The Art of Vulture Investing: Adventures in Distressed Securities Management

CHAPTER 5

Swooping In: Tropicana

The Turkey Vulture’s …expression is uncommonly serene, and there is something about the face that suggests infinite patience. Huddled on their perches, wrapped in shabby vestments, the birds look like a group of balding monks gathered in prayer.

—Pete Dunne, The Wind Masters: The Lives of North American Birds of Prey

People just hate to be proved wrong. This fundamental truth of human nature pervades all aspects of finance. No one likes to concede a mistake in making a lending decision or analyzing an investment. Rather than cutting their losses, most investors will stick with, or even add to, a failing position until they can no longer ignore the truth—at which point they tend to sell out in a panic. So, for a vulture, it pays to circle patiently, waiting for the right moment to swoop in.

The bankruptcy of casino operator Tropicana Entertainment, LLC in 2009 amply demonstrated this principle. In fact, the case offers several important lessons for the canny investor in distressed companies.

First, don’t shy away from complex, highly regulated companies embroiled in litigation. Once the dust settles, these investments may yield extraordinary profits. Second, if you decide to get involved, do so slowly and carefully, because these situations tend to get worse before they get better. Moreover, you should be prepared to monitor each bankruptcy court ...