Common Stocks and Uncommon Profits and Other Writings

1 2 3
8
Five Don’ts for Investors
1. Don’t buy into promotional companies. 
Close to the very heart of successful investing is finding companies 
which are developing new products and processes or exploiting new 
markets. Companies that have just started or are about to be started are
frequently attempting to do just this. Many of them are formed to 
develop a colorful new invention. Many are started to participate in
industries, such as electronics, in which there is great growth potential.
Another large group is formed to discover mineral or other natural 
wealth—a field where the rewards for success can be outstanding. For 
these reasons, young companies not yet earning a profit on their oper-
ations may at first glance appear to be of investment value. 
There is another argument which frequently increases interest. This 
is that by buying now when the first shares are offered to the public, 
there is a chance to “get in on the ground floor.” The successful com-
pany is now selling at several times the price at which it was originally
offered. Therefore why wait and have somebody else make all this 
money? Instead why not use the same methods of inquiry and judg-
ment in finding the outstanding new enterprise now being promoted as 
can be used in finding the outstanding established corporation? 
From the investment standpoint, I believe there is a basic matter 
which puts any company without at least two or three years of com- 
mercial operation and one year of operating profit in a completely dif- 
ferent category from an established company—even one so small that
it may not have more than a million dollars of annual sales. In the

---

1 2 4
 
established company, all the major functions of the business are cur-
rently operating. The investor can observe the company’s production,
sales, cost accounting, management teamwork, and all the other 
aspects of its operations. Perhaps even more important, he can obtain
the opinion of other qualified observers who are in a position to
observe regularly some or all of these points of relative strength or
weakness in the company under consideration. In contrast, when a 
company is still in the promotional stage, all an investor or anyone else 
can do is look at a blueprint and guess what the problems and the
strong points may be. This is a much more difficult thing to do. It
allows a much greater probability of error in the conclusions reached. 
Actually, it is so difficult to do that no matter how skillful the
investor, it makes it impossible to obtain even a fraction of the “batting
average” for selecting outstanding companies that can be attained if 
judgment is confined to established operations. All too often, young 
promotional companies are dominated by one or two individuals who 
have great talent for certain phases of business procedure but are lack-
ing in other equally essential talents. They may be superb salesmen but 
lack other types of business ability. More often they are inventors or pro- 
duction men, totally unaware that even the best products need skillful 
marketing as well as manufacture. The investor is seldom in a position 
to convince such individuals of the skills missing in themselves or their 
young organizations. Usually he is even less in a position to point out
to such individuals where such talents may be found. 
For these reasons, no matter how appealing promotional companies 
may seem at first glance, I believe their financing should always be left 
to specialized groups. Such groups have management talent available to
bolster up weak spots as unfolding operations uncover them. Those who
are not in a position to supply such talent and to convince new man- 
agements of the need of taking advantage of such help will find invest-
ing in promotional companies largely a disillusioning experience. There 
are enough spectacular opportunities among established companies that 
ordinary individual investors should make it a rule never to buy into a 
promotional enterprise, no matter how attractive it may appear to be.