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Carlo Cannell on Lessons of Extinction for Investors

J. Carlo Cannell, founder of Cannell Capital, has just completed his presentation, entitled Hydrodamalis Gigas, at the Value Investing Congress. The following are our notes from the presentation.

Extinction and Investing

  • Example #1: The Steller’s Sea Cow is known as Hydrodamalis Gigas (which is extinct) and is the title of the presentation. Before humans arrived, they ranged along the North Pacific coast. By the middle of the 18th century, they were restricted to the Bering Sea with a population of around 1,500. They were hunted for food, skins, and fat oil and went extinct in just 27 years after being discovered. How does this relate to investing? Sometimes new circumstances come into the equation or investment situation. Some species (companies) can have a more difficult time adapting to a changing environment. For example, a restaurant would have a more difficult time adapting to a slowdown in the economy than an oil/gas company.
  • Example #2: Irish Elk (Megaloceros Giganteus)—extinct. Became extinct due to maladaptive traits. How does this relate to investing? Some corporate creatures are struggling for survival. We cannot predict when the environment will change. Companies that have fallen victim to this form of extinction include: Orange 21 Inc, Bakers Footwear, Heelys, and Design Within Reach.
  • Example #3: The California Condor (Gymnogyps Californianus) – critically endangered. Carrion scavengers like the condor were taxonomically diverse in North America during the Pleistocene. The Pleistocene was a colder time with wide open grasslands, sustaining “megafauna” including mammoths, bison, and ground sloths. Condors feasted on the abundant carcasses. The combination of warmer climate and the arrival of humans drove the species to the verge of extinction. How does this relate to investing? Example American Automakers—akin to the condor?
  • Example 4: The Red Queen Effect: for an evolving system, continued development is needed in order to maintain viable fitness relative to a system it is co-evolving with. For example, faster cheetahs result in selection for faster antelopes, faster antelopes select for faster cheetahs. This relates to business through price wars. For example, Best Buy vs. Circuit City and how a reduction in prices can have a negative spiral effect. Relates this example of extinction to the semiconductor equipment industry as well.
  • Buffett avoids many of these risks by investing in companies that are more essential (i.e. razor blades). Carlo tries to observe the patterns which govern nature—and makes investments based on his conclusions. It’s easier to benefit from the laws of nature than to try and predict the next Coke.
  • Industries he finds attractive: agriculture –mentions irrigation companies (mentioned two based in Omaha) , oil/gas (equipment service companies)—mentions sandridge-quicksilver-... some precious metals and the death care industry (cremation).

About Carlo Cannell

Cannell has 16 years of experience investing in small caps and over 19 years of experience in analysis of technology companies. A graduate of Princeton, he attended New College, Oxford, and studied business at Templeton College. Mr. Cannell, a third generation investment manager, is the Managing Member of Cannell Capital LLC in Jackson, Wyoming.