The 4 Cs

What makes a bad company? My answer is the 4 Cs:

Cyclicality
The company sells a product for which demand is strongly cyclical. During a downturn their sales plummet.

The company's margins are wafer-thin, so they have no room for cutting prices to boost demand.

The company has high fixed costs.

The company has a negative tangible book value, and no reserves to help them see out a downturn.

Competition
The company produces a generic product which is easy for others to copy.

The company is not the lowest-cost producer.

The company has many competitors.

The company does not have a strong brand.

Capital
The company requires substantial capital investment in order to expand.

The compant is heavily leveraged and pays a high price for it.

Competence
Management is inexperienced in the sector or over the business cycle.

Management takes credit for successes and blames failure on external forces.

Warren Buffett
This has come across a very Buffet-esque post. WB invests in companies that avoid these pitfalls, like GEICO, Coca-Cola, Gillette, etc..

Me
Most of my purchases have looked at value rather than the real quality of a company. I've been reluctant to pay a high price for a great company. Perhaps that's because prices really are too high, or perhaps I've not paid enough attention to the 4 Cs.

RBS - Has operated with insufficient capital, and that cost me as a result. Management has blamed problems on the "unprecedented" credit crunch, when this seems to be a normal part of the credit cycle.
TW - This does badly on most of the tests.
ZRX - Broadly speaking I think ZRX avoids most/all of these pitfalls.

I'll take another look at some quality companies that are moderately priced, and see if I am interested.