value
Avoid Turnarounds
The rule
Skip distressed and "grand revival" stories. Buy businesses that are already excellent, rather than hoping a bad one will heal.
Where it flips
This rule can make you avoid a genuinely good business going through a short, well-understood stumble. Not every dip is a doomed rescue case. The fix is to tell apart a great business having a bad quarter from a weak business promising to transform, and shun only the second.
It is tempting to buy a struggling company cheaply and bet that new managers or a new plan will fix it. But such recoveries are hard, slow, and often fail. The cheap price usually reflects a real, deep problem, not a bargain. It is far safer to pay a fair price for a business that has already proven it is excellent than to gamble on a poor one becoming good. Let others try to rescue the sick. You buy the healthy.
A worked example
Arjun is tempted by a beaten-down company promising a "grand revival." He passes and buys a steadily excellent business instead. Two years on, the revival has stalled while his healthy business kept growing. [illustrative]
How to spot it
- ·declines 'revival' and 'restructuring' stories
- ·prefers proven excellence to hoped-for repair
- ·treats a cheap price as a warning, not a lure
Pulak Prasad · What I Learned About Investing from Darwin