The Distressed Investing Playbook: How the Smart Money Profits When Companies Fail and Markets Go Haywire

Contents

Preface: Good Morning, Chickens

The Art of the Deal: Bankruptcy 301

A High-Stakes Playbook

Chapter 1

Why Distressed Investing?

The Market Beckons

Getting Started

The Six Rules for Distressed Investing (as Followed by Industry All-Stars)

Rule 1: Buy at the Right Price or Be Damned

Rule 2: Do Your Homework

Rule 3: Debt Comes First

Rule 4: Protect Yourself

Rule 5: Bankruptcy Sales Offer Advantages

Rule 6: Take Advantage of Uncertainty

Bankruptcy in 2025: Things Are Heating Up

Key Insights

Chapter 2

Bankruptcy 101

The Bankruptcy Landscape: Fundamentals

Bankruptcy Parties

Bankruptcy Levers

Professionals in Bankruptcy Cases

Restructuring Support Agreements (RSAs)

Case Study in Reorganization: J.Crew

Key Insights

Chapter 3

Types of Distressed Assets

Trade Claims

JCPenney, Nortel Networks, Lehman Brothers: What Trade Claim Cases Reveal About Industry-Specific Risks and Opportunities

How to Buy Trade Claims

Special Situation Investments

Distressed Real Estate Notes

How to Access Distressed Real Estate Notes

Operating Businesses

Turnaround Strategies

Case Study A: Manufacturing Business with High Debt and Low Margins

Case Study B: Cabinet Manufacturer with High Margins and Strong Management

Risky Business

Key Insights

Chapter 4

Getting on First Base: Sourcing Distressed Opportunities

The Getting on First Base Approach

Who You Know: Leveraging Your Network

Industry You Know: Using Sector Expertise to Spot Opportunities

What You Know: Using Public Information to Gain an Edge

Trade Publications and Industry News Sources

Google and AI Keywords

A Digital Gold Mine: Public Information Sources

Networking and Cold Outreach

Brokers and Firms

Navigating Ethical Considerations

The Getting on First Base Approach in Action

Fall in Love with Making Money, Not Your Hobbies

Conclusion: The Harder You Work, The Luckier You Get

Key Insights

Chapter 5

Analyzing and Valuing Distressed Assets

Understanding the Distressed Company Structure

Healthy vs. Distressed Balance Sheets

The Distressed Investing Waterfall

Building a Financial Model

Liquidation Analysis: The Fundamental Valuation Method

Rule #1: Determine the Liquidation Value of an Asset

Rule #2: Anticipate Changes to the Balance Sheet

Rule #3: Do Your Due Diligence

American Airlines Liquidation Analysis

Titan Solar Liquidation Analysis

Important Features of Liquidation Analyses

Discounted Cash Flow (DCF) Analysis

Comparable Company Analysis

Evaluating Collateral, Liens, and Risks to Recovery

Advanced Strategies in Distressed Investing: Beyond Traditional Valuation

Case Studies from Industry: Highlighting the Value of Bottom-Up Research

Revlon’s Bankruptcy Case

Five Forces Analysis

PG&E’s 2019 Bankruptcy Filing

Key Insights

Chapter 6

Acquisition Mechanisms and Strategy

Asset vs. Stock Acquisitions: The First Fork in the Road

Asset Deals

Stock Deals

Pacific Ethanol: Stock Acquisition, Asset Deal, or Funding a Stand-Alone Reorganization?

