An Essential Charlie Munger Quote...

“A lot of success in business and in life comes from knowing what you want to avoid.”

That’s a quote from the late, great Charlie Munger. And in the world of investing, it’s sometimes good to create “automatic disqualifiers” for certain sectors or businesses.

Why?

Because doing so helps you avoid future problems further down the line.

And in today’s dispatch, I want to highlight three sectors that I personally avoid - as well as my rationale for doing so.

1. Fashion

Fashion is a volatile industry. Trends are constantly changing and today’s hottest brand or designer may become completely irrelevant two years from now.

Burberry Group plc is down by more than -42% over the past decade. Lululemon athletica is down -22% this year. And Ralph Lauren Corporation, which is up +252% over the past five years, still underperformed the S&P 500 on a 10-year timeline.

• Ralph Lauren Corporation 10-year average annual total return: 9.02%

• SPDR S&P 500 ETF Trust 10-year average annual total return: 12.94%

Maybe fashion stocks are a great trade if you’re a growth investor capable of spotting trends before Wall Street - and that’s not meant to be dismissive, there are plenty of investors who excel at this - but as a buy-and-hold investor I simply avoid the sector.

2. Video Games

Video games are a multi-billion dollar industry. And as tech gets cheaper, gaming continues to grow in popularity. Fun fact: I recently had a legal consultation and my lawyer originally learned English so he trash talk other players on War Thunder.

A big, growing business with international appeal.

But, video game stocks are pretty hit or miss.

Take-Two Interactive Software, Inc., publisher of the Grand Theft Auto games, is up +722% over the past decade. Meanwhile, Ubisoft Entertainment who publish the Assassin's Creed, Far Cry, and Tom Clancy games, is down -42% over that same timespan.

And Electronic Arts Inc., who publish recognizable titles like The Sims and Madden. has lagged the S&P 500 over the past 10 years.

Entertainment is an extremely competitive and innovative field. And, companies like Ubisoft and Electronic Arts are always involved in some form of controversy or backlash.

This sector is too competitive for my taste. And, gaming and entertainment trends are volatile. While there are some winners, like Take-Two Interactive, I try to avoid the gaming industry as a whole because it is outside my circle of competence.

3. Consumer Discretionary Purchases

Boats, RVs, chain restaurants, robot vacuum cleaners, theme parks, gizmos and gadgets…

These are all consumer discretionary sectors that I avoid.

Consumer discretionary purchases are completely optional. And, these items are first to go during a recession or economic downturn.

On top of this, many consumer discretionary stocks simply don’t perform well.

THOR Industries, Inc. makes recreational vehicles and this stock is only up by about 50% over the past decade. Likewise, Dine Brands Global, owners of Applebee’s, are down -73% during that same timeframe. iRobot Corporation, the company that makes those Roomba vacuum cleaners, is down -90% in the past 10 years.

And, recreational boating company Malibu Boats, Inc. has a 10-year average annual total return of just 3.52%.

Consumer discretionary stocks are always popular with unsophisticated retail investors, in the 1950’s Brunswick Bowling was one of the hottest investments of the decade, because they’re very obvious and easy to construct a simple thesis around.

“What is something everybody hates? Vacuuming. What company solves this pesky problem? iRobot Corporation!”

The problem is that these products are completely optional, and the companies that make consumer discretionary goods often trade at high valuations because every investor can easily build a simple growth thesis. As a quick example, THOR Industries trades at a price to earnings ratio of 22.51 while delivering a 10-year average annual total return of 6.22%. Meanwhile, Insurance company Aflac Incorporated trades at a price to earnings ratio of 15.16 while delivering a 10-year average annual total return of 15.28%.

If you’re good at spotting retail trends before they hit the mainstream, consumer discretionary stocks could be a money printer. But as a buy-and-hold investor, I generally skip this sector due to the lackluster returns and cyclical nature.

Conclusion

Like Charlie Munger said, it’s good to know what you want to avoid.

And knowing which sectors you want to invest in, and which you don’t, can help you save a lot of time and effort when researching stocks. Additionally, having certain “no go” industries can protect your capital by keeping you away from manias or short-term trends that ultimately implode.

Your sectors and strategies may differ from mine. But, this is just something worth thinking about when you’re researching stocks or planning your financial future.

As always, thank you for reading and enjoy your day!

Disclaimer: This article is for entertainment purposes only. It is not financial advice, always do your own research.