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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
My blog:
Rangeley Capital on Harvest
My book:
Rangeley Capital Best Investment Ideas
  • Rangeley Capital Q&A 79 comments
    Mar 14, 2013 9:15 AM

    In prior articles and blog posts, I have discussed some of my favorite investment opportunities. In this forum, my goal is to answer any questions about the research and investing process at Rangeley Capital, in terms of how we define our strategy, monitor opportunities, size positions, or manage risk.

Back To Chris DeMuth Jr.'s Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

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  • SA Editor Samir Patel
    , contributor
    Comments (163) | Send Message
     
    Here are a few questions... feel free to answer all or none:
    - is your portfolio generally concentrated in a few stocks or broadly diversified? if so, do you have a "target" number or range of stocks to hold?
    - what's the maximum % allocation to a single stock you'd feel comfortable with?
    - what's your entry strategy? do you like to establish your full position all at once, or do you dollar cost average - and if so, do you ever buy more at a higher price, or only on dips?
    - once you've entered a position, what's your exit strategy? do you wait for it to hit your price target and then sell in that area?
    - will you ever abandon a thesis that's taking too long to play out if you see another opportunity with better risk-reward?
    14 Mar 2013, 09:47 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Thanks for kicking this off, Samir,

     

    Diversification

     

    Unfortunately, I have only a few good ideas. So that makes our portfolio more concentrated than most. Currently, we have twenty positions including cash in US$. That being said, twenty positions – when those positions are not closely correlated – achieve most of the benefit of diversification. Our research process is pretty involved, which makes it hard to own many more than that. Our target is actually even more concentrated: ideally, we would prefer to own closer to ten positions. In practice, what happens is that we get stuck in something, for example SSE, that is in the process of playing out. We don’t necessarily wait for it to come out of our portfolio before going on to the next research project.

     

    Position Sizing

     

    Regarding the maximum % allocation, I think about sizing in a different way. For me, the key is the maximum loss or downside budget. Many positions have a reasonably likely downside of 100%. Those are typically smaller positions. For positions trading very close to their downside, we are comfortable with large positions, typically 10% of our portfolio. We have two positions that are trading within about $0.01 of their reasonably likely downsides with $1-2 of upside which we think have very good odds of getting their upsides. In those instances, we will have concentrated positions, file on those companies, and publish on Seeking Alpha.

     

    Entry Strategy

     

    In terms of entry strategy, we begin to accumulate a position as soon as we have finished our research and have a variant view on value. What does it cost and what is it worth? If our view is 25% off of the market’s, we will build our position. Typically, we will buy about half initially, which can take months to get into depending upon liquidity. Then we will hold off on half for an “event event”, which is how I think of unusual trading opportunities. Earlier, I wrote about our position in NXY. We owned millions of shares of NXY, but kept our position somewhat smaller than we could in order to buy more on panicky dips. We buy more when our view becomes more variant. That can happen when the price is going down, up, or sideways.

     

    Exit Strategy

     

    A majority of our investments are self-liquidating. So, typically, we simply buy, hold, wait, and are cashed out in some way or the other. The ones that are not self-liquidating, we sell when the price reflects the expected value. This can happen in good outcomes and in bad. We are usually sellers when a security is trading normally, with information both available and utilized by rational, liquid counterparties. We like to buy for very very low prices, but are happy to sell for fair prices.

     

    Risk-Reward

     

    In theory, we would sell a position in order to buy a better one. In practice, it has never worked that way. In part, we are very liquid and like having a lot of cash available. So, when opportunities arise, we are able to act. We abandon a thesis when we the evidence suggests that we are incorrect, an event that happens all too frequently.

     

    -C

     

    Chris DeMuth, Jr.

     

    Rangeley Capital
    3 Forest Street
    New Canaan, CT 06840
    203.801.9969
    ccdemuth@rangeleycapit...
    14 Mar 2013, 10:41 AM Reply Like
  • SA Editor Samir Patel
    , contributor
    Comments (163) | Send Message
     
    Thanks for the detailed responses. I'll definitely be following the discussion, and I'll ask more questions as they come to mind.
    14 Mar 2013, 10:44 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » You're welcome. Sounds good.
    14 Mar 2013, 12:04 PM Reply Like
  • ActionDavidK
    , contributor
    Comments (12) | Send Message
     
    Can you share your process on finding investment opportunities?

