Rich Habits Podcast - 104: Exposing Unknown Hedge Fund Strategies w/ Chris DeMuth

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Starting point is 00:00:30 All right, Robert, today's episode, we have yet another guest. Our last episode was with Sahil Bloom. That was more of the mindset side of the equation and 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.

Starting point is 00:00:58 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 times to really understand it, get the notepad because we're going deep in this one, Robert. Yeah, 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,

Starting point is 00:01:19 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 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 so everyone

Starting point is 00:01:46 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. All right, let's jump into the episode. Hey, everyone, and welcome back to the Rich Habits Podcast, brought to you by public.com, a top five business podcast on Spotify. My name is Austin Hankwitz, and I'm joined by my co-host, Robert Croke.

Starting point is 00:02:13 Robert is a seasoned entrepreneur in his 50s with lifetime revenues of over 300 million, and I'm an entrepreneur in my late 20s with a background in finance and economics. Since quitting my full-time job in corporate finance a few years ago, I've built a seven-figure media business and actively advised 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.

Starting point is 00:02:48 Robert, before we jump into this really exciting episode with Christa Mewth, 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. Those of you that are new to the Rich Abbots 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.

Starting point is 00:03:16 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. All 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, stop everything because this episode is for you. Chris is an investing expert, a hedge fund manager, and a prolific analyst. That's right.

Starting point is 00:03:58 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. So 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

Starting point is 00:04:40 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. So I started in D.C. 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,

Starting point is 00:05:29 like, what is your fund specific investment strategy? How as an investor go, okay, I have this amount of money. I see some weird discrepancy, therefore I can make a process. Can 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 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.

Starting point is 00:06:01 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. So 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,

Starting point is 00:06:45 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. Prices 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 leveraged mismatch so that somebody who happens to find themselves in a situation, maybe they're massively over leveraged. They have to sell it.

Starting point is 00:07:22 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? Is there something you want to just not get fired for? Like, I'm, I have 60 cents of 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

Starting point is 00:08:05 wants to get out of the other side of the trade. I love that. And I want to talk. 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. You're understanding the nuances in the markets to be able to find these gold mines of

Starting point is 00:08:30 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

Starting point is 00:09:00 all the way through to having portfolios that are eight figures plus. And 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

Starting point is 00:09:37 all investing approach for 2025 because I think we have some interesting waters ahead in the investing kind of stratosphere. So everything I do professionally is very active, but in terms of thinking about my family and extended family, even, I think there's 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,

Starting point is 00:10:33 that I'm not going to have every aspect of my life buffeted by my most recent thought. So what I'm hearing, Chris, is that, for example, Robert and I continue to believe that artificial intelligence were in a secular growth trend. It's going to continue to revolutionize the world. Therefore, we want passive exposure to this technology via 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. But 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.

Starting point is 00:11:28 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. Now, what sets public apart is how they give you the tools you need to make informed investment decisions. There Your built-in AI tool called Alpha doesn't just tell you if an asset is moving.

Starting point is 00:12:03 It tells you why an asset is moving. So you actually understand what's driving your portfolio's performance, up, down, left, and to the right. Public is a FINRA registered, SIPC-insured U.S.-based company with a customer support team that actually cares. Bottom line, your investments deserve a platform that takes them as seriously as you do. You can fund your account in five minutes or less at public.com front slash rich habits and get up to $10,000 when you transfer your old portfolio. That'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.

Starting point is 00:12:42 Let's give your overall investing approach to our listeners as we had 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 enormous. 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. I would say that I am cheering on with a lot of hesitancy,

Starting point is 00:13:22 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 a regulatory policy. We have some wonderful people on the personnel quality is diverse. There's some people I look at it. Like, Is he going with these names? But the economic team's terrific.

Starting point is 00:14:00 The incoming Treasury Secretary, the incoming energy secretary is wonderful, the incoming OMB. A lot of the kind of, we 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. It 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.

