# 90% of Stock Buyers Are Actually Buying "Bad Businesses" | Buffett Divides Companies Into 3 Types—I Urge You to Read This Completely

Many people study candlesticks, follow news, and guess at policy.

But the first thing Buffett looks at when examining a company is never the price—it's a question:
What kind of business is this really?

In his world, there are only three types of companies:
Great businesses, ordinary businesses, and terrible businesses.

If you can't distinguish between these three, no matter how hard you try, it's very difficult to make long-term money.

I'm going to explain this logic to you in the simplest way possible.

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**Type 1: Great Businesses**

These companies have one obvious characteristic: it's very difficult for others to steal their business.

They typically have a very deep moat—whether it's brand, distribution channels, technology, or network effects. New competitors can enter, but it's extremely hard.

They also have a very comfortable ability: the power to raise prices.

Raw materials go up, they raise prices; costs increase, they raise prices; the economy struggles, they still raise prices. Customers complain, but ultimately they still buy.

The growth of these companies often isn't explosive growth, but it has something very appealing:

They require minimal additional capital investment.

Most of the money they earn is true free cash flow.

So you'll see three typical characteristics:
- Low capital requirements
- High and stable returns
- Growing cash reserves

What's even more interesting is that these companies barely depend on management.

Even if the management team is just "normal caliber," the business still runs forward on its own.

So if you encounter such a company, what should you do?

Simple.

When the price is reasonable, or even just slightly cheap, you can buy.

If the price is 10-20% below intrinsic value, I wouldn't hesitate.

After buying, you don't need to stare at the screen every day.

For this type of company, there's only one best strategy:

Long-term holding.

Let time make money for you.

——

**Type 2: Ordinary Businesses**

Most listed companies actually fall into this category.

They have some competitive advantage, but their moat isn't very deep.

Many competitors exist, but it's not like just anyone can easily eliminate them.

These companies usually have growth, but growth requires constant investment.

For example: expanding production, opening new stores, advertising, developing new products.

In other words:

The money they earn needs to be reinvested to maintain growth.

Their capital returns are typically at a mid-level and fairly stable.

Cash flow is decent, but nothing extraordinary.

There's another key point:

These companies are very dependent on management.

An excellent management team can make the company run very well.

But if management is merely average, the company becomes mediocre.

So how should you buy this type of company?

The strategy must be completely different.

I only buy when it's "very cheap."

For example, when the price is 30-50% below intrinsic value.

Because this type of business fundamentally lacks a particularly strong moat.

Your profits come mainly from "buying cheap," not from the enterprise itself.

So when market sentiment is high and valuations become expensive, I consider selling.

Simply put:
Buy cheap
Sell dear

——

**Type 3: Terrible Businesses**

Many people lose money precisely because they fall into this category.

These companies have several very obvious characteristics:

- Almost no moat
- Anyone can enter the industry
- Price competition is extremely fierce

Today you make money, tomorrow someone with a lower price puts you out of business.

Worse yet, these businesses typically burn cash extremely.

Equipment needs updating
Capacity needs expanding
Capital expenditure is massive

You see a strange phenomenon:
Company revenue grows quickly, but shareholders make no money.

Because the money earned is entirely reinvested.

Capital returns are typically low and highly volatile.

Cash flow is often negative.

The most ironic part is:

Even if management is excellent, this type of business is very hard to turn around.

Industry structure has already determined its fate.

So for these companies, I have only one strategy:

Don't touch them.

No matter how cheap they look.

No matter how heated the market is.

Don't touch them.

——

**Finally, I want to give you a very practical investment sequence.**

When you look at a company going forward, don't look at the stock price first.

Ask yourself three questions:

First, does this company have a moat?

Second, do the profits need to be continuously reinvested?

Third, is its capital return rate long-term stable?

If all three answers are good, you may have found a great business.

If only some aspects are decent, it's probably an ordinary business.

If all three are terrible, it's a terrible business.

True long-term investing isn't really about finding "the next bull stock."

It's about constantly putting money into the best businesses.

Given enough time, compound interest will do the rest for you.