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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • Value Investing Forum 23 comments
    Mar 7, 2013 4:13 PM

    It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one.

    - Charlie Munger

    Any value investing questions (or answers)? If you seek a margin of safety, you came to the right place.

    When you look at a company, do you ask yourself, "what does it cost and what is it worth?" If so, how do you find opportunities? What are you finding?

    I look and sift the world for such misplaced bets. When I occasionally find one, I first exploit it for profit on behalf of my family and partners at Rangeley Capital. Then, I write about it for anyone else interested in such ideas. To those ends, I want to open up this forum to any value investor in search for a margin of safety. Please ask about any of the previous ideas on this blog, in my articles, or elsewhere.

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Comments (23)
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  • Steven Reiman
    , contributor
    Comments (348) | Send Message
     
    Chris,

     

    What do you use as a starting point? Obviously you do a lot of due diligence on your companies but how do you initially narrow your search down?

     

    Steve
    7 Mar 2013, 05:44 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » That is a great question and I am happy to try to answer it.

     

    Ultimately, we want to understand the price that we are paying and the value that we are buying. However, I do not start with either price or value. Instead I start with a counterparty. Here is what I mean. My research begins with an examination of a market participant with an attribute that is likely to lead them towards uneconomic behavior. What might that be? Pressure, for one example. Perhaps a large bank is liquidating a bankrupt client’s portfolio of senior secured loans and they are extremely price-insensitive/time... Politics, for another. Maybe someone does not want asbestos or tobacco exposure. Essentially I begin by looking for something that a given counterparty wants to buy “at any price” or sell “at any price” and I take the other side of the market. I am essentially a liquidity provider to stressed markets.

     

    Only then, do I ask “what is it worth”? I would like to get to the point where I have a great deal of comfort around $1 of expected value, even if that is really the center of a range. So the $1 of expected value might be, after a good or bad outcome, $0 in the specific instance or $2. However, I like to understand probabilistically where the expectancy lies.

     

    Finally, “what does it cost?”. If there is 1.) an uneconomic counterparty and 2.) a $1 of expected value that I am able to analyze and understand, then I am happy to price out the given security. While I pay as much as $0.75 for a $1 of expected value, I am much happier at $0.50. We try to have as much capital as possible exposed to opportunities that cost $0.10-0.40, but these are few and far between and sometimes take months to find and when we find them, they are usually opportunities with many subjectively undesirable characteristics. But I live for those.
    7 Mar 2013, 05:57 PM Reply Like
  • Steven Reiman
    , contributor
    Comments (348) | Send Message
     
    Chris,

     

    Thank you for the quick response-you have a very interesting and unique viewpoint. You also seem to be write on just about everything you write about!

     

    Steve
    7 Mar 2013, 06:19 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » Thanks for the kind words. But alas, I am wrong about this or that all of the time. In fact in a period of time that I have been quite happy with the overall return, we have suffered from numerous adverse outcomes. We have always had some failures (ranging from 20-35% of our positions) and are certain to have many more. We deal with this with price-sensitivity and position sizing, since we do not have too much confidence in our precision or, for that matter, for the possibility for too much precision given how wild and uncertain the world has always been.
    7 Mar 2013, 06:28 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (847) | Send Message
     
    Hey Chris,

     

    I understand that you run your hedge fund with a strategy on event driven investments. Can you walk through with me some of the thought process that goes into evaluating a spinoff company? And how do you bring yourself to buy a spinoff company if it already had a huge run up?

     

    This seems to be a big dilemma for me. I completely understand that finding dollars worth 50 cents are much more attractive, but I constantly find dollar bills that are worth 70 cents instead. Any suggestions or tips?

