Go Nikeforos – Its your birthday!

It is two years to the day that the Nikeforos portfolio made it’s first investments. The portfolio was put together based on my philosophy of where the gaming industry was going and what its role was in the economy. I drew a line around the industry that was wider than most people would have drawn, hoping to catch all parts of the value chain and focus on larger trends rather than hot tickets.

The portfolio included some hardware makers, some developers, of course, but also distributors, IP originators (film industry), key suppliers (chip makers), and would keep an eye on e-sports and gaming accessories. While not directly investing in Amazon, Google, Tencent and Apple, it kept an eye on the movements of these top predators in the gaming universe.

Two years later the result is an auditable ARR of 50.43%, a Sharpe ratio of 1.67. The portfolio outperforms the only gaming ETF in the world (ETFMG Video Game Tech ETF – US26924G7060) by 44% over these two years.

What has pleased me the most is that the outstanding performance of this portfolio is a direct result of the decision I took when constructing the portfolio to spread the net wide with a holistic definition of this sector – it is not a portfolio that got lucky on a couple of crazy IPOs. It is also a portfolio with effectively zero turnover and long-term investment horizon that hasn’t changed since day one.

So let us look at what has happened – almost everyone who has invested in the games industry in the last few years has done well. As a baseline, we can take NASDAQ the global success story of the last two years – up 49%. During the same period, the ETFMG Video Game Tech ETF outperformed NASDAQ and returned 88% – pretty good. The Nikeforos portfolio is up 119%.

Some of this performance comes of course from weeding out a few crappy stocks, but key success factor for these two years has been defining where gaming fits into the global economy, and not focussing on developers and consoles. For example,  I reasoned back in 2016 that a common key to all gaming activity is graphics performance, a huge part of the experience whether you are a mobile candy crusher, console basher, or CS freak. Gaming has been pushing the graphics chips market forever and the two will always be intertwined. In the portfolio, NVIDIA and AMD have performed exceptionally well. If you follow these companies then you know that by being the best at what they do in the graphics chip market meant that they have been best placed of anyone  to take advantage of every single trend over the last two years – Bitcoin, VR, Automated Vehicles, streaming video content, CGI, e-sports, etc etc.  all these trends have graphics cards crunching data at their heart.  Are these gaming stocks? Yes! they are key to any gaming growth and are exposed to all segments of the gaming market. Gaming is what has pushed their capabilities in the first place, and means that they are best placed to benefit from future demands that gaming industry has already shown them the way.

Source:https://techstartups.com/

The Nikeforos slogan is a quote by Einstein “Combinatory play seems to be the essential feature in productive thought” – which, to me, means that play with different concepts and ideas is the driver of innovation and creativity. With the graphics chips makers – technology aimed at reproducing realistic worlds and interactions for gamers has lead to technology that maps the real world and allows Automated Vehicles to navigate it better and safer.

What could I have done better? One missed opportunity over the last two years is Nintendo. In May 2016 Nintendo was the biggest pure gaming company, but in my view, one of the worst stocks, down 80% from its peak in November 2007. A mature company with an industry pedigree like Nintendo needs to be churning out a reasonable dividend and have a steady business model with games, licensing, hardware all looking like they are on top of things, not jumping up and down on trends and potential. Basically, after 40 years in the market, they should be the Microsoft or Apple of the gaming world. At the time Nintendo had some great history in both consoles and games, but at the same time had not converted that into hard cash on anything like a regular basis, not good enough for a company with such a distinguished reputation and coverage of the market.

Soon after the launch of the Nikeforos portfolio, Pokemon Go launched in July 2016, it was all anyone talked about for months and the game swept over the world, actually physically changing individuals’ behaviour, bringing people onto the streets and parks the world over, in short, a very cool product, ticking all the boxes and some new boxes that had to be invented were made just for that game. As Pokemon is one of Nintendo’s most famous pieces of IP maybe it was time to jump into the stock. History shows that, for Nintendo, success doesn’t mean financial success. Closer inspection revealed that most profits from Nintendo Go would end up with Google who own Niantic, the developer who brought it to market. As it happened, Nintendo Go burned brightly but then faded very quickly and the income stream never materialised to justify the crazy rush on the shares.

Then the Nintendo Switch was launched in March 2017. It was definitely an interesting package, but I wasn’t in a position to judge if it was going to be a success and didn’t want to reallocate the portfolio’s resources on another risky Nintendo project. Since then the console has done very well (ok, the best selling console ever in the US and Japan) and the share price has risen on good sales and improved margins, it would have been nice to have been part of the nearly 100% upswing, but there is still a lot of room for improvement given the stock is still 40% off the peak from the Wii fuelled boom in 2006-7, and the success of the Switch hasn’t signalled a long-term change in how Nintendo go from hero to zero every few years.

What about the next two years? It is my ambition to turn this model into a vehicle that can be shared by many,  a fund is on its way, watch this space…

As part of that project, I am starting to “weaponise” the investment process, bringing even more rigour and allowing me to cast the net wider over the 3000 companies in the investment universe finding new corners of the industry and identifying long-term investments.

I want to democratise the investment process, bringing in industry insiders and expert commentators as well as crowd-sourcing ideas from our investors, drawing on the wisdom of the crowd. I believe this will provide a uniquely efficient method, as well as a uniquely engaging approach for investors.

Feel free to get in touch if you want to contribute to this project!

/Richard

@Nikeforos