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Rangeley Capital December 2012 Investment Report

Rangeley Capital December 2012 Investment Report

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Published by Chris DeMuth Jr

Rangeley Capital manages a value-oriented, event driven strategy that seeks to exploit durable inefficiencies in the financial markets and invest with a wide margin of safety. We invest in businesses that trade at an attractive price with respect to intrinsic value. We look to corporate events (i.e. mergers, spin-offs, restructurings, etc.) to unlock value for shareholders regardless of the direction of the markets. Our firm leverages the investment team’s complementary skills and experience through a cohesive process designed to combine fundamental valuation analysis with in-depth corporate event research. Critical to our strategy is a focus on identifying structural inefficiencies in the market that cause the price and value of a security to diverge, where our research gives us a meaningful advantage.

Rangeley Capital manages a value-oriented, event driven strategy that seeks to exploit durable inefficiencies in the financial markets and invest with a wide margin of safety. We invest in businesses that trade at an attractive price with respect to intrinsic value. We look to corporate events (i.e. mergers, spin-offs, restructurings, etc.) to unlock value for shareholders regardless of the direction of the markets. Our firm leverages the investment team’s complementary skills and experience through a cohesive process designed to combine fundamental valuation analysis with in-depth corporate event research. Critical to our strategy is a focus on identifying structural inefficiencies in the market that cause the price and value of a security to diverge, where our research gives us a meaningful advantage.

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Categories:Business/Law
Published by: Chris DeMuth Jr on Jan 16, 2013
Copyright:Attribution Non-commercial

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Cumulative Return118.0%8.6%-6.7%Annualized Return16.9%1.7%-1.4%Correlation to S&P 5000.651.00 0.75Best 12-Month Period145.9%53.6%16.6%Worst 12-Month Period-30.6%-43.3%-22.1%
RangeleyCapital(net of fees)EventHedgeFund IndexS&P 500TotalReturn
December 2012 Investment Report
Rangeley Capital performance is shown net of 1.5% management fee and 20% incentive fee. Past results are no guarantee of future results and no representation is made that an investor will or is likely to achieve results similar to those shown. Individual investor performance may vary from the overall fund return due to timing of capital activity and other reasons.
Strategy OverviewGrowth of $10,000 Investment
(Since Jan 2008)
Cumulative Return
(Since Jan 2008)
Rangeley Capital manages a value-oriented, event driven strategy that seeks to exploit durable inefficiencies in the financial markets and investwith a wide margin of safety. We invest in businesses that trade at an attractive price with respect to intrinsic value. We look to corporate events(i.e. mergers, spin-offs, restructurings, etc.) to unlock value for shareholders regardless of the direction of the markets. Our firm leverages theinvestment team’s complementary skills and experience through a cohesive process designed to combine fundamental valuation analysis within-depth corporate event research. Critical to our strategy is a focus on identifying structural inefficiencies in the market that cause the price andvalue of a security to diverge, where our research gives us a meaningful advantage.
Monthly Returns
(net of fees)
Performance Statistics
(Since Jan 2008)
Return vs. Risk
(Since Jan 2008)
* S&P 500 is a total return index, including dividends.** Event Driven Hedge Fund Index is sourced from Hedge Fund Research, Inc.
Sortino Ratio
measures the return of an investment per unit ofdownside risk. A higher ratio indicates a better risk/return tradeoff.
-0.100.10.20.30.4
Rangeley Capital(net of fees)S&P 500(Incl. dividends)Event HedgeFund Index
   S   o   r   t   i   n   o   R   a   t   i   o
$-$5,000$10,000$15,000$20,000$25,000
Rangeley Capital (net of fees)S&P 500 Total ReturnEvent Hedge Fund Index
-20%0%20%40%60%80%100%120%140%Event HedgeFund IndexS&P 500(Incl. dividends)Rangeley Capital(net of fees)
YearJanFebMarAprMayJunJulAugSepOctNovDec2012
0.5%2.0%0.8%-0.4%-1.7%2.1%0.2%5.9%2.8%-1.6%4.0%2.6%18.2%16.0%6.0%
2011
2.9%1.3%1.3%11.9%3.3%-2.0%-4.5%-9.1%-7.4%7.1%-2.2%-0.7%0.0%2.1%-4.9%
2010
3.4%2.9%2.2%4.1%-4.1%-2.5%6.3%-1.4%3.5%3.3%-0.6%6.0%24.7%15.1%2.0%
2009
9.2%-23.5%-8.1%20.9%18.2%5.5%13.8%5.3%11.0%-2.2%7.0%7.7%73.6%26.5%16.6%
2008
-1.6%-1.5%-2.9%7.3%1.4%-5.3%3.1%0.9%-6.7%-8.2%-6.3%5.1%-14.8%-37.0%-22.1%
RangeleyEvent HedgeIndex**S&P 500*Annual Return
 
