Code. Money. Literature.

In 2008, I picked Buffalo Wild Wings (BWLD) in a stock picking contest. YTD, it’s up around 30%. But I ate there for the first time the other week (after picking up $75 of chicken wings for other occasions). I’m not so bullish now. Why?

The atmosphere. Okay, I’ll admit I was kind of overwhelmed the first time I went there. Boneless wings costing between 75 cents and a buck each? Yeah, good stuff, but not the kind of thing that I’d do once a quarter.

Eating there was disorienting. Dozens of screens. Noise through the roof. Lousy acoustics. Air temp designed to drive you out of the place. Sensory overload. Cheap burgers, pithy amount of fries. Great wings. Even the kids were overwhelmed. Everything oriented towards turning you over quickly.

It reminded me of the time we took a Caribbean cruise, almost a kind of tourist trap, complete with smiling kitchen staff peering out through their porthole sizing up the next round of suckers they were reeling in. Perfunctory service. We won’t be back anytime soon.

So I’m down on BWLD. Yes, they’ll do well simply because they are in that stage where they aren’t mainstream yet, and there are plenty of folks who have yet to experience the store, dropping a load of cash there in the process. But it has no legs. Watch for this thing to jump the shark sometime in the next 24 months. This isn’t even analysis, it’s just a channel check. No one there appeared to be enjoying themselves. They all looked like anxious monkeys waiting to flee.

Thought I’d weigh in on this interesting question posed on Paul Kedrosky’s Infectious Greed blog.

While Tiger Woods may very end up winning the tournament, how do these performance surprises happen? What is it about golf, in other words, that makes competency so fragile?

To put some numbers on it, Tiger is deemed the best golfer in the world because he wins 28% of all major tournaments that he enters. Meanwhile a top tennis player, like Roger Federer, wins a significantly higher percentage of majors, with Federer at 35% and the great Bjorn Borg at 41%. Winning competency in tennis is more stable, it seems, than in golf.

What is golf so fragile? The ball doesn’t move, and the player isn’t in motion, so two major variables disappear. Granted, the golf swing is longer and the clubs change, which is not the case in tennis (there are no serving rackets, etc.), but staying in place with the same equipment and a stationary ball are all major advantage.>/p>

The answer seems obvious to me, and several of the comments get it right. In a typical round of golf, Tiger Woods has somewhere between 62 and 80 opportunities to exercise his skill against the overall distribution of opponents who each have between 62 and 85 opportunities to exercise their skill as well. In the course of a tournament, this is around 280-300 opportunities. In contrast, a typical tennis match gives Federer or Nadal anywhere from 400 to 700 opportunities to exercise their skill advantage. Over the course of a tournament, this may be upwards of 3500-5000 opportunities. If you consider Woods’ or Federer’s advantage as something akin to the house advantage at a casino, a small edge becomes more definitively pronounced the more bets placed; the confidence of a larger sample size in revealing level of skill is higher than that of a smaller sample size.

Furthermore, in golf, variance in a particular stroke creates dependent events; one bad shot can slightly increase the likelihood of additional bad shots for the scope of that hole (one of 72). In tennis, the scope of dependent events is limited to a single point (one of perhaps 250-300). While smaller than the other effect, this also contributes.

The other factor: within a tournament, tennis matches are played serially and one-on-one, typically progressing from seeded matches where the house advantage is larger to ones where it is smaller. Golf is every player going against a relatively small sample against a long tail of competitors—something similar to the birthday paradox comes into play as the likelihood increases of finding someone capable of stringing together 4 outstanding rounds (relative to their expected advantage) as the number of simultaneous competitions goes up.

