value investing conferences

By Vitaliy Katsenelson author of The Little Book of Sideways Markets, and Active Value Investing, and owner of

VALUEx Vail 2011 is over.  I already miss these three days.  I got the idea to put together VALUEx Vail after I attended VALUEx in Klosters (a little ski resort town in Switzerland, located on the other – the “value” – side of the mountain from Davos) in February this year.  Since I live only two hours away from a magnificent (and much improved) replica of Switzerland – Vail – choosing the location for the conference was a no-brainer.  At the core of VALUEx is that there are no star speakers, and all the content (i.e. presentations) of the conference are participant-generated.

Here are pictures from the conference.

Once I started to download my thoughts from the conference onto paper, I couldn’t stop, and my writeup got to be eight pages long.  I’ll break it up into two emails.

Every day (Wednesday through Friday) we met at 5 pm at a different restaurant, where for two hours we listened to six 15-minute presentations, with 5- to 10-minute discussions following each.  From 7 to 8 pm we had dinner, and from 8 till the restaurants kicked us out (usually around 10) we had a “dessert lecturer” and a lively discussion.  All of us would gather around and the “dessert lecturer” would discuss a topic and answer questions.  I’ve attended a lot of conferences, and I’ve learned that the goal is not to get an “actionable” investment idea, but to be stimulated by new thinking and the rethinking of old ideas.

This is how Paul Brophy, one of the participants, described this conference:

“I think I was expecting something more like the standard get together that focuses on everyone providing an idea or two.  Instead, it was just as you said, a place where smart, interesting people talk about markets, politics, families, and yes, a stock pick or two over breakfast, late-night drinks, and waiting for the next zip line ride.”

The first day’s lecturer was Sizhao Yang (he goes by Zao).  Zao is not a traditional value investor, in fact he openly admits that he is still learning about value investing; it is more like a hobby for him.  However, in his non-hobby time he started the company that created Farmville, one of the popular games on Facebook, with over hundred million users, which he later sold to Zynga.  Given his experience, I asked Zao to speak about social networks.  I tremendously underestimated the breadth of Zao’s knowledge, which extends far beyond social networks.  His granular understanding of technology companies was breathtaking.  Here are some thoughts from Zao’s talk.  Most are his, and some are mine, triggered by our discussion.

Groupon will be facing an uphill fight in its business, not just from Google but more importantly from Facebook.  A majority of Groupon customers came from Groupon’s advertisements on Facebook – the Facebook users.  Now Facebook, which has much more granular information about its users (e.g., location, education, likes/dislikes, etc.), will be going after Groupon’s customers.

Groupon may also have another problem: the user experience is poor because Groupon  is “too successful” at bringing new clients to the merchants.  This business model suffers from the “be careful what you wish for” curse.  Merchants are overwhelmed with the new demand and thus the quality of service declines.  My wife bought a service on Groupon that requires six appointments.  She went once and was told she had to wait three months until the next appointment because, thanks to Groupon, the service provider was overbooked.  It seems that my family will not be using Groupon or that service provider again.

Zao mentioned that bargain-hunting customers often don’t turn into repeat customers, and therefore, though the cost of acquisition of the customer may not be high, the total value of the customer (purchases over lifetime) is low.

Facebook and gaming. Most people access Facebook during work.  Social games (e.g. Farmville) are predominantly played by women.  These games lend themselves perfectly to the Facebook (play at work) environment, because you need to “check” on them a few times a day – unlike traditional games they don’t require continuous, uninterrupted play and you don’t need to install 10-gigabyte, graphic-intensive software on your employer’s computer.  For the above-mentioned reasons, social networking games (like Farmville) don’t usually compete with the likes of World of Warcraft or Call of Duty, which are predominantly played by men.

“Something else”. This brings up a very interesting point.  In the past the impact of the internet on “analog” businesses such as newspapers was fairly symmetric.  For instance, newspaper classified sections were losing customers to,, etc.  The average user spends 30-plus minutes a day on Facebook – that is the time they don’t do something else.  So the first casualty of Facebook (the “something else”) has been daytime soap operas.  It is very possible that viewership had been on the decline for a while, but women spending more time on Facebook was likely the last nail in the soap opera coffin.  As investors, we need to be aware of asymmetrical threats that are posed by technological innovation.

About asymmetric threats. I’ve been noodling lately on whether the internet distractive force will spill beyond music and book retailers.  Today’s smart phones allow you to scan a barcode instantly at a store and in an instant get the comparative prices of local and online retailers.  While shopping for a projector for the conference at Micro Center, a local retailer, using RedLaser, a free app on iPhone, I found that Best Buy online (which will deliver to the store for free) had it $50 cheaper.  All I had to do was show the screen of my iPhone to the sales clerk and the price was matched.

Best Buy stock looks statistically cheap, trading at about 10x earnings; but I keep wondering if its business model will need to change dramatically to adjust to the disruptive properties of instant comparison shopping, which puts it head to head with online-only retailers.

Gamestop is another stock I have watched from afar.  It seems only logical that in the future more and more PC and console games will be downloaded, not bought on DVDs.  Therefore, no DVDs to buy, no games to trade, and no reason to visit the store.

Some companies have done a good job adjusting to disruptive technologies; Netflix has done a great job, Blockbuster not so much.  Or think how brilliant Jeff Bezos of Amazon was willing to undercut their core book business by coming out with Kindle.  It comes down to management and their willingness to disrupt their current (profitable) business for the future but not yet profitable opportunity.

DNA. When Zao talked about technology companies he emphasized the importance of corporate DNA, which is usually implanted by the company’s founders.  The more creative and more dynamic is the business, the more important DNA becomes.

Research in Motion (RIMM) has engineering DNA, and it has done a great job making highly sophisticated, very secure smart-phones for the business market.  Apple has design DNA and thus has created terrific iPhones for

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