Throwback Thursday: How to Be Right Even If You’re Wrong – Final Thoughts on KING

This is another post in our ongoing Throwback Thursdays Series, where we share blog posts from the past to bring you a ton of value and help you learn faster.

In Part 1 of this mini-series on KING, I talked why I was looking at KING and did a full preliminary analysis of the company; which it passed.

In Part 2, we looked deeper into its financials.

In Part 3, I told you about 4 major red flags that I came across while reading KING’s financials that caused me to not trust its managers and stop the analysis.

Today, we’re talking about KING’s buy out by Activision Blizzard and how to be right even if you’re wrong.

This is the final post in this Throwback Thursday Case Study on KING.

I hope you get a lot of value out of it.

Let’s get to it.

***

How to Be Right Even If You’re Wrong

If you’ve ever played golf you know how frustrating the sport can be.

Even if you have a perfect swing, select the perfect club, hit the ball on the face of the club where you want to, and hit the ball with the right amount of speed; if the wind picks up while the ball is in flight, or hits a small divot when it lands, it can make your “perfect” shot look terrible.

The same is true when investing.

If you evaluate a company, after researching it for more than 100 hours, that it’s undervalued, has great margins, produces a ton of cash, and has little to no debt, and so you decide to buy it…

Then a major competitor has a breakthrough innovation that derails your company’s business, or your company has a small problem that turns out to be big later; these kinds of things can derail your entire investment thesis.

The inverse is also true.

If you evaluate a company, and after putting a ton of time into it, you find that it doesn’t fit your required investment thesis so you pass on it, and then it gets bought out at a premium, then you feel like you did something wrong.

If you love golf or investing, you have to learn to deal with these kinds of situations or you’ll drive yourself crazy.

In golf and investing, there is no such thing as playing well or doing things right – every time.

Even when Tiger Woods was at his best during the 2000 PGA Tour season, he “only” won 9 of 20 tournaments he entered. That’s a 45% success rate during his best career year.

When investing and something goes against your investment thesis, it pays to remember this, and also the following quote by investment great Peter Lynch.

But even if the market, or some insane company, proves your investment thesis wrong in the short time, the decision you made can still be the right one.

In June and July 2015, I did a case study on Candy Crush Saga maker, King Digital Entertainment (KING), at the request of a reader.

At the end of the case study, even though they had great margins and produced a ton of cash, I found that they had major risks keeping me from buying into them.

For those who want to read my thoughts on KING, go here.

For those who don’t, the major issues were:

1. KING could reprice options
2. It paid company insiders way too much
3. It had the most complicated share structure I’ve ever seen
4. It had some related party transactions that were nefarious

Any one of the above by themselves, are bad enough to keep me from investing, but all four combined, kept me as far away from the company as possible.

I remain comfortable with this decision even after Activision announced it’s buying KING out for $5.9 billion today.

Why? Because the price Activision paid for KING is insane.

Using just one example, Activision paid $2 billion more for KING than what Disney paid, $4 billion for Star Wars in 2012.

Does anyone on Earth think Candy Crush, Farm Hero Saga, and KING’s various other games and community are more valuable than Star Wars?

But this isn’t the main reason I remain comfortable with the decision I made in July.

When I began investing, I took each investment decision on a case by case basis. I had no strict buy or sell criteria, and every investment decision I made relied on how I felt on that particular day.

This meant most of my decision making process relied on emotion: the last thing you want to rely on as an investor.

Relying on emotional whims early led to lost money, lost opportunity, and more stress.

The more I learned the more I realized I needed to develop strict buy and sell investment criteria to take emotion out of the equation.

Over time, this led to my preliminary analysis checklist, my selling checklist, and my general investment checklist to name a few; these are why I’m comfortable “losing” out on a 26% gain in a few months.

Just because Activision is willing to waste money, and yes there is a great likelihood the money they spent on KING will get wasted, doesn’t mean my decision in June and July was the wrong one.

Why?

Because I stuck to my investment thought processes.

Owning KING involved taking on too many major red flags so I decided to pass, and wouldn’t have bought into the company at any price barring an NCAV situation.

Before developing my investment thought processes, when seeing the KING buy out, it would have frustrated me. Why? Because it was at a 26% premium to what I could have bought them at in June or July.

This would have made me feel like I lost a quick and easy 26% opportunity.

But this makes no sense.

How could I have known KING was going to be bought out in a few months time? How could I have known Activision would pay such a high price for KING?

I couldn’t, so why dwell on what I couldn’t have known and what I don’t know, and why not instead rely on what my research and processes told me at the time.

I may have been “wrong” in the short – term this time, but next time, the company could go bankrupt, could get investigated by the SEC for fraud, or could lose all its subscribers in a short time: all would be disasters for shareholders.

If done right, investing shouldn’t be gambling. Buying KING would have been just that. And this is why even though I was wrong, I was still right about KING.

Have you developed your own investment processes? Do you require strict criteria to be met for any buy or sell decisions? Would you have regretted not buying KING?

Let me know your thoughts on all in the comments below.

What do you think of this analysis? Did I miss something? Should I have done something differently?

If anyone else has recommendations on companies they’d like to see me research and analyze, please let me know in the comments below.

***

I hope you got a ton of value out of this case study and learned something you can use in your own analysis.

Let me know your thoughts on KING and its buyout by Activision Blizzard in the comments below.

P.S. Improve your value investing knowledge and check out our FREE book On Float. If you pay the shipping I’ll pay to get you the book anywhere in the world so you can learn about this ultra-valuable and hidden investment concept to gain a huge advantage over other investors.

P.P.S. If you want to see our other case study videos, click here to go to our Value Investing Case Study playlist on YouTube.

P.P.P.S. Our 3 brand new courses are on sale now, but only for another 24 hours before they go back up to regular price. To check them all out before the 81% off sales are gone, go here.