Hedge Fund Manager, Value, Event Driven, Special Situations
Contributor Since 2011
I was named after my father, Christopher DeMuth Sr. A scholar from the Chicago school of economics, he taught me the second most important lesson for my career: that markets work very well and certainly better than any alternative that man has so far imagined. From a very young age, I tried to consume a steady dose of market theory starting with Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics by Henry Hazlitt. It made so much sense to me that it became hard to listen to political views of anyone who had not read it and understood it. The greatest living economist, Prof. Tom Sowell visited my home once and my reaction was worshipful. In terms of an economic perspective on the world, his struck me as useful, relevant, and complete. I had nothing to add and eagerly dashed through the days and years of school so that I could get out and on with my life.
It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.
- Thomas Sowell
Markets can take on all comers. Compared to the alternatives, they lead to the greatest hope, growth, opportunity, prosperity, and justice. The second best thing I learned was that markets are that good. The best thing I ever learned is that they are imperfect. They have flaws and I could find where those flaws are located. This would be my life's work, wading through markets in hot pursuit of their inefficiencies. What is it like to find one? Euphoria. Finding something that others missed, sitting there for the taking. It is pure mirth. For some reason it is a kind of humor - if only funny to me, it is funny to me when prices are wrong. Taking money out of the broken corners of this system is an afterthought. It aids in keeping score and I like to win that game. But my love is for the game.
In search of a bankroll
I did not have any money. I needed something that would not demand any capital or risk but would pay well and quickly. My first step was to accept a half dozen credit card solicitations for cards with 0% interest in the first year. It seemed like a good place to start. Why they were eager to lend me money was a bit of a mystery. The solution might have been found in the similarity between my name and that of my more employed and credit-worthy father but it was not a question that I long pondered. To me, the important thing was to go from $0.00 to $0.00 with a line of credit.
I discovered the bond market and loaded up my credit cards with purchases of treasury bonds. Just before the year was over, I sold them, took the early redemption penalty of the last quarter of interest, used the principal to pay off the cards in full, and pocketed $1,125 of interest. Then I did it again. And again. By Junior High School, I had my bankroll.
Circuit City's Unbeatable Price Guarantee stated that,
Circuit City is proud to offer the best prices on consumer electronics. Period. Buy a product from us and if, within 30 days of your purchase, you find a local competitor offering a lower advertised price for the same in-stock item, we'll refund 110% of the difference. If you haven't yet purchased the product, we'll beat the competitor's price by 10% of the difference between our price and theirs. Either way, you win.
Yes you do. It was that extra 10% that I just couldn't get out of my mind. I couldn't stop thinking about it. I loitered around the stores where I got to know the salesmen and the sales schedule. President's Day became one of my favorite holidays. The weekend before, I would stock up. It didn't really matter what I bought. I bought everything and anything I could afford. The important thing was that they were not on sale and that they would be willing to hold them for me for just a week. They got my money and I got receipts.
Their most expensive television cost me $15,000. Prices were dropping rapidly and it was marked down to $10,000 the next week. They honored their guarantee by rebating me $5,500 before I returned it for $10,000. I bought and returned that television enough times to be able to afford to keep it (not that I ever would). Time to leave for college.
Years later, I read that Circuit City discontinued their Unbeatable Price Guarantee in 2008 and filed for bankruptcy protection in 2009.
Credit (Card) Arbitrage
The credit card companies kept sending me offers and I kept accepting. Over time, my collection included one for my favorite clothing store, favorite bookstore, favorite airline program, and a couple for cash back. My combined credit limit breached a quarter of a million dollars. I set out to find a way to put it to work.
I knew just what I wanted to buy but needed to find a seller. In search of one, I sent out four hundred identical letters to financial institutions asking if I could use my cards to invest in money markets. Most ignored me. A few bothered to say "no" in a tone that expressed surprise that I would have asked. But a few said "sure, why not" so I was able to get to work.