     

    What news sources do you read on a regular basis? WSJ? Barrons?
    14 Mar 2013, 11:25 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » I read the Wall Street Journal, the Financial Times, Barron’s, Grant’s Interest Rate Observer, and many industry trade publications. But mostly, I read primary sources: 10-Ks and 10-Qs, earnings releases, and other communication directly from companies. Most opportunities come from discovering interesting things in SEC filings.
    14 Mar 2013, 12:04 PM Reply Like
  • Squeeky Wheel
    , contributor
    Comments (297) | Send Message
     
    Question Set Number 2:

     

    * Could you give an overview of your pre-research screening process? You mentioned regular notification via edgar (?) and I noticed you follow over twenty thousand SA authors, so I assume you are running some automated text analysis scripts. Could you discuss that further?

     

    * Regarding position sizing further - Do you have a set downside budget for all trades, or do you adjust the downside budget and if so, how is it determined?

     

    * More on entry tactics - As you mentioned some of your positions have low liquidity (for example OBAF, which you have mentioned before, trades a few hundred to perhaps two thousand shares a day) and thus have high spreads (around 4% for OBAF). On these do you pay the spread, wait for a seller, or use another technique?
    14 Mar 2013, 11:41 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Yes, I get a lot of alerts on Edgar (monitors SEC submissions): http://bit.ly/15OMjps which is typically the beginning of the research process for me. On Seeking Alpha, we follow authors for both content, where there is information that is not priced into the market as well as (far far more frequently) there are statistically interesting things about their interest.

     

    In terms of downside, we are typically risking around 3% of original invested capital in a given position. That being said, we try to eliminate as much arbitrariness as possible, so have some flexibility when opportunities are extraordinary.

     

    Yes, some of our positions are illiquid. In the case of positions such as OBAF, we are not enthusiastic about paying the large spread. We would prefer to enter during an equity offering at a substantial discount to intrinsic value and exit via a corporate transaction such as a strategic merger with a larger institution. Other than such entries and exits, we don’t trade much.
    14 Mar 2013, 12:15 PM Reply Like
  • ActionDavidK
    , contributor
    Comments (12) | Send Message
     
    If you don't mind sharing, what specific filing types do have alerts for on Edgar?
    15 Mar 2013, 11:10 AM Reply Like
  • gsterling
    , contributor
    Comments (552) | Send Message
     
    How much, if at all, do you consider macro factors when making investments?

     

    Do you ever invest on foreign exchanges?

     

    Thanks,

     

    Gregg
    14 Mar 2013, 11:54 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » We have never made an investment that relies on macro factors. Macro factors push us around a bit, but all of our investments have been based upon bottom up, firm-level analysis.

     

    Yes, we invest on foreign exchanges all of the time.
    14 Mar 2013, 12:17 PM Reply Like
  • Miguel Marecos
    , contributor
    Comments (71) | Send Message
     
    Hi Chris:

     

    My question is related to your search strategy. From what I have read from some of your other posts, you like to look for securities that have a someone in a distress position. (Distress sellers, forced selller, etc...). How do you go about to find these situations? news? sites?
    On average, how many situations you look before you build a position?
    Have you have any restriction on your search strategy?

     

    Thanks

     

    Miguel Marecos
    14 Mar 2013, 11:59 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Are there any restrictions on our search strategy? We need an investment that is 1.) legal 2.) ethical and 3.) can be purchased at a substantial (at least 25%) discount to its expected value. Clearly, these restrictions are designed to be very loose. We need a broad mandate in order to be as opportunistic as possible.

     

    How many situations do we look at before building a position? Perhaps about a hundred research projects per each that we ultimately invest in. Historically the ratio has been something along the following: 90% are priced about right, 9% appear to be mispriced, but it ultimately turns out that the price is about right and our analysis is wrong, and about 1% appear to be mispriced and are, in fact, mispriced upon further analysis. We just buy those in that last 1%.

     

    How do we find constrained counterparties? Sometimes, we find something of interest in the background section of proxies. Other times constrained counterparties come to us. We try to find narrow mandates, such as index funds that have to sell a massive amount of some security at a specific time. Most cost-insensitive investors are simply time-sensitive. But, thematically we are looking for someone who wants to do something “at any price”, either getting in or out. We will generally be happy transacting when we can understand 1.) what something is worth 2.) what it costs (when that cost is far from its value) and 3.) who our counterparty is and why they are behaving in a way that is not economic. We also try to focus on areas were someone lacks liquidity or where their mandate forbids certain types of exposure.

