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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. Rangeley Capital and his value investing forum, Sifting the World (StW), search the world for misplaced bets. Rangeley exploits them for... More
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  • Just A Few (Okay This Time More Than A Few) ?s For… Me 27 comments
    Nov 9, 2013 1:22 PM | about stocks: BRK.A, BRK.B

    Special Situations and Arbs was kind enough to ask me a few questions for this series, saving me from looking a little crazy and a lot pitiful by asking myself questions and answering them.

    It is unusual for a Hedge Fund Manager to be so open about his ideas, line of thinking and actual stock selections. Your transparency gives SA readers a look inside a HF. Whys do you share so much?

    Good question. Typically we have a fully sized position before I utter a peep, which allows me to be more open about positions. Also, in several occasions, we have filings with the SEC anyway, so our positions are not a complete mystery. I mostly share so as to not bore to death my social friends. SA allows me to connect on the topics that I care about with people interested in those topics as opposed to the poor souls whose only crime was to accept a dinner invitation. Do you want to hear about mutual conversions? I have a hard time reconciling myself to the fact that not everyone does.

    Do you think other Hedge Fund Managers could add value to their business by becoming active on SA? If so how?

    It is a fine platform, certainly my favorite, for idea dissemination. So it really depends upon whether one has ideas worth disseminating. Reactions from readers can help hone ideas, especially when they are from people with specialized knowledge that one does not already have. I doubt that it accomplishes much for asset raising as many SA readers appear to be committed do-it-yourselfers who may have little interest in investing in hedge funds.

    What is one thing nobody on SA knows about Chris DeMuth?

    That is a tough one as I've gotten to know some of the SA editors well, had SA people over to my work and my home, and shared notes on everything from my first investments at age nine to my current portfolio, and have detailed my various extracurricular activities. So whatever I say will probably have at least one reader chime in with an "I knew that!"

    One thing few people on SA know about me? Krav maga. I am a dedicated student several times a week after the market closes. I have tried several times to think of an angle to incorporate something I've learned in krav maga into a blog or article with ramifications in the investing world, but so far nothing has come of it. It is not something that really comes up much, but it has been a big part of my life.

    You have an arbitrage background. Are arbitrageurs made or born?

    For arbitrage, one must have an intense focus and one must be, as Mr. Munger would say, a lifetime learning machine. These attributes are probably born. Then, people who spend all of their time and energy focusing on what they think matters and if they constantly learn and improve, they can make themselves better over time. So, it is a combination.

    At Rangeley Capital, what do you consider your benchmark index to be? The market as a whole, event driven or other?

    Other. I think about durations in 3-5 year increments, because that is the increment that our performance has a statistical significance given the number of positions that we have in that period. We should meaningfully outperform the riskless rate of return and do so by an amount substantially in excess of the amount of risk that we take.

    Event driven investing has a binary aspect to it. There are some inevitable losses in that kind of investing. How do you handle the losses emotionally?

    Some people are emotionally suited to handle investing and its inevitable losses. When asked why he made it, Bruce Kovner said in part that, "I stay rational and disciplined under pressure". Alas, not me. I am an anxious wreck who loathes every loss down to the last penny and expresses a level of emotional maturity that is frequently corrected by my 5-year old son. My saving grace is that I force myself to stay rational and disciplined, albeit with less equanimity than a Kovner. I fire myself from particular positions or for particular days and get away from investing. I do the right thing, but I don't enjoy being around myself when I lose. Were I to poll my colleagues (which I will not), I imagine that they might agree.

    How many positions does Rangeley typically hold at a given time? Now?

    A few dozen is typical. Now I am a bit lighter than typical.

    How do you use options in the fund?

    Options are useful tools for two of my purposes. First, they are useful when I want to be long or short, but I want to isolate a very specific price and date (such as a view around a potential corporate transaction or regulatory decision). Secondly, from time to time I own large positions that are consistent with my long-term view, but then get negative procedural checks indicating hiccups along the way. Options are useful for exploiting the opportunities from the hiccups without unwinding my core position.

    Many people on SA know of you but not many know of your partner. Do you want to say a few words as to his value to Rangeley?

    Rich is extremely focused on detailed fundamental valuation; he does deep dives into the finances of each of our investments. Additionally, he has spent time in management and in front of boards of directors, so he has the eye of a practical operator that gives him sound views on reasonable assumptions that we make regarding management and board behavior. Finally, he built and organizes our systems regarding the implementation of position sizing utilizing the Kelly growth criterion. That frees me up to focus on idea generation, event probability, and thinking through the optimal structure for corporate assets.

