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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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  • Taking Bribes From Billionaires 33 comments
    Mar 19, 2013 12:22 AM | about stocks: GD, TXT

    Yes, please.

    This would be an excellent time to be a billionaire (history records few times when being a billionaire would be bad). Being poor is never any good and being middle class has been a bit rough what with a tepid recovery and so on. But for the rich - very very rich - it is pretty great. Credit is loose and asset price inflation can be found essentially anywhere.

    But what good is this for the bargain hunter? We price-sensitive sleuths search the world for price failures, for counterparties whose time-sensitivity leaves them little room to negotiate effectively on price. Often, these counterparties are in a bad way - pressured, leveraged, failing, and out of control. However, there can also be price-insensitive counterparties at the other extreme - not a care in the world, ultra liquid, prospering, and able to indulge every whim.

    So what do they want? Sometimes, they want to be a first mover, to get what they want and to get it now. They want to be first in line… and that can cost a lot. One strategy that can be useful in moving towards membership in the ranks of the idle rich is to invest in high-end wait list deposits. These places in line can often be purchased and re-sold for a serious profit to billionaires who will pay practically anything for what they want but were not quick enough to secure an early place in line.

    For example? The new Gulfstream G650 from General Dynamics (GD) goes for 65 bucks and took an initial order from two hundred tony customers from various climes. It is the fastest civilian jet in the world, can go 8,000 miles on a tank of jet fuel, and cruises through the dark purple sky at 51,000 feet over both undesirable weather and less desirable mortals. The air pressurization in the cabin is such that you don't get as many symptoms of jetlag, meaning that this purchase can be justified as both a health and time saver. If you don't have one, you don't have everything. When you step on board, you won't have to remove your shoes, board by row, or get groped by someone in uniform unless it is your preference. Depending upon configuration, it only sits about eight. But then again I only like about eight people (although one might grow suspicious that even these eight are only mooching off of the friend with a new Gulfstream).

    The catch was that they only delivered 50 per year for the first four years starting in 2012. 50? What the heck? Starting with the working assumption that everyone wants one, there will be countless billionaires standing around waiting for their plane. Steve Ballmer? He may be crap at running Microsoft (MSFT), but he is not someone who should have to wait… and since he is not one the wealthiest 50 people in the world he could be left out in the cold for a year(!). Chinese real estate tycoon Hui Ka Yan? He might not get his for four years. And the Chinese market tends to be quite particular about new planes, OEM direct.

    So, forget about the $65 bucks, naturally that is just the beginning (hangarage, insurance, jet fuel, landing fees, captain, co-pilot, and flight attendants who will let you call them stewardesses will be ongoing costs of $3-4 bucks/year. Ugh). Instead, just focus on buying a place in line - an initial $500k eventually reaching a full deposit of $3 mil. The chance that you'll lose that $3 or have to cough up another $62 while standing in line with Oprah and various Saudi princes looking over your shoulder to see what is the hang up? Zero. You will never get to the front of the line. You'll never have to. First year return on a deposit? 100% straight up. Sure, they get their place in line, but you get a quick $3 mil.

    Now that you've monetized your deposit, time to head down market to the projects of the jet world, crossing to the wrong side of the tracks, the seedy underworld of "light jets" or even the "very light jets". Now, you're only going 2,000 miles on a tank and you might even be getting someone else's sloppy seconds in the used market. They can run for $1 per mile and can use short runways, which is not nothing. With $3 mil in your back pocket, you can get this Cessna Mustang from Textron (TXT):

    Meh.

    You've just traded your place in line for a perfectly adequate, sorta okay, gets-you-from-point-A-to-point-B, serviceable jet. It's just… It's just… Well, when you were waiting in line - even knowing that you were going to flip the deposit for a profit - it felt real. It felt right. You started having these thoughts about the G650. And after that, it could be a little hard to walk away. It is kind of like a breakup. So, give yourself a little time before settling…

    Themes: G650, Cessna Stocks: GD, TXT
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Comments (33)
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  • Chris I really like these articles. You have really clever ways of finding value and being able to exploit it.

