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 DeMuth's value investing forum, Sifting the World (StW), search the world for misplaced bets. Rangeley exploits them for its investors and DeMuth writes about them on StW.
1. How and why did you get started investing? What is your background?
I have invested for my whole life, but professionally I did public policy research in Washington, District of Columbia Ă‚ for hedge funds interested in antitrust and regulatory affairs before moving into investing.
2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas from?
We are event-driven value investors. I work on a team of a half dozen people. We look for deep discounts to intrinsic value. We focus on primary sources for idea generation.
3. What drew you to that specific strategy? If you only had three valuation metrics what would they be?
I am interested in corporate transactions. I am particularly interested in deep discounts to NAV, ideally discounts to liquid securities and cash on the balance sheet, and discounts to our view of expected value during complex corporate transactions.
4. What books or other investors changed the way you think, inspired you or mentored you? What is the most important lesson learned from them? What investors do you follow today?
"You Can Be a Stock Market Genius" by Joel Greenblatt (Trades, Portfolio). This book showed how the greatest mispricing oven occurs around corporate events. Today, I still follow Greenblatt.
5. How long will you hold a stock and why? How long does it take to know if you are right or wrong on a stock?
It varies from a few weeks, for example, in some tender offers to over half a decade, for example, in mutual conversions.
6. How has your investing approach changed over the years?
The philosophy has not changed at all. The opportunity set shifts. In 2009, for example, we accepted softer catalysts when valuation was highly compelling. Heading into 2017, we demand harder catalysts. But that is just a function of the equity market valuation.
7. Name some of the things that you do or believe that other investors do not.
Russia is a great investing environment. Bonds are dangerous today. Risk and volatility are distinct topics; today they are quite different.
8. What are some of your favorite companies, brands or even CEOs? What do you think are some of the most well-run companies? How do you judge the quality of the management?
From an operational perspective, AB InBev (BUD, Financial) has one of my favorite companies, brands and CEOs. It is one of the most well-run companies in the world. They are careful with cost and brilliant with hiring. The can buy virtually anything and make it better.
9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?
No, we do not use any stock screeners. In fact, many of our favorite investments look just horrible on traditional screens. In terms of finding undervalued businesses, we first ask “where would value be hidden?” before counting up what something is worth, so we frequently look where no one is looking or everyone is panicking.
10. Name some of the traits that a company must have for you to invest in, such as dividends. What does a high-quality company look like to you and what does a bad investment look like? Talk about what the ideal company to invest in would look like, even if it does not exist.
I do not really tell a company what traits they must have for me to invest in it; underpaying covers all sins. If it is legal and there is limited liability, I would be delighted to invest in anything at the right price.
11. What kind of checklist or homework do you utilize when investing? Do you have a specific approach, structure, process that you use? Or do you have any hard cut rules?
I like to be as knowledgeable as possible on all public filings. Then I like to speak with everyone described – from the board and management to the major competitors, vendors and customers.
12. Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
Ideally, proctological. Yes, we talk to management and often write them too.
13. How do you go about valuing a stock and how do you decide how you are going to value a specific stock? When is cheap not cheap? If you can, give some examples.
We first try to find the true odds of positive and negative outcomes before backing into the market’s expectation and the market-implied probability of potential outcomes based on market prices. It is cheap when the true odds are materially higher than the market’s perception.
14. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?
M&A is shaking loose bargains here and there, especially in small-cap, pharma, energy and banking. We have no preconceived notions of what sectors are “good” or “bad,” but tend to take a close look at banks and thrifts.
15. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
The equity market is somewhat overvalued; the bond market is extremely overvalued. What concerns me the most? Everything, but I am a worrier.
16. What are some books that you are reading now? What is the most important lesson learned from your favorite one?
I always have a book going on audible and another on Kindle and another on paper. I am reading "Nemesis: The First Iron Warship and Her World"Â by Adrian G. Marshall on paper, "Pre-Suasion: A Revolutionary Way to Influence and Persuade"Â by Pobert Cialdini on Kindle and "The Undoing Project: A Friendship That Changed Our Minds"Â by Michael Lewis on Audible. Cialdini’s latest book, "Pre-suasion," fits in beautifully with his earlier ones in terms of understanding the power of manipulation. It is hard to be rational without coming under the spell of all sorts of manipulation, but Cialdini’s books make it easier to identify and guard against it for anyone who wants to think clearly and analytically.
17. Any advice to a new value investor? What should they know and what habits should they develop before they start?
It is far too much work unless you really love the process. Read the canon of value investing and proceed only if you are ravenously enthusiastic for more.
18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?
By far, my favorite value investing resource is Sifting the World, a community of long-term value investors that I am lucky to host. On StW, there are many investors whose coattails I ride, most notably Andrew Walker.
19. Describe some of the biggest mistakes you have made value investing. What are your three worst investments that burned you? What did you learn and how do you avoid those mistakes today?
Whatever the expected value, in a crisis, the correlations can and do go to one. For example, I was too big in pharma at the beginning of the year. In terms of sins of omission, I have been insufficiently curious about securities that are not quantitative bargains. There are a few securities that are not traditionally cheap that could be worth owning and I never do. Thirdly, net, it may have been a mistake to write about investing. I enjoy it but it may have made me more procyclical to hear readers so happy when stuff is up and sad when it is down. Virtually all reactions are procyclical.
20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?
I wrote a blog post on just that topic. Name the emotions, optimize your environment, study potential manipulators, fire yourself sometimes, make reversible mistakes and finally, collect comparative advantages.
21. How does one avoid blowups in value investing?
One does not.
22. If you are willing to share, what companies do you currently own and why?
BNCCorp (BNCC, Financial) is one of my investments. It is undervalued as a standalone company and even more undervalued as a target to a strategic acquirer.
23. How have the last five to 10 years been for you investing wise compared to the indexes?
Delightful (details available only to accredited investors due to regulatory constraints beyond my control).
24. Here's a fun one - What stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham buy today if he were you?
Neither would answer that!
25. What is the most contrarian investment you have ever made? Why did you make it and how did it turn out?
Contrarian within the value investing community, probably bitcoin.
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