The Pros and Cons of Each

The Outcome

UCC Article 9 Sales

Section 363 Sales

A Balloon Maker Goes Pop

Receiverships

Summary of Mechanisms

Choosing the Right Mechanism

Final Thoughts

Key Insights

Chapter 7

Advanced Bankruptcy Strategies and Industry Case Studies

Getting J-Screwed

Liability Management Exercises (LMEs): The New Battleground

Uptier Transactions: The Art of Leapfrogging Creditors

Drop-Down Transactions: The Shell Game

The Serta Mattress Decision: Courts Draw a Line

Investment Implications: Navigating the New Landscape

Tax Considerations: The Hidden Value Drivers

Net Operating Losses (NOLs): The Valuable Tax Asset

Cancellation of Debt (COD) Income: The Bankruptcy Exception

Strategic Implications for Investors

The Texas Two-Step and Mass Tort Liabilities

The Scrub Island Case: Navigating Complex Restructurings

Special Considerations

Small Business Bankruptcies: Subchapter V

Industry-Specific Factors in Bankruptcy: Challenges and Opportunities for Investors

Retail: Adapting to a Changing Consumer Landscape

Energy: The Volatility of Commodities and Asset Valuation

Healthcare: Navigating Regulation and Patient-Centered Restructuring

Hospitality: Balancing Real Estate Value and Brand Strength

The Bigger Picture: Industry-Specific Knowledge Is a Competitive Advantage

Conclusion: The Investor’s Mindset

Key Insights

Chapter 8

Managing Bankruptcy Cases

Brooks Brothers: The Ripple Effects of Retail Collapse

The Anatomy of a Bankruptcy

First-Day Motions: Setting the Stage

Debtor-in-Possession (DIP) Financing: A Lifeline for Debtors

Brooks Brothers’s Zero-Interest DIP Financing

GWG Holdings Case: DIP Financing and Strategic Maneuvers in Bankruptcy

DIP Financing and the Battle for Control

Executory Contracts and Their Role in the Restructuring

Outcome: Who Won and Who Lost?

