104: Exposing Unknown Hedge Fund Strategies w/ Chris DeMuth

0:00Tito's Handmade Vodka is America's favorite vodka for a reason. From the first legal distillery in Texas, Tito's is six times distilled till it's just right and naturally gluten-free, making it a high-quality spirit that mixes with just about anything. From the smoothest martinis to the best Bloody Marys, Tito's is known for giving back, teaming up with nonprofits to serve its communities, and do good for dogs. Make your next cocktail with Tito's. Distilled and bottled by Fifth Generation Inc. Austin, Texas. 40 % alcohol by volume. Savor responsibly. All right, Robert. Today's episode, we have yet another guest.

0:32Our last episode was with Sahil Bloom. That was more of the mindset side of the equation in his new book, The Five Types of Wealth. This episode, we're flipping that on its head. We are going deep into the investment side of the equation. We've brought on a hedge fund manager who manages a ton of money. And this guy is an expert at merger arbitrage and figuring out mispriced stocks and opportunities. And he gets into it in this episode. So if you're someone who is maybe thinking about taking notes or you got to listen to an episode a couple of times to really understand it, get the notepad because we're going deep in this one, Robert.

1:10Yeah, that gives me goosebumps because one of the big narratives we've been talking about a lot in the Rich Habits Network is getting people to think differently, think deeper and really read between the lines to understand where to make money. And this episode covers that. So yes, please have your notebooks ready. Take notes. You might have to watch it a couple of times because there's some mind bending information in here. And it was absolutely an incredible episode. I can't wait for everyone to hear it. With that being said, there are points where Chris really got into the weeds. But Robert and I, I believe, did a pretty good job of summarizing what he was talking about.

1:45So everyone listening can have a better understanding of like how he approaches those things. So if you get a little bit confused, don't worry. Robert and I jump in periodically to summarize what he's saying and make sure we're all on the same page about these different strategies and ideas. Yes, incredible. I am so, so proud of it.

2:27business and actively advise some of the most well-known fintech companies around the world. As the show name might suggest, every episode. We talk about rich habits as they relate to business, finance, and mindset. However, we try and bring you two unique perspectives, one from an industry veteran, which is Robert, and the other myself, someone who's still in the process of building wealth and figuring it all out. Robert, before we jump into this really exciting episode with Chris DeMuth, let's do what we always do and just say a big thank you to our listeners. We have had so much growth and we just owe it all to you.

3:01Those of you that are new to the Rich Habits podcast, as well as the Rich Habits Network, but also those of you that have been following along from day one, we appreciate you so much. And for those of you that are new and you maybe haven't checked out the newsletter, make sure you get a look at that. It is an incredible weekly newsletter. And just, we really appreciate all the accolades keeping us at the top of the charts and sharing it with your friends. There's always someone out there that needs a little help with their mindset, their finances, or maybe their business, and we're here to provide that help.

3:32All right, Robert. Now, what are we going to be talking about in today's episode? Today, we're thrilled to sit down with Chris DeMuth, one of the most insightful and talented authors on both Seeking Alpha and Substack. So if you're someone who wants to level up your investing in 2025, five stop everything because this episode is for you chris is an investing expert a hedge fund manager and a prolific analyst that's right you're hearing it from me he is a prolific analyst chris is the founder of hedge fund rangely capital and runs one of the most popular investing groups on seeking alpha sifting the world where he shares his best ideas deep research extensive resources and real-time updates as his investments play out.

4:19So Chris, welcome to the Rich Habits Podcast. I'm super stoked, just like Austin is, to pick your brain, share all your thoughts, and maybe we can go into some what's next for 2025 because we'd love to hear that as well. Thank you so much for having me. It's great to be here. I will do the very best I can to be interesting enough to sustain your rankings. Chris, we're super excited you're here, my friend. We've been talking about this for a really long time. So walk us through your journey into the investing world, your specific investing strategy, and how you built a hedge fund around it that is now nearly 20 years old.

