Turnarounds Seldom Turn

There are lots of reasons to follow a business, even if you have no plans to invest in the company.  Turnarounds often seem like a viable option for value investors because their valuations have fallen so far from where they once were (see this post about “discounting”).  However, value investors who have this inclination should plaster this quote above their office desk.

“Both our operating and investment experience cause us to conclude that turnarounds seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.”

Aeropostale offers a great example of this lesson in real time.  After hitting a high of almost $32 in 2010, the stock has steadily declined to around 40 cents today.  Below is the chart for the past two years.  After falling almost 70% from $32 per share to $10 in 2014, the stock has went on to decline an additional 96%.

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I am sure to get a few emails regarding X, Y, or Z company that had a miraculous turnaround and the stock went up 1000% fold.  Sure, that happens.  But it is rare, and akin to relying on your special teams to block a punt and return it for the game winning touchdown in the final seconds of the game (a la Michigan St. vs Michigan). I guess there is always a chance?

More to Explore

Returns for Great vs. Bad Businesses

Munger and The Cattle Rancher

Munger’s ability to find great businesses is directly related to his ability to consistently discard bad businesses. He is excellent at inverting, and discarding the bad businesses as quickly as possible.

The Abominable No-Man and Bad Management

Some investors think a business is good, but know that management is bad.  These investors justify the investment based on the idea that the great price of the business is worth the bad management. This is akin to marrying a supermodel who is going to yell at you all day.  Whatever pleasure your eyes may derive from the marriage, your ears will endure a greater amount of pain in the long run. The pocketbooks of those partnering with bad management are likely to see a similar 50%+ decline in their net worth.

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