Maximizing Your Investment Returns: How to Avoid Hidden Costs and Boost Your Portfolio’s Performance

The stock market has been sluggish in recent weeks: the indexes are close to the lows of 2017 and 2018. The frightening news cycle and frenzied financial professionals believe that the stock market may fall even lower. Recent data and business closures demonstrate that a greater recession is possible. I believe that this recession, or the fear of such a recession, is positive for the U.S. economy. Let us not forget that we have already seen signs of life, in every economic recovery, to be greatly disappointed. No matter where the short-term equity market goes, the long-term strategy will always be effective. Two years from now, the stock market may still decline by 30%, but 20 years from now, the market will historically yield at least 10%.

As you probably know, research shows that professional investors have difficulty outperforming the market with stock selection. But as with any statistical data, be cautious about academic topics that have selected bias. Most of these data refer to professional investors as any person who can open a fund. Many well-connected or trust fund babies like Chelsea Clinton’s husband (Marc Mezvinsky) always underperform the market. Pension and endowment funds received 80 cents for every $1 invested by Marc Mezvinsky. Most of these professionals are rich enough to use their capital or well enough connected to collect money from close networks. These affluent and connected professional groups rarely perform the required investment due diligence. Buffet famously said, “Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.”

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Losing out on other opportunities

In this regard, there are many hidden costs to stock-picking. For example, in 2017 more retail investors bought REIT stocks because it was an outperforming the index average. The Real Estate Investment Trusts (REITs) were the best performing industry from 2010 to 2017,the entire industry quickly turned into one of the worst investment opportunities during and after the crash. Malls were a major industry to buy between the 1970s and late 1990s; most developers focus their efforts to build out malls that are quickly becoming empty shells and debt load. If you didn’t know much of this real estate information before reading this post, then you are one of these stock pickers that are at risk of losing money.

Nevertheless, too many people consider themselves a stock-picking genius. The majority of people will be smart enough to invest, but being smart does not offset a higher return. Being a business-orientated or entrepreneurial individual doesn’t make you more qualified as an investor either. Being an investor is a profession, such as being a firefighter. If your house is on fire, the least qualified person to save your house from fire – it’s you.
Anyone can learn about fire safety, but that doesn’t mean they have the knowledge to use that information to save themselves from a fire.

Many people are unwilling to apply due diligence to investments. Anybody can outperform for a few years in a bullish time. The common characteristics of retail stock pickers are individuals who lack financial skills, often have short-term benefits in their portfolio, and lack of long-term stocks.

The Hidden Costs of Trading – FIX Flyer
The Investment Hidden Fees

What are the other hidden fees of stock picking? I called it the T&T problems Time & Taxes

  1. The first cost is Time. If you have little knowledge and try to spend time learning, then you are racing against the clock against someone that is simply more knowledgeable and prepared. Novice investors spend time choosing stocks and never learn more about their investment through due diligence. Studying makes you informative, but it’s a long process before you get really knowledgeable to execute an investment. Knowledge originates primarily from information and experience.
    Everyone on the internet is informed about politics, but not everyone is knowledgeable. If TV ran the news on Biology and Chemistry 24/7, like political news, we would all feel like we can discuss science topics like we are all Ph.D. Scientists. I have another blog which is going to talk about the difference of being informed and knowledgeable. If you continue to choose stocks without being fully informed, you will underperform the market by 5% or more per year (50% in potential missed earnings over 10 years)
  2. The second cost is Tax, if you’re trading in a taxable account. The gap between short- and long-term capital gains is significant. When trading shares, it may be tempting to exit positions, particularly well after just a few months. Trading often leads to greater tax costs and I avoid it. Capital tax gain taxes are 0 to 20% vs income taxes that can be about 25% to 40%. Consider the amount of money you will leave on the table if you pay income tax on your investment performance. My investment strategy is to target long term positions over short term capital gains. Most people are thrilled to receive short-term profit (but they don’t realize that they pay income taxes on it).
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Time & Taxes

Taxes and time can seriously erode performance, particularly for high-frequency stock traders in higher tax brackets. Most economic research studies show these and other mistakes made by the ordinary investor can reduce returns by 4% or more a year relative to a stock index (which hasn’t included the short-term tax fees).

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Kobe’s Legacy Lives On: The Investing Lessons I Learned from the Black Mamba

On January 26, 2019, I had lunch with a prospective client on a Sunday afternoon. During the meeting, my phone vibrated repeatedly in my jacket, prompting me to wonder what the urgency was behind the messages. Later, when I checked my messages, I learned that they related to the death of Kobe Bryant.