    One of the things I appreciate about your involvement on SA is the volume of articles (on a wide variety of subjects related in someway to the stock market or investing) that you link as Stock Talks. There are so many. How can you read them all?

    I hope that the quantity isn't a nuisance. I prefer to read books than white papers or articles, but pass on what I find most interesting among articles. I read every word and love reading. It would be hard to invest if one doesn't love reading because there is so much information to assimilate. I am an early riser and I simply ignore anything that I don't find either interesting or productive. That gets my time commitment to zero of many activities that are typically big time sinks for most people. I think about my portfolio and my time in much the same way and my job is to optimize. Part of that optimizing is a radical specialization of labor. My labor is reading and thinking.

    Unofficially I would say there's nobody on SA that posts as much as you. How many hours per day on average do you spend on the site?

    That is hard to say. As something that I'm thinking about? 18. As the only thing that I'm thinking about? 0.

    What is the one thing you can't live without on SA?

    Sharing ideas with Eli Hoffman.

    What is the one thing you would change/add on SA?

    I would like for bloggers to be able to customize the name of their Instablogs. I want mine to be called "Sifting the World" instead of "Chris DeMuth Jr's Instablog".

    According to your website, your record of top long and short idea of the year has been sensational the past few years. When may SA readers expect to learn about your 2014 top long and short?

    So far so good. We are pleased with how LORL is working out (although it is somewhat hard to see since they have paid out substantial special dividends through the years since that long was initiated) and we are happy that the TMF short, one of the few repeats, is redeeming itself after last year. Last year's short idea was anomalous relative to our experience shorting these leveraged ETFs.

    Our top long and short will be announced before the first trading day of 2014 as always. We will offer some concluding thoughts on GPT and TMF, this year's long and short and we will offer something new. That something new will involve value, a catalyst, and a counterparty that is doing something other than maximizing value.

    You have said you spend hours and hours searching for inefficiencies in the market. With so many intelligent people in the market why does an edge exist?

    Usually, it doesn't. In the rare instances where it does, the counterparty has lost control of the situation somehow. We don't really pit out judgment against someone else's judgment. We provide liquidity to the capital markets where that liquidity is mispriced for a specific, peculiar reason.

    What are the ingredients necessary for you to pull the trigger and place a trade?

    A dollar of value has to be analyzable. It has to be certain within a band. It also has to be mispriced by an amount that is at least 10% and preferably 20% outside of that band. So I pay $0.90 for an actual dollar (a literal dollar, for example a SPAC with short term treasuries that I have the right to liquidate). But a $1 of expected value that is $1 give or take $0.20 we would grudgingly pay $0.70 or so and would be happy closer to $0.60.

    What would you recommend to someone who is looking for relatively safe yield in this zero interest rate environment?

    Earn more money and spend less money. If you are looking for relative safety in a low risk environment and can't find it, then don't force it. We are but humble analysts. We look and hopefully sometimes find, but we don't tell the market what to offer us and we certainly shouldn't pretend it is there when it is not just because we want it.

    What are your current macro thoughts on stocks, real estate, bonds, cash, and commodities?

    I spend between 99-100% of the energy that I dedicate to investing to firm-level research. In my opinion, investing is value investing and economics is microeconomics. But macro is as good a hobby as any. Stocks are expensivish, but that can go on for a while. I don't go out of my way for exposure, but when I see something on sale, I buy it without too much worry over macro noise.

    I went long real estate for the first time in late 2011. So far so good. Expensivish, too. However, my number one favorite inflation hedge is to buy all of the things I'll ever want (that don't depreciate; this tactic does not work with lettuce or microchips). One acre, barn, lake or tree will equal one acre, barn, lake frontage, or tree in a decade or two and if that is what I want, I thought is sensible to simply buy them now. Whether they are worthless or priceless in nominal fiat currency will be pretty immaterial to me. I'll still own them and since my tastes don't change much, will still want them.

    Bonds are not just expensivish, they are actually actionably expensive. We are short the long-bond in an investment that is our best and largest short for 2013. What could go wrong? The biggest problem is that Japan or another country or region could collapse first, causing capital to fly to the US long-bond and driving yields down, quite possibly driving them negative. In part, this investment effectively bought us interest rate protection for long investments such as GPT.