     

    Have you actually done what this article is about?
    19 Mar 2013, 05:19 AM Reply Like
  • Author’s reply » Not exactly; this one I tried to write "theoretically". While I have done most -- but not all -- of the tactics that I write about, I am trying to split the difference between being useful to readers while note wrecking the opportunities by describing them. The most spirited responses that I've gotten in direct e-mails has been encouraging me to be quiet by people who already know about my tactics and already use them and don't want them disrupted by overly disseminating them.

     

    But I will say that I am 100% certain that this one works, or worked as described.
    19 Mar 2013, 07:42 AM Reply Like
  • Excellent article, and very well written. Applause for the effort. Have you made a list of the many wait lists we untouchables can afford to join? Custom handmade guitars by well-known luthiers, pro sports season tickets, super cars, etc?
    31 Oct 2013, 02:45 AM Reply Like
  • Author’s reply » Not yet, but I should try. Pro sports season tickets, super cars, and wine futures (tied to specific vineyards as opposed to the more widely traded Bordeaux futures) are probably three of the areas I'd look. The key attributes are strong demand led by at least some fanatics and a nominal market for places in a queue in which price is set by somewhat arbitrary norms instead of real competition.
    31 Oct 2013, 03:37 AM Reply Like
  • In defense of billionaires, if I ever become one I would own a jet and hang out with the Koch brothers and Mitt Romney. Two things I would never do in my present economic circumstance.
    Good read Chris.
    19 Mar 2013, 08:08 AM Reply Like
  • Author’s reply » I hope to see you there (or at least hitch a ride from time to time)!
    19 Mar 2013, 08:17 AM Reply Like
  • Chris, another fun and stimulating piece of writing. I really enjoy your take on things, thanks very much. Best regards, jcw
    19 Mar 2013, 08:36 AM Reply Like
  • Author’s reply » Thanks for the kind words. It is fun to get egged on a bit to keep writing.
    19 Mar 2013, 08:42 AM Reply Like
  • Chris this was great. I'm going to fwd to a pilot friend who flies around this type of shopper. His stories confirm the rampant snobbery among the jet-set. Light jets are for rentals, jr. analysts and midwestern manufacturers inspecting plants on day trips. He flies mid-sized jets: execs, entrepreneurs and wealthy families going on vacation.
    19 Mar 2013, 10:51 AM Reply Like
  • Author’s reply » Thanks! In my experience one can auction deposits on cars and boats, too but planes are among the most scalable of this type of opportunity. It fits into my preference to be on the price-sensitive/time-i... side of any market. This type of investing is sort of a hobby outside of work.
    19 Mar 2013, 11:05 AM Reply Like
  • Thought provoking article.

     

    Many wealthy pilots buy experimental aircraft and trade in that circle. X-craft (or should I say exp-craft) have an advantage as one can have them built to spec without having to wait years. Buying old jet aircraft and retrofitting is also an option for those looking to transport passengers and cargo. In fact, in the case of x-planes, many choose to buy a large private hangar and hire mechanics to build the craft, and then spend some vacation time there to qualify for the x-plane requirements.

     

    I get your point though, but just think about it: why buy GD and TXT for these businesses when the private jet aircraft/prop aircraft are a relatively small part of their behemoth businesses? In the case of GD, it lost money last quarter. We have to face the reality that investment values are found less and less in the public equity markets and more so elsewhere. Buffett had a reason for buying NetJets.
    19 Mar 2013, 04:46 PM Reply Like
  • Author’s reply » You're welcome. Very interesting comments. Sounds as if this is something that you know quite a bit about.
    19 Mar 2013, 04:50 PM Reply Like
  • And I thought buying BCS football tickets in advance was a profitable strategy. This is a whole new level. I imagine you have to be accredited though and have more than the 500k-3M liquid. Otherwise the upper middle class could mortgage their house and make a quick 100% flip =)
    19 Mar 2013, 07:08 PM Reply Like
  • Author’s reply » And there are deposits on cars and boats that can be similarly profitable but at smaller scales.
    19 Mar 2013, 07:11 PM Reply Like
  • That is exactly where my mind went. Maybe Chris can shed some light.

     

    The $3M liquid wasn't the concern for me, it was the accreditation on the $65M I was concerned about. :) I am sure GD is more concerned as the time gets closer and the building begins they want their $65M. Chris do you have more understanding on the actual process, any experience or real life examples?