     

    At the end of the day, we are simply trying to be rational and focused, while seeking counterparties who are the least rational and focused.
    14 Mar 2013, 12:29 PM Reply Like
  • Miguel Marecos
    , contributor
    Comments (71) | Send Message
     
    In your opinion, what are the most important characteristics a person should have to be a successful investor?
    14 Mar 2013, 08:15 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » I think that it is a combination of two characteristics: focus and rationality. One needs to be able to decide and act on what is important. And one needs to be able to separate one’s thinking from one’s emotions, especially when others are not.
    14 Mar 2013, 08:33 PM Reply Like
  • Wall Street Teacher
    , contributor
    Comments (399) | Send Message
     
    For me, the core criteria is often 1) how much of their own $$$ does management have at risk and 2) how stable is a given management team and 3) who are the anchor investors(if any)? 4) strength of IP.

     

    Do you have a short checklist of positives you have observed in your historical winners?
    14 Mar 2013, 09:12 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » I think that the key to our historical winners were purchased at bargain prices. They had a value that we could understand. They were bought from someone who was not able to keep them or did not want them, for reasons unrelated to their prices or values.
    14 Mar 2013, 09:17 PM Reply Like
  • Todd Johnson
    , contributor
    Comments (6952) | Send Message
     
    Chris,

     

    My guess is you will find 100 new clients, for your hedge fund, with your track record and posting here.

     

    Todd
    15 Mar 2013, 01:20 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Thanks. Meanwhile, it is fun to share ideas. Research can be a lonely activity sometimes and it is nice to get feedback on some of the things that I am working on.
    15 Mar 2013, 07:23 AM Reply Like
  • TheCompleatAngler
    , contributor
    Comments (162) | Send Message
     
    Have you ever taken an activist stance and become a 13D filer in order to try to maximize value for any of your investments or been tempted to do so?
    15 Mar 2013, 02:06 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » We are constantly in contact with the board and managements of the companies that we have invested in. So we are “active” but not “activist”. We have not had the need to file 13Ds thus far, although I had to file 13Gs on my investment in Clinical Data (CLDA) before it was sold, SSE (in the process of being sold), OSHC, and GKK.

     

    Am I ever tempted? Yes, I am tempted today.
    15 Mar 2013, 07:27 AM Reply Like
  • sheldond
    , contributor
    Comments (1022) | Send Message
     
    Any thoughts on diversification when certain sectors are highly undervalued. For example financials in the recent past to today versus what could be considered a top in many sectors.

     

    Yesterday you asked about equities with little downside risk. When I kept looking through my portfolio and the small banks and financials still have some legs but most of my undervalued equities have risen to fair values. I know there are undervalued equities out there so it's time to put my explorer hat on and start reading through companies starting with D.

     

    This caused me to take profit in all of my risk on equities recently and build my cash position which I will still trade but only in short term moves.

     

    My longs are still longs. Still believe in the mnkd run before FDA. I like the BAC buy back proposal and AIG over the long haul.

     

    Another question that often makes me pause. Is when to take profits?

     

    Best,

     

    DCSIII

     

    PS another day of reading primary documents....any chance you can give me the starting letter of one of your ideas to see if I can find it...lol (I know I know). If you can feel free to message me. i love to read. So I guess I will start with the letter D today looking for the next FOE
    15 Mar 2013, 09:13 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Thanks for the note. I rarely think too much about sectors. However, I have generally been fairly concentrated in community banks, oil & gas, and pharma.

     

    You’ll probably be happy with the cash position. It is so hard to raise a lot of new cash right when there are a ton of new opportunities.

     

    AIG should work out very well.

     

    When to take profits? When the price is “normal” or fair. I would prefer to pile up cash instead of owning fairly priced risks. There will be mispriced risks in the future, so I am happy to wait for those. Ideally, there will be many returns of capital, so that you don’t have to do anything.

     

    As for the new ideas, I’ll file on them and write them up shortly.