Starting point is 00:14:23 I think we're going to have a backlog of four years of deals that should have gotten done that we're going to. were stymied by really awful regulators at the FTC and the DOJ over the past few years. We're talking to you, Lena Kahn. Kneeded. MNA 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.

Starting point is 00:14:57 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 MNA, aka mergers and acquisitions, right, when a Adobe announces they want to buy Figma or an Amazon announces they want to buy whomever else, right? Companies buying other companies, I believe is really great for not just venture capital and keeping that sort of like, you know, capital allocation, you know,

Starting point is 00:15:27 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. Can 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.

Starting point is 00:16:09 I think it's the case that that was my biggest position ever. We had 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. And 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

Starting point is 00:16:53 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. I 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 knows or something. They can kind of, they do it enough after while. You can kind of appreciate people's work. And some, you know, a couple of young women will

Starting point is 00:17:31 walk by and they can kind of look at each other and recognize the here 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 there. And why did Goldman demand that? And oh, isn't it interesting that they have the leverage to put that sentence in? And so maybe 60 or 70 percent of its 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 a situation is the easier the research, because if

Starting point is 00:18:12 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, also, was like, hey, so how everything's going with Robert? He looks at me and says, then your business, these 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.

Starting point is 00:18:43 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, 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. So I was incredibly bearish on its standalone value. But you think about it probabilistically.

Starting point is 00:19:08 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 the 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 outgoing. 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.

Starting point is 00:19:44 And 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. Nobody wings it better than Elon.

Starting point is 00:20:24 I mean, nobody likes to. 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 eye dotted and T-cross. These were just two people. I like them both, very smart people and polar opposite personality types. And they were going to go but heads in her courtroom and she was going to get the final word.

Starting point is 00:21:00 So this was a game that really was going to be won by her or settled on her terms. I love that breakdown, Chris. 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? I'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 him. And so that's what Elon had to do.

Starting point is 00:21:35 He had to come up with $54 in 20 cents per share to go buy everyone's Twitter. stock from them. And what he realized is that shares of Twitter stock were 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 2420 difference and realize that is profit. And so, you know, back to what you were just explaining, Chris, is like, you realized who the federal judge was and like the odds that he was actually going to have to buy this company for that amount of money. And like 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,

Starting point is 00:22:18 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 it at this, you know, $30 per share. I get to sell it to Elon for $52.40. I'm going to make that difference. Like that is merger arbitrage. And that happens all the time in the stock market where someone's going to come in, buy a

Starting point is 00:22:38 company for $50, $60, $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.

Starting point is 00:23:09 The 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 going to 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. And I'm going to continue. I want safety because I am virtually certain to not lose much,

Starting point is 00:23:44 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 catalyst to unlock returns. We 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.

Starting point is 00:24:27 You should have a 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. So 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 success. 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.

Starting point is 00:25:20 And so much of the influences of the world are exactly backwards. You know, 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. And 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.

Starting point is 00:25:51 I don't. I just need to be super careful. So I'm not destroyed at the wrong time. So yeah. So I think that if you want to be able to swing back, you need to have liquidity and fortitude at the right time. in 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.

Starting point is 00:26:15 And 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 while 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.

Starting point is 00:26:45 It helps to enjoy doing the work and it helps to have ways to say, okay, you fought that, yay, you don't have to lose millions of dollars just because it doesn't go the way you think it's going to go. Writing for me is very helpful. I'm kind of fredenic. I enjoy the topic enough that my wife once joke that when I've run out of my good ideas, I start in on my bad ideas. And so writing kind of slows me down because I've always been my own audience. It at least lets me kind of take the time to present it in the way than I don't get overly hyperactive. That really resonates with me because, and probably you too, Robert, because as people who study the stock market and read the headline news and see the earnings and all these different things, it seems like every day, every week, month, there's a new stock that everyone needs to have on their radar or their watch list or a new

Starting point is 00:27:34 idea that we all need to be putting money into. When in actuality, some of the best investors I know are the ones that go hyper-focused on a specific idea. That specific idea actually has upside potential worth of the time of the, you know, call it 9, 12, 18-month investment horizon. And it works out. Because to your point of your friend saying, we'll let someone else make money over here, well, like, this isn't worth our time or this is just too much. Or like, cool, we can't do everything as investors. I feel this with cryptocurrency specifically. I feel like crypto, there's always a new meme coin.

