Amaya: my greatest mistake

One of the the things Charlie Munger frequently says is that you should rub your nose in your mistakes. That’s what I am going to do in this post.

Amaya is probably the worst one that I have made. There are a number of mistakes I made with this and I want to go over them. I based my decision mostly on this VIC posting. You can read my over-confident and tremendously embarrassing post here.

I avoided doing this for a while and to be honest I can’t help but cringe when I look at what I wrote. I was massively overconfident. My over-confidence was based on one thing…I was very sure they would be able to achieve their growth targets.

Amaya was originally a provider of B2B gambling services (basically gambling software/hardware for casinos). Then David Baazov organized a buyout of a Pokerstars/Full Tilt Poker. He was a minnow swallowing a whale and in order to do this he had to take on a lot of debt.

The basic growth story for Amaya was that they would diversify from Poker to other verticals in online gambling like online slots, table games, or sports betting. The reason I loved this story is that I thought it would be easy. It would not require advertising because they already had a massive customer base and they could leverage their existing websites for new software. I literally thought it would be like flipping a switch. In addition I was over-impressed by the CEO and what he was able to pull off with Pokerstars so I thought for sure he, would be able to execute. They had also already tried adding the new verticals in certain markets and it worked. Finally I thought online gambling was a great business because it costed very little to grow. In online gambling you have the phenomena of Negative net working capital. Essentially when you grow your customers give you money. So I thought: great business, easy to grow, already proven growth strategy, impressive management.

In retrospect I made a number of mistakes. The first is that I trusted the growth story way too much…which is ironic because its the classic mistake value investors are taught to avoid. I trusted management too much. Additionally I completely discounted negatives which would come back to bite me later like the massive debt the company had. Finally I compounded my mistakes by oversizing my positions. Of all my mistakes this was by far the biggest. My position size was 15% of my portfolio. I bought the stock at 30 and its now 18. Thus I took a 9% hit to my portfolio from this one position.

There were a number of criticisms of my thesis on Corner of Berkshire and Fairfax. I should have listened more carefully. One thing that was brought up was that the company had its debt in USD and its earnings where in EUR. This is one of the reasons they had an earnings miss and after that the stock tanked. My thesis was way too reliant on what I though would happen with near term earnings.

I was pretty stupid. Incidentally I have had this happen before in other areas of my life where I have been totally sure I wouldn’t make the same mistake as others and I ended up doing exactly that. I hope this is the biggest mistake I ever make because it was costly. But I doubt it.

Stop trying to make things work

I think a lot of investors try to be superior analysts. To find hidden value.

In some sense they get seduced by investors like Warren Buffett. You end up believing that to truly understand a company you have to read every footnote, every number, understand everything and find the value that others missed.

There is a danger in this though; the trap of trying to make things work. You end up trying to find a way that a company could have hidden value. You make projections, you forecast a future different than the past, you make optimistic assumptions. You try to find a way that your investment could double. The worst thing is that the more work you do the more you feel like you have to find a way that the company must make sense. In some sense this is a sunk cost fallacy…you end up believing that you have to find value in something to justify the time you wasted on it.

Investing in not unique in this regard. It happens everywhere. In relationships, in jobs, in education. People try to make things work.

So what should you do? Instead of putting your effort into analysis, put it into searching more broadly. Work hard searching for value…don’t work hard analyzing companies. The best investments are not hidden….they are in plain site.

And finally instead of trying to look for reasons why the thing works. Try to make things not work. Look for problems.