One of my friends had sent me a late-breaking piece, and initially, I thought it couldn’t be true. I believed that social media was jumping to conclusions. However, upon visiting various social media sites and popular news media, I encountered the same, inevitable truth. In an attempt to hold onto the hope that Kobe was still alive, I watched replays of his games repeatedly.

The news left me in disbelief for the entire day, and I yearned for more news that would report that it was just a minor accident. It was emotionally difficult to hear that his daughter had died in the same helicopter accident. I couldn’t fathom the devastation that Kobe’s family must have felt after experiencing such a catastrophic helicopter crash. Kobe has always been an inspiration to me, and his loss is deeply felt. Anyone can relate to Kobe because he was genuine. His passion was undeniable, and the way he lived his life was truly inspirational.

Who Was Kobe Bryant?

Kobe Bryant was just 17 years old when he entered professional basketball in the NBA straight out of high school. At the beginning of his career, Bryant didn’t have many opportunities to play, despite having more potential than many of his teammates. When he was given the chance to play regularly, NBA fans saw glimpses of his unique style and skill. As his career progressed, it was clear that he was destined for greatness.

In 2002, I was fortunate enough to see Kobe Bryant and Michael Jordan play in the NBA for the first time. The home game took place in Washington, D.C., with the Wizards, led by Michael Jordan, facing off against the Lakers, led by Kobe Bryant.

The game was intense and close, but the Wizards ultimately beat the Lakers in the final seconds. During the game, Jordan told Bryant that he could “wear those shoes, but never fulfill them.” This critique annoyed Bryant so much that he stopped communicating with his team for two weeks. In the next game against the Wizards, the Lakers won, with Bryant scoring a retaliatory 55 points.

Michael Jordan VS Kobe Bryant – 2002.11.08

There were numerous similar stories about Kobe’s desire for revenge on the court, as he always found ways to improve and get ahead. His work ethic and pursuit of wisdom and knowledge led to five NBA championships and a lengthy list of legendary achievements.

Kobe Bryant’s work ethic was legendary. The best moments of his career were not captured on ESPN; rather, they occurred during the early mornings and late nights when he practiced more than anyone else. Bryant was always the first and last person to arrive at and leave the gym. He followed a strict workout regimen and even found ways to practice while injured, such as focusing on his weaknesses or using his uninjured hand. There was no off-season for Bryant; his summer training sessions were traditionally just as intense as the regular season. Hard work, both on and off the court, was a consistent effort for him. Kobe Bryant exemplified the meaning of perseverance and hard work through his actions.

Talent can only take someone so far in their profession. For example, most starting players in the NBA have the potential to score 20 points per game and some have scored a 20-point game, but most players cannot consistently perform at that high of a level every night. Similarly, most investors will have some years of outperforming the market, but most investors cannot consistently outperform the market average over a lifetime. Those few who can consistently perform at a high level share one trait: hard work.

Bryant believed that he should work hard as if he never had any talent. When asked why he was such a hard worker, he said, “To think of me as a person that’s overachieved would mean a lot to me. That means I put a lot of work in and squeezed every ounce of juice out of this orange that I could.”

Hard work is about commitment and there are no substitutes for it.

Lesson about short cuts: Blackberry (BB) had the potential to compete with Apple (AAPL) but has been unable to do so due to a lack of innovation. As a result, it is no longer a significant player in the smartphone industry. In an attempt to regain market share, Blackberry released a rushed and unfinished smartphone. However, the company did not invest enough in research and development or give its engineering team sufficient time to deliver the promised features. As a result, Apple has already won the market and Blackberry was unable to match its commitment.

Actively Seeking Wisdom and Knowledge

Kobe was skilled at using every tool at his disposal to become a better basketball player. He watched soccer and noticed that soccer players had a unique freedom of movement. He observed that they used more ankle torque than basketball players, but did not experience a higher incidence of ankle injuries. Kobe began researching ways to improve his signature shoe. He asked Nike to remove a few millimeters from the sole to provide better traction and incorporate the benefits of soccer shoes. The result was a low-top shoe that offered structural ankle support, improved traction, and faster response time.

Kobe Bryant was known for cold calling basketball players and business leaders to learn about their successes. He studied the movements of animal predators in order to incorporate them into his jump shots and psychology to gain an advantage over his opponents. Kobe also analyzed the weaknesses of other players and the foul calls made by referees. Some might view Kobe’s behavior as erratic, but those in similar positions of success often see this level of obsession as normal and even beneficial.

