LifeGame

Sony Games, Vita and the Future

http://kotaku.com/5933894/ Interesting interview. I understand that some things are cyclical like fashion and Italian food. I used to love text adventures and $.25 arcade games.but i wouldn't bet my billion dollar company on it. If I ask my nieces and nephews if they want a Vita or an iPad 3 I'm pretty confident I know the answer and it's not "it's a Sony." I think Sony Games has a bright future after they get clobbered for a while but I don't think it's in handhelds and I'm skeptical it's the PS4 unless the PS4 becomes a complete home entertainment appliance of some kind. Even if he's right that freemium and social are a fad... mobile and tablets are not. Some things go in cycles others go to the graveyard... and i think the graveyard has more gravity here.

Why I bought shares in Citibank, Zynga and RadioShack, avoided Apple...

READ THE NEWS, BUY APPLE.

I know. Apple (AAPL) is the smart play. Everyone owns Apple stock and everyone is getting rich. It's the talk of all the parties, there's lines out the door, the stores are packed 24/7. There are even secret APPL stock investment clubs that trade ONLY AAPL. I love Apple, own their products and believe they are one of the best companies and brands in the world - and will stay that way for to foreseeable future.They are strong and will likely get stronger. Conclusion: not buying it.

 

GIVE ME YOUR TIRED, YOUR POOR, YOUR HUDDLED MASSES

I prefer high risk nightmare dogs like Citibank, Zynga and RadioShack. Companies that I think are suffering badly in many different ways and may not even be around in 12 months. Companies that no one wants, everyone has sold and people are embarrassed to have held onto. Why would I do such a stupid thing?

 

RULES OF ENGAGEMENT

Well... here's why. My investment philosophy is like this. The whole point of buying a stock is to make money... how much? MORE than you could if you just stuck your cash in an S&P index fund and forgot about it. MOST professional institutional investors are not able to achieve this. I suspect the numbers for amateur investors is even worse (I include myself in this group). So, it's not about picking winners, it's about making money... and that requires you to think about investment as a probability game. I believe that, generally, it's more likely for a hated, forgotten and despised loser with some advantage to defy it's low expectations than a huge, public, well loved winner to beat it's ever increasing expectations.

And beating expectations is much of the battle. I'm not expecting Zynga to "beat" Apple, they don't have to... they just have to beat what people think they can achieve... and people don't think they can achieve much. But why do they think that? Does this opinion line up with the company's value and prospects relative to the odds of achieving them. This is the question that valuation needs to answer. How much is something REALLY worth and when people think it's worth less than that for irrational reasons... that's a place where you can find a potential advantage.

This creates a very contrarian philosophy. Not because I decided "I am a contrarian because that sounds cool" but rather, I'm naturally drawn to things that people run from and naturally run from things that people are drawn to. Since I resisted the urge to buy Apple,it's gone up about 40%... so, yeah, that was a "bad call." But I also didn't buy internet stocks in the 90s and avoided buying a house in the 2000s for the same reason. So I figure that makes me even :).

I STILL think Apple it's headed for a fall. How much? I have no idea. I just can't make the numbers work for Apple. It's impossible to maintain the kind of growth investors demand to keep the stock going - there's just not enough consumers, and it's just so easy for someone to release a super cheap iPad and suck away a whole bunch of market share before I'll know it happened. I suck at timing and so I'll cave at their peak and then wait too long for the recovery. I can FEEL the urge to buy Apple now, just talking about it.

Suddenly they'll miss earnings and go into free fall. Could take a quarter, could be 5 more years. Might never happen. Just my opinion.

 

DIDN'T YOU KNOW BANKS ARE SCREWED AND EVIL?

Now when I bought Citibank last year. Bank stocks were PUMMELED. Banks were evil. Banks were paying huge bonuses and had no clear reason for doing so. They were "stuffed to the gills" in bad loans. "No one knows" how deep the hole is, was in every newspaper. So people were dumping them like crazy. Before the 10 for 1 split Citi was trading at like $2-$3/share... down from about $60 in 2008. Of course, that $60 was built on lots of bad loans which they now need to absorb, and by they I mean us :). But at $2-$3/share (before split, it's around $38 now) the cash value and property holdings of the bank is almost worth more than that. Citibank has LOTS of customers... you are probably one of them.

Also, Citi is big, huge, $100 billion market cap, if they go down... OMG... it's financial armageddon part 2... they are TOO big I think. Too big to fail you might say. The odds of the Government allowing them to go totally down the drain are very small, I just don't see it.

Do I believe C is a solid company? Not particularly. Do I think that they have some kind of amazing business vision that will drive the stock back up to $60? Absolutely not. But I also think the likelihood that banking is "going away" any time soon is very small; and I think the likelihood that Citibank is going away is also small. I have a lot of faith that our government will spend whatever it takes to save them, should the need arise.  I have faith that our bankers will figure out more creative ways to stuff themselves with money... they did it before, they'll do it again.

Thus, the odds of Citibank and banking in general recovering at some point in the future to some degree above their current dog price, seems very good. When? No idea... could be years. How much? Again, no idea. But I believe more than the S&P 500 over time - hence my buy.

 

UHH... ISN'T ZYNGA GETTING SLAUGHTERED? THEY DROPPED 15% THE OTHER DAY... YOU'RE A MORON...