     

    Best,

     

    -C
    15 Mar 2013, 09:24 AM Reply Like
  • Eric Compton
    , contributor
    Comments (6) | Send Message
     
    Hey Chris,
    Excellent postings and articles, have really enjoyed reading through your work, my question is regarding options. Do you use any options strategies currently or have you used them in the past? If you do use options, how do you go about conceptualizing when they will make a good contribution to your portfolio vs. when it would be better to focus on other investment methods?
    16 Mar 2013, 02:42 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Thanks. Yes, we use options strategies all the time.

     

    We judge everything on a 1x basis, as if it was equity. We set the upside, downside, and probabilities of each just like with equity. But sometimes when we have very specific price or date expectations, we use options.
    16 Mar 2013, 02:55 PM Reply Like
  • Leftope
    , contributor
    Comments (6) | Send Message
     
    Thanks for all the articles you've put together.

     

    Assuming no immediate catalysts, low leverage and positive earnings, do you have a P/B cap on what you'll pay for bank conversions?

     

    If a bank can't sell itself for 3 years after a conversion, are you willing to pay more with 1 year left on the moratorium versus a newer conversion?
    19 Mar 2013, 03:23 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » You are welcome.

     

    My preference is 60-70% of book.

     

    No, I'm not really that interested in paying up for ones close to their likely sale date. I buy the vast majority of the equity that I own in the conversion process as opposed to the open market.

     

    The reason why I'm not that time-sensitive is that we have a liquid balance sheet and collect dividends. Also, I like getting long-term capital gains tax treatment, especially when there are large gains.

     

    I hope that helps.
    19 Mar 2013, 03:39 PM Reply Like
  • Investing services
    , contributor
    Comments (24) | Send Message
     
    What do you think about unscrupulous tactics launched at OTC stocks. You note you like to control price on stocks. Is that your overall plan on these items? To control the price?
    19 Mar 2013, 11:50 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Just so that I can better understand the premise of your question, which I think I might be missing, where do I note that?
    22 Mar 2013, 04:45 PM Reply Like
  • Squeeky Wheel
    , contributor
    Comments (297) | Send Message
     
    What Chris means is that he cares more about the price he buys at than the time he buys at. As a analogy, he never places a market order (buy now whatever the price!); only placing limit orders (only pay $5 per share, no more!). So he 'controls' his purchase prices by being picky.
    23 Mar 2013, 11:52 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Thanks for this good explanation. All true. Hopefully that answers what was being asked.
    23 Mar 2013, 12:01 PM Reply Like
  • Yuanxi Zhang
    , contributor
    Comments (237) | Send Message
     
    Do you quantitatively decide on your portfolio sizing?
    23 Mar 2013, 12:34 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » We use the Kelly formula as described here:

     

    http://seekingalpha.co...
    23 Mar 2013, 12:41 PM Reply Like
  • Yuanxi Zhang
    , contributor
    Comments (237) | Send Message
     
    Thanks! I have been reading the book as well. I am wondering how I can expand the formula for a single bet to deciding what percentage of the money should be put in to each position I will enter. Would you just use the formula for each single position and then shrink the weights so that they add up to 1? I am also confused about whether to use the raw return or annualized return in the formula. Is there a modified version of the original Kelly Criterion?

     

    Thanks!
    23 Mar 2013, 02:45 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Yes, as you describe. Raw. I'm sure, but use the original.
    23 Mar 2013, 03:28 PM Reply Like
  • Yuanxi Zhang
    , contributor
    Comments (237) | Send Message
     
    Thanks! So the model here "http://bit.ly/XQAxnK" tells me to only invest 1/3 of my cash into the ideas I have based on my parameters. The odds I used are calculated with the market price--e.g. suppose the downside is 0.35, and the upside is 6.65, then the probability the deal will complete is 5%, and the odds are 20. I am not sure whether model works the way I want. Is this bet with downside 0.35 and upside 6.65 the same as a 20-1 bet all or nothing bet?.
    23 Mar 2013, 06:09 PM Reply Like
  • Yuanxi Zhang
    , contributor
    Comments (237) | Send Message
     
    never mind...
    23 Mar 2013, 08:59 PM Reply Like
  • Miguel Marecos
    , contributor
    Comments (71) | Send Message
     