The QualTek Case: Using Cash Collateral to Access Working Capital

Treatment of Executory Contracts: Assuming or Rejecting Ongoing Agreements

Plans of Reorganization: Charting a Path Forward

Wrapping Up

Key Insights

Chapter 9

The Trade Claims Playbook: Rules, Risks, and Rewards

Understanding Trade Claims

Types of Trade Claims

The Rationale Behind Investing in Trade Claims

The Trade Claim Market Landscape

Final Thoughts

Key Insights

Chapter 10

Trade Claims Investing Strategies

The Trade Claim Investor’s Mindset

Uncovering Trade Claims

Online Marketplaces and Platforms

Conducting Due Diligence

Assessing the Debtor’s Financial Condition and Prospects

Analyzing the Bankruptcy Case and Potential Outcomes

Investing Strategies for Trade Claims

Timing Considerations

Executing and Managing Trade Claim Investments

Monitoring the Bankruptcy Case and Claim Status

Exit Strategies

Case Study: Sears Bankruptcy

Final Thoughts

Key Insights

Chapter 11

Investing in Fraudulent Bankruptcies

Investing in Fraud Cases: The Madoff Payoff

Courting Controversy: Clawback and Trustee Fees

The Stanford International Bank Scandal

The Enron Scandal: Complexities in Bankruptcy Claims Trading

The Collapse of MF Global: A Tale of Reckless Bets and Missing Funds

Lessons from Fraud, Collapse, and Recovery

Key Insights

Chapter 12

Crypto: A Unique Opportunity in Distressed Investing

The Genesis of Crypto Distress: Mt. Gox

How Mt. Gox Established Themes and Implications for Future Crypto Cases

Cred: A Tale of Alleged Fraud and Misrepresentation

Widespread Crypto Crises: A Chain Reaction

Celsius Network: Rapid Rise, Sudden Fall

Voyager Digital: Overextension and Poor Risk Management

From Voyager to FTX: A Fall That Shook the Crypto World

Sam Bankman-Fried and the Rise of FTX

Revelations and the Beginning of the End

Bankruptcy and Unraveling of the Scheme

A Watershed Moment for Crypto

The Surprising FTX Asset Recovery

An Unprecedented Recovery Effort

A Caveat for Creditors

A Legacy for the Industry

Lessons from Crypto Distressed Investing

Key Insights

Chapter 13

Turning Chaos into Opportunity

Active vs. Passive Investing Approaches

The Salad Oil Scandal: Young Warren Buffett Proves His Chops

Passive Investing: Walter Schloss and the Rise of Index Funds

Debt vs. Equity: A Distressed Investor’s Dilemma

Case Study: Bed Bath & Beyond

Taking Control Through Distressed Investments

Asset Stripping Considerations

Restructuring Approaches

Out-of-Court Restructurings

The Holdout Problem

Legal Considerations in Distressed Investing

Third-Party Non-Debtor Releases

Case Study: Supreme Court Decision in Purdue Pharma

Litigation Funding: Opportunities and Risks in Distressed Investing

Conclusion

Key Insights

Chapter 14

The Distressed Investing Playbook in Action

Lessons from the Masters of Distressed Investing

Case Studies: The Playbook in Action

Start Small; Learn from Experience

Lessons Learned from Failure: When the Playbook Breaks Down

Mid-Market Example: The Turnaround Specialist

Navigating Risks

Valuation and Collateral Risks

Disclosure Risk and the Fine Print

Timing and Execution Risks

The Psychology of Successful Distressed Investing

Key Insights

Chapter 15

Bringing It All Together: Your Complete Playbook

The Distressed Investing Decision Framework

Your Distressed Investing Toolkit

Your Next Steps

The Next 2008 Financial Crisis

Conclusion: Prepare for Opportunity

Key Insights

Appendix

Glossary

Works Cited

Acknowledgments

Preface: Good Morning, Chickens

Things I love:

G-d, and my family. I have a large family—my wife and our five kids.

I love my country, but I also love other countries. I love my mini dachshund, Cruz. He’s twelve years old and comes to work with me every day, always barking at Rob, the postman.

I love sports. I love the Islanders, the Giants, the Knicks, and the Yankees, even though. they’re not the dynasty they used to be.

I like golf, but I don’t love it. Yes, I play a round now and then for fun, but it’s also a bit of a headache or heartache.

I’m a former Cornell University college rower, and I love rowing. I love the beach, but I love the mountains, too.

When it comes to making money, I love the bankruptcy business. And the part of bankruptcy I love most is distressed investing, which involves buying and selling assets that are part of a bankruptcy case. It’s been my passion for the entirety of my thirty-six-year career, and I love it.

I believe that after you finish reading the pages of this book, you will also come to love it. When you gain some fundamental knowledge of how the law and claims systems work in the United States, you can make enormous, life-changing gains.

Contrary to what you might think, buying distressed assets is easy to understand. It’s true that bankruptcy falls within the domain of our code-based legal system. But if you have firsthand knowledge of any industry, whatever it is—healthcare, real estate, boxing, wine bars, or canned food products—you can make sense of distressed assets. If you’ve observed an industry cycling up and down, through good times and bad, you have the capacity to buy distressed assets for less than you could at, let’s call it, retail.

I’m a student of history. Throughout history, great fortunes have been made in buying distressed assets. As you will learn soon, it’s all in the buy. What you pay for distressed assets determines your fate. Conrad Hilton is known worldwide as a hotel magnate, but did you know he made his fortune by buying distressed debt from banks during the Great Depression and using it to acquire hotel properties?

Cornelius Vanderbilt never built a single railroad company. The fortune he amassed, a sum that in 2024 purchasing power would make him richer than Elon Musk or Bill Gates, came through his buying of undercapitalized railroad companies.

Warren Buffett is known as one of the world’s greatest investors, but he’s really a value investor; that is, he is a distressed investor at his core.

Presumably, neither you nor I are in the same league as Warren Buffett. However, there are daily opportunities to buy assets at 30 cents on the dollar and then turn around and sell them for 85 cents on the dollar (to give one example of distressed investing), which is a 183% gain. In this book, I will teach you where to find these assets, when to buy them, how to trade them, and what it takes to play and win this game.