Perhaps, but Zynga is a different story. Governments have no problem letting tech companies die :). However, Zynga's cash reserves alone almost make it worth its $2-$3 price tag. Also, I believe that Zynga has figured out where it wants to be: mobile and gambling... and is placing lots of small side bets on other things via acquisitions and internal development. Since their questionable purchase of OMGPop, I think they've cooled down a bit.

Do I believe they are a great company with awesome vision? Not necessarily. Do I have faith in "senior management?" Not particularly. But I don't think it's horrible either - plus I'm not convinced that senior management is a huge factor in a lot of these falls and turnarounds. I do believe that they have a reasonable chance of turning around by using their stacks of money combined with streamlining the company and betting on clear goals. Also, I think the chances of on-line poker becoming legal are decent. When? No idea. But when that happens, Zynga is well positioned for a big win if it does.

Besides that, a company that has a market cap of 1.8 billion with 1.1 billion cash in the bank is attractive for acquisition. Of course, Mark Pincus owns a majority of voting shares so any buyer has to convince him, which might be difficult... so perhaps that war chest is less attractive. But if someone offered $5-$8 a share, it might be worth it. If I were a major Casino holding company I might throw some of my money at them right now.

Additionally, I have not written Zynga off as much as most investors. As little faith as I may have, I believe the hatred of the stock and management is excessive compared with the company's performance relative to the industry. Gaming companies aren't exactly setting the world on fire in the last few years.

I think the MAJOR reason that Zynga is suffering is because the flight from Web to Mobile is faster and more aggressive than anyone thought. It's not like other companies did this amazing job here and Zynga somehow screwed up... they are just bigger and more bought in to Facebook so their loss is far more visible. They IPOed right into a shitstorm from a timing perspective. I think they have a chance, and in many ways, more of a chance because they have lots of customers and lots of cash. Probability of recovery seems decent, cost of risk is very low. I believe that online poker is a potential industry.

Hated company with tons of money and employees fleeing faster than investors? I'm in.

 

RADIOSHACK... WOW. REALLY? I MEAN REALLY? THAT'S JUST STUPID.

Then there's RadioShack. OMG, I'm an idiot for buying that loser. RadioSchak? Really??? NO ONE goes there. Next year there will likely not BE a RadioShack. Best Buy is killing them in retail, they have no online presence to speak of, they have no strong strategy. Even their commercials suck. They have awkward, small, strip mall stores that no one goes to except that creepy dude that still builds robots in his mom's basement. Oh yeah, they are stuffed full of debt so I don't even have the "tons of cash" argument.

However, they do have steady sales (With dropping margins), distribution, and a good supply chain. They also have some brand recognition (thought that's fading). What's that worth? Probably not much. Will they make it? Probably not. I suspect there are very good odds they will go under next year. To save them would take some kind of miricle... what I like to call a "low probability event." However, if that event happens, I suspect it won't have a small impact. RSH is unlikely to grow by 5%-10%, it's going to disappear or skyrocket I believe and, I suspect disappearing is the much more likely scenario.

In the mean time they can bump along the bottom of the ocean for a few years. Maybe someone will acquire them. Maybe they will find a new niche by becoming a glorified smart phone/tablet reseller. Maybe geeks buying circuitboards will come back. Who knows? It's super risky. However, the cost of that risk is very low right now.

A total loser with few prospects that no one loves? I love a hail mary pass in the 4th. Buy baby!

 

CHANCE OF SUN 10%, BUT IT'LL BE SO NICE IF IT IS...

In all cases, I think the liklihood of these 3 companies outperforming the S&P in the future because of some unexpected event is greater than the probability of high visibility, sexy stocks you can talk about owning at parties will continue beat the S&P. And that's the key... beating the S&P. Most of my investment is in indexed S&P mutual funds because I suck at beating averages, just like most investors.

For me C, ZNGA and RSH represent a fun experiment in constitution and probability. Telling people "yup, I just loaded up on Radio Shack" when they are bragging about 30% returns on APPL is tough. It's even tougher when you have to tell people "Yea, I think they suck and are going to go under next year." Now you just look stupid - and maybe I am. But investing isn't about picking winners at a frequency it's about growing value faster than indexes; and to do that you need to really understand the difference between probability and frequency. I think people are underestimating the probability of these dog stocks coming back, and I am willing to bet on it.

OPTIONS, OPTIONS, OPTIONS

I don't like buying options because they are wasting assets with a fixed timeline. Also, they are confusing and math is hard. So, for me, buying hated, nearly worthless stocks that will probably disappear but might rocket back is a way of buying options while avoiding the leverage and fixed timeline that I don't like. I can own RSH until they completely disappear. It's a bit of odd rationale, but hey, I sleep better at night! 

MORE BAD IDEAS!

Other great investment ideas:

Nokia (NOK): Totally screwed- Apple and Samsung are destroying them. Lumia + Windows... long shot. Good luck with that. Glad I don't live in sweden (EDIT: Oops, Finland. Sweden is where the hot blondes are... Finland is where they make phones no one wants anymore... sorry Sweden, my bad.)

Research in Motion (RIMM): Done. No one buys Blackberries anymore. New OS? Who cares. You had your day, but it was back in 2008.

American Apparel(APP): Who? Yeah. Exactly. Look it up... it's ugly.

Happy investing :).