We spent almost all of October working through our Watch Lists. Of all the Watch Lists, our eyes gravitated towards Media and Entertainment because there were some Gaming companies that looked reasonably priced. Take a look:
This is the way to read this chart: If we don’t need to believe ridiculously high revenue growth for a company in order to consider buying, it sits atop our task list. We prioritize our time by spending it on stories that are more believable. For example, Zoom may be a great company with a great product that may grow by a factor of 10X, but it’s a little harder for us to digest that compared to, say, Zynga that “requires” less than 40% growth for its valuation to make sense.
We’re always thinking about “Expected Returns” as defined by the following equation:
(Probability of Upside X Magnitude of Upside) + (Probability of Downside X Magnitude of Downside)
Estimating magnitudes is easier. Estimating probabilities is harder. In equity investing, we tend to dwell more on the upside rather than the downside. After all, the downside is “limited” to 100%. The upside is potentially limitless. However, at The Buylyst, we reduce the probability of the downside by investing in what we call near-inevitabilities – our Investment Themes. That’s the first step. The second step is to avoid overpaying for an asset – this reduces both probability and magnitude of the downside.
Every couple of weeks or so, we clarify our thoughts on these near-inevitabilities in the form of a concise, easy-to-digest worldview article. This is the first step in reducing the probability of the downside.
This Worldview article is about Media & Entertainment, specifically about videogames.