Value Investing

When investing in struggling companies, one of the most critical challenges is determining whether the company has the potential to recover or if it's stuck in a value trap. Mario Gabelli, a renowned value investor, offers valuable insights on this topic in his recent interview.

Gabelli shares an example with Telephone and Data Systems Inc. (TDS), a company that had all the makings of a value trap-stubborn management, declining stock prices, and a lack of clear catalysts for growth. Yet, by recognizing the need for a catalyst and the potential for financial engineering, Gabelli was able to identify when the company was ready to break out of its trap.

So, my question for you today is this: how do you approach this decision? Do you look for specific catalysts, management changes, or financial restructuring opportunities? Or do you rely on broader market trends and economic indicators to guide your decision? Evaluating the company's business model, management quality, and potential for strategic change is crucial, but it can be difficult to know when these factors will truly drive a turnaround.

I'd love to hear your thoughts on this. Have you had success in identifying a company that was able to recover, or have you experienced the pitfalls of a value trap firsthand? If you haven't read Gabelli's insights yet, I highly recommend checking out the article-it's filled with practical examples and strategies that might inform your approach.

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Jenna Brashear
AAII Community Manager
Chicago, IL
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Well, since nobody else answered your question, Jenna, I'll throw my answer at you: I simply don't invest in "struggling companies." I want companies that are generating cash hand over fist and are likely to continue doing that. And I'd love to buy them when they're really cheap, although they usually aren't, so I try my best to NOT pay too much for them.

I have a strong suspicion that guys like Gabelli have made a lot more money off of their customers than they have investing their own money. 

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Rob Adams
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Hi Robert,

Thanks for sharing your thoughts. Apologies on the delayed response, it's been busy around AAII with the new quarter rolling around. It's clear that you focus on investing in cash-generating companies, which is a disciplined approach. Many investors, myself included, prefer stable, profitable businesses over those with higher risks. Your point about paying a fair price for quality companies is a smart strategy for long-term success. It's also worth noting that while some investors, like Gabelli, may focus on turning around struggling companies, it's not a strategy that works for everyone.

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Jenna Brashear
AAII Community Manager
Chicago, IL
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Original Message:
Sent: 09-10-2024 16:41
From: ROBERT ADAMS
Subject: Evaluating Struggling Companies: Recovery Potential or Value Trap?

Well, since nobody else answered your question, Jenna, I'll throw my answer at you: I simply don't invest in "struggling companies." I want companies that are generating cash hand over fist and are likely to continue doing that. And I'd love to buy them when they're really cheap, although they usually aren't, so I try my best to NOT pay too much for them.

I have a strong suspicion that guys like Gabelli have made a lot more money off of their customers than they have investing their own money. 

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Rob Adams
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I agree with Robert's caution to stay away from struggling companies like TDS.

I add the observation that getting lucky on one risky bet does not promote you to "guru" .... or prove that your investing philosophy is worth following. As they say about blind squirrels ... they will find an acorn sooner or later.  I would need to see at least 10 more examples to have a sample large enough to provide some degree of certainty over 90%.

I also add that the 60 or so AAII Guru screens have track record of finding "struggling" companies (due to underappreciated quality, value, growth, etc.) over 20 years or so.

If Gabelli can't present a portfolio of 10 or more success stories he does not measure up to pedestrian standard AAII in-house "guru" screeners have demonstrated each week for years. 

I trust AAII Quality, Growth, Value, and Guru monthly portfolio "adds" more than Gabelli's one off TDS example.

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BARRY JOHNSON
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Thanks for your input, Barry, I appreciate you both for joining my value discussion! You make a very good point about needing a larger sample size to judge the success of any investment strategy. I agree that one example, like TDS, might not be enough to prove a broader approach. Your mention of AAII's successful Guru screens over time is a good example of data-driven decision-making, I tend to use those myself quite often. Having multiple strategies to compare is always useful, and AAII's track record provides a solid alternative to following individual investors like Gabelli.

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Jenna Brashear
AAII Community Manager
Chicago, IL
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Original Message:
Sent: 09-11-2024 10:33
From: BARRY JOHNSON
Subject: Evaluating Struggling Companies: Recovery Potential or Value Trap?

I agree with Robert's caution to stay away from struggling companies like TDS.

I add the observation that getting lucky on one risky bet does not promote you to "guru" .... or prove that your investing philosophy is worth following. As they say about blind squirrels ... they will find an acorn sooner or later.  I would need to see at least 10 more examples to have a sample large enough to provide some degree of certainty over 90%.

I also add that the 60 or so AAII Guru screens have track record of finding "struggling" companies (due to underappreciated quality, value, growth, etc.) over 20 years or so.

If Gabelli can't present a portfolio of 10 or more success stories he does not measure up to pedestrian standard AAII in-house "guru" screeners have demonstrated each week for years. 

I trust AAII Quality, Growth, Value, and Guru monthly portfolio "adds" more than Gabelli's one off TDS example.

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BARRY JOHNSON
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