4:55So I started in DC doing government risk analysis for prop desks and hedge funds. That was largely getting information relevant to merger arbitrage, distressed investments that had some kind of regulatory component to them. left to manage capital for one of my clients, and then left that to start my own fund. And so the interest kind of came out of things that had a policy sensitivity to them, some kind of regulatory issue from DC. And so when you say regulatory issue, policy discrepancy, kind of mispricing, what is your fund's specific investment strategy? How does an investor go, okay, I have this amount of money, I see some weird discrepancy, therefore I can make a profit.

5:40Can you kind of break that down? Sure. So the kind of value investing cliche is looking to buy a dollar with 50 cents. And I would say that I am a subset of that that has or insists on a very specific plan for how we're going to get our dollar back. There's more to life than money, but there's not more to investing than money. And that often involves a corporate change. a business is going to sell or it's going to liquidate or they're going to have a special dividend. I think about underpaying. And then I also think about how, as it becomes normal or a normal opportunity instead of an abnormal one, kind of how we kind of reconcile what appears to be a discrepancy between the value and the price.

6:25So what you're saying, Chris, is that you have a knack for finding mispriced securities, right? Stocks, companies, things like that. And the reason they're mispriced is because you believe that a real world event or some sort of like binary yes or no is going to happen to that company. Yes, they'll pay a special dividend, or yes, they'll get acquired, or yes, they've got this debt that they will default on, right? You think something's going to happen to this company. Therefore, you believe that the stock price will be dramatically different after that event happens than where it is today. Exactly that.

7:00Prices are somewhat rational, but they also have situations where the counterparty is not the best one for that situation. So there can be a scale mismatch or a leverage mismatch so that somebody who happens to find themselves in a situation, maybe they're massively over leveraged. they have to sell it. So I love situations where I'm buying something from somebody who has to sell or I'm selling to somebody who it's their job to buy. So over leveraged or an agency problem, a person who has some reputational reason to want to sell to me or buy to me. One of the things I've done my whole life is when I'm in a new town, show up at one of the, a seedier bank branch and say, hey, what's your most embarrassing loan you made this quarter?

7:51Is there something you want to just not get fired for? I have 60 cents on the dollar for almost anything that you don't want to have to explain to your boss. And I just like situations where I'm not matching wits. I'm simply a service provider for somebody who wants to get out of the other side of the trade. I love that. And I want to talk on something as well. And that is kind of my message recently has really been similar to yours, to our audience, and that is getting them to think deeper. And that's exactly what you're doing. You're reading between the lines. You're going down the rabbit holes.

8:25You're understanding the nuances in the markets to be able to find these gold mines of opportunities. And that's just something that's really, really important to me to get our audience to do. Look past the headlines and look for the opportunity. It's been a really big thing for me. And I love this conversation because this is what you do in real life, real terms every single day to find these big scores by reading between the lines and understanding the deeper information. Our audience ranges from people that are in their early stages of their investment journey all the way through to having portfolios that are eight figures plus.

9:05And what's cool having you as a guest is that I think you'll actually be relatable to every single one of them. So I've seen that your writing often focuses on tax efficiency, portfolio structure, and thinking strategically, like we said, about passive exposure. So can you explain to our listeners how you define passive exposure and why it's important for investors to keep it on the front of their minds when investing? And then part two is I want to have a further breakdown of your overall investing approach for 2025, because I think we have some interesting waters ahead in the investing kind of stratosphere.

9:44So everything I do professionally is very active. But in terms of thinking about my family and extended family, even, I think there is a need to kind of hedge yourself so that you're never taking any existential firm risk or personal catastrophic risk ever. And that you're not just kind of carried away by your last thought. So there's kind of an aspect of humility to passive that says, I am not here to try to get better than I deserve. I'm happy with some amounts of my resources just to kind of expose myself broadly, tax efficiently and at a low cost to the general results of this category. and that that's fine and that sure, I'll have some ideas about it, but I'm not going to have every aspect of my life buffeted by my most recent thought.