Over the past four decades, I’ve been in the room with some of the very best and worst players. I’ve learned what works and what doesn’t. I’ve seen shrewd millionaires walk away penniless and savvy young gamers come away with bargain-basement deals.

First, you have to understand that distressed investing is a discipline. Second, you have to be willing to engage in the process, which sometimes means allowing yourself to get the stuffing knocked out of you in a room full of bankers and lawyers.

The Art of the Deal: Bankruptcy 301

For an illustrative example, we can look at none other than President Donald Trump and his negotiation of the Plaza Hotel’s debt in 1992. (This was long before Trump had contemplated a political career, and, as such, this story is not meant as a political statement, just a colorful anecdote.)

Trump is not technically a distressed investor, but over the course of his career he’s frequently found himself in situations where distressed investors lurk, often uncomfortably close. He has experienced the agony and ecstasy of being forced to grapple with shrewd, sophisticated, experienced professionals over heavily leveraged assets more than a few times.

The series of events leading up to Trump’s forced appearance in a crowded law firm conference room was many years in the making. It began with his purchase of the Plaza Hotel in 1988 for $400 million using significant debt. Later that year, he decided to finance the completion of the five-star Taj Mahal casino in Atlantic City, mostly with high-interest, 14% per annum junk bonds, amassing another $675 million in debt. With the United States entering a recession in 1990, this proved to be bad timing. Trump soon found himself needing another $675 million from a consortium of seventy-two lenders to save a combination of his assets, including the Trump Shuttle airline, the Plaza, and his Atlantic City casinos.

Unfortunately for him, the funds still weren’t enough to see him through the economic downturn. The Taj Mahal was put into bankruptcy in 1991, and Manhattan real estate values continued plunging. Interest payments accrued, and by 1992, he owed $550 million on the Plaza alone.

At the time, I was a young associate in the bankruptcy department at a Park Avenue law firm, just five years out of New York Law School. For me and my colleagues in the strange world that is bankruptcy law, Trump’s travails were kind of like watching the Olympics. We couldn’t get enough of all the twists and turns.

As it turned out, Trump’s high-stakes negotiations with a small army of lenders and lawyers were taking place just a couple of blocks away from my firm. They had gathered to restructure the mountain of debt he’d taken on to acquire the Plaza Hotel, his highly leveraged trophy asset. It should have been a humbling moment, but you wouldn’t have known it from his demeanor.

Legend would have it that when Trump strolled into the packed conference room that day, his first words were something like, Good morning, chickens. I wasn’t there, but several reliable, independent sources gave me details about the meeting. Considering all that has happened in the ensuing years, this line certainly rings true.

With so much at stake, why start an important bankruptcy meeting by calling creditor representatives chickens? I can think of at least four reasons.

First, it instantly threw everyone off guard. Bankers and lawyers prepare for these kinds of encounters with studied sobriety, arming themselves with documents and evidence. With one word, Trump had them off balance.

Second, it was a funny, quirky remark that caused people to pause. No one walked into the meeting that morning expecting to be labeled a chicken. I can only imagine the bemused expressions on the bankers’ faces.

Third, the term chicken is colorful. It doesn’t immediately evoke hostility. Think about what Trump didn’t say. He could have said, Good morning, idiots, or replaced the word idiots with any number of different profanities. Lawyers love a good fight, and opening with a taunt would have only energized them.

What does one retort to being called a chicken? Well, you’re a chicken, too!? No, it doesn’t work. By calling the bankers and lawyers in that room chickens, Trump subtly implied that he somehow had the upper hand. Why? Because chickens are harmless, innocent birds that often wind up being plucked, roasted, and eaten.

Fourth, Trump’s words suggested he was fearless, compared to the cowardly or risk-averse chicken bankers and lawyers. In American culture, being a chicken goes against national mythology; after all, we are from the Land of the Free and the Home of the Brave.

