The Turnaround Letteran e-report

TURNAROUND

INVESTING

MISTAKES

BY GEORGE PUTNAM, III

Lock in more value stock profi t by

knowing--and avoiding--these common

distressed debt investment pitfalls.

Dear Value Investor,

Although turnaround investing seems to be an industry buzzword these days, I’ve been locking in stock pro! t from this concept for more than 28 now. After graduating from both Harvard Law School and Harvard Business School, I ! rst became involved with distressed securities as a lawyer in the late 1970s.

Seeing the ine" cient niche in which bankruptcies and turnarounds were researched, I founded New Generation Research, Inc. and began publishing e Turnaround Letter in 1986.

I’m proud to report that, as of April 30, 2015, the annualized return on my stock picks over the past 15 years was 12.74%, vs. the S&P 500’s 2.69%--making e Turnaround Letter the top-performing investment newsletter of the nearly 200 monitored by Dow Jones’ Hulbert Financial Digest.

TURNAROUND LETTER VS. S&P AND WILSHIRE

Source: Hulbert Interactive

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~ Benjamin Franklin

“The only thing more expensive than education

is ignorance.”

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# ese numbers speak for themselves: e Turnaround Letter surely has proven that a prudent contrarian investing strategy can be quite pro! table.

MarketWatch writes, “Warren Bu$ ett is not the only investor who publishes a must-read newsletter”--noting that several have outperformed Berkshire Hathaway with the added bonus of not making “you wait a whole year, as Bu$ ett does, to get updated insights.” Berkshire Hathaway’s 15-year annualized growth rate is 9.4%. MarketWatch reports that # e Turnaround Letter easily “bettered that return” with its 12.1% gain.

Like any stock market approach, however, this technique is not without pitfalls. I’ve learned a lot of lessons over the years, and I want to share this experience with other contrarians. Of course, there is no legitimate fast-track to instant riches but avoiding these common mistakes should add stock pro! t to your portfolio.

Happy investing!

George Putnam, III, Publisher e Turnaround Letter

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# is is related to the previous point. Many investors look at a stock and say something like “it used to trade at 30 and now it’s at 3--therefore it must be a good thing to buy.” Unfortunately, the fact that a stock once traded at a higher price does not guarantee that it will ever get back there. You must ! nd a fundamental reason why the stock will rebound.

Paying too

much attentionto price history.

Many stocks trade at low price for good reason, and without some sort of a catalyst will never rebound. Remember, every stock that becomes worthless trades at a low price for a while on its way to zero. Warren Bu$ et once said, “Turnarounds seldom turn.”

Mistaking a low stock price for being cheap.

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to price history.

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Sometimes a company or a whole sector will be cyclical and regularly move up and down because of economic or other factors. In that case it makes sense to buy the stock when it seems to be near the trough of a cycle. However, sometimes the problems are not based on short-term cycles but rather very long-term or even permanent trends. Often these secular trends are related to product obsolescence.

Confusingsecular and cyclical problems.

# is is a problem for many value-oriented investors because they often recognize the opportunity in a battered stock well before the rest of the market. However, this problem is not so serious as long as you avoid the next pitfall.

Beingtoo early.

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Beingtoo patient.

Unfortunately, it is also quite possible to be too patient and stick with a stock that will never rebound. # is often happens in conjunction with one of the other mistakes. # ere is no easy way to determine how much patience is appropriate. You just have to periodically re-evaluate the fundamentals of each position.

Turnarounds can take quite a long time. And even after the company has begun to turn, it can take the market a while to recognize that fact. Few things in investing are as frustrating as making a good call but selling the stock just before it takes o$ because you have gotten tired of waiting.

Not beingpatient enough.

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It is easy to get mesmerized by the gain potential in a particular low-priced stock and put too much money in it. It is important to remember that turnarounds are inherently risky. Even if you avoid most of the pitfalls mentioned here, events may not work out the way you expected. # e best way to manage this risk is through diversi! cation.

Not diversifyingenough.

Stock comes at the very bottom of a company’s capital structure, and all other creditors have to be satis! ed before any value can go to the stockholders. # erefore, if a company has a large amount of debt, that increases the risk that a stock may fare poorly. You can often get a sense of the magnitude of this risk by looking at the price of a company’s bonds. If the bonds are trading at a fraction of their face value, that can be an indicator that the stockholders are in for trouble.

Not paying

enough attentionto the debt.

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# is is closely related to the previous point, as well as the ! rst two we mentioned. Very rarely will a company in Chapter 11 be able to generate enough value to get down to the stockholders. # erefore, even though a Chapter 11 stock may be trading at a very low price, it is most likely not a good buy because it will probably go a lot lower, frequently to zero.

Buying the stockof a company in Chapter 11.

Insiders don’t always have the best view of what is really happening to their company. Often they will be blinded by their loyalty to the company or be overcon! dent about their ability to turn the company around. It is not unusual to see top executives add to their holdings shortly before a company goes bankrupt.

Putting too much faithin insider buying.