When it comes to investing, choosing NOT to put your money somewhere can be just as important to your success. After all, one bad investment can easily water down the rest of your portfolio and cripple your returns.
Sometimes we need to ask ourselves, "W.W.W.B.D. - What Would Warren Buffett Do?"
While there's no way to know for sure the exact companies that you should avoid, there are certain guidelines that can help keep you on the right track.
Have you ever asked the questions: Should I save or invest? or What should I invest in?
Here's a list of things that you shouldn't be investing in:
1. Companies You Don't Understand
Investing in a company requires a deep level of understanding as to how that company operates, what their mission is, what their obstacles are, and more. Without this level of understanding, investing becomes speculation. And speculation is little more than gambling.
Imagine that you were considering buying 100% of a company. Wouldn't you want to know everything about that company you possibly could before you became its sole owner? That’s a huge investment and you wouldn’t want to sink all your money into something you’re not confident will succeed.
Regardless of whether you are buying 100% of a company or just a tiny fraction of it, the same level of scrutiny should apply -- this is still YOUR money and YOUR future.
Rule #1 investors stay firmly within their "circle of competence" — meaning, only invest in companies you already understand as a consumer, employee, or observer. If you can't explain what the business does, how it makes money, and what might put it out of business, in just a few sentences, then it's not in your circle — and it's not a smart investment.
For example, if you're an avid user of Apple products and understand the ecosystem, supply chain, and customer base — you're already ahead in understanding the business model. But if someone tries to pitch you a cybersecurity stock and you’ve never worked in tech or studied it deeply, that’s a red flag.
So, before you consider investing in a company, make sure you are completely familiar with the company and the industry it operates in.
Preferably, you will be at least somewhat familiar with these things before you ever even start researching a company. Any company that you are not deeply familiar with should be avoided.
2. Companies with Untrustworthy Management.
Even the best companies are only as good as the people leading them. Regardless of how many times it comes back to bite them, though, there will always be CEOs and other executives who cut corners, engage in shady business practices, and ultimately put their company in jeopardy.
At first, these companies may seem to be doing quite well. Until it all comes to a head, they may even be benefiting from their unethical leadership.
However, these practices never turn out well in the long run, and it's always the shareholders who suffer the most.
As Warren Buffett says,
“When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”
Similarly, Rule #1 emphasizes that trustworthy leadership is non-negotiable for long-term investors. You want to look for management with high integrity, transparency, and a long-term mindset.
So how do you tell if a company has untrustworthy management?
Start by looking at their past record. Ideally, it'll be squeaky clean. If you do find that an executive has engaged in shady business practices in the past then it's a safe bet that they'll be tempted to do it again.
One Rule #1 strategy is to read the company’s annual shareholder letters. These letters can give you a great sense of whether leadership is being honest about challenges or simply spinning a story to please Wall Street.
Dig deeper. How upfront and honest have they been in the past?
Did they try to sugarcoat problems and hype up expectations higher than they should be or were they honest in the face of trials and success alike?
If a CEO sounds more like a salesman than an honest leader, you should avoid their company like the plague.
Lastly, you'll want to look at a CEO's salary.
Is their compensation justified by their performance or are they drawing massive paychecks without pushing the company forward? Being paid large sums without producing positive results doesn't necessarily make a CEO untrustworthy, but it can make them complacent, which is almost just as bad for the shareholders of a company.
3. Companies That Aren't On Sale
If you've found an amazing company with great management that you understand and believe in then you are well on your way to making a sound investment.
It's absolutely essential, though, that you wait for the market to put that company on sale.
If it’s not there yet, stick it on your watchlist and keep an eye on it.
A company is “on sale” when its current price is significantly below its intrinsic value — ideally, 50% lower to provide a healthy margin of safety. Calculating intrinsic value requires understanding the company’s growth rate, earnings, and return on invested capital (ROIC). When the stock price drops due to short-term market noise but fundamentals remain strong, that's your moment.
For instance, if you've determined that a company’s intrinsic value is $100 per share, you’d aim to buy it at $50 to ensure you have a buffer if something doesn’t go as planned. This cushion helps protect your downside while maximizing your potential upside.
The margin of safety is there to help you avoid risk. If that company doesn’t do as well as you thought it would, at least you will have solace than you paid 50% less than you could have.
The good news is that prices go up and down, and if you're patient enough, great buying opportunities on excellent companies will come up. It's important, though, not to buy companies that aren't on sale.
So how do you determine if a company is on sale?
To calculate your margin of safety, I suggest you use my margin of safety calculator. I have a Margin of Safety Calculator here for you if you'd like it done for you.
Final Thoughts: Invest with Intention
Successful investing isn’t just about knowing what to buy — it’s about knowing what to avoid. By steering clear of companies you don’t understand, businesses with questionable leadership, and stocks that aren’t on sale, you dramatically reduce your risk and increase your chances of building long-term wealth.
The Rule #1 strategy is built on the idea that the best investors avoid mistakes just as aggressively as they seek opportunities. So before you hit that "buy" button, ask yourself: Would Warren Buffett invest in this company? Would I feel proud to own 100% of it?
When you treat every investing decision like it could make or break your financial future — because it can — you'll naturally become a more thoughtful, patient, and successful investor.
**Editors Note: Last Updated April 3, 2025**
How to Pick Rule #1 Stocks
5 simple steps to find, evaluate, and invest in wonderful companies.
Related Posts
How to Invest Money: A Simple Guide to Grow Your Wealth
15 of the Best Investing Books Every Investor Should Read