10:39So what I'm hearing, Chris, is that, for example, Robert and I continue to believe that artificial intelligence, we're in a secular growth trend. It's going to continue to revolutionize the world. Therefore, we want passive exposure to this technology via the the VGT ETF, right? The Vanguard Big Technology ETF, all these names I'm sure will continue to profit more from AI over the coming decade. But also, we have our own specific stock ideas that we think will outperform even the benchmark indices over the same period of time. So, what you're saying is it's cool to have stock ideas because you've done a lot of research on these ideas and you believe that they'll outperform.

11:18But it's also important to have the humility of, well, I'm also just going to passively have some money in like a VGT or even an S &P 500 that will trend higher over time. Exactly that. Now, before we jump into our next question with Chris, I've got to talk to you all about public.com because if you're as serious about investing as Chris is, you need to know about public.com. On public, you can invest in everything. Stocks, options, bonds, cryptocurrency. They even offer some of the highest yields in the industry like a bond account that pays over 6 % and remains locked even if the Fed continues to cut rates.

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12:33That's public.com front slash rich habits paid for by public investing, full disclosures in the podcast description. Let's now jump back to the interview. Let's give your overall investing approach to our listeners as we head into 2025 and beyond. What are your thesis? What are your big ideas? Where do you think the markets are heading in the coming months and year? I guess coming right off of the inauguration last month, I'm thinking a lot about policy changes, the new administration. I've been very engaged in thinking about the transition team and who's getting key roles and what we can glean from it in terms of their direction.

13:13I would say that I am cheering on with a lot of hesitancy, a lot of the things they want to do on spending, which I just think is extremely hard. And the territory between having the will and talking about it rhetorically is just really different than taking big bites out of the federal budget. I think it's going to be a hard time for the bond market. I think it's going to be a hard time for just confidence in our monetary and fiscal policy. I'm feeling quite almost euphorically optimistic about regulatory policy. We have some wonderful people on the personnel quality is diverse. There's some people I look at and like, where is he going with these names?

13:58But the economic team's terrific. The incoming treasury secretary, the incoming energy secretary is wonderful. The incoming OMB, a lot of the kind of, when you get farther from Trump's day-to-day interests and you get some really good people, they're going to have a little bit more of a free hand, can be more important in some ways. So I'm excited about the regulatory environment for M &A. I think it's going to have a just flood. I think we're going to have a backlog of four years of deals that should have done that were stymied by really awful regulators at the FTC and the DOJ over the past few years.

14:35We're talking to you, Lena Khan. And it was openly hostile to companies that they use their nominal antitrust power, really weaponized to hurt companies that were political rivals. And I think that you have all of those companies, most of them survived, and many of them are going to get to do a deal. So I think it's going to be a spectacular M &A environment and just generally a great business environment for America on the regulatory front. I totally agree with you, Chris. I think M &A, aka mergers and acquisitions, when Adobe announces they want to buy Figma or Amazon announces they want to buy whomever else, companies buying other companies, I believe, is really great.

15:22for not just venture capital and keeping that sort of capital allocation cycle moving, but also it allows for some of these large trillion-dollar companies to continue to grow and deliver additional earnings for their shareholders. Now, something about M &A that I want to talk about, Chris, that I think is really cool is you masterfully predicted Elon Musk buying Twitter, and you did all the research on the federal judges around it, and you laid out this wonderful playbook for some of your subscribers and investors that tune into your work here of like, here's what I'm doing and here's why I think it's going to work.

15:58Can you walk us through sort of that as an example of my name's Chris, I think something's going to happen. Therefore, I'm going to do something with my money so that I can make money on that assumption. I think it's the case that that was my biggest position ever. We had a big stake in Twitter. I was fascinated by it. I mean, one thing that you can kind of lean into a little bit is, you know, situations, you ask yourself, if nobody asked you to do something and there was no money at stake, what would you be reading about anyways? And if you can kind of overlap that a little bit with something professional, that's a nice way to have a life.

