simply Investing. If a company fails even one Rule you should move on to another company. These rules are designed to minimize your risk and maximize your gains for the long-term. These rules make investing easy and simple to implement. The goal is for you to build a resilient stock portfolio that will provide you with growing passive income each year, regardless of stock prices and the economy.

I'm here to help
I can help you to start investing today, why re-invent the wheel when you can learn from my 20-years of being in the stock market. I've witnessed first hand the ups and downs of the market, and I know what it's like to start investing your hard earned money. I created the 12 Rule of Simply Investing to help you get started right away, so you don't have to wait on the sidelines any longer. The sooner you start investing the sooner you will be on your path to financial freedom.

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