Distressed Asset Evaluation Framework

Every distressed asset looks like a bad investment at the moment of maximum pessimism. The investor's job is to determine whether the distress is temporary — creating an extraordinary entry — or permanent, making current prices a trap for the overconfident.

Why This Matters

Templeton built his fortune by buying at maximum pessimism: Japanese stocks in the 1950s when the country was rebuilding from ruins, emerging markets in the 1980s when others considered them uninvestable, technology stocks in 1999 when he shorted the most expensive. The common element was a rigorous framework for distinguishing genuinely cheap from cheaply priced — businesses where the distress is temporary from those where it is structural. This five-step framework operationalises that distinction.