Here’s why I avoid these terrible ASX shares at all costs

You work hard for your money and you don’t want to lose it. Here are some terrible ASX shares that I’d avoid at all costs!

| More on:
Man pinching nose and holding other hand up in a 'stop' gesture turning away in front of an orange background

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Avoiding underperforming ASX shares can help to provide market-beating returns. The reason is purely mathematical. If you lose 30% of your initial investment in an ASX share, just to break even you’ll need to earn a return of 50%. And it can cost you even more. If you lose 50% of your capital, you need to earn a return of 100% to break even!

Warren Buffett has some great rules for investing in stocks. The following 2 are some of my favourites and simply explain why you should avoid bad ASX shares at all costs:

  1. Never lose money;
  2. Don’t forget rule No. 1.

So with that in mind, here is one type of ASX share that I believe investors should avoid at all costs.

Junior explorers – boom or bust

The S&P/ASX 200 Index (ASX: XJO) is made up of a lot of what I call ‘terrible shares’. And a lot of these terrible shares are junior explorers. Now, I don’t have an issue with savvy business folk trying to make it big, but as an investment, junior explorers are a bad idea in my opinion. For every Twiggy Forrest and Fortescue Metals Group Limited (ASX: FMG), there are thousands of stocks you’ve never heard of… And never will again.

Show me the money

My main issue with investing in junior explorers is that, in my view, they have terrible business fundamentals. The companies need to raise (your) capital to acquire tenements and to perform test drilling. All in the hope that the results are favourable. There is no product, no pricing power, no brand, no moat and certainly no operating cash flow.

Market mechanics

Given the size of most junior explorers, they can often be more thinly traded than their large cap counterparts. This can cause problems for investors that don’t utilise limit orders to buy these ASX shares. It also lends itself to people with a vested interest in the share price over-hyping the stock.

You work hard for your money

Most people’s money comes from their business or their job. Now I work really hard to earn an income and I bet you do too. Having a punt on junior explorers can be thrilling, and great for the office banter. But at the expense of your hard earned cash, it’s an expensive undertaking.

You should only be investing with cash that you don’t need in the next few years. Drill down even further (hilarious mining pun), and if you do want to try and become the next Gina or Clive, allocate an appropriately small portion of your stock portfolio to it. If it goes to zero, you only want a little! If it goes to the moon, you only need a little!

Motley Fool contributor Lloyd Prout has no position in any of the stocks mentioned and expresses his own opinions. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ ASX Shares

a woman wearing a close-sitting hat featuring wires and thick computer screen glasses clutches her computer monitor and looks shocked and disturbed as she reads old-fashioned computer text from the screen.
Technology Shares

Here’s why ASX 200 tech shares (ASX:XTX) outperformed today

ASX tech shares have taken a turn for the better today.

Read more »

Worker in hard hat looks puzzled with one hand on chin
Resources Shares

Why did the Rio Tinto share price (ASX:RIO) have such a lousy 2021?

We look at what happened to this ASX 200 mining giant's shares last year

Read more »

a miner wearing a hard hat smiles as he stands in front of heavy earth moving equipment on a barren mine site.
Share Gainers

Here’s why the Rumble Resources (ASX:RTR) share price is climbing 5%

The mineral explorer's share price is on the rise amid promising drill results.

Read more »

share price high, all time record, record share price, highest, price rise, increase, up,
⏸️ ASX Shares

Here are the top 10 ASX 200 shares on Wednesday

Here are your top 10 biggest gainers in the ASX 200 on Wednesday.

Read more »

comical investor reading documents and surrounded by calculators
⏸️ ASX Shares

The ASX reporting wrap-up: WiseTech, Bravura, Seven Group

Just what the investor ordered. Here’s a recap of the companies that reported on Wednesday...

Read more »

Doctor performing an ultrasound on pregnant woman
⏸️ ASX Shares

The ASX reporting wrap-up: Ansell, Kogan, Nanosonics

Just what the investor ordered. Here’s a recap of the companies that reported on Tuesday...

Read more »

blue arrows representing a rising share price ASX 200
⏸️ ASX Shares

Here are the top 10 ASX 200 shares on Tuesday

Here are your top 10 biggest gainers in the ASX 200 on Tuesday.

Read more »

unhappy investor considering computer screen
Share Market News

The ASX reporting wrap-up: Charter Hall, Ampol, NIB Holdings

Just what the investor ordered. Here’s a recap of the companies that reported on Monday...

Read more »