As I get back into investing, I am inspired by VC firm’s Anti-Portfolio and sharing five companies I loved but whose stocks I never bought. You can jump to my current portfolio, but this article goes beyond “would’ve, could’ve, should’ve” and outlines what I look for in foundational stocks and my investment thesis.
This week, Enthusiast Gaming (TSX: EGLX) soared.
I bought some shares last year and my holding was under-water most of the year, but the underlying reasons the company and stock caught my attention remained valid… it was a matter of time before investors and the stock market caught on. Last year I also expressed my bullishness on Snap, and since then the stock price has taken off, as well, quadrupling since I got in.
Stick to what you know
Completing my finance degree, Warren Buffett taught me that investors should
a) invest in companies they understand,
b) back management that is not just competent but shows candor,
c) avoid the institutional imperative (herd mindset) and
d) ultimately have a long term outlook: buy the stock, forget about it.
Drawn by the dot com revolution, I skipped on a career in finance and moved into startups, first in search (one of the first meta search engines Mamma in 2000), then online publishing (men’s online magazine AskMen from 2000-05), before finally embarking on the entrepreneurial journey with WatchMojo in video production & syndication. That industry expertise combined with my finance training naturally led me to focus on media stocks – fitting since while in college I would have guessed I’d become an analyst covering media companies or an investment banker focused on the media sector.
The Anti-Portfolio: 5 Awesome Companies
I was inspired by the “anti-portfolio” holdings that some venture capital firms have publicized over the years. The following are five companies I loved but stocks I balked at. To be clear, I am sure there were probably other firms I also wanted to buy who didn’t become behemoths (I am sure I own all five shared indirectly through my “indirect” holdings which are managed by investment managers). But, in discussing them, I explain my investment philosophy and approach and set the stage for tomorrow when I will release details of my current investment portfolio, which include Enthusiast Gaming and Snap, amongst others. The following is for informational, educational and entertainment purposes; please consult an investment professional.
#1 – Search: Google
Throughout the early 2000s, I had a front row seat in search, which was the most effective form of advertising. While at Mamma, I supported the CEO and CFO and worked on many competitive landscape analysis. It was clear that even the then-in-beta Google was a company unlike any other and likely to win the search wars – which it did. From 2002-04 I had accumulated roughly $100,000 in a rag tag assortment of second tier digital media stocks including search and directories (Infospace, Ask Jeeves), new media darlings (Yahoo), tech firms (Sandisk) and a mish mash of penny stocks because – why not? One thing I used to get a rush out of doing was making a get to go long (buy) a stock right before it announced earnings: would the market be positively surprised? Often times I was right, sometimes I was wrong. That gave me a bit of a rush, but because my time horizon was long-term, I would just hold the stock for a long time and hope it would get back in the money. I stopped that practice as it was a bit reckless and akin to going to the casino and playing blackjack. I’m not a gambler in that sense.
By the time Google filed to go public, it was a machine. Its financials were privately-held, but it was clear that it would be a rocketship. The company IPO’d in 2004, and my plan was to convert all my holdings – $100,000 – into Google stock. But, in the days leading up to it, my then boss mentioned that at $85/share, Google was over-priced. I don’t put that much stock in a company’s share price, but rather, its market value. The $85/share translated to $25 billion. I felt would be the premier media and tech company of the 21st century but my boss’ word of caution stuck with me. But, I was unmoved and intended to sell my B & C players for the mother of all stocks: Google. As I worked a full-time job and never wanted to be a day trader, on IPO day I simply didn’t get a chance to place an order. If my memory serves me right (you can read this, I rather not!) the stock opened at $98 and it never presented the dip I was hoping for. The stock crossed $100 and while an investor should care more about capital appreciation, that created this mental block thinking “well I could have had it for cheaper.” Google grew its core search business and expanded into a myriad of different markets – via smart acquisitions like Android and YouTube, which in 2012 I referred to as the best M&A deal of all time in digital media.
By 2005, IGN Entertainment bought AskMen. Then months later News Corp’s Fox Interactive Media bought IGN. I got married and caught the entrepreneurial bug and proceeded to divest of my stocks and RRSPs (Canadian equivalent of 401Ks) to fund the ongoing, money-losing operations of WatchMojo. One silver lining is that I effectively made a parallel bet on Google: betting the WatchMojo farm on YouTube in 2012, which paid off as YouTube moved from the pariah to the belle of the ball.
But, I remained on the sidelines.
