Disadvantages of Commodity Business
Article by Sherin Dev; Join me Twitter / Facebbok
Investing on commodity type business are a nightmare for value investors due to various reasons. It is very simple to identify a commodity type business if you try to identify some common factors that including or excluding a company to or from commodity type business. Why any value investor not interested or not to go for investing on commodity type business? Here are some important reasons to explore major disadvantages of commodity type business.
A commodity type business generally not have any business monopoly in the market with any of the product. It also leave lots of room for its competitors to come with various products or similar products. If such situations arises, generally competition will start and that result to reducing prices of products. As I have mentioned in my various articles, when there is competition happens, companies will not be able to sell its products to the right price.This will affect to the company profit and force to depends for debts.
Commodity type business are not able to beat inflation by raising or reducing price because of the existence of huge competitor base. This will be a major disadvantage for such business to fail or sunk to debt in the future. Investors thus lose there money to a great extend.
Identifying a commodity business is easy. Any business that have no consistency with per share earning for last 10 years, probably have a commodity type business. Such business generally have huge bad debts. Any company have a debt more than two times of its yearly net profit, should not be considered as a good value investments as per the strategy of legend investor Warren Buffett.
If you look into the cash flow of such companies, you can find the cash flow through financing activities will be high due to issuing new shares time to time for managing enough funds for business activities. This will further reduce the investors wealth to a great extend. Here is an article to know how stock buyback help investors to adding wealth to their investments.
Building an Intelligent investing strategy is the only possible solution to avoid such dilemma happening to investors. As I said in the previous article, reading to get right strategies and select the proper strategy as yours are the right methods.
Further read: Disadvantages of Monopoly Business !
Comment your thought here. Also, inform any queries that you may have on this article.
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Sherin Dev is the founder and editor of Investinternals.com Blog. Learn more about him here. Follow him on Twitter @Moneyhacker or be in touch with him at Facebook
If you like to add a guest article in this blog, contact him at investinternals@gmail.com
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Its my pleasure to see your comment here. thanks!
It is a good idea not to invest in a commodity type business unless you can get in at a very good price. But they have to be way undervalued.
Hmmm..... difficult to answer the question specially the word undervalued came on it. But, if you are not going to take care of any commodity business, then why bother about whether it is undervalues or over valued? -Sherin
hmm... that is nice to hear..
thanks for the visit and comment
Yup! You are right.. go ahead with a winning one.
There is no disadvantage. I have specifically mentioned the companies doing commodity business like steel companies where huge competitor base found and this force companies to reduce prices and move to lose gradually.
It is so happy to hear. Looks such loyal people like you as my readers always... keep in touch..
Happy 2010! its coming up soon. I loved this article that you wrote. I've bookmarked your site and shared it on my Facebook. I hope you don't mind! Thanks!
Thanks Brick, Andy and ipad... Very happy to see you all here and expect you come again with lots of queries and suggestions for me to enlighten this blog to new levels... wish you all a very happy X'mas and Joyous New Year!
Keep in touch ...
Can i add you to my blogroll? I think your writing skills are great. You are really gifted.
#Rad, please do. I would soon do the best from my side to appreciate you too.
#Inventory, thanks for the nice comment. Keep visiting and in touch.
Wish you a very happy and joyous new year for all
#Spy #Sanjy it is very nice to hear you and happy to know that you liked this blog. I expect you more to read in this article and like to hear any suggestions on this. Keep in touch always....
well written thanks to the author cheers!I am interested in reading more of your work.
Hola! I've been following your web site for a long time now and finally got the courage to go ahead and give you a shout out from Austin Texas! Just wanted to say keep up the good job! thank you,
Yes. Silver of course....
It should not be considered as a good value investments as per the strategy of legend investor Warren Buffet because Any company have a debt more than two times of its yearly net profit
Good read. There is currently quite a lot of information around this subject on the net and some are most definitely better than others. You have caught the detail here just right which makes for a refreshing change – thanks
Nice blog, wroth to read it again.
People were rushing mad to invest in silver, see now it is crashing like nobody's business, i hope it comes down to realistic level...to 24 k per kg
I thank you for this blog. It is really a lot of interesting information. For me, it is informative.
Really something to think about.I truly agree to these disadvantages.
I strongly feel that I have mentioned the reasons in the article itself to know why value investors don't prefer commodity type business. However the common factors are, due to excess competition, price leverage is no more with such business and thus not able to stood against inflation.. this will cause debt burden thus investors will not get any reward... There are many but I feel this is the main - Sherin
I agree,commodity type business generally not have any business monopoly in the market.
Yes. Take the value investing route through learning the advices from Philip Fisher, Benjamin Graham and Warren Buffett... you will get the right investing knowledge. Visit Birkshire Hathaway website and collect all the Buffett's letters to shareholders. Read it. It has all to become a great investor.
Superb! I love the details mentioned!
@spying cell phones - I never said all the commodity businesses are spam. However most of them are not suitable to invest due to its competitive nature where investors going to get nothing as profit.
A commodity business mean any business that struggle to sustain due to high competition and less profit with huge debt.
Is this sufficient for you to understand what is a real commodity business?
#los angeles church, if it is overvalued, investors lose money. It is difficult to get undervalued commodity business because of high competition and debt.
#Hotel in Firenze - It is our duty to check and identify a or more product in our country that enjoys monopoly. If you went through each and every product that we uses frequently, there should be some that enjoys such monopoly. competition of course lead to the quality but the same time the cash flow to make such.. Investors thus lost their money because that would pump to research activities.. Being a market leader, a service or product should enjoy monopolistic position.
Sherin you are great.. thanks for this article
You really expanded upon a subject that I usually don’t care much about and made it very exciting. This is a unique blog that I will take note of it.
Thank You
your information helps me consider some useful things. i like such type of articles. thnx
It’s very kind of you to share such an interesting point of view.
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