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Chris DeMuth Jr. is the founder of Rangeley Capital LLC. Rangeley is an investment firm that focuses on event driven, value-oriented investment opportunities. Prior to founding Rangeley Capital, Mr. DeMuth spent his career as a securities analyst for several hedge funds and proprietary trading... More
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  • Some Things “Just Aren't Done”.  25 comments
    Aug 16, 2013 2:41 PM

    What wouldn't you invest in?

    To define the question a bit further, I want to place some constraints: legal, honest, financials written in a common language, and accounting under a common standard. I am thinking only of investments that are both permissible and analyzable. Within that universe of opportunities, what wouldn't you invest in, were a given security trading at a price that appears to meaningfully diverge from its value? I ask in order to get the lay of the land in terms of what "just isn't done". Bankrupt companies? Tobacco? Gaming? Firearms? Stocks under $5 per share? Leveraged companies? Late filings?

    My answer: nothing. There is nothing that I would not buy for the right price (under the constraints enumerated above). The expected value of one's portfolio is a result of outcomes and sizing but it is also limited - voluntarily limited - by your mandate. As for me and mine, I want to maximize expectancy and therefore minimize the arbitrary limitations on our mandate. At the same time, we love counterparties with constrained mandates. What are your constraints? Stated another way: if you could invest in whatever you like, what would you dedicate your time, energy, and money towards? In practice, how does that diverge from what you spend your resources on today?

    In polling friends at large money managers, the typical response is that they spend between 5-20% of their money under management on investments that they think are the best (had they no audience but their selves and no goal but +EV). The rest is for institutional reasons, typically career preservation and reputation management. The problem with investing is that many of the investments that are most institutionally defensible have virtues that are the most obvious and priced in.

    Happily, I've been able to preserve an environment that is dictated by expectancy: first and foremost our downside, then our upside and probability of each potential outcome. The simple task of trying to make sense of the world is hard enough work. It is nearly impossible to do it while simultaneously trying to appease arbitrary irrelevant goals simultaneously. Trying to actually make sense can be so different than trying to look like you are making sense that the two will frequently end up on opposite sides of a trade. We will end up liquidity providers for counterparties who have to show that they are in the latest fad or out of the latest scare, because that is what they are paid to do. Some things just aren't done… and we love to do them for the right price.

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Comments (25)
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  • Squeeky Wheel
    , contributor
    Comments (343) | Send Message
    "legal, honest"


    These, especially the later, are more fuzzy than at first glance. Take Tobacco, who lied about the effects of tobacco for decades. How about the big banks who withheld significant off-balance sheet arrangements leading up to the crash? Legal - yes; honest - maybe not??? On the former, what about companies doing business in China, as virtually all them are involved in some form of quasi-illegal corruption. All companies are hiding something (internal financials!) so perhaps honesty should be treated as a spectrum rather than a binary. Buffet has commented that he uses degree of management honesty as a criteria.


    My big category really falls under "analyzable". I'm not a full time analyst (I have a much more interesting day-job). So there are large swaths of companies where I don't have the time/knowledge to understand the risks. I file these as "I don't know" - I choose not to spend the time to understand them - and avoid them.
    16 Aug 2013, 03:37 PM Reply Like
  • DAG Investments
    , contributor
    Comments (4299) | Send Message
    My answer is the same: nothing. In fact, it annoys me immensely when I hear people argue that others should not invest in, or should sell out of a stock, because of some misguided moral judgment that has nothing to do with a sound investment thesis.


    The problem I see with that approach is not only that it flies in the face of one of the most basic tenets of investing (removing emotional factors from the investment thesis), but it also assumes that companies with flowery reputations are somehow better than the ones without. Based on my personal experiences, it is often the case that companies with reputations as perfect "corporate citizens" (although I hate that phrase since companies are not people) are actually worse from a morality standpoint. In other words, it sometimes only means that lots of practice has just made them better at hiding improprieties.


    As long as a business is legal, it's fair game from an investment standpoint. Beyond that, politics is the appropriate channel to solicit change ... investments are for making money. In fact, I would argue that most of our societal problems stem from individuals confusing their desire to make money with a pretense to serve the public interest (aka politics). To me, it seems obvious that works both ways ... trying to impart societal change through investment markets is equally perilous.
    16 Aug 2013, 03:44 PM Reply Like
  • Jonny Edwards
    , contributor
    Comments (56) | Send Message
    So if slavery or child porn were legal, would you invest?
    3 May 2014, 07:00 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (7989) | Send Message
    Author’s reply » Good questions. No and no. I can usually be found in support of liberty, but these are two examples of sometimes legal industries that I would never support.


    Slavery is the opposite of liberty. The view that I cannot enslave others informs the answer to most public policy questions.


