Contrarian investing is like an extreme form of value investing; contrarians will make investments that even a bold value manager would baulk at. It’s a fact of investing in unloved (and, in some cases, distressed) companies that some of the companies you invest in will fail. Simon Mawhinney says that when seeking to separate the turnarounds from the future bankruptcies, the first step is studying the balance sheet.
“Companies don’t go bankrupt if they don’t have a lot of debt. Typically, they don’t go bankrupt if they’re generating reasonable amounts of free cashflow… First and foremost, the strength of the balance sheet is important.”
Watch this short video, where Simon explains why some of our best investments have come from investing in companies trading on a high P/E Ratio.