How To Create Wealth Investing In Turnaround Stocks

This blog post is to announce my new web site turnaroundstockinvesting.com. I created the site to help contrarian investors take advantage of the bear market we are now entering. I believe that over the next year enormous opportunities will be created for contrarian investors to generate very large returns.

Unlike the majority of value investors my strategy for managing a portfolio of turnaround stocks is a bit different. I use technical analysis to send me signals as to when to start buying and or sell a turnaround stock. I call this system my stop and reenter portfolio strategy. Its designed to protect my capital as turnaround stock investing is prone to having many stocks that never turnaround. Turnaround stock investing is similar to venture capital investing.

I have been investing for 30 years in distressed and under-performing public and private companies. Over this time it has become clear to me that Pareto’s 20/80 principle is intact when investing in turnaround stocks. This means that 80% of your profits will come from 20% of your stock positions. As a young businessman who prided himself on being a clever financial analyst, it took me many years to realize that having a strong risk management strategy was just as important as sound fundamental analysis. I saw repeatedly that my judgments and those of other smart investors was not full proof.

This may be a hard concept for young investors to understand, as you have not had a large sample set of investments to teach you this. For those experienced investors reading this I am sure you understand what I am saying.

When I log into sites such as Seeking Alpha I always see numerous well-thought-out analysis on stocks by analysts that believe a stock is selling at large discount to its intrinsic value. However, six months later that great value is down significantly. To many it would appear that the analyst was just plain wrong or terribly early and did not do a good job. However, nothing could be further from the truth. Predicting the sequence of events for a company that is under-performing or experiencing losses is very difficult.

In 2014 I was buying Corinthian college at 2 a share after spending countless hours researching and was stopped out at 1.25 In 2015 i was whipsawed in Alpha Natural Resources 4 times believing a coal bottom was at hand. I did an enormous amount of research on each position but ultimately listened to Mr. Market as to when to stop out of my shares as opposed to buying more as they were declining. I relied on the market to send me a signal that my analysis was wrong and stopped out before having a train wreck on my hands.

Each of these stocks went to zero, as they did not turnaround. Remember the 20/80 rule I discussed before. Many of you reading this may say what a loser or how could he pick such disaster stocks.

Don’t forget that Deep value investors looking for opportunities in companies loosing money or with weak profits are venture capital investors. Yes, I lost in coco and anr but I have had numerous 5 baggers and a few 10 bagger that initially looked as crazy as my coco and and purchases.

You just wont know ahead of time if your turnaround stock will be a zero or a 10 bagger no matter how much research you do and no matter what your business experience is. In fact I’m sure if you sat down with Howard Marks of Oak tree or even Seth Klarman they will admit that the 20% of their investments that yielded 80% of their returns were not the positions they originally believed would be the winners. There are many brilliant people in the value-investing world. However, eventually everyone succumbs to the 20/80 principal. Right now value investors are struggling and losing a lot of capital as they sit in stocks that decline day after day. They refuse to believe that Mr. Market as Ben Graham called the stock market could be right in destroying the stock price. Investors backed by their spreadsheets and enormous research believe they are smarter than Mr. Market.
For those of you who have been investing for a decade you understand what I’m saying. It only takes one or two investments gone bad in your portfolio to damage your financial position. These were probably also stocks you thought were great values when you bought them and your risk of loosing was very low. I created turnaround stock investing because I believe that the time has come to form a community of value and contrarian investors that want to learn and need help cutting losses. I realize that for many value investors the idea of selling shares in a stock because the price chart broke a key level of support or because it has declined over 20% is voodoo. However, deep down you realize you should this.
Consider early 2015, how many of your value stocks that initially appeared to be great values have declined well over 50%. Initially you looked at your spreadsheets and DCF models laughing at the falling price and buying more and more. Its only now that you realize many of these value stocks will never recover especially if they are natural resource related companies.

Yes it’s hard to admit that Mr. Market is right the majority of the time. Value investors do not have to suffer and sit with large losses or double and triple down on stocks. Why not incorporate a few tools to help you time your purchases and admit defeat earlier. Value investors fail to remember that after you stop out of a stock you can always reenter in the future.
Yes it may be hard to reenter if you are managing $100 million but that’s not a problem for many reading this post.

I spent the majority of my time in 2015 cutting losses and am I glad I did it. It was hard and at times I felt defeated. This is all natural because it’s what our brain does to us. The brain wants to protect our ego and not have to admit we may be wrong.

If you are deep value investor or contrarian you must have a system to cut losses and protect capital. A year like 2015 and 2016 can wipe out value investors.
Why not realize that you can always reenter a stock after you sell it. It’s quite a liberating thought. You don’t have to catch the exact bottom if your looking for stocks that can rise 100 to 300%. Respect the downtrend that most value stocks are in. Its sending signals that the turnaround is not happening yet. You don’t have to be a contrarian that lives his life in quiet desperation We are entering a unique bear market where most publically traded companies are more leveraged with debt than at anytime in the past. When cash flows start to decline for a leveraged company the volatility of that stock will increase enormously as it starts trading like an option. I believe this is why many value stocks have fallen so rapidly. Have a plan on how you will handle your drawdowns and if any of your stocks have a leveraged balance sheet be prepared to respect what Mr. Market is telling you.

With the formation of turnaroundstockinvesting.com I decided to create a small e-book that incorporates some of my strategies on stop losses and portfolio management. Stop losses and psychology are often discussed in trading books but rarely discussed in value investing books. That is why I created the eBook titled “How To Create Wealth Investing In Turnaround Stocks”.

I hope you join turnaroundstockinvesting.com and download the free eBook by clicking on the book offer on the site.