Playing Games

I grew up a “gamer.” I was right there at the beginning. I remember playing Atari video games, including Pong, at four years old with Mom, her sister, and the neighbor next door. I thought it was the best day of my life when Mom and Dad got me a Nintendo for my birthday (yes, just Nintendo… the original). I spent the next many months playing Super Mario Brothers (again, just Super Mario Brothers).

Games have changed, game playing hardware has changed, and I have changed. I don’t get to play games as much as I did. But, I would be lying if I didn’t admit looking forward to a time when Carter demands whatever the latest state of the art gaming system is, or else he’ll never eat vegetables or clean his room again. I’m sure my cave-in point will be much shorter than my wife’s.

I also have to admit it hurt just a bit when I realized my six year old is better at the game he is playing on the iPad than I am. I guess the point has been reached where it doesn’t matter how experienced my brain and game playing body muscles are, youth wins through youth. He “just gets it,” without too much thought or practice.

I’m sure there are plenty of you who understand gaming from a parent’s point of view. Dad always thought they were stupid, a sentiment many of you may share. Well, there are currently more than 2.5 billion gamers around the world. The gaming industry is expected to have revenues of $180 billion in 2021. Six percent of gamers are over 65 years of age, while only 21% of gamers are under 18 years of age, and roughly 45% of gamers are female. Also, a recent survey by the Entertainment Software Association found 70% of parents believe video games have a positive influence on their child’s life.  

So yes, things change. But, I am hoping my understanding of investing isn’t one of those things. Do the young investors out there “just get it?” Have I been left behind? Perhaps you’ve heard your kids or grandkids talk about the game Roblox. More than 50% of kids under the age of 16 in the United States play Roblox. Roblox has been around since 2006. It is actually a platform with a storefront, where people can play games created by its own users. Those creators can sell stuff to others users/players for Robux, which can be converted to real dollars.

This explanation is only slightly less confusing than trying to explain how the Roblox Corporation “went public.” It did so through a direct listing, instead of the normal Initial Public Offering (IPO) method or the now more exciting Special Purpose Acquisition Company (SPAC) route. The company ended its first day of trading up 55% with a market cap just shy of $40 billion. The company’s revenues in 2020 were $924 million, and it had a net income loss of $250 million dollars. The Roblox Corporation saw significant growth in 2020, both in revenues and losses.

Roblox, and the big performance of its initial offering despite its recent years of losses, is currently a top news story. The more financial news you watch, the more you realize there are basically two major types of stories. The first are fear related stories. Fear related news is a mainstay in most media today, and it is definitely an easy go to when you have air to fill and markets to worry about. Earlier this year, these stories were about presidential policy and tax increases, and then the threat of Coronavirus resurgences and new mutated strains. Right now the big fear we’re hearing about is inflation…. Inflation is going to come and it will be worse than the 70s, and everything will fall apart. The truth is these are all valid fears to some extent. A new mutated coronavirus strain that our vaccines cannot combat would be terrible. Exorbitant taxes that drive our wealthy away or drive the masses to discord would be terrible. A quick return to 20% inflation would be terrible.

Luckily, however, the financial news media gives us a little sweetener along with the dreadful medicine. The second type of financial news stories we see all the time are the get rich quick ones, and there are a lot today - IPOs, SPACs, Bitcoin, Cryptocurrencies, Commodities (Copper, Gold, Silver), Stonks/Memestocks, and the most recent new craze, the Non-Fungible Tokens (NFTs).

A Non-Fungible Token is an “investor’s” proof, in the form of a piece of computer code of the Ethereum blockchain, that said investor owns a digital picture, an individual tweet on Twitter, a bit of digital song, or a meme gif. Most of these digital proof tokens are paid for with Bitcoin or other crypto currencies. So, if you wanted to, you could buy a picture, using digital currency you bought with U.S. dollars, and you would then be able to prove to people that you own it, because it is recorded on the Bitcoin and Ethereum blockchain. Nevermind that anyone on the internet can still access and see the picture... you get to claim ownership. You could later sell this “investment” to someone else, but your payment would probably be in the form of digital currency.

As I said, and as you may think from my less than clear explanations, perhaps I have been left behind and simply don’t get it. However, I do believe I know the difference between investments and speculations. The following is from Seth Klarman’s 1991 book Margin of Safety which we’ve referenced many times. It is taken from a compilation of his quotes I have near my desk:

Investment success requires an appropriate mindset. Investing is serious business, not entertainment. If you participate in the financial markets at all, it is crucial to do so as an investor, not as a speculator, and to be certain that you understand the difference. Needless to say, investors are able to distinguish Pepsico from Picasso and understand the difference between an investment and a collectible. When your hard-earned savings and future financial security are at stake, the cost of not distinguishing is unacceptably high.

I am guessing the majority of money flowing to these newest speculations is not from people worried about their hard-earned savings or future financial security. What we need is an equal amount of financial news featuring investors who are worried about their savings and financial security, championing their own boring successes. Families who invested steadily over their working careers, despite being exposed constantly to financial news concerning either fear or greed.

Kendall and I have often said that we begin our investment process by deciding how much to allocate between equity and fixed assets, and this is primarily driven by the current level of interest rates. However, concurrent to this first step is a constant categorization of investments versus speculations.

How I categorize the majority of what the financial news is selling today is clear, but knowledge is the key to making that assessment. We’ve spoken to a number of you recently regarding Bitcoin and cryptocurrency. If you ever want our views on any of the big news stories you see, or want to know why we aren’t including these things in our portfolio, please reach out and ask. Or, if you need them, I still remember a few Nintendo cheat codes from back in the day.

Justin Anderson

P.S. Here’s a Netflix Cheat Code which is similar to a very old Nintendo Cheat Code: Use this to “deactivate” your Netflix account when your app freezes on your smart TV, or won’t play a specific episode.
Press on Remote Control: UP, UP, DOWN, DOWN, LEFT, RIGHT, LEFT, RIGHT, UP, UP, UP, UP