Finally, Kedrosky implies that prior performance above the norm in close proximity to the tournament in question should predict future performance. On the one hand, it should be easy to dismiss this. If separate tournaments are independent events, then hitting 14 of 14 fairways the week prior should have no bearing on whether he does so this weekend, no more than the roulette wheel coming up red 14 times in a row should affect the 15th spin. However, you can’t discount this entirely. Good performance is an indicator of lack of impediment (e.g., lack of injury) so to the extent that the course and conditions are similar from week to week and there being no evidence of injury occurring in the intervening week, we at least know that some of the factors that could degrade from his optimal advantage are not present. Put another way, rather than Tiger being “in the zone”, we may only really infer that he’s “not not in the zone”.

Further related reading: Intensity of tennis match play

I skipped last week’s update. Not a lot of trades, got killed on my shorts, and busy in real life to the point that I couldn’t commit the requisite ten hours a week or so to trading. But here are some quick updates of the blunders of the last couple of weeks.

Crushed on BBY and FAZ

Totally missed out on the chance to cover all my BBY positions (the shorts and the puts) back when it was at $25, only to see it rise to $39 in a squeeze. I’m still short, although I can’t carry this for much longer. Their ad campaign (i.e., “I must not be cool enough for a Mac”) and their IT to me means that there’s a good company in there somewhere saddled to a failing business model. I did average down on the puts, which I think are a losing cause, so those will be the first to go.

I took a big one day hit on FAZ, but luckily bailed before it lost even more, riding it from 43 to 27. Stupid, stupid, greedy, greedy.

I also had some SPY puts that I need to pitch—well over my typical loose stops. I recovered a little today on all the weakness, and despite the futures looking up for tomorrow, I think I can sit it out a little bit longer. A lot of the government’s actions, working or not, seem to be improving sentiment, so this comes down to whether my desire to fight a trend is stronger than my trading account. Maybe the two weeks of goosing was just there to give cushion to this weekend’s firing of Wagoner. Although come on. Are corporate structures really working if it requires the government to step in and fire a guy who lost $82 billion under his watch? We’re not even talking market cap loss. $82 billion in losses. You think after the first, I don’t know, $40 billion or so they maybe think about “going in a different direction”? No one who gets fired after losing $82 billion is a “scapegoat”.

I’m within about 5% of the largest cash position I’ve had in the last six months, so being a little short isn’t hurting. It’s just hard to find things to bet for or against at these levels.

The Big Lesson These Last Two Weeks

If life events interrupt, set stops or get neutral before checking out.

Upcoming

The end of the quarter is near. I still hold some SRS, the BBY and SPY puts, long AMZN and sitting long INTC. Sometime this week I’ll sell April calls into whatever trend continues—either the INTC and ATVI on strength, or the SRS on weakness. I really need to get back to neutral and recalibrate for more limited attention. StockTwits has fallen by the wayside for the time being, although armed with TweetDeck, I’ll make another run at it in the second quarter. Apologies to the people in that community whom I’ve forsaken. I shall return. I may just be focusing a little more on the Code and Literature, and a little less on the Money.

“CNBC could be an incredibly powerful tool of illumination for people that believe that there are two markets. One, that has been sold to us as long term. Put your money in 401(k)s, put your money in pensions, and just leave it there. Don’t worry about it, it’s all doing fine. Then there is this other market – this real market that’s occurring in the back room, where giant piles of money are going in and out, and people are trading them, and it’s transactional and it’s fast. But it’s dangerous, it’s ethically dubious, and it hurts that long-term market. So what it feels like to us – and I’m speaking purely as a layman – it feels like we are capitalizing your adventure by our pension and our hard earned [money] – and that it is a game that you know is going on, but that you go on television as a financial network and pretend isn’t happening.”
—Jon Stewart

And that, my friends, summarizes the motivation for 6 months of active trading in the market.

Before September 19, 2008, I was a buy and hold investor. I picked stocks, held them for too long, reluctantly sold, because in the long run, stocks went up. And I was extra dumb because I bought individual stocks instead of index funds, so the odds were against me since about 2/3rds of stocks (as do 80% of mutual funds) underperform the market.