Even back then, Trump had acting ability. Also, most people don’t realize that he was honing his habit of calling people unflattering nicknames many decades before the 2016 presidential campaign, when U.S. Senators Sanders and Warren became Crazy Bernie and Pocahontas, respectively. Labeling opponents and critics is a serious negotiating strategy that serves a purpose—especially when it comes to the high-stakes world of debt negotiation.

The chickens line landed like a punch. It disrupted the flow of the meeting at the outset, resetting the tone for how the proceedings would go. It was an audacious way to take some negotiating leverage back, and it worked.

After filling the stunned and silent conference room with his words, he launched into a rant about New York City real estate and the value of having the Trump name on it. Eventually, it all became too much for his audience. As folklore has it, one high-powered lawyer for the banks known for his curt demeanor finally interrupted and told Trump to Sit the f--k down and shut the f--k up—all while picking his nose.

(When a meeting of this type veers off course, that’s how an astute legal tactician neutralizes an opponent. What incredible theater!)

Trump being Trump, perhaps he figured his swagger and salesmanship could convince the chickens to slash the interest rates on his debt and give him more time. Suffice it to say that didn’t happen. Nevertheless, considering his poor bargaining position, Trump made out about as well as anyone could. He was denied most of the accommodations and relief he requested and gave up a 49% stake in the hotel to the creditors, but he got a repurchase option, which meant they gave him an opportunity to buy the stake back if he could come up with the money. And he ultimately got to keep his plane and yacht, a remarkable concession.

Here’s a guy whose debt exceeds a billion dollars, yet he had the audacity to negotiate for and keep these symbols of wealth. Why did they let him? Because in the grand scheme of things, a plane worth $3 or $10 million and a yacht worth $20 million do little to offset a half-billion-dollar hotel property bleeding red ink. On a pragmatic level, the time and effort required to separate him from those assets wasn’t worth it. Give credit where credit is due. Trump’s bravado probably got him terms no ordinary bankrupt businessperson could dream of.

This story is a powerful lesson for any distressed investor: Having a deep understanding of leverage and the psychology of your counterparts can yield unexpected advantages, even when your position seems hopeless. Most debtors don’t walk out of a room like that still owning their yachts, planes, or even automobiles, unless they know how to navigate the fine line between corporate and personal liability.

The kind of person who can hold their own in a creditor’s meeting is the exact sort who is drawn to distressed investing. They possess a high tolerance for risk and the temperament to dance along a razor’s edge. They relish the fact that when egos clash and billions are on the line, the drama rivals any Broadway show.

All that said, distressed investing requires more than just raw bravado. Success in this field isn’t about throwing bankers and lawyers off balance with bold words. It also requires preparation and the ability to strategize. Trump’s unconventional tactics may have worked for him, but they are not a reliable blueprint for many if not most. An effective distressed investor needs a solid grasp of the market and the legal frameworks they’re operating in, not to mention a precise sense of timing.

A High-Stakes Playbook

That’s where this book comes in. It is a playbook for the high-stakes world of distressed investing, much like the ones coaches have for football teams. My goal is to give you the plays you need for successful distressed investing. Some people may be more or less emotionally suited to handle intense pressure when it spontaneously arises. But more often than not, it is preparation, not just temperament, that separates the winners from the losers in this game.

In the pages that follow, I will walk you through the investing process step-by-step, just as I do with the students in the MBA classes I teach at New York University. Not that academic credentials are required to be a successful investor in distressed debt. Anyone can do this type of investing. The deals are out there if you know where to look and how to acquire them.

We’ll explore how fortunes are lost when once-mighty companies spiral into bankruptcy and how wise investors pick up the pieces by buying assets thought to be worthless and selling them at a profit.

You’ll learn essential insider tricks, such as how to:

acquire everything from real estate to business loans at killer discounts in times of distress.

value distressed assets using proven frameworks like liquidation and cash flow analysis.

navigate critical bankruptcy processes, from claims to cramdowns and more.

source the very best turnaround opportunities even before others spot them.

assess red flags and mitigate risks inherent to this edgy area of finance.