     

    Much appreciated,

     

    Wilson
    7 Mar 2013, 07:42 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » Spinoff valuation is similar to typical long stock research, but with a particular sensitivity to understanding who and when and why sellers might be in the market (such as when large holders with the spin-off outside of their mandate). Generally, I don't like to buy something that has had a huge run up. However, the direction of a stock is not really a factor in our strategy. If you constantly find dollar bills that cost $0.70, you should be very happy and you will be very rich. If you are certain that is what you are looking at, you should buy it and size it appropriately.
    7 Mar 2013, 10:36 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (847) | Send Message
     
    Thanks for the response Chris. As always, I really appreciate your insights!
    7 Mar 2013, 11:57 PM Reply Like
  • SafisKusai
    , contributor
    Comments (236) | Send Message
     
    I know that you have stated that you are short chinese firms listed in america (reverse merger things). What are your thoughts on the massive wave of chinese firms doing "going private" transactions? I've been scanning Edgar 8-k filings and those are the majority of mergers i've been seeing. Do you think that this is just the legit firms realizing that their business's are way to undervalued and have you taken part in any of these transactions?
    7 Mar 2013, 10:19 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » That is a great question. Happily, we have not been short any that have been taken private. On one hand, the real frauds are less likely to get bought. On the other hand, there are some exchange arbitrages in which they pull from one exchange and re-list at another that offers higher average multiples, so sometimes even the shady ones will get bought just to re-list later elsewhere. But mostly, if there are any legitimate ones, they won't want to get classed with the sleaze. For us, all of our research is firm-level and based on specific information and judgment on specific companies, so that should help us avoid being stuck short something when it is acquired for a premium.
    7 Mar 2013, 10:32 PM Reply Like
  • Meatball Bob
    , contributor
    Comments (38) | Send Message
     
    Chris,
    In my portfolio, I'm often torn by the idea that markets are very efficient, at least efficient enough for me to question any valuation I come up with that differs much from the market price. I played competitive tennis and every time I thought I was great, I moved up a level and realized how many other people were out there who were that much better. I think the same way about financial markets. Everyone works hard and everyone wants to win. I'm just prone to think that with all the brilliant, rational, self-interested folks out there, plus the cheaters, subtract the transaction costs how can I or anyone else for that matter have an advantage. How do you reconcile this in your own thinking? What gives you confidence that the price system isn't working properly?
    8 Mar 2013, 10:05 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » I find the market about 99% efficient -- very efficient but not perfectly so. Happily, the 1% is pretty durable and identifiable. So I just focus on that 1%. I first look for stress, for constrained, rushed counterparties in markets where I can dictate price. I like buying when sellers have market orders and no one else is on my side of the market.
    10 Mar 2013, 12:29 PM Reply Like
  • TMFDeej
    , contributor
    Comments (66) | Send Message
     
    Hi Chris. Thanks for the great ideas. I only wish that I had started following your writing earlier.

     

    I have been doing a little digging on LORL and I see that Telesat recently tabled a potential IPO offering. How do you see LORL monetizing its stake in Telesat? It's fantastic that LORL's ownership position in Telesat is worth more than LORL's share price at the moment, but how do you see the gap narrowing? Thank you so much for your time. Have a great weekend!

     

    Enthusiasm fizzles out for Telesat stock offering

     

    http://bit.ly/Y2cPbL

     

    Jason
    8 Mar 2013, 07:48 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » My sense is that the IPO has been put off due to inbound interest to acquire Telesat. SATS would probably be the best owner, but several other bidders could compete.
    10 Mar 2013, 12:31 PM Reply Like
  • TMFDeej
    , contributor
    Comments (66) | Send Message
     
    Thanks for the insight on LORL, Chris.

     

    I know that they are not classic value plays, but I have become increasingly interested in jockey plays over the past several months. Two that I have my eye on now are:

     

    1) Air Lease and Steven Udvar-Hazy. John Osterweis of Osterweis Capital presented an interesting case for the company in an issue of Value Investing Insight a couple of months ago.

     

    and

     

    2) Sandstorm Metals and Energy (STTYF) and CEO Nolan Watson. Roumell Asset Management did a short, but interesting write-up in its letter to investors a couple of quarters ago:

     

    http://bit.ly/14P679T

     

    have you looked at either of these as potential investments. I'd love to hear your thoughts.