Then I wanted a MacBook Pro.

Invest in tools. Invest in yourself. That’s what took me into that first short term trade. AAPL was down too much, into the $120s and I knew that it had to pop. So I bought calls, put in a limit order to sell at a profit, and bam, made a cool $1700. I didn’t know anything about position sizes, I didn’t know jack. But it won. Then I won about 14 more, and I thought I had it figured out. When the building is burning and people are running away, run towards it. Buy when the spike down occurred, sell (and sell short) on the spike up.

Sure, I had up months and down months, but in the trading portion of my account, I was generating some serious alpha. And that’s when it started to become clear to me that passive investing is just a way of becoming a sheep to be slaughtered for the active investor. In poker, there’s a saying: if you look around the table and can’t find the fish, the fish is you. I’ve shown that time and time again over the last six months.

My money is split into two pots: my “buy and hold” account which operates under the same premises as it did for the 15 years prior, and my trading account, which I actively enter and exit positions in under timeframes ranging from hours to days.

Since mid-September, my buy and hold account is down about 25%. My trading account is up 220%.

Lesson learned.

But it sucks. I’ve been able to generate these decent return, at the cost of about 10 hours a week at night and on the weekend studying and following up tweets and links and StockTwits threads and participating. The opportunity cost is that “investing in myself” has turned into “managing my money”. I’m not necessarily creating new value, I’m trying to salvage the value I had before, swimming against a current of bad news. I’m learning a lot, no doubt, and due in no small part to the relationships I’ve established through StockTwits. It’s not enough to make a career of it, but it’s also enough to keep me from giving it up and just resorting to mutual funds and CDs.

So I got my MacBook Pro with the proceeds I earned. And it’s paid off several times over. So score one for investing in tools, investing in yourself.

Trades: Out of INTC, AAPL calls

Earlier I had purchased two lots of INTC calls for a cost basis of around 0.36 per contract. The first batch (about 60%) sold at 0.50, the second batch (about half the remaining) sold Tuesday at .55 and the final batch went this week on Thursday at .64. My thesis back in week #7 of the StockTwits experiment was that INTC was a bargain at 12.75 or below. The whole trade ended up being a 51% gain. Not bad for catching part of the turnaround.

The AAPL calls I had purchased at 12.50 went for $17 on a limit order Thursday for a 35% gain. Could have let those run a bit more. I still think there will be several opportunities for AAPL in the 80s, although the low end of the range seems to be creeping up. Previously it was a no-brainer to go long in low-80s and short at 97. That range may have shifted up about 5 bucks.

Puts on the Pop: BBY and SPY

While this may end up being a mistake, I took the opportunity to buy more Best Buy and SPY puts with the proceeds from the closed calls. These are fairly minor positions. I’m just going to continue playing this back and forth of buying on weakness and selling on strength until it starts to fail.

The funny thing is that I missed out on a lot of upside by holding the existing BBY and SPY puts as the market rallied. The BBY is especially interesting because it’s the second time that I wrote a long post being negative on a stock only to have the market prove me totally wrong in short order. The first time was when I panned Mastercard; this time, I was talking down BBY at 24.50 just before it rallied to 28.50. In both cases, I lived up to the idiot retail investor moniker. Treat me as a contrarian signal when I’m talking something other than tech. I’m not sure whether it is just coincidence, or whether some subliminal survival mechanism kicks in that starts a rationalization process, but it’s something I’m going to watch.

Long Term: AMZN

The Amazon I bought last week turned out to be a good buy. I’m staying long AMZN. If you didn’t catch my Kindle 2.0 review, be sure to check it out.

I bought a Kindle 2.0 because I wanted to buy a Kindle in October 2008, but decided that there were enough limitations (e.g., no fixed-width fonts, a killer for someone who codes, and form-factor issues) that I’d wait. But I was already sold. When the 2.0 pre-orders came out, I was all over it late that first day, and received mine at the end of February.