That day, I put $250,000 in money markets. Before the end of the month, I paid off the cards with the balances in the money markets. For convenience, I was able to set up an automatic payment plan. The money would bounce back and forth from the credit cards to the money markets and back. Each month, I would collect several hundred dollars of interest in the money market accounts which would grow from month to month. Each month, I would collect $3,200 in cash back and gift certificates for clothing, books, and airline miles. I got status on various airlines, one of which is good for life. The IRS considered these payments to be rebates, so the tax rate was 0%.
My life on the road
After leaving home, my interests were interdisciplinary. I wanted to both seduce a pretty college girl and bum around Europe. I eventually succeeded at the first (now my long-suffering wife) and so was able to dedicate myself to my studies of the second. I needed to get there and needed to be able to sleep and eat somewhere. I wanted to do so in style and for free.
I scraped together my flying budget as a part-time professional bumpee. This involved plotting ahead, using a combination of airline strike schedules and seating charts to determine the most constrained seating supply, which I would then buy. If an airline called a strike, I would buy seats on their competitors flying the same routes. Once I got to the gate, I would ask to be bumped in return for a hotel room, meal, and travel vouchers. After a while, they would take my offers to take a bump over the phone, so I didn't even need to be in the departure city to collect. It works out to approximately $511,000 per year in vouchers for a couple of bumpees.
I settled on a favorite hotel in London and another in Paris. I ended up just giving away flights to France when my stack of Air France vouchers grew too high. A favorite Asian airline has a frequent flyer program that allows its members to tap directly into their website's master chart of flights and seats for all of their partner airlines. That was the key information that I needed to consistently secure bumps.
A few years ago at 35,000 feet, my 3-year old son, sitting behind a few chocolate chip cookies and a glass of milk that they served in a martini glass, turned to me with a thoughtful expression and asked,
Daddy, do all airplanes have bars?
Forex Trading at Duty Free Shops
This all came about quite by accident. I was in a duty free shop at a European airport, making a small purchase when the clerk asked what kind of change I wanted. He explained that as a convenience, they offered a range of currencies and it was the customer's choice. I asked how frequently they updated the rate. "Monthly" he answered without expression.
After briefly pawing through the store's copy of the FT to check up on the recent activity within the foreign exchange markets, I asked for Norwegian Krone and received back in change as much as I had paid. I snatched up my paper, my purchase, and the change and was off to the bank.
I picked up several Swiss franc notes, all denominated in thousands, so I could scale this up. I repeated the process each month right before the duty free shops reset their foreign exchange rates, so that I was transacting with the stalest possible rates. There was always some currency pair that had swung over a month, so I was able to clean out the cash registers of the appreciated currency. I would buy the smallest available bottle to keep the bill as low as possible. I was there for the change. I went from store to store doing the same. The proceeds were enough to pay for the next month's fun before hitting the duty free shops once more. Today, foreign exchange arbitrage speeds are measured in tiny fractions of a second. But I had a one month advantage. After a summer of trading foreign exchange at the duty free shops, I headed home with bags full of tiny whiskey bottles and appreciated currency.
Now, I've settled into life at home and work. The kids keep hustling between selling lemonade and coffee out front.
In their first antitrust violation, the owner of our town's best coffee shop met with my six-year old to discuss pricing. By the end of the meeting, he convinced him to hike it from $1 to $2, because, "customers in this area have become accustomed to premium coffee costing at least $2." The increase stuck. Today, if you would like to come by his stand for coffee, it will cost you $2.
As for work, I get much of it done from our Maine office where the only noise is from the waves and the birds of prey.
I focus my professional attention on the capital markets, but still search for the same advantages as my childhood antics. All I really want from the market is free money. I prefer getting it with as little capital, risk, or taxes as possible. I am happy to keep looking as long and hard as it takes. Are these advantaged opportunities all over the place? No, markets work as well as my father and Prof. Sowell say they do; however, every once in a while, you can find something. It is just a tiny glitch in the system. The price system breaks down. I will try to be ready. I will do what I can to exploit it for my partners at Rangeley Capital and members of Sifting the World.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.