Starting point is 00:28:10 There's always a new this, always something to own, something to buy, something to trade. And it can feel really overwhelming when we want to be net buyers of assets throughout our lives. And we want to be, you know, owning equity in profitable companies that go up and up to the right over a long period of time. And whenever we have all the noise around us, it makes it hard to focus on those one or two big opportunities every year. But I think that's the big takeaway from this question, Chris, which is like, as investors, we can't always have that shiny ball syndrome where a squirrel is looking around what's next, what's next.

Starting point is 00:28:42 Sometimes it's, yeah, turns out hymns and hers was a great idea and the stock is up 400% in the last 12 months. Or turns out Palantir was a great idea and the stock is up whatever it is. right? So it's like you don't always have to be chasing the next thing. Sometimes the next thing is already inside of your portfolio because you bought it only three months ago. Yeah, 100%. I love it because even in our private live last night, Chris, people were asking after the big run-up of Palantir in the last few days, they were already asking what is the next Palantir? And that question migrated from what is the next Navidia. So people have these short attention spans and don't

Starting point is 00:29:18 understand what if Palantir still has another 80 or 100% to run in the next two years? Why do you need to find something else? You're already going to beat all the benchmarks by a mile. So I love that thought process and just a really, really good way to cover that. Chris and you, Austin. So I want to go into my next question and that is we're in a period of shifting market dynamics. You know, we have the new administration, economic uncertainty. You know, we have all of these evolving policies. And we've talked a little bit about categories. that you broadly focus on in the market. But can you share any macro trends or potentially even policy changes

Starting point is 00:29:55 that you're watching the most closely in 2025? I'm thinking about trade policy quite a lot right now. So we invest internationally in kind of trying to think about which countries, one, kind of are on the ins and outs relative to American trade policy, but also just as the world goes from not just a free trade, system, but kind of a free trade international system where trading routes were safe, where tariffs were low. The advantage of being relatively in close and defensible proximity of trading partners, I think, goes up a lot. So I've been very interested in countries like Poland

Starting point is 00:30:40 in Europe, Argentina and Latin America, Mexico, and North America, where there can replicate different parts of a historical trading pattern in ways that are more defensible that are closer and that could act without China. Interesting. I mean, you're hitting the nail right on the head. Obviously, last week we saw the crazy volatility after the tariffs were announced and then, like, put on pause. And so do you think that tariffs are going to continue to be a major theme of 2025, one of those, you know, headlines that's going to cause a lot of volatility for the markets? It may cause a lot of volatility. I think that was one of the world's shortest trade wars over at. I think that there's some serious issue regarding China. I feel like

Starting point is 00:31:26 the issues regarding Mexico and Canada are a little less serious and a little bit more easily dealt with. I have some close friends that are kind of Trump whisperers in the administration who are very, very sophisticated on economics and very, very good at managing their relationships within the administration. And I think that it was pretty clear, pretty early on that Fendell specifically with the drug issues with Mexico and Canada, the border issues, some of which, frankly, kind of was on offer to us anyways. The tariff topic was a kind of dramatic way, a flourish with which to approach those.