The first night, I downloaded a ton of free content. If you’re interested, there’s a whole slew of public domain books available that range from classics from Tolstoy, Dostoyevsky and Joseph Conrad, to the first book I read, “The Art of Money-Getting” by P.T. Barnum.

The Kindle changed the way I read.

Here are the surprises, the things that I didn’t really understand about the Kindle but that pleased me.

One-Click Buying

Amazon is reviled for its patent on one-click ordering, but the Kindle shows this power. I sat at my computer in the most frictionless environment possible, viewing free public domain books, and going through about 1000 in 30 minutes, picking around 20 which, with a single click each, I could have wirelessly delivered to my Kindle. Abstractly, I understood this. But I didn’t really get it until I suddenly had a huge amount of content freely available downloaded to the Kindle within seconds of being purchased on the computer.

I’ve long said that the genius of Amazon as a company is the mastery of distribution. If you don’t understand this, you don’t understand Amazon. It is the primary reason for the insane multiple. They will be bigger than Wal-Mart, and they will get a target on their back the size of Texas. They’re like Microsoft in 1994—set to explode, but with many formative decisions still in front of them. I only wish I could get Amazon Affiliate bucks on readers buying the stock, because that’s the real story here. But I tell you what: take the spare cash you have, that money you’ve been waiting to invest, and split it into two piles. One pile is a small one. $369 for the Kindle. The other pile is whatever your average position size is. Two-percent, five-percent, whatever. Split that in half, and put half in AMZN stock, and put the other half in about 6 months from now or if it dips into the 40s on market weakness (unlikely, given its recent strength). You’ll pay for this Kindle and the next version and the version after that and all the content you’ll buy for the next 5 years many times over.

One-Click Reading

Okay, but what about the device itself? The first Kindle had the aesthetics of a Russian space capsule console. Thick, non-Apple-like, bulky. The Kindle 2.0 is sleek. The buttons are clicky, solid-yet-tinny, but get the job done. You can read a freaking book with your thumb! I can’t overstate this power. Sure, no good for the bathtub, but who was time to read in the tub anymore? This is reading for the laziest of the lazy. You could be one of those 1017-pound dudes on the Discovery Channel who has to be chain-sawed out of his house and this could still change your life.

I’m a chronic no-bookmarker. The saving of context saves me the hassle of finding my place, or dog-earing, or sticking whatever scrap of paper that’s available in a book and having one of my kids yank it out anyway.

It’s Not All Good

Okay, now for the downsides.

Rendering of content that was designed for a fixed-width font or had long lines is problematic. If you’re a coder, this is an issue. But I’m a glass half-full kind of guy when it comes to Amazon, so I foresee a killer “programmer’s Kindle” eventually emerging on which you can have all essential programming documentation at your fingertips and easily accessible. It seems like such a natural evolution that I think the wise move is just to get the Kindle now, buy some stock, and use the winning proceeds in a couple of years to pay for the upgraded device. Reorientation of the display to landscape might help, but then the buttons would be in the wrong place.

The jog-stick sort of sucks. This could be smoother and faster, but it’s not critical. It’s your thumb that gets the workout. This is by and large a passive device, so optimizing for the core function—reading—is the right design decision now.

But It Still Kicks Butt

Joshua Schacter says that focused narrow experiences—basically, doing one thing and doing it well—is the hallmark of Web 2.0. Kindle is the first Web 2.0 device. It nails the e-reading niche and experience. It’s disrupting the publishing industry already.