    I love cash. Having liquidity, certainly more than one's average counterparty, makes it easier to make sensible decisions. My favorite place for cash is in mutual institutions, federally insured and awaiting potential equity offerings. If everyone kept enough cash, it would also be easier to be less reliant on your job. In turn, that would make it easier to walk away if your employer ever asks you to do anything morally compromising. You can just walk away and it is no big deal because the liquidity is there for your family for the foreseeable future.

    While silver is cheap compared with gold and gold miners are cheap compared with gold, gold itself is still relevant as systemic risk insurance. Systems collapse. Complex systems tend to be able to hide the potential of that collapse better than they avoid collapse itself. So, one might want to moderate potential outcomes by spreading bets - some within our current system and some without. Gold is an important part of what one can store for eventualities outside of our current system.

    Will we experience another 2008-2009 type meltdown this decade?

    Yes, it is reasonable to expect that we will. We have not delivered but instead have reshuffled the leverage. Over the past five years, we've gone all in with our bet on short-term palliatives and appearance of stability. Either we have created a magical perpetual motion machine in which consequences can be put off for ever or this will have serious repercussions or. My preference is for the former but I am planning for the latter just in case.

    If you could ask Warren Buffett one question what would it be?

    Having read his letters, all of the books about him, and every set of notes that I could lay my hands on of his annual meetings, I believe that he is a worthy hero. I am particularly fascinated by the Buffett Partnership era. His recent investments at Berkshire Hathaway (BRK.A/BRK.B) are less applicable. We overlap more in his personal account, which he invests actively from time to time. We were both actively investing in Korea around the same time and were both pleased with the outcome. I don't think that I would ask him what, specifically, how he would invest Buffett Partnership money at a 9-figure scale because he would not answer (this would be my question if I could slip him truth serum first).

    Instead, I want to better understand the jarring incongruity of a hero of capitalism in practice who is also such an opponent of capitalism in politics. I adore so much about his investing philosophy, leadership, ethics, philanthropy, frugality, and humor. His advocacy of a centrally planned economy with the better part of the GDP spent by government just doesn't seem to fit. Why? Is it to create more inefficiency to exploit? Protection money? Guilt? He would not need to go far to see the virtue of liberty -- his life is an argument for liberty and what free people can do with that liberty. Why not support liberty in politics with the enthusiasm that he has used liberty in all facets of his life?

    SS&A, thank you for taking the time to come up with some great questions. I enjoyed thinking about the answers.

    Stocks: BRK.A, BRK.B
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Comments (27)
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  • kadison
    , contributor
    Comments (328) | Send Message
    Thanks for this piece. Chris, just out of curiosity how much cash do you currently hold as part of your portfolio?
    9 Nov 2013, 01:52 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11478) | Send Message
    Author’s reply » 20% or so; "The way to get rich is to keep $10 million in your checking account in case a good deal comes along." - Charlie Munger
    8 Apr 2015, 06:59 AM Reply Like
  • bazooooka
    , contributor
    Comments (3689) | Send Message
    Chris, have you trained in speed reading or similar? Any tips? I'm amazed by how much you read and analyze everyday.
    9 Nov 2013, 06:28 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11478) | Send Message
    Author’s reply » No, but I'm interested in the idea of speed reading. Mostly, I just love reading and spending time with text. Tips? Have a clearly delineated category that is "fun/intrinsically valuable to you" and another that is "productive/lucrative/... for greater purposes". Then spend zero hours and zero minutes per day outside of those two categories. Outsource or ignore everything else. I like reading and analyzing a lot, in part because it takes so much pressure off of my output. Having a lot of material lets me reject the vast majority of ideas and still be left with enough to work with.
    9 Nov 2013, 07:41 PM Reply Like
  • Blue Corn Investments
    , contributor
    Comments (482) | Send Message
    Awesome. Chris - I (and I'm sure many many others) very much appreciate your involvement here at SA. Your stock talks, articles, and instablogs are outstanding. This series you have been doing "Just a few ?s" has been very informative and interesting reading.


    A big thank you from me!
    10 Nov 2013, 12:14 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11478) | Send Message
    Author’s reply » You're welcome, R.S. Analytics.
    8 Apr 2015, 06:59 AM Reply Like
  • Terrier Investing
    , contributor
    Comments (585) | Send Message
    "this tactic does not work with lettuce or microchips"


    I'm stealing that line. just fyi.


    (awesome interview - big round of applause for both CD and SS&A!)
    10 Nov 2013, 01:02 AM Reply Like
  • SA Eli Hoffmann
    , contributor
    Comments (1024) | Send Message
    Best interview of the series! (full disclosure etc.) Great job on the questions by SS&A, whom, like Chris, I have had the distinct honor of meeting in person.