16:35And in my case, I like process. I like contracts. What are kind of the self-indulgences instead of rushing to read through for content and for the parts that I know are important. I love just to be able to kind of peruse things. I get up super early and I read a ton and I'm happy to kind of slowly read through all the parts that I don't think are going to matter. But then every once in a while, a few months later, if you just have a big backlog of reading, you can kind of go back to that. So I was very aware of not just the contract, but kind of the negotiating dynamics that led to it. Once you have gone through a lot of contracts and you know, a lot of these advisors, you can glean how the negotiations put that contract together.

17:17I have some friends that are plastic surgeons in New York, and they joke that when somebody walks down the street, they can say, oh, that's a Dr. Green nose or something. They can kind of, they do it enough after a while, you can kind of appreciate people's work. And some, you know, a couple of young women will walk by and they can kind of look at each other and recognize the handiwork. Merger contracts for me are like that. I kind of know the lawyers and the bankers, And I kind of know when a sentence goes in, why did Goldman demand that? And, oh, isn't it interesting that they have the leverage to put that sentence in?

17:49And so maybe 60 or 70 percent of it's reading. And then the remainder is kind of going back to principles with questions relative to your best efforts, kind of in a clean room to understand it. But then you kind of do the investigatory work of what's actually happening. The more adversarial and contentious the situation is, the easier the research. Because if something is incredibly smooth and say you two guys are getting along great in your deal and I kind of want to stick my big nose in your business. And I ask Austin, I was like, hey, so how are things going with Robert? He looks at me and says, none of your business.

18:28These things are fine. But when things start to really fray, when there's going to be a litigation, when there's, you know, you might be on the hook for losing a huge amount of money, you start to open up to outsiders in a different way. And it's easier to kind of weave your way into these situations. In any event, that was a, yeah, that was a, I think our biggest investment ever, the one where you can kind of quantify the upside. That was pretty clear. It was a contract with a cash deal. A scary aspect of it is as time goes on, more time gives you more time to lose money. and my fundamental valuation of the company just kept going down and down and down.

19:02So I was incredibly bearish on its standalone value. But you think about it probabilistically. It's just like trying to play poker is probably a pretty good example of, you know, you're trying to maximize your expected value. And kind of the stoic aspect of it is in the moment, what makes sense to do now? And then you kind of just man up about a good or bad outcome. Yeah, this really speaks to kind of one of my favorite things that I say in my speaking engagements. And that is, you know, all the money and all the wealth is made in the trenches, not at the bottle service and the fancy dinners. And I always tell them that the person at the end of the day with the best paperwork wins.

19:44And so you really just solidified that of understanding the deal, understanding the minutia of the contract, because so many people are so excited. that they don't take care of the documentation and they don't make sure that they're covered. And in the end, it can always lead to bad things because, you know, you always want to trust people at their word and what you know about them. But at the end of the day, you want to make sure that all your bases are covered from a paperwork perspective. 100%. The Twitter situation was a funny one in that Elon, who I hugely admire, is the winging it master of the universe.

20:22Nobody wings it better than Elon. I mean, nobody likes it. I would just say he wills things into existence out of fragments of some idea. And nobody is less of a winging a person as the judge we had in this case, a serious, a student Roman Catholic woman. And boy, she wants you to have every I dotted and T crossed. These were just two people. I like them both very smart people and polar opposite personality types and they were going to go butt heads in her courtroom and she was going to get the final word so um this was a game that uh really was going to be won by her or settled on her terms i love that breakdown chris and i think just want to make sure we're on the same page about really what happened with elon buying twitter is whenever you go and you buy a company especially a publicly traded company, you have to buy it with cash, right?

