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Vulture Investing: Great Strategy for Bear Market Comments

Kelly Summers   |   May 08, 2008
For an average individual investor a sliding market means bad news. His or her entrusted investment is going downhill along with troubled companies. However, some investors, in particular vulture investors armed with tons of money target these troubled companies in order to acquire them for pennies. What is the reasoning behind this strategy? The answer is - buy low.

The process of buying out formerly strong but now almost bankrupt companies is called vulture or distressed investing. This strategy is a sort of �value investing� but aimed at hard-up companies in their worst state. The final aim of vulture investors is to gain huge percents on restructuring or liquidating those companies.

Although it might sound very risky to an individual investor because of a negative picture usually attributed to a bankrupt company, quite the opposite is in fact true. �When you own a group of these investments, the prices are already so depressed there's not much downside risk,� said Steve Savage, editor of the Value Line Mutual Fund Survey. �The plays tend to be more opportunistic and independent of the market.�

There is no need of turning into a vulture in order to benefit from other companies� depreciation. Instead, you can invest in one of them. Many of vulture investing companies, like Berkshire Hathaway, are publicly traded holdings. Similar to their world-known peer, they are run by managers historically known for sniffing out value. Although associated risks are significant, the returns on average exceed those of a typical value fund over the last decade. Also, investments in vulture companies are for long-run, with returns rising in years as they sell profitable investments and stagnate when they hold a lot of cash.

Many companies that acquire other troubled companies are traded at great discounts. The aim is to attract capital. BusinessWeek names publicly traded companies like Leucadia National, White Mountains Insurance, Alleghany, Pico Holdings and Brookfield Assets Management to start your research with.



Leucadia International (NYSE: LUK) owns companies in numerous sectors from biopharmaceuticals to wineries to a light & power company in Barbados, though currently the firm�s portfolio tilts toward natural resources. Leucadia�s Chairman Ian Cumming and President Joseph Steinberg practice �the epitome of distressed investing,� buying companies like Premier Entertainment Biloxi, that owns Katrina-destroyed hotels, or AmeriCredit, the subprime auto lender.

Leucadia currently trades under $50, and since 1979 the stock price has appreciated a compounded 25% a year, on average.



Alleghany (NYSE:Y), which focuses on insurance, owns a portfolio of stocks and bonds. One of its big winners is Burlington Northern Santa Fe Railway (BNI), on which it has earned over 500% since 1994. The company shuns publicity and is barely covered by Wall Street, in part because with lots of cash and little debt it doesn't often hire investment bankers. It is currently traded at about $342 a share, which is a hefty discount to its estimated $518 fair value. Alleghany�s stock has been up an average 20% a year over five years.



Pico Holdings (NasdaqGM: PICO) is another successful vulture investment firm. Its stock has delivered compounded average annual gains of 18% over the last 14 years that current management has been at the helm, which is more than twice of the S&P; 500 index. 70% of the company�s assets are in the rights to underground aquifers and other water resources in Southwestern states, making it one of the better water-asset plays, analysts say. Pico�s shares have been down 7% this year, just above its book value of $27. Its fair value is estimated to be between $62 and 67.
If you cannot afford investing into Berkshire Hathaway, whose stock is currently worth $130,000, think of investing into one of these vultures.
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