#2 – Mobile: Apple
I was never gonna be a day trader; I was more into long term capital management. Fitting, since my final college paper was on the LTCM hedge fund. Anyway, the second time I had this feeling was when a colleague returned from the USA with Apple’s iPhone in 2007. I had the same kind of sentiment seeing the iPod even earlier in the decade, but seeing the iPhone was certainly more of a game changer as it was clearly a revolutionary innovation in mobile computing.
Of course, I was flat broke on the verge of running out of money (which WatchMojo did in December 2007), so the thought of buying stock in anything was a pipedream. The only “stock” I was accumulating was refrigerator boxes, as I feared I may end up living in one in a back alley… WatchMojo would continue to add to its losses until 2011. Apple would go on to become a $2 trillion dollar company; I have contributed through the purchase of multiple iPhones!
#3 – Social: Facebook
By late 2000s and early 2010s, I was in the trenches struggling to make payroll (I adopted a bi-monthly instead of bi-weekly frequency to have two less painful payrolls each year, even though the amount in aggregate was the same). I used to dream of stopping the hemorrhage and simply being able to meet payroll with less anxiety.
By 2012, we broke-even. That same year, Facebook had its IPO. Whereas companies used to go public sooner, Facebook was part of a breed of companies that had gone public later in their life cycle. While Google was valued at $25B when it IPO’d, Facebook was weighing in a gargantuan $100 billion market cap when it IPO’d.
As a result, not surprisingly, their stock didn’t exactly come out firing on all cylinders and tumbled out of the gates; it remained flat for the first year and eventually, it got attractive. But, all I could do was sit on the sidelines. Facebook bought Instagram in 2012 for $1B and then Whatsapp in 2014 for $18B. Were it not for those acquisitions that bolstered its moat in mobile, there’s simply no way that Facebook would be a $750 billion (in market value) business today.
You can’t buy stocks with sweat, blood & tears
WatchMojo had its real first profitable year in 2013, but cash flow is a “trailing” metric: you eke out a financial profit, then eventually a real profit, start to pay off debts, but the time you start generating free cash flow is further out. As an entrepreneur, my obligation was to grow my business. So once you’re profitable, you look for investment opportunities, be it internal or external. I was more focused on funding WatchMojo’s natural growth, and that’s where we poured our free cash flow. If external, they could be in private or public securities.
It’s Never Too Late To Do What You Always Wanted to Do
As a side note: I’m blessed to be an entrepreneur, but I always instinctively knew that I may not be a serial entrepreneur and may eventually spread my wings and become a more active investor and hands-on advisor.
In 2018, I interviewed former White House Communications director and hedge fund entrepreneur Anthony Scaramucci. In 2019, invited me to his SALT (alternative investing) conference. There, I produced the Fox in the Henhouse documentary but while there, I had an epiphany. Since then, I’ve grown more grateful and focused on managing WatchMojo while starting to invest in private companies via the Granicus Group and am now returning more actively to public equity as well. For more on my internal vs external thought process, read this.
#4 – Commerce: Amazon
It was clear that Amazon would be one of the iconic companies of our time, if for no other reason that Jeff Bezos was always a risk-taking bad ass who definitely set the trends and broke the conventions. The question, early on, was whether you wanted to go along for the ride. His menu started off with losses as appetizer, with a ton of debt as the main course. It was indigestion for most. I would have been fine with that, but at the onset, I wasn’t that drawn to Amazon the ecommerce player early on.
When it launched Amazon Web Services (AWS) in the early 2000s, it caught my attention. When you start an online business, eventually you educate yourself around the web’s infrastructure. Much of what we don’t see is somewhat commoditized. But Amazon’s investment in AWS was prescient. Around 2010-12, when we started to look into AWS for our own needs, I was drawn more and more to Amazon’s boundaryless ambitions but again: no cigar.
Hindsight’s 20/20 & Risk is Relative
Around the time we started to generate real profits (2013), it was clear to someone with a finance background who worked on the Internet that companies like Google (Alphabet now), Amazon, Facebook, Apple weren’t really risky given macro trends. But, considering how risky WatchMojo was (built on a platform, exposed to copyright risk, etc), once we became profitable, I adopted a fairly conservative investment profile: I wasn’t sitting in cash or heavily in bonds, but the stocks and funds I was invested in passively were more value-oriented.
As such, to my own surprise, I steered clear of the FAANGs – whose businesses I was more comfortable in ascertaining than say consumer staples, restaurants, banks and so on – and had a nice boring portfolio with predictably boring results. It worked.