I’ll be your fly on the wall as famous investors and corporate flameouts take center stage. You’ll discover how some financiers have made out like bandits via distressed investing; hear delicious, lesser-known details from famous bankruptcy cases; and learn from the chess-like legal battles over Enron’s and FTX’s financial carcasses in the wake of their massive frauds.

Do you have what it takes to profit from the Chapter 11 pressure cooker?

Let’s find out.

Chapter 1

Why Distressed Investing?

What if I told you there was a way to buy commercial real estate for pennies on the dollar? Or lend money out at 40% interest while borrowing at 5%? Or purchase a manufacturing business with $100 million in assets, $50 million in revenue, and $2 million in cash flow for just $2 million? Opportunities like these may sound too good to be true, but they exist in the world of distressed investing.

Opportunities to buy distressed assets emerge when the overall economy and markets struggle, making them a powerful diversification tool for smoothing out portfolio returns across cycles. As equities and commodities crash, and companies fall on hard times and plummet in value, distressed investors get busy doing deals. They see opportunity amidst the chaos.

Their operating principle is simple (and familiar to anyone with even a basic understanding of investing): buy low and sell high. But finding value where others see only trouble requires a keen eye, plenty of creativity, and nerves of steel.

At its core, distressed investing is bargain hunting, scooping up assets on the cheap from those desperate or eager to sell. The upside potential can be enormous once markets recover and values rebound to normal levels. Of course, with great potential reward also comes significant risk. Separating the genuine diamonds in the rough from the lumps of coal takes skill and the ability to do rigorous analysis.

That said, distressed assets may offer more transparency to potential buyers than public stock and bond markets. Public securities, meant to be bought and sold with a click, provide only the information required by securities laws, and most investors have no say in how they are structured. Contrast that with buyers of distressed assets, however, who often get direct access to company management, allowing them to ask tough questions and kick the tires before making a deal or agreeing to a purchase. This feature provides a margin of safety and the chance to investigate whether value truly is hidden or nonexistent.

The profiles of history’s greatest distressed investors provide valuable insights and inspiration for those just starting out, which is why I will showcase so many throughout this book. Take Conrad Hilton, the hotel magnate (see Fig. 1). During the Great Depression, he scooped up distressed debt from struggling banks, using it to acquire hotel properties for a fraction of their value. In one famous deal, he bought the Waldorf Astoria’s bonds for a measly 4.5 cents on the dollar and flipped them for 85 cents, a 1,789% gain. That’s turning $22,500 into $425,000.

Figure 1: Conrad Hilton, Founder of Hilton Hotels

Or consider Cornelius Vanderbilt, the railroad tycoon. As I mentioned in the preface, contrary to popular belief, he never laid a single track himself. Instead, he rolled up smaller, undercapitalized railroad companies on the cheap and combined them into a powerful network.

More recently, hedge funds and distressed debt funds have been flocking to the bankrupt remains of cryptocurrency giant FTX. At first, customer claims (or trade claims) were being sold for 10 cents on the dollar. However, as more information emerged about the value of the assets, claims rocketed up to 90 cents and past 100, all in the span of a year. As soon as crypto prices started rising and it became apparent that FTX’s assets were bargains, institutional investors rushed to get as large a share as they could.

Pioneering titans and today’s powerhouses of commerce provide a masterclass in the three core pillars of distressed investing: 1) Buy Low/Sell High; 2) Be Creative; and 3) Move Fast. By and large, the individuals who thrived learned through trial and error, but you already have a leg up, namely, this playbook.

Every investment involves a degree of risk, but most people avoid distressed investments because they fear the unknown. Knowledge and information can help overcome that fear.

My goal is to shift your mindset from passively reading about distressed opportunities to actively developing the insight and confidence needed to join the 0.1% of investors who seize them.

Figure 2: Types of Distressed Assets

The Market Beckons

Of course, the sorts of investors mentioned above benefited from immense scale, backing, and connections. But even if you are not on Warren Buffett’s speed dial, distressed opportunities are everywhere, often close to home.