21:23I've got shares of Twitter, maybe Robert's got shares of Twitter stock, maybe Chris has got shares of Twitter stock. And the only way you're getting the shares of my Twitter stock is if you're giving me cold, hard cash for them. And so that's what Elon had to do. He had to come up with$54.20 per share to go buy everyone's Twitter stock from them. And what he realized is that shares of Twitter stock we're trading at perhaps$30 a share. So Chris said, I'm going to go buy some stock at $30 a share with the assumption that Elon is going to buy it from me at$54.20 per share. So I can pocket that 24-20 difference and realize that as profit.

22:00And so back to what you were just explaining, Chris, is you realized who the federal judge was and the odds that he was actually going to have to buy this company for that amount of money and what the timeline was and the disparity between the mispricing of the asset on the stock market versus what it could be paid for by the acquiring entity, aka Elon Musk. And this is really the strategy behind your hedge fund, right? This merger arbitrage strategy. So just hearing that from Chris to see like, okay, I'm going to buy this$30 per share. I get to sell it to Elon for$52.40. I'm going to make that difference.

22:33That is merger arbitrage. And that happens all the time in the stock market where someone's going to come in, buy a company for$50,$60,$70,$80 a share, and it's only trading at$65 for whatever reason. And that whatever reason is the market saying, I'm not sure this is going to happen. I don't know if this will get approved by the FTC. I don't understand all the nuances here. And that is what Chris is really good at, figuring out that mispricing of that security and being able to arbitrage it in his favor. So I'd like to share a little snippet from an article that you put out just last week. and I really want the Rich Habits audience to listen very, very closely.

23:09The title of the post is called Safety First, and you were talking about what type of investor you are, and you ended it by saying this, and I'm gonna read it verbatim. I, for one, want safety first, but not just because I'm being a wuss. I want safety first because safety, defined as buying stocks only at close proximity to their real economic downsides, is a greater perch from which to be predatory. I love that. I'm going to continue. I want safety because I am virtually certain to not lose much. Only then I can size positions and go after opportunity for large potential rewards. So in the end, we can be safe and at the same time go after the most mispriced assets with catalysts to unlock returns.

23:59We can be safe predators, maybe even aggressive predators. So can you talk a little bit about that to our audience? How do they put that into perspective? And let's talk about how you assess your safety in order for you to have as much conviction as you do about these investments. It's very easy to have economic exposure sort of proportionate to how much you've thought about something. And it's a terrible idea. You should have an active life of thinking about things. And it's fine to have a lot of alerts up for if things happen in the future. But you don't need to expose yourself just because something's interesting, just because you like something.

24:45So I think it's very important to do a ton of research and to be always poised, always have more liquidity than your counterparty. more fortitude than your counterparty. And I have all of the normal emotional bandwidth of enjoying successes and being sad about failures. And so I have to kind of govern myself to not be in a position where I'm spent at precisely the time that I need. And so much of the influences of the world are exactly backwards. At the moment when you're at the point where there's nothing else to make and there's only downside, it's when you're going to get called a hero right when you need to have humility.

25:36And when there's no more money to lose, you're being called a villain right when what you need is fortitude. So you can't expect the world to give you any of this stuff. You have to have it yourself. And some people have it as part of their emotional composition. I don't, I just need to be super careful. So I'm not, uh, destroyed at the wrong time. So yeah. So I think that, um, if you want to be able to swing back, you need to have, uh, liquidity and fortitude at the right time. And the right time is going to generally feel horrible. So having kind of tricks, I have a good friend who's a portfolio manager at a big hedge fund in New York.

26:15and one of these guys are kind of smart and rich and handsome and what's worse, he's a really nice guy. And so I'm always kind of playing up to him a little bit, wanting to play with the big boys and ideas and bringing like really kind of complicated ones. And everyone's well, he'll say, Chris, you know, we can just let somebody else make their money there. Like we don't have to, we don't have to try to make all of the money everywhere. You know, it's fine that you did all this, but it's not quite right. Let's just be happy if it works and we don't have to expose herself at all. And so be kind of at peace with that.