Speaking of FAANG, I always rooted for Netflix and felt that Reed Hastings and Ted Sarandos were highly competent managers who would disrupt Hollywood with ease because of Hollywood’s innate risk-aversion. Without a doubt, there were many moments even predating the Quickster debacle that I considered buying shares. But, I won’t lie, unlike the other 5 companies I would include in the Anti-Portfolio, I cannot say that there was one moment when I wanted to throw a ton of cash at Netflix because I was always concerned with their debt (as it’s the true killer of companies) and mainly feared that eventually Hollywood would get its act together and consumers would wear down over SVOD fatigue. As it would turn out, while Disney, WarnerMedia, NBC Universal eventually launched direct to consumer streaming products, it was too late to put a dent in the Netflix juggernaut. And then Covid gave Netflix an edge over the incumbents.
#5 – Moonshot: Tesla
I don’t know much about cars. But I get how macro trends affect behavior and can figure out which individuals can mobilize and execute. Elon Musk first got on my radar after he merged his X.com with Max Levchin’s Confinity to create Paypal. eBay bought Paypal for $1.5B. He’s crazy, but good crazy. You can tell he didn’t let the proceeds of his stake in that eBay sale sit in his account for long. One of the many projects he eventually backed was Tesla which had been incorporated by others in 2003.
I didn’t need an engineering degree to see consumers were fanatical about Tesla and given climate change realities, Tesla would be part of the solution. Tesla launched its IPO on NASDAQ in 2010, becoming the first American car company to do so since the Ford Motor Company had its IPO in 1956. By the mid 2010s, with WatchMojo doing better and in fact, I referenced Tesla to my financial managers as an example of something risky (to them) that seemed like a flashback to Google to me in the early 2000s. Being busy as ever with WatchMojo, I created my direct investment account in 2016 but then… sat on it. This year in 2020, Tesla went on a rocketship trajectory; also like Google, I missed the boat and moved on.
There’s a lot of psychology in investing, when I was in college studying finance, I realized finance was “Accounting + Psychology.”
When I was trading on the Montreal Stock Exchange floor as part of a class, I realized trading is “Finance + Anthropology.” You scan the floor, see people’s mood and emotions… and you can predict certain momentum, which trading is based on to some extent. I didn’t like the near term aspects of trading, so I didn’t pursue that career path.
In accounting, it’s a mistake to make a decision based on sunk costs. Similarly, in investing, you should care less about historical asset prices and more about capital appreciation, but to me, admittedly, when I have missed out on something, I hesitate to get in at a higher price. Well, at least I used to.
Snap isn’t in the Anti-Portfolio because unlike the others, I actually bought the stock.
When WatchMojo took off like a rocketship on YouTube – i.e. we were the 7th largest channel in the world on the platform in 2014 based on subscribers added and views generated – we looked at other platforms to syndicate our content on. Facebook was a natural bet but with video accounting for less than 5% of its business, I felt like Facebook would never be as into video as others would. To quote investor Kevin O’Leary, “what you pay attention to will grow,” and I don’t think Facebook has paid enough sustained attention to video. It has wanted to be big in video, but wanting is not a strategy.
A company we eventually came to appreciate more was Snap. Early on, admittedly, we joked that we didn’t even understand it. Born in 1978, I consider YouTube my “native” web video experience. I think someone born in 1998 may favor Snap and someone born in 2008 may go with TikTok, but over time, YouTube’s massive catalog of pretty much all of the video content in the world that matters gives it a moat: as young kids grow older, they will seek the broader catalog YouTube has. That said, I felt like Snap was a monster opportunity after its humbling post-IPO. A bit like Facebook (but even more pronounced), Snap’s IPO was lackluster and its stock traded downwards. But unlike Facebook, which IPOd late relative to others, Snap IPOd early, partially because founder Evan Spiegel had incentives to do so.
However, to its credit, Snap had evolved into more than a one-trick pony, and its efforts with Discover and video programming were astute. I felt that it looked at YouTube and Facebook’s weaknesses and then developed a product that satisfied its users and delighted its marketing clients. I discussed it a bit more in my 2019 video expressing my bullishness. Seeing them bring on all-star sales executive Peter Naylor (whom I followed while he was at Hulu) gave me further assurances that the company was on the right track and the results speak for themselves.
Snap and Enthusiast Gaming are but two stocks in my portfolio. Now jump to my current portfolio.
Disclaimer: Nothing here should be misconstrued as investing advice. Educate yourself, speak to many investors, read up on mistakes others have made and speak to a professional who can help you based on your investment profile and time horizon.