    Chris, you always make full Kelly bets? or sometimes you reduce based on your analysis?
    For the sake of example let's say that Kelly would tell you to put 60% of your portfolio on a single bet/stock... what would you do?
    23 Mar 2013, 03:19 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Yes, we always make full Kelly bets. But we use conservative premises.
    23 Mar 2013, 03:27 PM Reply Like
  • Miguel Marecos
    , contributor
    Comments (71) | Send Message
     
    Hi Chris!
    Another question, when do you sell you positions? When they trade at your estimated fair value? or you start selling before?
    Thanks,
    25 Mar 2013, 03:51 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » We sell our positions, regardless of whether there was a good outcome or bad outcome, when our valuation has converged on the market price. When odds = implied market probabilities of the blended outcomes. So, essentially when the market is fair/normal/resolved/e... Typically there is a high level of clarity and certainty. Then, we are gone. Mostly, this is in a return of capital and is at the private market valuation.
    25 Mar 2013, 03:54 PM Reply Like
  • TheCompleatAngler
    , contributor
    Comments (162) | Send Message
     
    I would be most appreciative if you would discuss the opportunities that exist in squeeze outs and how you think about/approach them. (TARO seems to be a good current example.)
    25 Mar 2013, 04:01 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » TARO is a gem. We have been pretty involved in most squeeze out opportunities. It has been one of our most consistently positive opportunity sets. A reason why it has been safe is that the counterparty also sits on our side of the table and can mark up their books by paying us a full price. So, we like owning publicly traded subsidiaries and do so knowing that the parent co can take them out and pay us for killing off the corporate costs and can get competitive information out of the public domain by doing so.
    25 Mar 2013, 04:19 PM Reply Like
  • sogreat
    , contributor
    Comments (47) | Send Message
     
    Do you have an article about such squeeze out opportunities?
    26 Apr 2013, 08:58 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Not yet; I should.
    27 Apr 2013, 06:46 AM Reply Like
  • TheCompleatAngler
    , contributor
    Comments (162) | Send Message
     
    Much obliged! This is an area that I've never thought about except in passing, have never targeted, and have precious little experience with. You've given me a theoretical foundation for further inquiry. I would suggest with all humbleness one additional point to be made out about the benefits of a squeeze out to the controlling shareholder, which springs to mind now that my intellectual gears have begun to turn on this topic: the controlling shareholder gains full benefit of the subsidiary's balance sheet and cash flows, which I don't think would the case while the subsidiary is independent. (Please correct if I'm wrong, anyone.)
    25 Mar 2013, 05:13 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Yep. True.
    25 Mar 2013, 05:24 PM Reply Like
  • TheCompleatAngler
    , contributor
    Comments (162) | Send Message
     
    TARO's controlling shareholder has been trying to chisel TARO's minority holders for more than half a decade. They do not act as though they sit on the same side of the table as the minority owners. Based upon your commentary, I'll consider that they are anomalous in their unwillingness to mark up their books by paying a full and fair price.
    25 Mar 2013, 05:30 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » I agree 100% with TARO. However, they are not actively attacking TARO either in the manner common to many unsolicited bids wherein the bidder emphasizes the downside and qualitative weaknesses of the target.
    25 Mar 2013, 05:32 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Incidentally, Sun should offer $80 for TARO, but even at $80, I would not be an enthusiastic seller as TARO will probably reach that price on its own this year.
    25 Mar 2013, 06:02 PM Reply Like
  • TheCompleatAngler
    , contributor
    Comments (162) | Send Message
     
    I can't attest to the veracity of this, but I did read somewhere that on a recent earnings CC, the CEO of Sun Pharma did say that TARO's recent revenue levels were unsustainable, presumably he was referring to the inevitable revenue erosion that generic manufacturers experience without bringing new drugs to market. But then I came across this news report:

     

    http://reut.rs/15MOl7V

     

    It did sound like he was talking down TARO's prospects and by implication its value while Sun's most recent deal to acquire what it didn't already own of TARO was still in effect.
    25 Mar 2013, 06:04 PM Reply Like
  • Ashraf Eassa
    , contributor
    Comments (8817) | Send Message
     
    Chris,

     

