As investors we normally don’t have our investing time pieces synchronized with reality. We buy a train ticket, but the train arrives late or never at all. We are often too “early” to the turnaround, catalyst, acceleration of growth.
I’ve found I’m normally 2-4 quarters earlier than I think I am. This is why position sizing in turnarounds is so important and keeping the position smaller than you want it to be.
The exception is when you actually get the timing right. Winning normally looks like sitting on dead money for 1-2 years longer than you thought and then having the stock triple in a month.
Being early and having to wait a few more quarters is a curse in the short-term, but a blessing in the long-term. It forces you to dig in and really form the conviction to hold. You form deeper conviction when you are forced to wait. “Delayed Gratification” would be the best investing book title.
Stocks rarely perform in the time frames we predict, and it’s why the market only works for investors that have more patience than they thought they would ever need.
Being early isn’t an issue unless the business is losing money. Money losers are always targeting profitability within 12-months, and then it takes 24 months longer. This could mean 1-2 more dilutive financings which could turn an above average IRR into no IRR. It’s why it’s important to at least find a company that can tread water (breakeven) while you wait. This way if you are wrong, you won’t lose much.
A investor’s biggest risk is dilution. Find companies that can self-fund their growth so you can afford to wait for the train. If the train doesn’t arrive, you won’t lose the money you spent on the ticket. You can transfer it to another train.
Turnarounds are exhilarating when you get the timing right:
You establish a 1–3-year variant view on a business. Variant = the business is better than most investors think.
You buy a few quarters ahead of the inflection/acceleration when the stock is still hated, misunderstood and cheap.
You are willing to look wrong before you are right and hold dead money.
You realize you were 1-2 quarters earlier than you thought. This is fine if the business is profitable.
The business suddenly turns, inflects, accelerates, and the stock goes up 100% in a month. All your peers that passed initially are starting to get interested. The best investments are the ones your peers won’t agree with/look at until after they go up 100%+.
Then the business puts up a second surprisingly good quarter, and the stock goes up another 100%.
Then the business puts up a third surprisingly good quarter, and the stock goes up another 100%.
The opportunity in most turnarounds is the majority of investors only remember the company for what it was. Even after a new management with a new strategy starts to execute there is an extra 1-2 quarter lag in the stock taking notice. The "re-discovery" process is a function of management execution + slow converting of non-believers.
Here is the investor psychology of a hated/misunderstood turnaround stock as the business turns up. One of the hardest parts of turnarounds is holding onto them as the business transitions from a value multiple (not valuing the future) to a growthier multiple (valuing the future). You need to grow with your investments to hold on and capture the right tail of life changing returns.
It’s hard to hold onto a stock that gets a little expensive when 90% of the reason you bought it was because it was cheap. You are anchored to what it was, not what it is, or what it could be. It’s hard to pull up that anchor of value and raise the sail of growth.
It's the same as past relationships. There are plenty of people that only remember you for who you were when they knew you. 5-10-20-30 years ago when you were a different person. Sometimes you cringe when you see certain people because they remind you of the person you used to be. You aren’t that person anymore. You've grown. It’s the same with companies.
Your greatest achievements occur when the odds are against you. When people have underestimated you and your potential. When all they remember is your past mistakes. They haven’t stayed in contact to see how much you’ve grown and how hard you've prepared.
Most turnaround stories are just like you.