Starting point is 00:32:11 So I think with our very close allies that are on our border. that that's going to be maybe less than it first appeared, China might end up being more than at first appeared. You know, we don't have the same kind of easily deliverable things that Trump wants from China that we did from Mexico and Canada. That makes a lot of sense. And I guess my last question for you, Chris, for this episode, you know, it's something I struggle with a lot, which is letting go of losing investments. I have lost tens of thousands of dollars in the stock market by holding on to something for longer than I should have or just being on the wrong side of a trade. I would imagine as a hedge fund manager, you've probably lost as much with more zeros on it,

Starting point is 00:32:57 hundreds of thousands, if not millions, right? So I'm curious, as someone who's trading with so much size or investing with so much size on a daily, weekly, monthly basis, what maybe framework do you follow as it relates to letting go of losing trades? Well, I think of my job on the research, side is identifying price anomalies, discrepancies, places where the price and the value have diverged the most. When they converge, my job's done. When the price is normal, something might be a wonderful investment, but kind of godspeed, I hope people do well. But when my thesis is played out, I'm done. Most of my exits are private market exits, not public. So if you get bought for cash, They take your stock and they send you what's a profit, but also simplification, also liquidity.

Starting point is 00:33:53 But in a disaster, if you're on the equity that goes to zero, you're done as well. And so it's incredibly important to make high quality decisions. It's incredibly important to understand the right dynamics. So you don't want to ever lose more money than the downside is. You could have a wonderful investment. You think, oh, the downside's zero. And so you size it accordingly and you structure it so that you may have. a bad day, but you're not risking a bad week or a bad month over being wrong. I'm set up so

Starting point is 00:34:22 I can be wrong dozens and dozens and dozens of times a year that could be a spectacular year on a net basis. But I would think I want to be set up so that I can find big targets and not have anything based on my own precision. You know, nothing to the right of the decimal point is ever going to, you know, it'd be nerve-wracking if I was a design. safety programs on a nuclear facility and I'm kind of blase about right at the decibel point, but I'm not an engineer. I'm talking about the future and stocks. So these are things that you should only want to do if the crudest assumptions make it a great idea in terms of expected value. So if it collapses, it collapses, if it is a triumph, it's a triumph,

Starting point is 00:35:08 but either way, the value and the price converge again. Now, Price alone can never let you go because something might get cut in half, but it really should have only been down 10% or maybe it gets cut in half and it should have been down 90%. So price alone is always incomplete. I've never been able to come up with some trading gimmick that works for me only based on price. This is like, well, why did that happen? It could have been for a great reason or a terrible reason. But what gets me really interested is when something is superficially ugly but beautiful beneath the surface or superficially a beautiful but re-insid beneath the surface. A lot of times the two line up. I mean, it's just very approximately in a hundred times, 90 times the price will look about right. And the other 10 times the price looks wrong. But because nine of those times I'm wrong and I'm missing something. And one of those times I'm right and everybody else is wrong. And just need to make sure you got a lot of chips on the table that one out of 100 times. Well, it also seems like something that you think is really important is like the sizing, right? Robert and I talk.

Starting point is 00:36:16 about like portfolio weightings often and we want the vast majority of our portfolios to be invested into the blue chip ETFs and index funds as we are passively investing in American capitalism like the S&P 500 and the NASDAQ 100 and things like that and we believe our listeners should do this thing they should have the vast majority of their wealth in these sort of just wealth building machines but to that point sometimes like you know Robert and I will say hey we really like the single stock idea or we really like Bitcoin or something else, but we're only going to give it a 3% weighting of our portfolio. So in case we're wrong, it's not going to blow up our investment account and go to zero. And our investment accounts only go down by

Starting point is 00:36:58 3% because of us being wrong. And so it seems to me like what you're saying is the most important way to approach a losing investment is from day one understanding how much allocation to even give it when you're making that investment. So if it does lose, you didn't lose. You didn't lose the farm, you lost a couple of chickens and maybe the eggs that came out of them. A hundred percent. A hundred percent. If this is something you're really good at and you love, then great. But the vast majority of people could be only passive, could be only the, not only shift most,

Starting point is 00:37:28 maybe you should have all of it in passive exposures, look at how they've done historically and say, oh, none of your consumption aspirations or expectations should ever be based on doing better than the market's done historically. If you can outperform, yay for you, that should be upside. That shouldn't be something that you build your life around. Now, speaking of passive exposure to index funds, before we ask Chris our next question, let's talk about NEOS investments. Because NEOS investments just launched a new addition to their high-income ETF lineup that provides exposure to the 2000 small-cap stocks that make up the Russell 2000 index, while aiming to provide tax-efficient monthly income to their investors.

