Warren Buffett: 8 Business Yellow Flags

1: Excess production capacity

If competitors can easily flood the market with supply, then you have a commodity-like product.

2: Low profit margins

If a business can barely convert its revenue into profits, it signals the company can easily become unprofitable if revenue declines.

3: Highly competitive industry

Lots of competition will eventually erode any advantage by attracting new capital.

4: No pricing power

Buffett avoids companies that would lose customers if they passed on a price increase.

5: Erratic profits

If a business has boom and bust years, then it becomes impossible to predict the long-term returns.

6: Reliance on good management

Great managers come and go. If the business needs a great manager to succeed, it’s not a great business.

7: No identifiable competitive advantage

If he can't identify a company's moat, Buffett puts it in his “too-hard” pile.

8: Low returns on capital

Investing is a game of capital allocation. If a business cannot generate high returns on equity, it has no place in Buffett's portfolio.

There are exceptions to all of these rules.

But the exceptions are few.

If you spent your investing career avoiding these as much as possible, you'd STILL do very well.