Thursday, June 11, 2009

Book Review of Distress Investing: Principles and Technique

In the book "Distress Investing: Principles and Technique", Martin Whitman and Fernando Diz successfully outline many of the issues surrounding the complicated world of investing in the bonds of companies that are in bankruptcy. If you want my opinion in 5 words here it is: 'go buy the damn book'.

If you are sick and tired of buying/reading books on investment that are watered down, this would be a good way to step it up. If you read 'One Up on Wall Street' or 'Rich Dad, Poor Dad' and they changed your life, I suggest that you take a pass on Distress Investing. It is certainly not for the faint of heart and will definitely be picked up for college level finance classes.

Throughout various passages, Whitman and Diz outline the many different intricacies of US bankruptcy laws; not only that, but they do a great job of showing how they are applied in real life scenarios. Honestly, I think that the only way that you could learn more about the details of bankruptcy law would be to read all the pertinent legislation... the only problem being, you wouldn't know how it would be applied in various cases, such as Kmart.

The case studies on K-Mart and Home Goods International were excellent and certainly shed light on the practical application of theory, which value investors desperately need in this time of uncertainty. It was rereshing to see what sort of payments the companies were actually able to collect and/or distribute off of the balance sheet in the filings. Often times, as value investors, we are forced to guess at what we think a company's inventory is really worth in the event of a liquidation... remember Buffett talking about liquidating the textiles and the equipment going for pennies on the dollar?

Another great segment of the bond industry that was illustrated were the debentures of Ambac and MBIA. These are investments that Third Avenue (headed up by Whitman) presently have positions in; it was refreshing to get their opinion/thesis of the position. As you know, it is rare that managers go into great detail as to why they have a position in a company (generally, it is limited to 'well, it is pretty obvious that the company is significantly undervalued')... Whitman goes so far as to tell you what he thinks the likelihood of a default on the debt is!

One of the most important points made in the writing, is that it is safe to say that professionals and management make out like bandits in bankruptcy filings, due to restructuring proceedures and fees. There are also other problems with bankruptcy law that are outlined; though, the authors are quick to say (in that Winston Churchill sort of way) that America's bankruptcy laws would be the worst, if it weren't for all of the rest!

The bottom line is this: Distress Investing is one of the few books that I have read recently which has provoked a great deal of thought on my part. Without a doubt, this is the best book that I have read since The Black Swan. You should do yourself a favor and pick up a copy; you'd be crazy not to.

Disclosure: I did get a free copy of the book, though, don't receive any sort of compensation if you purchase a copy (even through the link that I provide). Also, if you want me to review your book, email me and we can work something out. :-)

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