One of the themes that I get back to regularly on this site is the difficult choice that vulture markets present. The Cliff’s Notes version of my thesis is that investors get excited for the vulture market as the market begins its first descent. By the time the market bottoms out, investors are scared to death. The laws of supply and demand dictate that this must happen. If you have a lot of buyers, prices have a tough time falling.

This post is about vulture opportunities and how investors get their heads wrapped around the opportunity and eventually pull the trigger. If you’re an investor and you’ve watched the market fall consistently for some time, whether or not the deal you are looking at reflects current market, it may be difficult to pull the trigger because you’re afraid that the deal will be cheaper tomorrow.

I’ll advance a framework for decision making that I think a lot of investors go through, but that some do not. My framework is sort of a series of rhetorical questions.

1. Is there a significant amount of distress that creates the opportunity?
2. Does the deal represent a significant discount from peak?
3. Is price erosion slowing?
4. What are the expected yields vs. other competing investment opportunities on a risk adjusted basis (treasuries, stocks, bonds, etc)?
5. In 12 months are you more likely to kick yourself for doing the deal, or not doing the deal?
6. Are your reservations about doing the deal largely born from the market-wide echo chamber (and is there a good chance that the echo chamber could be wrong)?
7. Does the market look undervalued by historical tests? What do prices look like based on long term average prices (5 year, 10 year)?

Volume tends to materialize in markets when investors can answer these questions favorably. I know there are some who would say that doing deals in the vulture market is as simple as sending the deals to the spreadsheet jockies and awaiting their thumbs up or thumbs down. I think the problem with that approach is that the spreadsheet framework for doing the deal is fraught with overconfidence on the risk factors. The other problem is that spreadsheet decision making over-magnifies the current trend and does not give weight to the potential to reverse trend. Doing vulture deals means that you have to be ready for trend reversal.

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