Investing Lessons from Super Bowl XXXIV

The Los Angeles Rams are a different team today than they were 22 years ago, but are we different investors? That year, I managed a team of senior brokers servicing the most actively trading clients of Charles Schwab. My employees had a fun pool for the NFL playoffs, and I was given the wild card Tennessee Titans, who made it to the big game to face the Rams. From October 19th, 1999, through December 31st, 1999 (over 10 short weeks and only a month before the Super Bowl), the NASDAQ soared a scorching +51%. But the market was riddled with new, unproven technology companies going public for the first time. People had faith in the new kids on the block though, and football fans went crazy when another new kid on the block, Kurt Warner, led the Rams to victory – becoming the first undrafted quarterback and the first year-one starter to win the Super Bowl. One of the most talked about things on Monday morning was the stop of the Titans wide receiver one yard short of a game-winning touchdown in the last seconds. But at Schwab, there was even more talk about the commercials, because the appetite that year for new technology companies was voracious. So what happened to the tech companies who aired the most popular ads that year?

You can watch most of the ads on YouTube, and it makes for a fun time (hint: there were LOTS of animals!). Many established companies added a tech slant to their ads, and many newer companies like WebMD and eTrade survived the economic slowdown that would quickly follow. But the majority of poorly funded, unprofitable companies are no longer – names like, Epidemic Marketing, and my favorite unprofitable dotcom posterchild,, all went out of business. Numerous others were bought out and ultimately shuttered or liquidated. The creative media makes ads with fun, punchy story-telling and sexy graphics, but when it comes to successful investing, it is critical to keep a cool head and do the hard math.

Today, celebrities like Matt Damon, Gisele Bundchen, and Tom Brady are promoting companies like, the Singapore-based cryptocurrency application, and FTX, the Bahamian cryptocurrency exchange. Budweiser sold out NFT digital images of vintage beer cans in just an hour last fall, and someone recently paid $450,000 to be Snoop Dogg’s neighbor in his Sandbox Metaverse. These pitches almost all have the “fear of missing out” slant baked-in to drive new business and dollars into crypto, NFT, and Metaverse investments. In 2000, the tech-heavy NASDAQ peaked only a month after the Super Bowl, and then fell a whopping -76% by the autumn of 2002. The 2000 Super Bowl has often been called the “dotcom bowl.” Beware as celebrity endorsers pitch various forms of Crypto, NFT’s, and the Metaverse this Sunday during Super Bowl LVI. If any lesson came from Super Bowl XXXIV it should be, in my opinion, have fun, but avoid letting ads drive your most important investment decisions. During that time after Super Bowl XXXIV a $1,000,000 portfolio of lower-quality tech stocks would have dropped to $240,000, losing a whopping $760,000. I lost a few dollars in my work pool back then, but I didn’t join the hype and chase high-flying tech stocks only to watch my retirement portfolio crash. History does not repeat itself, but I believe it rhymes.

Vertical Mergers & Binary Trade on ATVI

In the past I have written about Cigna twice: once regarding the proposed merger with Aetna, and once about their buy-out of Express Scripts. In both instances the respective stocks, CI and ESRX, traded at discounts to the proposed deal prices, presenting a potential opportunity for investors. We took advantage, and even though one deal fell apart and the other went through, made profitable trades on both. To be clear, I would never advocate buying a stock with a pending buy-out or merger unless we thought it was a good company to own, because deals often fall apart.

Last week Microsoft announced a planned buy-out of Activision Blizzard for $95/share in cash. ATVI is a holding in the Pawleys Dividend Fund and if the deal closes, represents a +43% gain to our initial entry point less than a month ago. ATVI rose quickly after the announcement, only to settle and drift lower. Today it hovers around $79/share, which is a 20% discount to the proposed buy-out price. Simply put, the market does not believe the deal will close, and the fancy word for trying to take advantage of the 20% price difference is referred to as “arbitrage.” True, over the past several years there has been more government scrutiny over vertical mergers, where two companies within the same industry but at different places along the supply chain join together. And it is well know that there is bi-partisan support to limit the powers of large technology companies here in the U.S. – which is truly amazing given how wide the political moat has become. The media has been hot in covering gaming, virtual reality, and the Metaverse, but the benefit of Microsoft acquiring Activision goes well beyond that, and will take the new norm of work-from home into the virtual reality space, re-creating the connection of being together at the office and beyond.

The newsfeed is going to get very noisy as we approach mid-term elections, so keep your seatbelts tightened! Anti-trust and the excessive power of large technology companies will be a hot topic for candidates. I believe the buy-out of ATVI will happen, but if it fails any buyer of the stock will end up holding a good company with very little debt, good earnings growth, and rock-solid cash-flow. The $3 billion break-up fee that Microsoft would have to pay Activision applies even under an anti-trust failure. The market capitalization of ATVI is $64 billion, and they carry long-term debt of just $3.61 billion. The break-up fee alone is enough to cover almost all of their long-term debt, and is well above earnings for an entire quarter, which has averaged $2.28 billion over the past year. I remain confident that stocks of companies with little or no debt, good earnings growth, and rock-solid cash-flow will perform well in a myriad of economic environments. We will find out by early 2023 if the MSFT/ATVI buy-out closes. In the meantime, the landscape is ripe for additional mergers and acquisitions going forward, so we may see additional activity in the Pawleys Funds as others find value in the stocks we have selected.

Activision Blizzard – Another Pawleys buy-out!!!

Yesterday Microsoft announced it would buy Activision Blizzard for $95/share.  I bought shares of Activision in the Pawleys Dividend Fund, LP, and for clients in Separately Managed Accounts in late December for around $66.40/share.  This means in three short weeks, we have a gain of +43% to the cash buy-out price.  This is a phenomenal result!

Activision marks the 11th buy-out of stocks we have invested in for clients, which is incredible given that at any time I am managing only 30-35 individual stocks.  I am not trying to pick potential buy-outs, but it validates my selection criteria, which is identifying stocks that others deem to be very valuable, and are willing to pay big premiums to what we are paying.  I continue to believe that investing in stocks of companies with little or no debt, good earnings growth, and rock-solid cash-flow will best position portfolios to outperform the markets in a myriad of economic environments.

Proper portfolio construction and disciplined rebalancing is key to achieving good performance, but selecting quality stocks is just as critical.  The average gain on these buy-outs has been +40% – the list is attached below for those who are curious to see the history.  I am very thankful to have the trust and confidence of everyone, and am so happy to have delivered a nice result to start 2022.