I recently wrote about my number 1 type of ASX share avoid at all cost. But there are some more terrible ASX shares that I will never buy. My original article goes into more detail about why you want to avoid terrible ASX shares, but here is a summary:
- If you lose 30% of your money, you need to make 50% to break even.
- Legendary investor Warren Buffett agrees and has provided lessons on this in the past.
So with that in mind, here are 2 terrible ASX shares that I will probably never buy.
Government supported industries
Government support (like subsidies or tariffs) or revenue (like government contracts) can seem like a great reason to buy an ASX share. You have a debtor that won’t go broke. You have a guaranteed revenue floor per customer. You have an artificial advantage over other countries. However in my opinion, over the long term I believe that these incentives create shares that are potentially terrible investments.
Economic incentives such as subsidies or protection like tariffs create uncompetitive and inefficient businesses. I believe that this can sometimes lead to terrible investments. A great example of this is in childcare. Providers such as G8 Education Limited (ASX: GEM) were incentivised to make investments to increase capacity at their centres or even buy more centres. However, the businesses were not disciplined in their growth. A quick look at a 3 or 5-year price chart paints an ugly picture.
This isn’t true for all ASX shares though. Some shares such as Electro Optic Systems Hldg Ltd (ASX: EOS) can (and I believe will) do well in the future with the government help. However it is worth noting that Electro is operating in the defence industry, which along with other necessary industries like agriculture, can be special cases for regulation and the like.
2 terrible ASX shares
Motley Fool co-Founder David Gardner is in my opinion one of the best investors of the 20th century. His numbers back that up. A favourite phrase of his is, “winners, win”.
I believe that the inverse is also true. Flawed businesses such as AMP Limited (ASX: AMP) or Virgin Australia Holdings Ltd (ASX:VAH), that have destroyed investor capital over decades, will potentially continue to do so. Turning around a business is difficult for a number of reasons. It could be brand damage, terrible business or market economics, poor leadership, or simply a bad company culture.
There are more than enough great ASX shares to buy out there. There’s no need to risk your cash on a value trap.
The Foolish bottom line
Share traders might be able to make money through short term volatility, but they aren’t going to make the exponential returns that the share market, compound interest and time provide. Long term investors are best to steer clear of these capital destroying terrible ASX shares.
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of February 15th 2021
Lloyd Prout has no position in any of the stocks mentioned and expresses his own opinions. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Electro Optic Systems Holdings Limited. The Motley Fool Australia has recommended Electro Optic Systems Holdings Limited. 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.