Consider that distressed investing covers many asset types across industries (see Fig. 2). These include trade claims, real estate loans, operating businesses, and special situations. Trade claims are debts one company owes to another, often purchased at a discount. Real estate loans may involve distressed properties and mortgages, particularly in overleveraged markets. Operating businesses can be companies attempting to restructure through bankruptcy or asset sales. Special situations refer to event-driven opportunities such as litigation financing or the modification of contracts that affect asset values.

I will examine each of these categories in detail in later chapters. For now, it is worth knowing that the United States dominates the distressed landscape, both in deal volume and in accessibility. The U.S. bankruptcy system, with its transparent and established legal framework, supports a steady flow of transactions.

Although the United States holds about 30% of the world’s total debt, opportunities also exist in other markets. In 2019, Japan and China ranked next in global debt levels (see Fig. 3). But debt volume alone does not determine opportunity. Non-performing loans and distressed assets vary in quality depending on local economies and legal systems. Investors must weigh potential returns against the additional risks of unfamiliar markets.

As a general principle, focusing first on the U.S. market makes sense. The combination of available deals, legal certainty, and lower operational risk makes it a sound place to begin.

Figure 3: Leading Countries by National Debt

Getting Started

So, where do you start as a novice distressed investor? I advise focusing first on industries and situations you know something about. If you’ve worked in healthcare, chances are you’ll have a major leg up analyzing distressed hospital systems or overleveraged biotech firms. Likewise, real estate professionals should scour their local property markets for potential opportunities.

If you don’t have expertise in any industry or situation, it’s not a deal-breaker. But it means you’ll need extra effort upfront to get up to speed. While distressed investing isn’t rocket science, it’s important to remember that no one will make it easy for you. At some point, you may be tempted to jump into a deal in an industry you know little about, but I strongly advise against it. This is a competitive and complex field, so be prepared to roll up your sleeves and do your homework.

Once you’ve identified a promising opportunity, the real work begins. To succeed in distressed investing, you must combine rigorous fundamental research, legal and financial creativity, and good old-fashioned hustle. As I spelled out in the preface, this is not a game for the timid. Distressed investing attracts some of the brightest and most ruthless people on the planet, all of them vying for the same deals. However, the rewards can be substantial for those willing to work hard and navigate the challenges.

The key is to stay focused, disciplined, and adaptable. As you gain more experience and build your network, you’ll develop a sharper sense of which opportunities are worth pursuing and how to navigate the complexities of a situation. Success in distressed investing is a marathon, not a sprint, so pace yourself and never stop learning along the way.

The Six Rules for Distressed Investing (as Followed by Industry All-Stars)

God gave Moses the Ten Commandments, which have served mankind well for thousands of years. Distressed investing doesn’t rise to the same level of importance in the grand scheme of life, but these six rules will serve distressed investors well. While they may not save your soul, they could very well save your capital.

Rule 1: Buy at the Right Price or Be Damned

The foundation of successful distressed investing begins with understanding liquidation value. No one embodies this principle better than Howard Marks, co-founder of Oaktree Capital Management, who famously advised, The most important thing is knowing what you don’t know. Marks built Oaktree into a $170 billion powerhouse by focusing relentlessly on entry price and downside protection. Similarly, Marc Lasry of Avenue Capital Group made his fortune by buying distressed debt at the right price.

During the 2008 financial crisis, Lasry purchased bank debt at 60 cents on the dollar that later recovered par (100%), thereby generating billions in profits. In the FTX case, early investors who purchased claims at 3 to 6 cents on the dollar created enormous downside protection, as the eventual recovery will turn out to be much higher than initially expected. These investors understand that no matter how compelling the turnaround story might seem, overpaying for distressed assets is the quickest path to failure.

Rule 2: Do Your Homework

As you’ll learn, distressed investing demands more rigorous due diligence than