     

    Jason
    11 Mar 2013, 05:46 PM Reply Like
  • bazooooka
    , contributor
    Comments (2657) | Send Message
     
    TMF,

     

    XPO is a nice bet the jockey play if you believe in roll-ups. Many on SA think it will be a Billion dollar business in under 2 years.
    12 Mar 2013, 01:11 AM Reply Like
  • TMFDeej
    , contributor
    Comments (66) | Send Message
     
    Thanks for the idea bazooka. I'll definitely look into it. Companies that make tons of acquisitions can be tricky, but the more stuff I come across, the better. I really appreciate it.

     

    Jason
    12 Mar 2013, 04:08 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » No but I will.
    11 Mar 2013, 07:45 PM Reply Like
  • bazooooka
    , contributor
    Comments (2657) | Send Message
     
    I too do hope you give us your take on Sandstorm; does seem to have a large underground type following on many different boards (especially in Canada).
    12 Mar 2013, 01:10 AM Reply Like
  • Mathieu Malecot
    , contributor
    Comments (1042) | Send Message
     
    2nded
    i love the model.
    12 Mar 2013, 09:59 AM Reply Like
  • TMFDeej
    , contributor
    Comments (66) | Send Message
     
    The thing that scares me personally about Sandstorm is that it almost reminds me of a First Marblehead type of business model (remember that mess), in that the company is laying out cash today with the potential promise of a potential income stream at some point down the road.

     

    The thing that eases that concern slightly is that Nolan Watson has successfully implemented this business model with both Sandstorm Gold and Silver Weaton in the past.

     

    Watson certainly made some missteps in some of Metans & Energy's early investments, but judging from a recent interview that I read with him, he seems to be learning from his mistakes and making adjustments.

     

    Jason
    12 Mar 2013, 04:08 PM Reply Like
  • TMFDeej
    , contributor
    Comments (66) | Send Message
     
    Hi Chris. GKK was down nearly 4% today and I thought that it must be related to something. that's not a huge move, but it looks like Mr. Market may not have loved the company's new Memphis acquisition.

     

    The press release doesn't say much at all about the buildings, other than the purchase price and location. Interestingly, the headline lists them as being in Memphis, TN, but the actual text says they're located in Olive Branch, Mississippi. I'm sure that's the Memphis Metro area. My parents live in Memphis, but I'm not familiar with this particular industrial building :). I can tell you that FedEx is located in Memphis as well and that a ton of shipping goes out through the airport there so I could see where industrial space might be desirable there if they were making things that needed to be shipped.

     

    The building is 100% leased to a single tenant through December 31, 2022. Which is good I suppose because as a REIT GKK will know exactly how much cash this deal will throw off, but it doesn't leave much room for growth. What does, though is the "adjacent 13.8 acre land parcel with capacity for an additional 250,000 square foot building." It will be interesting to see if GKK develops this land. I assume that it will, unless it decides to sell it off like it did with some of the other pieces in the BofA portfolio. If so, this will help to lower the total purchase price for the leased property, which is a good thing, but makes figuring out the economics of it more difficult right now.

     

    Gordon DuGan seems like he has been doing a good job as the CEO thus far, I guess that as shareholders we need to trust, but verify of course, that this trend will continue. As long as the deal is decent, I like the fact that they're putting money to work.

     

    I'd love to hear your thoughts on this acquisition if you have a chance. You are by far the most knowledgeable person that I have seen on Gramercy, and one of the best investors out there period.

     

    Thanks for your time Chris.

     

    Jason
    12 Mar 2013, 04:29 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4187) | Send Message
     
    Author’s reply » Thanks for the kind words. I don't put much meaning behind today's move (nor do I put much meaning behind the move over the past five days). There is not really enough information in the press release to judge, but I have a great deal of confidence in Gordon and his team. Their plan, execution, and communication have all been first rate thus far.
    12 Mar 2013, 04:35 PM Reply Like
  • Mathieu Malecot
    , contributor
    Comments (1042) | Send Message
     
    the last five days = trade-able. for an investor the action means little unless you are pricing options.
    13 Mar 2013, 04:41 PM Reply Like
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