    Question - how did you get started in the hedge fund business?
    2 Apr 2013, 08:04 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » I got started by doing public policy research for hedge funds in DC; I would monitor antitrust and regulatory issues and report back on what I learned. Then, I started working for someone else's fund. Then, I started my own. For the past five years, I've been particularly interested in arbitrage, corporate events, and time-sensitive counterparties. For the past quarter, I’ve begun following up my investments with articles in Seeking Alpha explaining what I am up to professionally and personally. It has helped me organize my thoughts as well as get some feedback from other investors. Here is the kind of thing that I do professionally: http://seekingalpha.co.... Since I am sort of a value junkie and look for pricing failures wherever I can find them, this is the kind of thing that I do personally: http://seekingalpha.co....
    2 Apr 2013, 08:13 PM Reply Like
  • Ashraf Eassa
    , contributor
    Comments (8817) | Send Message
     
    That's helpful, thanks. A follow up: what does it take to get a job at a fund?
    2 Apr 2013, 08:16 PM Reply Like
  • sogreat
    , contributor
    Comments (47) | Send Message
     
    Chris, how much AUM do you think is needed to support a starter fund? What are the set up costs?
    26 Apr 2013, 09:03 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » The most traditional feeder was probably the prop desks of large banks such as GS. That is basically out now. So, large funds, such as Bridgewater, have programs for training analysts. That is probably one good route. It always helps to have a favorite long and favorite short that you can rattle off. They should be ideas not priced into the market with better information and better insights than the rest of the market put together. Tall order. Easier for out of the way ideas where there is a structural inefficiency that interferes with the normal functioning of the price system.
    2 Apr 2013, 08:46 PM Reply Like
  • Nose Rub Investing
    , contributor
    Comments (13) | Send Message
     
    Hi Chris:

     

    I was wondering if you had any thoughts on the WIX acquisition by KOV? I have a short write up here:

     

    http://bit.ly/195Nzq1

     

    It looks very good so I feel like I may be missing something.
    13 Jun 2013, 03:45 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » I will take a look.
    14 Jun 2013, 09:14 AM Reply Like
  • Yuanxi Zhang
    , contributor
    Comments (237) | Send Message
     
    Hi Chris,

     

    How do you usually evaluate demutualization situations? Are there some quantitative measures you look at? Also, would you please recommend some resources for learning more about how to analyze this kind of situation? Thank you very much!
    22 Jun 2013, 04:17 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Yes, I've spent an hour or so a day for a few decades analyzing demutualization situations. Yes, there are some quantitative measures I look at. Essentially, it is similar to any other type of value investing. Because I do this extensively within my fund, Rangeley Capital, and because the opportunity is more capacity constrained than other strategies that we employ, I am pretty shy about discussing it. Maybe we could take the conversation offline sometime.
    22 Jun 2013, 08:27 PM Reply Like
  • bazooooka
    , contributor
    Comments (2350) | Send Message
     
    Motley Fool has always been a good resource for the retail guy who wants to play these. For big money it is much harder and less likely to be written about on the web. But for a few thousand shares here and there - there's decent deals and info that can (and has been ) shared.

     

    http://bit.ly/15xgE9L
    24 Jun 2013, 12:35 AM Reply Like
  • byslkwd
    , contributor
    Comments (114) | Send Message
     
    Chris, when you identify a short candidate, how do you decide whether to short the stock, sell the calls, or buy the puts?
    I am also curious if when you discount cash flows, do you spend much effort in determining the appropriate discount rate, tailor made for each investment, or do you use some rough number , (obviously somewhat dependent on interest rates and risk involved, but does it take you more than 5 minutes to decide on a rate?)
    27 Jun 2013, 11:28 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » After we decide on a company, we look at all parts of the capital structure and the risk:reward of all options. Sometimes an option enunciates what we are trying to do in an investment (isolating a particular price and date that we think is reasonable in a change of control situation, for example). We use the same rough number. It does not take more than five seconds to decide on a rate. One of my favorite compliments to an investment idea is "crude" and one of my worst insults is "precise", by which I mean that one works if you are within a 25% ball park of accurate while the other requires predictions to be correct on the right side of the decimal.
    27 Jun 2013, 11:48 AM Reply Like
  • byslkwd
    , contributor
    Comments (114) | Send Message
     
    I suspected as much. I suppose that you don't use complicated spreadsheets to produce different models either, and I wouldn't be surprised if you told me you don't use any spreadsheets (maybe just a convenient way to organize some info).
    27 Jun 2013, 12:14 PM Reply Like
  • Miguel Marecos
    , contributor
    Comments (71) | Send Message
     
    I love when investors without complicated models or tools beat the so called "smart money"... My favorite case is Walter Schloss!
    27 Jun 2013, 12:27 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » We have a pretty simple system. I use Excel to keep track of opportunities, but it is rudimentary. If I can find a $1 of value that costs me $0.60, I am not too sensitive to whether the $1 is actually worth $1.05 or $0.95.
    27 Jun 2013, 12:31 PM Reply Like
  • Acme Capital
    , contributor
    Comments (33) | Send Message
     
    I am interested in knowing what tools you use to organize and document your research?