Starting point is 00:38:11 Their ETFs may be especially interesting for investors looking to generate passive income inside of their existing portfolio. And as you've probably heard us mentioned recently, small cap stocks have historically performed well when the Fed starts cutting rates after a period of high interest rates. So if you're looking to add passive income focused ETFs to your portfolio, especially as the Federal Reserve may continue cutting interest rates in the coming months, consider learning more about Nios ETFs at NiosF funds.com. And as with all investments, investors should carefully consider their investment objectives, risks, charges, and expenses of Nios Exchange traded funds before investing. To obtain a prospectus containing this and other important information, please visit neosfunds.com and please read the prospectus carefully before you invest.

Starting point is 00:39:01 An investment in NEOCTFs involves risk, including the possible loss of principle. The equity securities purchased by the funds may involve large price swings and the potential for loss. Past performance is no guarantee of future results. All right, let's now jump into our next question with Chris. So let me piggyback this real quick. This brings up an interesting notion. So I want this for Chris specifically because I know what Austin's going to say, what do you think the proper allocation is for a big idea that you're hyper focused on?

Starting point is 00:39:31 What is a max of your portfolio as a percentage? that you should be hyper-focused on, because I see it all the time. You know, someone, we do a call-out and we say, we think that in two years, Navitya is going to be up 300%. Someone puts in $1,000. They ride it all the way up to 300%, but they never added to the position along the way to really capitalize on the winners. So do you have a specific percentage that for your big ideas that you're like,

Starting point is 00:39:58 this is really, really important to me in this portfolio? What is that percentage maximum? It's a very hard question for me to answer. Maybe the answer is how big was Twitter because you said that was your biggest position. Yeah, there you go. I always think about position sizing in terms of my original invested capital at risk with my downside assumptions. And sometimes they're quite robust, right? So sometimes Twitter was tricky in terms of sizing.

Starting point is 00:40:26 So that was well into the double digits position for us. That was an enormous position where I was extremely uncomfortable with the downside too. So that was not the asterisk, oh, I could have a 50% position. I could have more than 100% position, but I'm still not going to risk more than a, you call it 3% of original investor capital where you have some kind of structural protection. So you nominally are putting in huge amounts of money, but it's not really huge amounts of risk. So I think you pick an amount relative to your downside and have very careful downside assumptions. It lets you be much more dynamic when you're buying it a price close to that downside.

Starting point is 00:41:04 As I get older and older, almost all of my denominator is really my portfolio. When you're 20 and your denominator is your portfolio and your future earning stream, I think it's fine to have two or three positions. You could have a 50% position or a 30% position that's fine. It's not a 30% position of your lifetime. It could be a less than 1% position of the denominator that matters. When you're 20, if you don't have the wife and kids, and you are smart and have a lucrative career ahead.

Starting point is 00:41:38 I think it's a great call out, right? Because, gosh, I remember back in 2017 was that big bull run in Bitcoin when I went to like 1,000 to 20,000 or something. And, you know, I was way more allocated to cryptocurrency as a college student than I should have been. And I also wrote it all the way back down, which is embarrassingly frustrating. But I told my dad that and he's like, Austin, you're 22 years old, 23 years old. you have the rest of your life to make this money back, right? So I think like having that is an interesting sort of mindset when it comes to positioning.

