THIS ARTICLE WAS FIRST WRITTEN BY JERRY AND PUBLISHED ON THE BF GF MONEY BLOG

poker

 

Have you ever played Texas Hold’em Poker, tournament style?  Have you noticed how the chip leader at the table – the player with the biggest stack of chips, somehow emanates this magnetic field which sucks all the other player’s chips towards him?  Have you seen how the players with dwindling stacks shove all-in at the Chip Leader, only to watch in dismay as the Chip Leader calls, and swallows the tiny stack up?

That’s the power of the Big Stack Chip Leader, the Bully at the Table.

Poker, Business and Investing, all share many similarities.  In this post I will talk about the concept of Big Stack Bullies in the business world, and investing in such companies.

 

Table Selection is of Utmost Importance

To be profitable in poker, table selection is of utmost importance.  You would want to choose a table with noobs and passive players.  Unless of course, you are on a mission to prove that you are the best, go ahead and jump into a table full of aggressive ‘sharks’.  But no, let’s put our ego aside, remember:  It’s not about being right, being smart, or being original. It’s about the Money, stupid.

I like to identify the biggest, baddest boys in the industry, then study them and the competition.

Again, when looking at the competition, you want to make sure that there aren’t too many competitors.  Just like in a poker game, when there 10 players at the table, your skill and earnings tend to be rather insignificant as the odds of winning are diluted among more players.

I like to look at an industry where the market share is favourably skewed towards a few Big Stack Bullies.  This requires some reading up and basic knowledge of the industry.

Let’s use a real life example of a company I invest in the Online Travel Booking industry : Priceline (PCLN)

 

PricelineNegotiator

Let’s take a look at Priceline vs its competitors

Priceline vs competitors

 Data pinched from Yahoo Finance

 

Priceline towers over its competitors by the sheer size of its earnings.  Expedia, which is second place, doesn’t even come close.  EBITDA of 3.17B vs 752.36M.  That’s a Big Stack Bully right over there.

 

Reasons to like the Big Stack Bully

 

big stack bully

 

Big Stack Bullies all started out as small time players in their respective industries.  It is through brilliant strategy, precise execution, sheer grit and some luck that earned them enough chips to become a force to be reckoned with. In other words, Big Stack Bullies become what they are by being the best at what they do.  Although investing in winning companies with a good track record may not necessarily guarantee you portfolio success, I would like to think that it tilts the odds in your favour.  If you like supporting a lousy soccer team and crying whenever they lose a match, then by all means pick the worst company in the industry!

Big Stack Bullies tend to have deep pockets as well, hence they are positioned to be able to take more risks, expand and capture new markets more comfortably than small players.  Have you ever played poker with a small stack of chips before?  You basically only have 2 decisions to extract the most value – Fold or go All-in.  Have you been called by a Big Stack Bully when you go All-in before?  He can call you with mediocre hands as he can afford to make mistakes a couple of times and still win all your chips in the end.  As a small stack player, you just have to keep praying that the odds are in your favour because one mistake and you are gone!  Hence, a Big Stack Bully can afford to take more risks and make more mistakes than the small stack, whose very survival depends on its every decision.  That’s the power of the big stack.

Priceline (PCLN) matches the 2 points I mentioned above.  A quick glance at the data above shows that it’s execution and strategy out matches all its opponents.  Priceline average annual earnings per share growth also beats Expedia (EXPE).  Take a look at the comparison of their average EPS growth over the years.

 

Year PCLN (EPS) EPS GROWTH % EXPE (EPS) EPS GROWTH%
2005 4.21 0.06
2006 1.68 -60.10% 0.7 1066.67%
2007 3.42 103.57% 0.94 34.29%
2008 3.98 16.37% -8.63 -1018.09%
2009 9.88 148.24% 2.05 -123.75%
2010 10.35 4.76% 2.93 42.93%
2011 20.63 99.32% 3.41 16.38%
2012 27.66 34.08% 2 -41.35%
2013 36.11 30.55% 1.67 -16.50%
2014 45.67 26.47% 2.99 79.04%
Average EPS Growth 44.81% 4.40%
(Priceline)   (Expedia)

 

Priceline also makes use of its chips to make smart, strategic acquisitions.  It has bought over Booking.com, Kayak.com and even recently, Opentable.com.  Priceline does not just rest on its laurels comfortably as the Big Stack on the table, it continues exerting pressure on its competitors by rolling out mobile apps that promotes cross-selling, (e.g, Book a hotel > Book a car > Book a Restaurant).  Although its growth may inevitably slow down due to its sheer size, I like the management’s constant scouting, exploring of new opportunities for strategic acquisitions.

 

Risks of investing in the Big Stack Bully

Does it mean that your money is safe if you just invest in winning companies?  No.  Nothing is ever certain in the business world. Make sure you get that in your head.

Here are some problems with investing in the Big Stack Bully

  •  Slower growth due to sheer immense size of the company (*smaller companies grow faster.)
  •  Hungry, well-run competitors stealing market share (Trip Advisor (TRIP) is growing pretty fast…)
  •  Unforeseen dangers lurking beyond the horizon ( News of Google entering the Online Booking Industry – Another big stack bully entering the fray?)

 

 

With that, I hope I gave you something to consider when investing in stocks… or playing poker.

 

Happy Lunar New Year!

 

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We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded.The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Jerry’s personal capacity and does not in any way represent those of his employer and other related entities. Jerry is a shareholder of Priceline. 

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