     

    But as Chris said above, this is never a cause for concern due to the demand. I have done the same with concert and sports tickets, and like you said this is a whole new level. But one deal a year, puts the rule of 72 to shame.

     

    This is seriously something I am going to look into more, the time factor intrigues me. I think the potential things stumbling across is infinite and I thank Chris to opening my eyes to something I never considered.
    20 Mar 2013, 07:00 PM Reply Like
  • Author’s reply » They want to know that 1) one is able to pay and 2) is serious (hopefully writing this won't hurt #2). That being said, they didn't seem to care all that much as someone was going to pay and there was a backlog, so that it would probably be fine with them if someone walked away from three bucks and number 201 was able to get in line.

     

    Worth looking at. Lucrative and fun -- except for the actually walking away from :-(.
    20 Mar 2013, 07:06 PM Reply Like
  • Thank you for the response. Yeah not bad for them at all if someone walks away from the three bucks and 201 becomes 200. Thanks again.
    21 Mar 2013, 01:48 AM Reply Like
  • Very good piece and outside of the box thinking that opens the mind to more places to invest...
    19 Mar 2013, 11:53 PM Reply Like
  • Author’s reply » Thanks for the kind words.
    20 Mar 2013, 07:45 AM Reply Like
  • Thanks Chris, you are always a great read!
    20 Mar 2013, 10:42 AM Reply Like
  • Author’s reply » You are welcome. I really love this one. These kinds of trades are sort of my hobby outside of work. They use the same way of thinking.
    20 Mar 2013, 11:08 AM Reply Like
  • Chris,

     

    Great read!

     

    Thank you.

     

    Robert
    20 Mar 2013, 12:58 PM Reply Like
  • Author’s reply » Thanks! I'm trying to get my somewhat serious ideas out in the form of articles and fun ones on this blog. We'll see how it goes. Best,

     

    -C
    20 Mar 2013, 01:00 PM Reply Like
  • Interesting trading concept. This seems like something that investment funds ought to be able to do. Any chance you at Rangeley have considered deploying your capital for this trade?
    22 Mar 2013, 09:07 PM Reply Like
  • Author’s reply » No, this kind of thing is just a hobby/personal account idea.

     

    Professionally, I've never done something of this sort because it is not really scalable and liquid enough. However, at Rangeley, we have invested in GKK and OUTD. I hope to have articles out on both by early next week.
    22 Mar 2013, 09:24 PM Reply Like
  • Author’s reply » The Big Bad Private Jet Every Billionaire Wants:

     

    http://bloom.bg/1dvF3aa-Gr9nqgn9Qgqd~MGi6Hmit...

     

    March 27 (Bloomberg) –- The GulfstreamG650 is on every CEO's wish list. With a list price of nearly $65 Million, you'll have to wait for nearly 4 years to get one after you sign up. The G650 has a top speed of 611 mph, just 3 mph slower than a Boeing 747, and can fly you from New York to Beijing non-stop. (Source: Bloomberg)

     

    Please let me know if you'd like one.
    27 Mar, 10:54 AM Reply Like
  • are you in line? played my new Dehradun guitar for the first time last weekend :)
    27 Mar, 11:39 AM Reply Like
  • Author’s reply » Yep! Love those guitars.
    27 Mar, 11:41 AM Reply Like
  • Have you ever secured and sold a spot for something like this? What will the price insensitive types pay to be among the first?
    28 Mar, 07:21 PM Reply Like
  • Author’s reply » I am going to answer that hypothetically in order to avoid disrupting the opportunity: it would be reasonable to conclude that one could secure and sell a spot for something like this. Price-insensitive types (typically from China, Russia, and the Middle East) might pay 2-3x the cost of deposits. It is similar pricing dynamics to car extras -- people are paying a lot anyways and so don't really care about a bit extra.
    28 Mar, 07:26 PM Reply Like
  • One girl wanted a blue guitar so Dave asked me to find some dyes for him late last week. Scroll down for the result http://on.fb.me/1dBVDp5
    28 Mar, 08:05 PM Reply Like
  • Author’s reply » Nice! Really cool.
    28 Mar, 08:05 PM Reply Like
  • Fun work, hunting through the markets for real indigo. Ok... back to topic, where is your Gulfstream motif?
    28 Mar, 08:10 PM Reply Like
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