Recently I was asked how my investing perspective changed over the 32 years of publishing The Turnaround Letter. It's a fascinating question because change is constant, and often beneficial (although that's not a given) in the business world. If change is the norm, can investing principles stay constant? I firmly believe that they can.
For example, Apple is one of the greatest value investing stories in history. You can call it the validation of the Benjamin Graham's value investing thesis. Apple was near bankruptcy in 1997 and Microsoft had to come in and rescue it with a $150 million equity investment. Without that fortuitous investment we may not have had revolutionary products like the iPhone or iPad. MarketWatch author Mark Hulbert recently pointed out that I recommended Apple in 2002, when it was trading for a split-adjusted price of $1.14. Hard to believe that Apple stock traded for little over a dollar (split-adjusted) just sixteen years ago. In his article, I shared that a lot of the same basic principles I believed when I wrote our first ever Letter, I still believe today. For example:
- While much of the stock market is quite efficient, there are inefficient niches where you can earn outsized returns, and I still believe that turnaround stocks represent such a niche.
- You should not try to time the market. In the unlikely event you are smart (lucky?) enough to get out of the market at the right time, it is even more unlikely that you will be able to get back in at the right time.
- Two of the most important keys to successful investing are diversification and patience. If anything I believe this even more strongly today. No matter how much conviction you have on a stock, it won’t always work out the way you expect. Diversification is the best way to protect against that. Similarly, there are many times where I have been ultimately right but definitely early. You have to have the patience to wait for your analysis to pan out.
- Many of the elements that I look for in a turnaround stock have not changed. These include:
- Solid core business.
- A good brand or franchise.
- A healthy enough balance sheet to give the company enough time to fix its problems.
- New management that can bring about change.
- A large, active investor pushing the company to create shareholder value.
- A good dividend yield to compensate you while you wait for the turnaround to take hold.
Through diligence, and hard work the market still rewards those with the patience to persevere.