Multi-billionaire investor Warren Buffett once offered these rules for the stock market: “Rule #1. Never lose money. Rule No. #2: Never forget Rule #1.”
In 37 years of investing, I’ve broken these rules often. But following Buffett’s Rule #1 has steered me clear of some awful businesses. For example, here are two companies that I’d shun today.
1. Trumped-up valuation
Former US president Donald Trump now has a stock market-listed business: Trump Media & Technology Group Corp (NASDAQ: DJT). This group went public on 26 March 2024 after merging with a listed special-purpose acquisition company.
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Trump owns 57.6% of this social-media company, so buyers of its stock tend to be among his most avid fans. However, I find this businessman and his behaviour disagreeable.
Even putting my doubts about Trump aside, this group looks like a dumpster fire priced at a laughable valuation. In its latest full-year results, TMTG lost $58.2m on revenue of $4.1m. To me, this resembles a firm heading for failure.
At its opening-day peak, this ‘Trumped up’ share price hit $79.38, before plunging. On Monday, 15 April, it hit a low of $26.25 — down 66.9% from its high — before closing at $26.61. Even after this collapse, TMTG’s valuation is $3.6bn.
Nothing could convince me to buy stock in such an overhyped company. This meme stock is largely a dream stock for fervent Trump supporters. Frankly, I’m not interested in buying into this latest example of ‘Tulipmania’.
In the interest of balance, I could be wrong. Trump’s Truth Social social-media app might eventually become the #1 platform for Republican voters. And there are a lot of them. Advertising and other revenues could soar, growing this business into its multi-billion-dollar valuation. But I doubt it!
2. Run-ins with regulators
Stock-market history has taught me to avoid companies that get into trouble with regulators, particularly in the financial sector. One such company to fall foul of its overseer is financial-advice firm St James’s Place (LSE: STJ).
Founded in 1991, St James’s Place advises clients on their financial needs, sells them products and manages assets on their behalf. Throughout its history, this wealth manager has faced accusations of levying high, complex and opaque charges on clients.
In 2023-24, the Financial Conduct Authority gave the firm a few ‘taps on the shoulder’, raising red flags over the company’s business model. In July last year, it announced cuts to its fees, sending its shares tumbling.
This stock-market fall was followed by further slumps in October, when the FCA pressured the group to review its fee structure further, and in March, when the firm revealed a one-off provision of £426m for client refunds.
In 2022, SJP made a pre-tax profit of £504m, but the above problems generated a pre-tax loss of £4.5m for 2023. Its shares have crashed 66.2% over one year and 64.1% over five years.
With its stock down over three-quarters from its 2021 high, St James’s Place is a company in crisis. Its valuation has dived to £2.2bn, while its shares languish at lows not seen since late 2012.
Again, I could be wrong — this group might make peace with the FCA and win back the trust of its clients. This could boost revenues and turn this tanker around, but I won’t be betting on this outcome.
