90% of people buying stocks are actually buying 'bad business' | Buffett divides companies into three types, I advise you to read them thoroughly Many people study candlesticks, read news, and guess policies. But Buffett's first thing when looking at a company is never the price, but a problem: What kind of business is this? In his world, there are actually only three types of companies: Great business, ordinary business, terrible business. If you can't distinguish between these three, even if you try hard, it's difficult to make long-term money. I will explain this logic to you in the simplest possible words. —— The first type: great business This type of company has a clear characteristic: it is difficult for others to steal its business. It usually has a deep moat, such as brand, channel, technology, and network effects. It's not impossible for a new company to come in, but it's very difficult. It also has a very comfortable ability: it can increase in price. The price of raw materials has increased, it has increased; The cost has increased, so it has gone up in price; Despite the economic downturn, it can still increase in price. Customers may complain, but in the end they will still buy. The growth of such companies is often not the kind of crazy growth, but it has a very fascinating aspect: No need for additional capital investment. Most of the money earned is genuine free cash flow. So you will see three typical features: Low capital investment High and stable return rate More and more cash is available What's even more interesting is that this type of company doesn't rely too much on management. Even if the management is only at a 'normal level', business will still move forward on its own. So what should you do if you encounter such a company? It's simple. When the price is reasonable, even just slightly cheaper, you can buy it. If the price is 10% to 20% lower than the intrinsic value, I will not hesitate. After purchasing, there is no need to monitor the stock every day. The best strategy for this type of company is only one: Long term holding. Let time help you earn money. —— Second type: ordinary business Most listed companies are actually in this category. They have some competitiveness, but the moat is not that deep. There are many competitors, but not everyone can easily defeat it. These companies usually have growth, but growth requires constant investment. For example, expanding production, opening new stores, investing in advertising, and developing new products. let me put it another way: The money earned must continue to be invested in order to maintain growth. Their return on capital is usually at a moderate level and relatively stable. The cash flow is also good, but not particularly exaggerated. There is another key point: This type of company relies heavily on management. An excellent management team can make the company run well. But if the management's ability is average, the company will become mediocre. How should I buy such a company? The strategy needs to be completely different. I only buy when it's' very cheap '. For example, the price is 30% to 50% lower than the intrinsic value. Because this type of business essentially does not have a particularly strong moat. The money you earn mainly comes from "buying cheap" rather than the company itself. So when market sentiment is high and valuations become expensive, I will consider selling. Simply put, it means: Buy cheap Expensive to sell —— The third type: Terrifying business Many people who lose money actually fall into this category. This type of company has several very obvious characteristics: There are almost no moats Anyone can enter this industry The price competition is very fierce Today you make money, tomorrow someone will kill you at a lower price. Even worse, these types of businesses often burn a lot of money. Equipment needs to be updated Capacity needs to be expanded Huge capital expenditure You will see a very strange phenomenon: The company's revenue is growing rapidly, but shareholders are not making any money. Because all the money earned was invested back. The return on capital is often very low and fluctuates greatly. Cash flow is often negative. The most ironic point is: Even if the management is excellent, this kind of business is difficult to improve. The industry structure has already determined its fate. So for this type of company, my strategy is only one sentence: Don't touch. No matter how cheap it looks. No matter how lively the market is. Not touching either. —— Finally, I would like to give you a very practical investment sequence. In the future, when you look at a company, don't start with the stock price. First, ask yourself three questions: Firstly, does this company have a moat? Secondly, does the money it earns need to be continuously reinvested? Thirdly, is its capital return rate stable in the long term? If all three answers are good, then you may have found a great business. If only a portion is good, then it is highly likely to be a regular business. If all three are bad, then it's a terrible business. Real long-term investment is not about finding the 'next bull stock'. But constantly putting money into the best business. Over time, compound interest will do everything else for you.