How to attend the Value Investing Congress

By Felix Salmon
October 12, 2010
Value Investing Congress today and tomorrow.

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It’s the Value Investing Congress today and tomorrow, I’m not sure whether I’m going to be able to make it at all, but you can be sure that lots of financial journalists will be filing breathless reports about various celebrity hedge fund managers’ investment ideas, and that the actual delegates at the conference will be even more excited about the prospect of getting to be in the same room as these multimillionaire investment stars.

It’s a highly artificial environment, where fund managers get to present their best case for why a given stock is undervalued. And if there’s one lesson to learn from going to this event, it’s that successful fund managers are also highly-accomplished salesmen. They’re fantastic at telling stories, and by the time their presentation is over, you’re all but phoning up your broker on the spot, telling him to buy as much as he possibly can.

It’s an amazing place for hedge fund managers to find and impress potential new investors in their funds: it’s that rare opportunity, for them, to speak to a large audience which has money to burn (tickets are $4,395 apiece) and which clearly is predisposed to like their ideas — all in a distraction-free environment where nobody is going to challenge their analysis with a bear case or otherwise interfere with the message being sent.

If you’re attending the Congress, then, I’d urge that you be highly conscious of your own human biases. You’ve spent all that money — now you want to get value from it, right? You’re actively looking for stocks to invest in, and managers to invest with. Which means that the bar has to be set very, very high. Indeed, I’d argue that the bar should be set infinitely high — that the best thing to do is simply sit back, take note of the stocks that everybody is talking about, and then rank them. Make a list with the ideas and managers you found most compelling at the top, and the ones you found least compelling at the bottom. Then, do nothing for one year, or whatever time horizon you think is sensible to judge the managers on. If three years is better, then use that.

At the end of that period of time, look to see if there’s any correlation at all between the ideas you found most compelling, on the one hand, and the trades and managers which ended up making the most money, on the other.

What you’re doing here is not judging fund managers — rather, you’re judging your own ability to judge fund managers. After all, there’s no point in taking someone else’s investment advice if you exhibit demonstrably poor judgment in working out whose advice to take.

Ideally, you should repeat this exercise a few different times — maybe at successive Value Investing Congresses, maybe at other such events. Eventually, you’ll get a pretty good idea of your own ability to discern someone else’s ability to generate alpha. Or, to put it another way, you’ll work out whether you’re capable of distinguishing genuinely good stock-picking ideas from genuinely good salesmanship. I’m pretty sure that I can’t do it, and as a result, no matter how rich I was, it would be a waste of money for me to spend $4,395 attending this event. If you think you’re better than me on that front, then feel free to attend: I wish you all the best of fortune. But it’s almost certainly a good idea to test that hypothesis first.

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