Many successful people have an obsession with their work. It is a common trait found in leaders, business professionals, and investors. For example, Sam Walton immersed himself in the wisdom of all he could learn from competitors to junior associates at Walmart. He took advantage of every opportunity to enhance the business. The Walmart business model is built on low prices and efficiency. Another example is Elon Musk, who was months away from bankruptcy and slept in the Tesla factory for months in order to turn the company around. Warren Buffett searched through 10,000 pages of Moody’s manual to become familiar with every public company. Once he found a few suitable investments, he studied everything he could about those companies and invested accordingly.

Champions are constantly seeking to improve and develop their skills. In the world of sports, championships are often determined by small margins such as a fraction of a second, one snap, or one turnover.

In the world of investing, small differences can lead to millions in earnings or bankruptcy.

Kobe Bryant’s dedication to basketball is inspiring. He has influenced many people and shared his wisdom. His “Mamba mentality” is about working hard and living up to one’s potential.

Kobe believed that he should always work hard as if he had no talent.

The Music Will Stop for GameStop

Why does the used video game industry exist? The rise and expansion of the used game stores such as GameStop (GME) in the 1990s to early 2000s.
Collectible video games, particularly those that are rare or used, became popular after baseball cards. The proliferation of internet technology also contributed to the growth of the used video game industry by allowing for the frequent production of video games and the creation of a robust secondary market for used games. Many customers were willing to trade their completed games for new or used ones due to the constant release of new game titles.

However, both the used video game and baseball card industries lack official marketplaces, leaving customers unsure of the fair price for what they are buying or selling.

(If you want to read more about Funoland history and how it became Gamestop go here: FuncoLand History: The Company Behind Used Video Games written by Ernie Smith)

As a teenager, I loved visiting FuncoLand, a used video game and technology store that ranked second on Forbes’ list of the fastest growing companies in 1998. FuncoLand was an excellent place to purchase both new and used video games, and it also had a few consoles available for customers to try out demos. In the early 2000s, FuncoLand merged with EB Games to become GameStop.

Reason #1: Since 2010, GameStop’s business model has been in decline due to a decrease in console unit sales, weak pricing power, the increasing popularity of digital downloads, and the decreasing value of used games. In the past decade, many retailers have struggled to survive, and even specialized private equity groups that have tried to revitalize the retail industry have ultimately failed. Many retail giants, such as Bonwit Tellers, Incredible Universe, and Kids “R” Us, have either disappeared or significantly downsized. Millennials may enjoy nostalgicically reminiscing about the 90s, but they are not likely to shop at GameStop due to its high prices, inconvenient locations, unethical business practices, and lack of authenticity. All niche communities are built on authenticity, and when GameStop changed its name and business model, it lost that authenticity as well.

Management has speculated that the release of new gaming consoles will help to boost sales in 2020. However, in the most recent quarter of 2019, GameStop’s CEO, George Sherman, was surprised by the steep decline in sales. There are now too many GameStop stores, and new and used games can be found much cheaper elsewhere. Some bullish investors believe that GameStop will automatically recover sales through the new gaming console cycle. However, over half of GameStop’s console market opportunities have vanished between 2008 and 2020. In 2008, a total of 90 million consoles were sold worldwide, while estimates for 2020 range from 30 to 40 million.

Overview

The Global Unit Sales of Current Generation Video Game Console in million units (2008 to 2017)Infogram.

  • Used games are becoming less valuable each year, while digital downloads are becoming more popular. Used games are still a significant source of income for GameStop, but its sales in that category have declined every year since 2011. In 2019, Sony sold over half of its games through downloads. Microsoft, Nintendo, and Google have all invested heavily in online gaming.

Playstation 4 was released on Nov 15, 2013. GME stock from Nov 2013 to Nov 2017 is -67%