Starting point is 00:42:10 With that being said, though, I will be hard pressed to put more than 3 or 4% of my entire portfolio in a single idea or a single company. That's just not my risk appetite. But Chris, thank you so much, man, for joining us and walking everyone through sort of what merger arbitrage is and really explaining the difference between sort of these binary events and and that there's more ways to make money in the stock market than just investing into a company's management team or thinking that, you know, Microsoft's going to continue to do this AI stuff, therefore my dividend will go up or whatever, right?

Starting point is 00:42:43 There's a lot of different ways as a hedge fund manager that you can make money in the stock market than just investing in stocks. And I think that, to Robert's point, thinking deeper and reading between the lines, I hope this episode does that for people. I hope it allows them to open up their third eye with investing and really understand. that, you know, there's a lot out there that's not just buying stocks and ETFs. Yeah, and I think it's really important. This was an incredible episode, and I hope everyone watches it two or three times because,

Starting point is 00:43:13 Chris, you crushed it. And it's very important because, and it's been top of mind for me a lot lately, is getting people to do exactly that. Go down the damn rabbit hole. Understand what's really behind the curtain because that is where all the money is. So many people approach us, Chris, every single week and say, how are you guys so good at this? How are you always ahead of these secular growth trends?

Starting point is 00:43:35 And I always just tell them, we don't have to be first. We just have to be ahead of the masses and you can make a ton of money and really build wealth. So I really appreciate someone like you that has carved out this niche of deep thinking, reading between the lines, and understanding how to do this M&A arbitrage to the max to where you can really find these big nuggets of wealth and gains in these deals. So what an incredible episode. Thank you for joining us. It really means a lot to us.

Starting point is 00:44:05 Thank you, Robert. Thank you, Austin. Robert, that conversation blew my mind. I feel like every time I talk to this man, I'm learning something new. And I'm just so glad that we're able to find these hedge fund managers that manage a lot of money and are making some of the most informed and out-of-the-box investment strategies and decisions and connect them with our audience. I think that's what's so important about this podcast.

Starting point is 00:44:27 If it is, you know, Jay Jacobs from BlackRock, or if it's, as Scott Lynn from Masterworks or Christa Muth from Rangley Capital, we're able to find like the industry experts, put them on the show, and talk directly to our audience, now 70, 80,000 people strong. I love it because he even mentioned as a fan of the show that he really enjoys how we break down complex topics and make it easy for people to understand and be able to execute on those topics. So it was a wonderful, wonderful episode.

Starting point is 00:45:00 And I love it too because instead of us taking the cookie cutter approach to having guests where we just find people with big followings or maybe that people recognize, we go for the smartest, brightest people in each of their sectors of the financial and business world. And we bring them in and really, really break it down for people. And that is what I enjoy most when we have guests on the show. So thank you all for joining, following along each and every week and always sharing the podcast with others that may need a little help. whether it's their mindset, their financial journey, or their business, and bringing them into the mix here with the Rich Habits podcast and the Rich Habits Network. Also, Robert, last week's episode with Sahil Bloom was a massive success. We got so much positive feedback.

Starting point is 00:45:45 We got 18 comments on Spotify on that episode. So I'm curious. I want to challenge our listeners. Can you comment more than 18 comments on Spotify on this episode? What you learned, what you thought was interesting, what might have confused you. It doesn't matter. Throw us a comment. We're trying to get our comment action up on Spotify a little bit here in 2025.

Starting point is 00:46:06 And that's important because we get back to all the comments. I'm always in there replying. Roberts in their replying. We're having a good time with you guys over there on Spotify. So join us on Spotify if you haven't already. Subscribe to our podcast. Leave us a five-star review. And most importantly, leave us a comment letting us know what you think.

Starting point is 00:46:21 With that being said, everyone, thank you so much for joining us on this week's episode of the Rich Habits Podcast and have a great start to your week.

Rich Habits Podcast - 104: Exposing Unknown Hedge Fund Strategies w/ Chris DeMuth

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