Our investment partnership celebrated its fifth year in business on December 31, 2012. The fundreturned 18.2% net of fees in 2012 compared to 16.0% for the S&P 500 (including dividends).When we began this partnership 5 years ago, we set out with the long-term goal of generatingsuperior returns to the S&P 500 with a higher degree of safety.Since January 2008, Rangeley Capital has outperformed the S&P 500 consistently on a 1-year, 3-year and 5-year basis. Since we started, Hedge Fund Research, a global database of hedge funds,ranks Rangeley Capital among the top 5% of funds in the world.
Annualized Performance
-5%0%5%10%15%20%1-Year Return3-Year AnnualizedReturn5-Year AnnualizedReturn
Rangeley Capital (net of fees)S&P 500 (including dividends)Event Hedge Fund Index
 
2012 In Review
We would like to begin this letter by first thanking our partners. These last five years have beensome of the most challenging markets we’ve seen in our lifetime. It would have been infinitelymore difficult to accomplish these results if it were not for the long-term investment horizon of ourpartners. We also have a number of new partners this year, and we look forward to our next fiveyears together.Every few years we go back and re-read some of the letters that Warren Buffett wrote to hispartners, before he became the lovable grandfather who drinks Coke and before there was aBerkshire Hathaway as we know it. What’s fascinating about Buffett is that he does what he doestoday in large part because of structural opportunities (people bring him deals because of who heis) and structural impediments (so much capital to invest and a lack of anonymity). This makes hiscurrent decisions and style less relevant to everyone else. However, digging deeper into Buffett’spast, there are lessons that can teach us exactly how he got to where he is today.In 1969, Warren Buffett may have been tap dancing to work, but he also would have tap dancedright over anything that got in his way. He was the furthest thing from folksy: he was an arbitragespecialist. While he puts on the appearance of someone mildly befuddled by complexity, he was assophisticated as it gets at exploiting “workouts” as he called them. Workouts referred to securitieswith a specific timetable that arose from corporate activity – liquidations, acquisitions,reorganizations, spin-offs, etc. These were all publicly announced activities that could be readabout in the newspaper. Buffett’s edge wasn’t that he had better information than everyone else; itwas that he understood that in these “workouts” there was the potential for significant mispricingby the market, where the market price of the security no longer accurately reflected the true value
 
of the underlying asset. Buffett is a winning card player, and similar to how he invests, he onlyplays with an edge.What Buffett called “workouts” we call “corporate events”. We seek to find these types of opportunities where, regardless of the direction of the markets, we can buy companies for adiscount to their value and use corporate events to unlock that value.One of our largest positions for 2012 was in Dollar Thrifty (DTG). Throughout the year, we held asmall long position in DTG believing it was likely to be acquired by Hertz (HTZ) for a premium tothe market price. In late August 2012, HTZ announced publicly that it would pay $87.50 per shareto acquire DTG. DTG stock subsequently traded up to pennies from that price as investorsassumed the deal’s conclusion was imminent. Rich’s analysis of DTG’s business led us to believethat on a conservative basis, the company’s stock would be worth roughly $75 per share if the dealwere to fall apart. With an upside of pennies and a downside of over $10, this was neither safe norattractive to us anymore.
Dollar Thrifty (DTG) stock price
In October, something changed. The deal ran into trouble with its antitrust review at the FederalTrade Commission (FTC). What happened next is where we get our edge. As the merger becameless certain, investors who used leverage and held DTG stock with only pennies of upside, nowfocused on their massive potential loss if the deal did not close. Our interest was piqued becausethese investors were forced to either sell or overpay for insurance on their position irrespective of price. As a result, we had the opportunity to buy DTG stock below what the company would beworth as a standalone business with a definitive upside of $87.50 per share if the deal wentthrough, which we still thought was very likely.The FTC required that HTZ divest a number of the airport kiosks in order to calm antitrustconcerns. It was Rich’s contention that this merger was incredibly lucrative for HTZ based onDTG’s underlying value and based on the synergies between these two businesses. He believedthere was very little likelihood that HTZ’s management would pass this up because the value of DTG was far greater than the cost of losing these airport locations. Chris’ efforts on understanding

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