    Child porn: I think that most matters can be solved by private contract and consent among adults. However, the job of parents is to prepare children for the best use of liberty by the time that they are adults. That requires temporary prohibitions against many bad ideas (including porn) while they are children. This can be defended on the basis of liberty -- one could maximize the use of lifetime liberty while stopping less fully formed decision-makers from bad ideas, especially bad ideas that are hard to take back once one is adult.
    3 May 2014, 07:08 PM Reply Like
  • connellybarnes
    , contributor
    Comments (442) | Send Message
    I used to be a hybrid between libertarian and progressive. I was positive about human self-improvement and rationality, but wanted safety nets and a non-interventionist foreign policy. I liked fiscally prudent Democrats and Ron Paul.


    Then I realized that the more I tried to think about people, the less sense they made to me.


    So I gave up on understanding politics, but exploit irrationality for personal entertainment in betting markets.


    I would not invest in those industries either. It's funny because it's really just a bet, but I wouldn't be able to overcome my revulsion for those industries... I have no trouble with cigarette companies though!
    3 May 2014, 07:31 PM Reply Like
  • Jonny Edwards
    , contributor
    Comments (56) | Send Message
    "I didn't know I was a slave until I found out I couldn't do the things I wanted." - Frederick Douglass


    Others didn't realize he was a "slave" as well, at least in the way we see slavery in the universe of morality today.


    Morality is a tricky thing. Like the division between land and water, there's what will be permanently underwater and permanently dry.


    But there's also the beach in between, where the Ocean of the Immoral gains and loses ground on a regular cycle. One day, parts of the beach will be permanently underwater - and the associated "investment ideas" will also be lost forever, since ingrained moral revulsion will make us shudder the second we even think about getting our feet wet.


    The question is - which parts of the beach that we see today will go underwater forever?


    Slavery, child porn, Nazi-run industries all went that way a while back. Businesses engaged in South African apartheid policies are probably the most recent example - it seems like several folks on this platform would have invested.


    Oil? Guns? Russians?
    4 May 2014, 01:54 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (7989) | Send Message
    Author’s reply » Good points.
    16 Aug 2013, 03:44 PM Reply Like
  • SA Editor Samir Patel
    , contributor
    Comments (163) | Send Message
    I don't invest in "sin stocks" (tobacco, alcohol, other) for personal reasons, but will invest in anything else at the right price. That said, it's not a hard rule - the only sector I would absolutely never invest in is tobacco. If Anheuser-Busch was cheap enough, I'd at least consider it.
    16 Aug 2013, 04:10 PM Reply Like
  • claycombmichael
    , contributor
    Comments (49) | Send Message
    16 Aug 2013, 07:17 PM Reply Like
  • connellybarnes
    , contributor
    Comments (442) | Send Message
    As a kid what I really hated was moving the lawn. So the kind of investment I would most dislike would be one analogous to mowing the lawn -- a perfectly predictable and boring investment that pays well but for some reason you can't automate it. Push the red button and get $100. (Even worse of course is the black button that you push and you lose $100!).


    I like investments in areas I can understand, or which can be automated. I like investment which requires some coding or statistical research. Or somewhat confusing, unique, snowflake investments, but not so confusing that they extend beyond what I understand. For example, some complex tech company going through corporate events, that could be fun. But some complex real estate or bank, I have no idea what the words even mean.


    I am inherently more of a "creator" or "novelty seeking researcher" than an "investor" since I like creating new interesting stuff. I used to just make art in my spare time, but people didn't seem that excited about art. I didn't know what to do with money so I started looking for something challenging and interesting to do with it and that led me to investment.


    It can be fun but it also has a lot of red and black button moments. The most interesting part is probably the cognitive and behavioral biases.


    I'm not sure it makes sense to say "everything has a price," to an investor. I could probably float many arcane math theorems on a betting market, that almost no one could price. Given that people have bounded rationality, maybe a better rule would be "make a price on everything that you can understand." And then given that, the logical areas to invest in would be the areas you understand, and that are totally incomprehensible to everyone else. Reminds me of Buffett saying if he were young, he would have put 100% of his money in obscure South Korean companies such as flour mills. I certainly don't understand South Korean flour mills.
    16 Aug 2013, 09:57 PM Reply Like
  • connellybarnes
    , contributor
    Comments (442) | Send Message
    Probably a new investor could get the highest returns by finding countries and sectors that are extremely hated, illiquid, and incomprehensible, learning everything there is to know about that area, buying undervalued businesses, and then periodically rotating on. A career in Kuwait bonds during 1990s Kuwait invasion, then failed S&L companies, then broken dot com companies in the early 2000s, then real estate in 2008 followed by Japanese nuclear power plants and Greek banks, and some Libya mortgage swaptions now :-)
    16 Aug 2013, 10:23 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (7989) | Send Message
    Author’s reply » That would actually be a great plan.
    17 Aug 2013, 07:52 AM Reply Like
  • Robert Duval
    , contributor
    Comments (7402) | Send Message
    3 May 2014, 07:15 PM Reply Like
  • sheldond
    , contributor
    Comments (1314) | Send Message


    Following the misery has worked for me. I buy the worst at the worst times and yet it works.