    Chris and I have spent some one-on-one time, but this interview opened new windows into the mind and process of a stock-market genius. Chris, it's an honor having you as such an active participant on SA.
    10 Nov 2013, 03:13 AM Reply Like
  • SA Eli Hoffmann
    , contributor
    Comments (1024) | Send Message
    Posted the interview to Market Currents (on the home page now):

    10 Nov 2013, 03:37 AM Reply Like
  • Joe2922
    , contributor
    Comments (488) | Send Message
    So many "advisors" say cash is trash, tiny return that is negative after inflation (which is vastly understated by govt. manipulation) but I love having LOTS of cash for the peace of mind and flexibility it provides. I'm a bargain buyer in all aspects of living and investing, and bankrolling cash, saving & investing well beginning at age 28 allowed me to quit my high paying job at age 41 to trade & invest full time. I hate debt and haven't borrowed money since college, 1980.
    Lots of cash gives me total control over my trading, investing, and living. Wilbur Ross is one guy I always pay attention to. I ignore Buffett because I hate his politics and can't do what he does.
    10 Nov 2013, 06:58 AM Reply Like
  • Joe2922
    , contributor
    Comments (488) | Send Message
    This is the only market analyst I read, couldn't care less if bull or bear, uses good risk management-
    10 Nov 2013, 09:02 AM Reply Like
  • Perkins Cove
    , contributor
    Comments (637) | Send Message
    And I thought Chris's favorite thing to do was stack wood. Oh well.....
    10 Nov 2013, 07:43 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11478) | Send Message
    Author’s reply » It is up there, but I was trying for something that I hadn't mentioned before.
    10 Nov 2013, 11:10 AM Reply Like
  • VinnieChase13
    , contributor
    Comments (38) | Send Message
    "Instead, I want to better understand the jarring incongruity of a hero of capitalism in practice who is also such an opponent of capitalism in politics. I adore so much about his investing philosophy, leadership, ethics, philanthropy, frugality, and humor. His advocacy of a centrally planned economy with the better part of the GDP spent by government just doesn't seem to fit."


    I think this comment desires a greater explanation because it appears to directly conflict Buffett. Buffett is in record stating capitalism is the greatest method for wealth creation...and I don't think being a registered democrat changes anything. He's spoken of taxing 21-22% of GDP while spending 23-24% of GDP which still makes America a low tax/spend developed nation. As far as I can tell he's for a better equality of opportunity and a 30% tax on the super rich while being liberal on social issues. The centrally planned comment appears on the surface to be complete fabrication...strikes me as an envious libertarian comment...
    10 Nov 2013, 09:40 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11478) | Send Message
    Author’s reply » All fair comments.


    For a bit more background on my thinking, I pretty much ignore late stage convenient political rhetoric and focus instead on actions such as votes. If I thought we were talking about spending 23-34% of GDP, I wouldn't be so concerned. However, if one looks at congressional voting records and if one looks at spending commitments, Obama, for one important example, advocates government spending far in excess of 50% of GDP. And that is moderated by political opposition and the necessity of getting election. This is not quibbling about spending 20% versus 25%. This is about whether there are any practical limitations at all.
    10 Nov 2013, 11:10 AM Reply Like
  • VinnieChase13
    , contributor
    Comments (38) | Send Message
    Okay...but don't you think it's a bit of a stretch to correlate Buffett's Democratic affiliation to centrally planned governments? You are equating his voting record as superseding all his rhetoric, therefore labeling him as being best. Also, to be inferred from your thinking, you cannot vote for a candidate unless you agree with everything he says...and I believe that's very unfair.


    In my opinion, Buffett is very much a capitalist with liberal social leanings seeking pragmatic solutions to correct for monopolists' rents in order create better equality of opportunity. In my opinion, it's unfair to infer more than that.
    10 Nov 2013, 11:37 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11478) | Send Message
    Author’s reply » We are talking about one of my very favorite people on the planet and the person whose partnership is the model for much of my business. I wouldn't say dishonest and I'd be thrilled if your opinion of him is correct. Also, I was just trying to ask him a challenging question. Of course one need not vote for someone whose record is perfect; only more perfect than the alternative. But I'll stick with the centrally planned point. Buffett did not just vote for, but also publicly endorsed and financially backed Obama. One does not see it in Obama's rhetoric but one does see advocacy for central planning in his voting record and his actions.
    10 Nov 2013, 11:46 AM Reply Like
  • VinnieChase13
    , contributor
    Comments (38) | Send Message
    "His advocacy of a centrally planned economy with the better part of the GDP spent by government just doesn't seem to fit."


