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Invest, Then Investigate: A Contrarian Approach to Value Investing



The "Invest, Then Investigate" strategy is a contrarian approach to value investing that challenges conventional wisdom. Traditionally, investors are advised to thoroughly research a company before committing capital. However, this method proposes a different sequence: make an initial investment first, then conduct in-depth research. While counterintuitive, this approach can offer unique advantages in certain market conditions.



Key Principles:


  • Quick Action: By investing before extensive research, investors can capitalize on time-sensitive opportunities.

  • Skin in the Game: Having a financial stake motivates more thorough investigation.

  • Focus on Undervalued Assets: This strategy typically targets companies trading significantly below their intrinsic value.

  • Risk Management: Initial investments are usually small, allowing for gradual position building as research confirms the thesis.


Examples in Practice:


  • Distressed Securities: During the 2008 financial crisis, many mortgage-backed securities were trading at pennies on the dollar. Investor Bruce Berkowitz of Fairholme Capital Management saw potential value but knew thorough analysis would take time. He made initial small investments in these securities, then spent months investigating the underlying assets. This approach allowed him to build substantial positions at low prices before the market recovered.

  • Spin-offs: When a large company spins off a smaller division, the new entity is often overlooked and potentially undervalued. In 2011, Kraft Foods spun off its North American grocery business. Many investors quickly sold the spin-off shares they received, creating temporary price pressure. Value investors following the "Invest, Then Investigate" approach could have made small initial investments at depressed prices, then researched the company's prospects more thoroughly.

  • Post-Bankruptcy Equities: Companies emerging from bankruptcy often trade at depressed valuations due to investor skepticism. In 2013, American Airlines emerged from bankruptcy and merged with US Airways. The new entity's stock was initially distributed to creditors, many of whom sold quickly. Investors could have made small initial purchases and then investigated the airline's restructured operations and industry outlook.


Advantages:


  • Allows investors to act on time-sensitive opportunities

  • Encourages deeper research due to personal financial involvement

  • Can lead to better understanding of a company's true value

  • Potentially higher returns by getting in early on undervalued situations


Risks and Considerations:


  • Potential for losses if initial assessment proves incorrect

  • Requires discipline to sell if research reveals unfavorable information

  • May not be suitable for all investors or account types

  • Can lead to overconfidence bias if not approached objectively


Implementation Tips:


  • Start Small: Initial investments should be a fraction of a full position size.

  • Set Research Deadlines: Establish a timeframe for completing thorough analysis.

  • Use Stop-losses: Implement risk management tools to limit potential losses.

  • Diversify: Apply this strategy across multiple opportunities to spread risk.


The "Invest, Then Investigate" approach offers a unique perspective on value investing. While not without risks, it can be a powerful tool for investors looking to capitalize on market inefficiencies and undervalued assets. By combining quick action with thorough follow-up research, investors may uncover opportunities that others overlook. However, this strategy requires discipline, risk management, and a willingness to act on new information – even if it means reversing an initial investment decision. As with any investment strategy, individuals should carefully consider their risk tolerance and financial goals before implementing this approach. It may be particularly suited for experienced investors or as a small component of a diversified portfolio.

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