    3 May 2014, 07:58 PM Reply Like
  • connellybarnes
    , contributor
    Comments (442) | Send Message
    Cool, good to know it works! I try to seek out misery but everyone is so positive recently.


    I was looking at Yandex, the Russian search engine, which Putin was threatening, and it still has a 20+ P/E. It's ridiculous. I did see some value investors buying other Russian stocks so I should poke around more.
    3 May 2014, 08:02 PM Reply Like
  • ParisJOM
    , contributor
    Comments (190) | Send Message


    Respect for your intelligence and savvy.


    I am always on the look for oversold and hated things that I can pick up cheap (or vice versa on the up side).


    My recent buying spree involves some interesting mechanical strategies with RUSS and RSX ... purely a long delta play, as well as a similar set up on Brazilian equities and silver. I love silver at these prices and have been loading up more over the past week.


    On the other side, I see nat gas and coffee as being probably near tipping point due to fundamentals and the price pumping elements running out of steam.


    Thus I have been establishing short nat gas and coffee positions over the past week 2 weeks.


    I am keeping my eye open to corn (doing more research there), waiting for VIX to spike higher to renenter my signature short volatility trade, and I will examine high nickel prices this week.
    4 May 2014, 10:44 AM Reply Like
  • ParisJOM
    , contributor
    Comments (190) | Send Message
    By the way, one of my Reuters and Dow Jones news feeds feeds on my trading platform that I filtered is entitled "Nasty Shit"... I scope for political turmoil, terrosist atacks, fraud, natural disasters, crop & animal disease, and just about anything "negative" that may create a bargain somewhere.


    ... I sound evil :)
    4 May 2014, 10:48 AM Reply Like
  • ParisJOM
    , contributor
    Comments (190) | Send Message


    Rest assured my friend, if you have a positive attitude, an open mind and a pure heart, you can always find some nasty shit ans misery somewhere at any time :)


    Here are a few examples:


    There has been a potent virus killing off piglets rampantly. This has driven lean hogs to very high prices. A short position may be in order. (CME futures of ETNs on LSE)


    Brazil has had a drought caused by El Nino. Coffe is insanely high on the back of "unknown dammage" to coffee trees. I established a short position last week. (NYBOT futures or ETNs)


    The whole Russia-Ukraine fiasco. I have a long position on RSX.


    ... I'll be sure to send you a message as soon as I see some brilliant new events on my "Nasty Shit" news feed which may provide actionable possibilities. In the mean time, remain positive and know that you can always count on mayhem, misery, and general bad stuff happening regularly.
    4 May 2014, 03:15 PM Reply Like
  • connellybarnes
    , contributor
    Comments (442) | Send Message
    @ParisJIM: Sure, feel free to PM me -- I'm always happy to hear about mayhem in the financial markets :-).


    I'll probably put on an RSXJ long if it falls a bit more. At P/E of 5 and P/CF of 1.2 it's already well-done but I like charred.
    5 May 2014, 05:47 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (942) | Send Message
    I buy anything at the "right price."


    However, I don't like dealing with corrupt management/fake accounting. Pay me to give me those and I wouldn't dare to take them.
    16 Aug 2013, 10:48 PM Reply Like
  • Mike Arnold
    , contributor
    Comments (2164) | Send Message
    Wilson -- that would be "speculating" not investing, so you are off the hook.
    3 May 2014, 06:58 PM Reply Like
  • Robert Duval
    , contributor
    Comments (7402) | Send Message
    Give you mine.


    Post 911, some commentator -- probably paid by GS -- came on with the message that shorting the indices was unpatriotic.


    There was a lot of money to be made, and I flinched. That was a mistake I would not repeat.


    Shorting is not Anti-American or unpatriotic. Anyone with that message can keep it to themselves.
    3 May 2014, 07:14 PM Reply Like
  • ParisJOM
    , contributor
    Comments (190) | Send Message
    Dictating what is "patriotic" in a free society is not patriotic.


    ... that drives me nuts when I hear people saying "bla bla bla is upatriotic"... as if any one person has the monopoly on the definition of "patriotic"
    4 May 2014, 10:52 AM Reply Like
  • P.Gadget
    , contributor
    Comments (468) | Send Message
    A friend of mine once tried to get me to invest in a company that had been in existence for 20 years, but had never actually sold anything. They must have been geniuses because they always had a breakthrough in whatever the hot buzzword of the day was, and were able to keep selling stock to fund themselves. For some reason they never got out of the development phase though.


    So, there's one that it doesn't matter how cheap it is.
    4 May 2014, 02:46 PM Reply Like
  • ParisJOM
    , contributor
    Comments (190) | Send Message


    You bring up an interesting point... the often overloked difference between price and value.
    4 May 2014, 02:57 PM Reply Like
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