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Deep Thoughts from the Valuex Vail Conference

Valuex Vail is over. The three days of this investing conference, which I organize, are probably the most stimulating three days of the year for me. This year a group of roughly 40 die-hard value investors assembled in beautiful Vail, Colorado. This is not your typical, garden-variety conference. All the attendees deserve to be there. I intentionally keep the conference small, and it is an event that is not for profit but for learning. Participants have to apply to attend, they are hand-selected by yours truly, and all the content of the conference is attendee-generated. For three days Vail turns into a place where value investors come to share ideas and learn: 21 presentations over three days provide a lot of food for thought.

We only have room for one idea per two attendees and every attendee has to be willing to present (this is the cost of admission). As a producer of the conference, I get an interesting look into the stock market, because I get to pick the 21 best and most diverse ideas.

This year, as the conference was approaching and the market was hitting new highs, I heard a lot of “Here is my least bad idea.” With the present global macro backdrop, it is becoming increasingly difficult to put together a diversified portfolio of stocks that has an appropriate margin of safety.

But this is in keeping with the ethos of Valuex Vail. I don’t look at it as an “idea generation” conference — I can get ideas just from talking to my large network of value investors. Rather, the goal of the conference is to stimulate thinking, promote discussion and challenge held views. Even if I do not agree with the thesis of a presentation, as long as it makes me think about the issue, the presentation is a success.

A perfect example: two presentations on mortgage real estate investment trusts, one by Patrick Brennan, vice president and portfolio manager at Hutchinson Capital Management, and the other by Christopher Karlin, CIO of Aquitania Capital Management. Both were excellent presentations , but ironically, they made me realize how little I understand about what seem on the surface to be simple investment vehicles. Patrick and Chris talked about REITs in such great detail and brought out so many analytical data points that I realized I’d have been Warren Buffett’s proverbial “patsy at the poker game” if I had bought them without following this niche for a long time.

Another way to look at it is to think of your analysis of a company as an equation in which each force that impacts the company’s value is a variable. The more complex the equation — the more forces that affect the company’s value — the better you need to understand the company or the industry. If you find you cannot fully understand the impact of different forces or even be sure that you know what all the forces are, you will probably want to put the company on a watch list and follow it for a long time before you commit any capital to it.

Knowing your limitations is incredibly important: You cannot be good at analyzing every industry. I recently read an article by Phil Birnbaum on his Sabermetric Research blog that made a simple but brilliant point: “First, concentrate on eliminating bad decisions, not on making good decisions better.” Understanding what you don’t understand is the easiest path to avoiding bad decisions.

In the four articles to come, I’ll share my detailed thoughts from the conference. (There is no way for me to cover every presentation; therefore I’ll focus on the ones that twitched my writing muse. You can view slides from most of the presentations on contrarianedge.com .)

WWE

Matt S. is a dyed-in-the-wool value investor, but he is serving his time in equity sales at one of Wall Street’s top firms and thus asked to remain anonymous. At Valuex Vail, Matt made a very interesting case for WWE — yes, that’s World Wrestling Entertainment — and his presentation shattered the naive notion I had that it was a sport.

I had not realized the popularity of WWE. In 2012, 1.8 million people attended its live events, and it creates 6.5 hours of original programming a week. According to Matt, wrestling is one of the cheapest forms of popular entertainment, second only to a trip to the ballpark and or the movies. Matt argued that the cheapness of WWE’s stock is obfuscated by the company’s adventures (it calls them investments) in movies and reality TV. Matt believes that if the new media ventures succeed, they will be great for the company, but if they don’t, WWE’s majority owner and CEO, Vince McMahon, will kill them. McMahon’s large ownership is a net positive for the company, and everything he’s done to date has been shareholder-friendly.

Matt mentioned that the real risk to WWE is the Ultimate Fighting Championship (UFC), which is not staged. However, WWE holds almost ten times more events a year, and the cost of attendance at a WWE event is about 80 percent cheaper than that of a UFC event. Also, WWE is a much more family-friendly show than UFC. (I am curious about whether kids who watch WWE from the time they are little have a “Santa Claus” moment when their parents tell them that “wrestling” is just horribly — though you be the judge — choreographed theater.)

In the next article in this five-part series, we will look at the impact of the shale oil revolution on one manufacturer of railcars, barges and storage tanks.