Value Investing in Special Situations and Esoteric Opportunities

Key Quotes

"I kind of come from the value tradition. I'm a value investor, but more specifically, I look at special situations and event-driven opportunities, usually with some kind of policy bent."

Chris DeMuth Jr. explains that his investment approach is rooted in value investing but is more specialized. He focuses on "special situations" and "event-driven opportunities," often influenced by policy or regulatory factors, indicating a nuanced strategy beyond traditional value metrics.

"So I kind of have residual inventory, kind of topics tied to the US, and a lot of the things I think about are here. I live in the US, but equities are pretty fully valued, especially mega-cap tech. I'm shy about saying that because they looked kind of expensive to me and then more expensive and more expensive and have done really, really well through today. But I'm not eager for lots of kind of long US equity exposure."

Chris DeMuth Jr. expresses caution regarding the current US equity market, particularly mega-cap tech stocks, which he perceives as fully valued. He indicates a preference for international markets and smaller-cap companies that have not participated in the recent tech boom, suggesting a search for opportunities outside of mainstream, highly-valued US equities.

"But the thing that I would point out is a company that was and is very shareholder-facing, well-regarded, and I'd say well-understood by the market is FTAI Aviation. FTAI, no position in it, but I've followed it really carefully, and it has a, you know, $24, $25 billion market cap, so much, much bigger than Willis. But I think Willis's model, they're really changing. They've announced a number of JVs in the past month that I don't think the market's realized how much this could transform their business."

Chris DeMuth Jr. contrasts Willis Lease (WLFC) with FTAI Aviation, noting that FTAI is a larger, well-understood company in the same sector. He highlights that the market has not yet fully appreciated the transformative potential of Willis Lease's recent joint ventures (JVs), suggesting an undervaluation of WLFC due to its changing business model.

"On my way in, and this is something, you know, I've been for a very long time at this point, I'm very focused on assets. I'm very focused on paying a big at the time discount to NAV, especially where it's a plausible business, earning okay. And I'm just looking at an NAV that is that uses historical appraisals and a market where the market value had raced way ahead, and the market value is really transparent."

Chris DeMuth Jr. emphasizes his focus on net asset value (NAV) as a key metric, particularly when investing in companies trading at a significant discount to their NAV. He explains that this approach is viable when the underlying business is sound and earning a reasonable profit, and where the market value of assets is transparent and has outpaced historical appraisals.

"I would say that one of the things that I've learned is how much smallness is a corporate defense. And smallness is a corporate defense because my expenses as a shareholder don't scale down that well. I mean, I normally get my money back if I win, but the problem or situation is lawyers, advisors, and so forth. There's a kind of unitary cost to that that if I can make $100 million isn't that different than if I can make a million dollars."

Chris DeMuth Jr. identifies "smallness" as a corporate defense mechanism, explaining that the costs associated with shareholder activism do not decrease proportionally with smaller investment gains. He notes that the fixed costs for lawyers and advisors remain substantial, making it challenging to achieve a profitable outcome when dealing with smaller companies or smaller potential gains.

"I think that the least interesting drug is alcohol. I think its social acceptance is just a kind of a cultural historical artifact relative to the downside. You know, hangovers have to be one of the common most underrated symptoms of a serious health thing, right? Like if you walked up to somebody and you punched them in the face with the precise force equaling to a bad hangover the next day, you'd go to jail, and anybody would say like, of course you would, like you ruined a whole day of something."

Chris DeMuth Jr. expresses a critical view of alcohol's social acceptance, contrasting its perceived mildness with the severe health consequences of hangovers. He uses a vivid analogy to illustrate that the physical impact of a hangover, if inflicted externally, would be considered assault, suggesting that society underestimates alcohol's detrimental effects due to its cultural normalization.