The Art of Vulture Investing: Adventures in Distressed Securities Management

CHAPTER 2

Learning to Scavenge

The power given to the vulture by nature of discerning the approaching death of a wounded animal is truly remarkable. They will watch each movement of any individual thus assailed by misfortune and follow it with keen perseverance until the loss of life has rendered it their prey.

—John James Audubon, from Philosophical Journal, as quoted in American Ornithology, edited by Alexander Wilson et al.

For a vulture investor there are, so to speak, many ways to skin a carcass. Over the years, I’ve tried a number of different approaches—some more successful than others—and enterprising vultures come up with new twists all the time. But a few fundamentals continue to apply.

Vulture investing is all about leverage. In today’s financial markets, the term leverage has come to mean the multiplication of risk by borrowing much more money than you put down in order to make an investment or buy a company. The idea is to increase your returns exponentially if the deal pays off. But, as the financial crisis of 2008–2009 has shown, that sort of leverage often leads to default and bankruptcy when things don’t go according to plan. So in that sense, leverage is a vulture’s meat and drink.

Leverage has another, more common, meaning, though: using a tool to gain power over people and events. Every lever has a fulcrum, the point or support on which it balances, and which ...