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The Flaws in Your Investing Strategy

Written by Briton Ryle
Posted July 10, 2018 at 8:00PM

Do something, anything, for 20 years, and you can get a little jaded. I remember some veteran teachers I had seemed to hate kids. Heavy sighs before answering a question, no enthusiasm, just trying to get through the lesson plan for the day. 

How many times can you say "do you want fries with that" before you get a little edge in your voice? 

For me, being grumpy takes the form of being dismissive of a stock or trend or whatever, making a quick judgment based on my assumptions. 

I've seen a lot in 20 years. The internet bubble. Massive runs for gold and oil. Two brutal bear markets. Three amazing bull markets.

You simply can't be focused on a thing for so long and not start to see patterns. That's how our brains work: We recognize patterns (I've seen this before) and then formulate our response to them (I did this last time and it worked out pretty well — or not). You get bit by one dog, and you're likely to have some pretty specific thoughts about all dogs.  

Of course, we also have the ability to recognize that there is subtlety to patterns, small differences that lead to dramatically different outcomes (a little chaos theory to Jung's archetypes). So we refine our pattern recognition skills, we add to our data bank of responses, and we learn. Good ol' brain!

As far as microcosms of humanity go, the stock market is a damn good one. It's emotionally fickle (bearish one day, bullish the next). It represents the vast majority of human innovation — cancer cures, consumer fads and trends, geopolitics (oil and defense contractors). Stick around long enough and you'll be able to expound on why Twitter has the makings of a long-term winner while Snapchat may not even exist in five years, the difference between radar and lidar, and why thin-film solar panels are best suited for India's climate (that's why First Solar built a plant there).

And oh boy, if you wanna have the flaws in your decision-making process laid bare, start investing for yourself (and take notes that you can review later). It'll be like adult-you looking back on things that 10-year-old-you thought (oh my god, I wanted to be a fireman and I thought Amazon was overvalued at $900??).

The Cost of Being Grumpy

I still struggle with being grumpy sometimes. Here's a great example.

For the first 15 years of my career, Nvidia was an also-ran. Yeah, it had the graphics card market locked up tight. But that was it. The founder and CEO tried, but he kept missing the next big chip cycle. 

And so Nvidia was perpetually range-bound: $4–$20 from 1999 to 2006, then $10–$25 from 2007 to 2015. 

It was late 2014 when I decided to start positioning my Wealth Advisory newsletter toward tech stocks. I was reviewing Nvidia about a year later, around $25 a share. I thought it maybe had 50% upside, and I liked the small dividend. I thought I might catch it on an earnings sell-off.

Well, the next earnings Nvidia reported were very good. The stock launched over 20% to $30 or so. And I said to myself, "Well I'm not buying. Nvidia breakouts always fail." Grumpy!

Two months after that it was $40. A month after that, $50. Another month, $60. The first week of November 2016, Nvidia launched from $67 to $87. 

By then I had figured out what I couldn't see the prior year: Nvidia's founder and CEO had finally hit the next big chip cycle, AI. Every $10 jump after that was a kick in the b—rain. The stock mocked me. 

These days I try to be less grumpy. I have set my personal notification system to "ping" anytime I am tempted to dismiss a stock out of hand. It helps, though I'm pretty sure I will never completely overcome my biases.

I Got Pinged

So, my personal notification system pinged me just yesterday. My colleague Jason Stutman mentioned that he was bearish on a company called Turtle Beach (NASDAQ: HEAR). I know, stupid name. At the start of this year, you could've bought it at $1.75. Today it's around $23. 

Turtle Beach makes video game headsets, about $170 million worth over the last 12 months. Now, my son plays video games — he and his friends get together as a team in online game formats. The headsets let them talk to each other, which is pretty important. 

I got him a new headset for Christmas, and I can tell you there are a LOT of options. So many that you'd be hard-pressed to pick a winner. 

But as I understand it (because I'm trying not to be grumpy), the Turtle Beach headsets really are better for a couple new online game formats. I also have a grump tendency to ignore video games. But one Sunday a few months ago, 3.4 million people were playing this new game called Fortnite — at the same time. 

Now, that's not 3.4 million people who have individually placed a disk in an Xbox. Fortnite is like a game universe: 100 players in groups of four get dropped into the game, and they fight it out until one team is left. It's called Battle Royale. Sounds about right. 

There are a couple of these types of games out there. Fortnite makes money with in-game purchases. Another company offers a subscription model that is all the rage in the cloud these days. The big game companies (Electronic Arts and Activision) all are moving to online subscription models (the same kind of thing I wrote about with Adobe and Microsoft last month).

Fortnite has something like 135 million total players. Numbers like that show you why this online subscription model is killing off GameStop (NYSE: GME). 

Turtle Beach is expected to do $235 million in sales in its next full fiscal year. Currently with a $320 million market cap and a forward P/E of 16, it's not crazy expensive, despite the massive run it's taken. But I'm not sure how unique its technology is. Seems to me a headset might be easy to duplicate... but maybe I'm just being grumpy.

What I can tell you is somebody's buying a LOT of servers these days. 

Now, Intel commands better than 95% of the server chip market. And its data center group grew revenue at 45% in the first quarter. But I'm interested in AMD (NASDAQ: AMD)...

I could get all grumpy about AMD, what with its forward P/E of 26 and the 60% run the stock has made in the last couple of months. Instead, I'm gonna focus on the 2.7% share that AMD's EPYC chip has already taken. And that if it gets to 5%, that's nearly a 20% jump ($1 billion) in revenue. 

It is reasonable to assume that server makers and data centers alike want competition (Qualcomm abandoned its server chips a few months back). Maybe that's why Cisco has already announced a new line of data center servers featuring AMD's chips. 

AMD reports earnings later this month. I have no idea how that will go, but if past is prelude, AMD shares will move at least 10%, up or down. 

So you see, if I had stayed grumpy, I might've missed this whole angle for AMD (which I've had in the Real Income Trader covered call portfolio for a while). 

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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