     

    I have found Evernote to be a great tool for this purpose, but I find the primary drawback of this software is that its utility is dependent on operating in a paperless environment. I am one who still finds reading paper to be a pleasant, and more fruitful experience.
    30 Aug 2013, 06:19 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » I go through 500 pages of paper a day. Long HPQ on my demand alone. I have tons of file cabinets and a long suffering assistant who files paper. So, paper, hanging files, and alphabetical order. A (very) little Excel. I only typically own a few dozen names, so not that hard to track. I follow a few hundred that I like but for the current market price. Those I organize in Trader Workstation's Alerts. That is about it. Pretty crude and old fashioned. But most of the investors I like were in the 1800s, so I'm not too worried about innovating.

     

    I write a ton of margin notes in my books. With a 3 and 5 year old, it is hard to tell them to not write in books when they see me do little but write in books for hours each day. I love AMZN and do almost no shopping anywhere else, but can't make Kindle work because of note taking.

     

    Basically, I handle what I can and if the volume becomes more than I feel like, I become even more price-sensitive until it closes down the tap of inbound opportunities.
    30 Aug 2013, 06:27 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (817) | Send Message
     
    500 pages a day... I'm going to speculate that you are quite adverse in your speed reading skills.
    30 Aug 2013, 08:57 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Some I skim, but I like having all of the proxies and so forth on paper.
    30 Aug 2013, 09:04 PM Reply Like
  • Squeeky Wheel
    , contributor
    Comments (297) | Send Message
     
    Related question: what would be your preferred number of positions? How would you go about figuring that value?
    31 Aug 2013, 10:49 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Ten 10x positions would be ideal, but we are typically less concentrated for various practical reasons (positions that race before we're fully sized, etc.). This level of diversification accomplishes almost all of what diversification can accomplish. It allows our research to focus more than when our efforts are more diluted.
    31 Aug 2013, 11:04 AM Reply Like
  • Squeeky Wheel
    , contributor
    Comments (297) | Send Message
     
    So ideally 10, but in practice 24-36 - that's a pretty big ideal/actual gap.
    1 Sep 2013, 11:44 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (817) | Send Message
     
    Question:

     

    How much return would you allocate to the risk arbitrage strategy on your overall return?

     

    And I'm having a hard time finding things to do aside from reading. I can see why inactivity makes people jittery. How do you keep yourself from being too active?
    31 Aug 2013, 06:41 AM Reply Like
  • Special Situations and Arbs
    , contributor
    Comments (538) | Send Message
     
    Chris-Do you have any advice for me in terms of getting an article published as an Alpha Rich article? I'm starting to write on Seeking Alpha and I would love to write one Alpha Rich article so I can gain access to read other SA ones which become blocked after a month.
    Thank you
    5 Sep 2013, 06:46 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » Here is my best thinking on writing articles: http://seekingalpha.co.... It essentially defines the articles that I like to read and I think that my tastes overlap to a significant degree with the editors. I also like VIC write up guidelines for VIC and for SA: http://bit.ly/12OJOAz. What else? You can always e-mail me an idea and I would be happy to offer advice on a specific idea (especially if it a bargain with a catalyst).
    5 Sep 2013, 08:18 PM Reply Like
  • Special Situations and Arbs
    , contributor
    Comments (538) | Send Message
     
    Thanks so much Chris. I appreciate it.
    5 Sep 2013, 11:41 PM Reply Like
  • Special Situations and Arbs
    , contributor
    Comments (538) | Send Message
     
    Chris, I just submitted my first article. It isn't a alpha rich one but it feels good to be writing. Thanks for your support and the above links.

     

    Eric
    13 Sep 2013, 12:20 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4035) | Send Message
     
    Author’s reply » You're welcome. Glad to be of any help I can be.
    13 Sep 2013, 01:46 PM Reply Like
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