The Future: Long AMZN

When I hand the Kindle to curious by-standers, the first thing that all of them do is try to navigate by touching the screen. So you see where this is going. A lot of people look at the release of an iPhone/iPod Touch Kindle reader as a repudiation of the device itself, but remember…if Apple comes out with a tablet, the thing’s going to not have the same dynamics as the Kindle. Why? First, the screen technology will be different. The e-ink of the Kindle allows for a lower-power smaller profile. Second, the Kindle OS must be incredibly simple; even the Mac OS draws a lot, and Microsoft? Please. But I get the sense that adding touch to the Kindle is several orders of magnitude easier to accomplish than it would be to slim down any of the tablet operating system candidates out there today (much less create one from scratch.) This combination of first-mover advantage, plus association with a distribution channel, plus being on the right side of the technology stack. Amazon just wins, plain and simple.

So I’ve either convinced you to buy a Kindle, or to invest in Amazon. Not sure which. But if you’re here because you’re more interested in the stock than in the device, let me offer some caveats. First, Amazon has been incredibly strong during the recent downturn in the market. While the overall market has been down 20% in 20 days or so, AMZN has been up. You could have bought it for as low as $48 during the last 90 days, and as low as $34 in the last four months. If, as I believe, all good companies must be made to suffer, particularly retail stocks, before this depression can end, you may have several opportunities to average down. I got in at $60, but that might end up being a trade rather than a 2-5 year investment. I would be backing up the truck if Amazon starts painting numbers in the 40s or 30s again, even if their revenue starts getting hurt. They will crush brick and mortar because they are not about selling things, they are about DISTRIBUTING things. That’s their DNA. If you don’t understand that, you don’t get them.

So that’s my rant. Buy a Kindle 2.0 for the Amazon love. And buy the stock. Your kids will thank you.

An analyst upgraded Best Buy to “outperform” the other day on the basis of the Circuit City bankruptcy and closure of 567 stores, and the stock popped after breaking under $25 for the first time in a couple of months. With the similar rosy scenarios coming out of Citigroup and J.P. Morgan, my cynical spidey-sense is tingling at this sudden and spontaneous bloom of optimism. Is it the Daylight Savings Time bump, with the seasonal affective disorder washed away?

On the face of it, a 7% boost in BBY revenue over estimates seems plausible when their #2 direct competitor just disappears. Circuit City’s revenue was down 8% in 2008 over 2007, so let’s say they were the canary in the coal mine and BBY can expect a similar decline this year having been able to stave it off through better (meaning: less incompetent) management. That puts them at about $41 billion. Current estimates for Feb 2010 are $48 billion. To get the 7% increase over $45 billion to get to that $48 billion, when starting in the hole at $41 billion, you either have to believe that Best Buy won’t see a decline in core revenue due to poor consumer spending, or that of the $11 billion in 2008 CC revenue up for grabs, Best Buy can somehow snag $7 billion of it.

Please.

They’ll be lucky to snag $2 billion of it. First, they have to be in the same market as a CC store that was shut down to win anything new. There may be a lot of places where that is true, but not enough where Circuit City was beating them in any meaningful manner. Second, they have to beat Wal-Mart for those spurned Circuit City customers (and the ones who value price over name probably will be more likely to turn to Wal-Mart than Best Buy). Finally, for the ones who value the tech over the price, they’ll have to beat Amazon. I just see those more savvy shoppers less and less afraid of going online to get their electronics.

When it comes to Amazon, I’m not exactly the earliest of early adopter, but I’ve spent about 7 times as much on products at Amazon that previously I would have spent at Best Buy in the category of “products that are Best Buy’s bread and butter”. And I’ve noticed that people who are even later adopters, on the other side of the median, are doing the same. Ten years ago dropping $1000 or $3000 on a big ticket electronic item from an internet retailer scared most people. Those days are over. Best Buy’s relevance can really only rely on instant gratification purchases with minimal friction. I do think they have technology chops and get the internet, but too late. The time to build that competency and make the change was eight years ago, not now.

I’m not the master balance sheet reader, so take my estimates of revenues as back of the envelope math based on an assumption of continued lack of consumer confidence. A 15% spike in Best Buy’s price due to upgrades based on two-month old news just doesn’t pass the sniff test for me. Spidey-sense has me staying short.