    It probably doesn't seem to fit because it doesn't fit. You appear to be making a declarative statement on specious anecdotal information that this is what he is for. And by your own admission, your argument stems solely from his endorsement of Obama.


    I'm not aware of your political preferences...but your statement above, anecdotally at least, gives greater evidence of your biases and political leanings than tells me anything about Warren Buffett. Rational thinking, above all else, may be the best attribute used to accurately describe Buffett and Munger's philosophies on not just investments, but life in in being heavily influenced by the ancient stoic school of thought. You claim rational thinking has been one of your greatest attributes to achieve your successes, however it is you describe success. I may be wrong, but your comments of Buffett seem to depart a rational mode of thinking by correlating support for Obama as being an advocate for central planning...which stands juxtaposed to 80+ years of evidence.
    10 Nov 2013, 01:44 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11478) | Send Message
    Author’s reply » Fair points, but I was just asked to ask him a question:, "if you could ask Warren Buffett one question what would it be?". That was my question.
    10 Nov 2013, 01:51 PM Reply Like
  • Joe2922
    , contributor
    Comments (488) | Send Message
    I refuse to vote because it only encourages them.
    The entire system is corrupt with all votes bought and paid for by special interests.
    If everyone refused to vote, maybe they'd finally get the correct message, Change the System!
    I also think Benanke and his QE is evil on a net-net basis. Sure he saved the U.S. from its massive debts and saved the banks from their illegal, corrupt, greedy mistakes, but I can't imagine this will end well. And ACA is ruining me and the country because of mine and others 25% per year compounded premium increases, I'm being forced to pay for maternity and mental health coverages I can never need or use, and costs are being driven up by forcing health care into hospitals that would be better done in cheaper venues. Find one doctor in favor of it, I doubt there is even one.
    10 Nov 2013, 02:23 PM Reply Like
  • Charliehbryan
    , contributor
    Comments (115) | Send Message
    Buffett is an FDR-style capitalist who sees wealth created from the bottom up and not the top down and that the ill effects of the periodic crises endemic to industrial capitalism are best handled by governmental regulation of the markets and players.


    That hardly makes Buffett an advocate of a 'centrally planned economy' and I agree with your flagging of it for critical scrutiny.
    10 Nov 2013, 09:26 PM Reply Like
  • steppppo
    , contributor
    Comments (251) | Send Message
    Krav Maga ... excellent. I have been practicing for three years. Love it, love it, love it.
    10 Nov 2013, 10:01 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11478) | Send Message
    Author’s reply » It is a martial art heavy on the martial and light on the art. It is practical and effective. I'm hoping that my children pick it up too.
    10 Nov 2013, 11:03 AM Reply Like
  • sheldond
    , contributor
    Comments (1458) | Send Message
    Krav Maga seems to be all about efficiency and limiting risk.... Thanks for sharing.


    I also love the reading and am looking forward to your book discussion group. Not enough time to read everything.


    Will I kick myself for selling FOE since it has reached and passed my current fair value estimate?




    10 Nov 2013, 01:03 PM Reply Like
  • steppppo
    , contributor
    Comments (251) | Send Message
    I also hope my kids want to learn. I'm actually an assistant instructor at my school.


    It was only when I was a year or so into it that I began to realize the big differences between Krav and the other arts. I actually have a brown belt in Judo and, while I love Judo, it's not nearly as practical in terms of self-defense. We never discussed carjackings in Judo class.
    11 Nov 2013, 09:34 AM Reply Like
  • connellybarnes
    , contributor
    Comments (556) | Send Message
    Thanks for another great article! You're my investing hero and I've learned a ton from your articles already.


    The most valuable comment in this interview to me was actually your comment about limiting one's work to only "fun/intrinsically valuable to you" and "productive/lucrative/... for greater purposes." I think too often people err on the side of lucrative work that is not intrinsically valuable, and want to make sure I don't do the same (especially with my current job of "faculty," which is fun so far but I hear becomes endless committees, reviews, fundraising at some point).
    10 Nov 2013, 05:14 PM Reply Like
  • Jorge_Soriano
    , contributor
    Comments (317) | Send Message
    What an awesome interview, and makes no difference it was in 2013 - still relavent, more importantly, fun and intrinsically valuable to me.


    16 Jun 2015, 12:12 AM Reply Like
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