  • GameStop’s supply chain and marketing tactics are some of the worst in the retail industry: They do not offer free shipping unless the total purchase is over $50, while their competitors are upgrading their businesses with robotics, software, and logistics innovations
  • Corporate culture is toxic, and the business execution is mediocre: The gaming community is well aware of GameStop’s deceptive business practices. It is unclear what could make GameStop more successful than its competitors. In fact, it seems highly unlikely that the company’s management plan could result in success.
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  • Weak pricing power: New and popular games from other retailers are often discounted 10% less than Gamestop’s prices, and customers who use the retailers’ branded credit cards receive an additional 5% off. Additionally, used games can be found more cheaply on platforms such as eBay, Facebook, and Craigslist.
    • GameStop cannot compete against cheaper alternatives: Major retailers are willing to take losses on gaming discounts in order to build brand loyalty and make up the difference with higher-margin products. GameStop has therefore resorted to offering creative membership deals that may mislead customers into paying more for used games.
    • Used cheap games are recession-proof, not expensive used games: During a recession, consumers tend to look for the cheapest options rather than paying more for discretionary goods. Therefore, GameStop’s trade-in value may not make economic sense to many customers, as they can get a better value for their games through online retailers or platforms such as eBay, Facebook, or Craigslist. There are multiple ways to sell and buy games online that are more convenient and have considerably better prices.  The cost of shipping video games is really affordable, and you will still make more money selling games on eBay than you would at GameStop.
  • It’s not convenient to drive to a game store. Furthermore, it is more convenient for customers to buy games from larger retail stores where they can also purchase other items, rather than making a special trip to a game store. The supply of used video games is plentiful and it is easy to find popular titles from other marketplaces.
  • Lack of Customer Service & Knowledge GameStop’s customer service and knowledge may also be lacking, as the company has unrealistic sales goals and uses forceful sales tactics. Its membership points system may also be confusing and misleading.

2. History of Poor Capital Allocation – Low ROIC, no investment in business and waste of share buybacks.

  • Aggressive share buyback won’t work: GameStop’s aggressive share buyback strategy has been ineffective since 2010, costing the company over $400 million in share repurchases. This amount does not include the additional $120 million in buybacks from 2019. A company should only repurchase shares if it has sufficient funds to support its operations and the stock is selling at a significant discount to its calculated intrinsic value. However, GameStop is projected to run out of cash by the end of the year and will have to rely on high-interest credit to finance its operations.
  • Liquidity Fallacy: The “liquidity fallacy” argument, which suggests that as long as customers continue to shop at GameStop, cash flow is not an issue, is flawed. While investor Michael Burry is well-versed in liquidity and cash flow, he and other investors failed to consider the cultural significance of the gaming community to GameStop’s business. Customers are the most important asset on GameStop’s balance sheet, not dollars. Just as Sears had enough liquidity to implement a turnaround strategy, but ultimately failed due to a lack of customer demand, cutting costs too deeply can negatively impact the customer experience and ultimately hurt the company’s financial performance.
  • Fallen ROIC since 2014: Despite GameStop’s falling return on invested capital (ROIC) since 2014, due to a lack of significant investments in the business in recent years, Burry still identified it as one of his top investment ideas. It is unsurprising that investors may believe their skills and knowledge are transferable across industries, but in the constantly evolving world of gaming and retail, it is important to carefully assess all factors that could impact a company’s success.
Historical 10 year ROIC of GME

3. Proposing unproven Strategies – gaming events, retro games, and merchandise will not replace the loss of used games revenue.

  • Store gaming events are not proven strategies: Management has not provided information that shows gaming store events could create profitability. Most GameStop stores are simply too small for hosting gaming events. GameStop had a press release about their gaming events in Spring 2019, and it has been quiet ever since.  GameStop probably has already failed its first gaming event attempt. The best gaming hosts in the industry are only mildly successful.
  • Increasing retro and rare game sales will not stabilize revenue: Rare games sell on eBay at a much lower price than GameStop trade-in value. Collectible games will slow down the turnover inventory and they will take up shelf space from other, newer products.

Shifting sales to nongaming merchandise will turn GameStop into another commodity store: GameStop owns the ThinkGeek store that sells nongaming merchandise and its sales are going down too. GameStop eliminated the position of Chief Operating Officer (COO) and in recent months has begun to switch some of its business models toward collectibles and trading merchandise. In other words, GameStop is basically converting its store into another failing business: its sister brand ThinkGeek. GameStop’s best non-selling items are Bubbleheads that are made by Funko.  Gimmicky products like Bobbleheads are the beanie baby 2.0… Bobbleheads have high-net income margins, but it doesn’t add any value to GameStop. GameStop may get some foot traffic from Bobbleheads, socks, T-shirts, and other random merchandise, but total sales are simply not good enough to offset their declining game sales. In the early 90s, trading card stores attempted to switch from baseball cards to other popular merchandise, but eventually, the hobby store industry disappeared.

