In his book "One Up on Wall Street", Peter Lynch shares the types of stocks you need to avoid:
1. HOTTEST STOCK IN THE HOTTEST INDUSTRY
This is the stock everyone gets to hear about. Hot stocks go up fast, but when the price falls, it falls steeply too. Most people buy because others are buying it with a hope that the price will rise sharply soon.
“If you had to live off the profits from investing in the hottest stock in each successive hot industry, soon you’d be on welfare.”
2. BEWARE THE NEXT SOMETHING
“Another stock I’d avoid is a stock in a company that’s been touted as the next IBM, the next McDonald’s, the next Intel, or the next Disney etc. In my experience the next of something almost never is.”
3. AVOID DIWORSEIFICATIONS
Value for shareholders is lost when the company overpays for acquisitions, and when the acquisitions are completely beyond their realm of understanding. In most cases, buying back shares or raising dividends is a better option than acquiring companies. The trick is to find the right acquisitions in related business and manage successfully.
4. BEWARE THE WHISPER STOCK
From time to time, people will tell you about a company that they think is a great investment opportunity. Most likely they have been telling about this company to every other person. Those are whisper stocks with a hypnotic effect and a psychological appeal.
5. BEWARE THE MIDDLEMAN
“The company that sells 25 to 50 percent of its wares to a single customer is in a precarious situation. If the loss of one customer would be catastrophic to a supplier, I’d be wary of investing in the supplier.”
6. BEWARE THE STOCK WITH THE EXCITING NAME
“As often as a dull name in a good company keeps early buyers away, a flashy name in a mediocre company attracts investors and gives them a false sense of security. As long as it has 'advanced,' 'leading,' 'micro,' or something with an x in it, or it’s a mystifying acronym, people will fall in love with it.”