Gamestop is hoping for Collectibles to turnaround the company

Valuation Verdict:
GME at its best would be worth $5/Share, assuming a small decline of -2% revenue CAGR and an average 3% EBITDA Margin.  Bullish investors estimate GameStop valuation between $6 to $10, but it doesn’t require complex math to explain GameStop’s valuation. Analysts are overcompensating on complex valuation because they believe used video games can be a sustainable business model. The next 12 months will be critical for GameStop to improve its revenue or else the stock price will take a nose dive. 

GameStop has less than one year to prove to investors that they can stabilize and improve sales. GameStop currently holds $290 million in cash and $419.4 million in debt. GameStop has had many years to turn around the company, but they have just burned through cash to buy back a company that offers customer zero value. Buybacks are great if the company is greatly undervalued and if it receives enough funds to support both business operations and buybacks. In GameStop’s case, it only has adequate money to pay down debt or buy back shares.

GME will drop to $3 again and become a penny stock in the next two years. Private Equity dry powder is at an all-time decade high, and there is still no offer for GameStop. Based on the last 4 quarters, GME is projected to lose a minimal of $160M to $200M in 2020.

Conclusion:

The existence of GameStop came from the void of the used game market. The industry has evolved and that used game void is available through multiple channels that offer cheaper prices and better value.

A new generation of game consoles is arriving later this year, buying GameStop sometime to hold out. The question remains, how much longer can GameStop’s business model remain relevant in a fast-growing digital distribution era? Get ready to say Rest In Peace, as GameStop will join its non-innovative retail family members in bankruptcy shortly.

Can’t stop, won’t stop, Gamestop selling drops ’cause it, it gets down baby, it gets down baby

The GameStop, gameflop, and StockDrop

Where was Under Armour in 2001?

Before Under Armour became a famous sports brand worn by professional athletes, it was a small business founded in 1996 in my home state, Maryland. Kevin Plank, founder of Under Armour designed shirts to help cool down an athletes body during training. Under Armour clothing was available through a regional mid-size sport’s retail chain called Modells. Modells were also one of the first major retail chains to carry their brand.

I still remembered the moment UA apparel caught my attention in Modells. As soon as you enter Modells, Under Armour was the solitary thing you could look at because it was visible in front. It was situated on the button on the front left entrance and Nike was located near the front right entrance of the store. UA had this skin tight shirt on display that looks hi-tech and innovative. UA shirt was like no other clothing apparel that I have ever come across, the material felt light and smooth. I decided to buy a $40 shirt in 2001 that was worth my entire paycheck for mowing two lawns.

Purchasing an expensive shirt wasn’t the best financial decision, but I felt cool for being the first kid in my neighborhood to have an Under Armour shirt. I did not know anything about Under Armour business model yet, but I knew their shirt pulled in my skinny teen body felt like I transform into a superhero. I felt proud wearing UA gear and shouting “we must protect this house” during basketball games and gym workouts. I was attracted to the brand because the unique logo and the marketing motto “Protect this House”.

The UA business model started out, targeting the male demographic customers. UA is much more than a one trick pony company that sold skin tight shirts. They rapidly expanded their business in over 2,500 retail stores near the end of 2002, and shortly less than a year later it started offering Women’s apparel. In 2005, UA went IPO to expand their brand domestically and introduce more products.

15 years after, I am still wearing the UA shirt to basketball games, this time with a real superhero “Batman Embalm” that cost me over $50 dollars.    I bought more UA apparel and a few pairs of their place, but I am not the only kid anymore to purchase UA gear. There are children all over the world wearing UA and Adults in the gym are challenging my status quo as a superhero with their own UA superhero shirts.

UA grew tremendously and became competitive enough to challenge the sporting apparel industry leaders like Adidas and Nike. Its IPO gained over 800%, turning from a market size of ~ $770 Million to the current valuation of ~$8Billion! In that respect is no doubt, UA became a successful business and a household brand. Early UA investors have tons of earning money over the last decade. UA continues to expand to multiple clothing apparel lines and even introduce hi-tech sport electronics.

The business environment was very challenging in the early 2000s.    On Jan 2002, Kmart became the largest retailer in American history at that time to file for Chapter 11 bankruptcy. By the summer of 2002, US Airways, shared Kmart’s faith and declared Bankruptcy. Many trade names from the early 2000s have disappeared and became irrelevant. Today, many investors and shoppers recognize the UA brand. UA offer products for nearly every major sport and is a world-wide brand. While Under Armour has been wildly successful so far, they are really small compared against Adidas and Nike. Stay Tuned for my next BLOG on learning what is keeping Under Armour, UNDER PRESSURE!