Efficient Market Hypothesis … people will always have to learn the hard way

Monday, October 7th, 2013 @ 3:11 pm | Electronics, Finance

In 2006/07 I started my journey into the financial markets that led me into learning about options, futures and foreign exchange; eventually into taking the CFA program. That journey started with AMD and a study that we had to do for school. That was a time when AMD was running on all cylinders. They were taking server market share, leading on the 64-bit transition and had a general cost advantage over Intel. Major PC makers were moving from Intel only shops to support both companies.

What is did not understand was that the market prices in all of these news topics, and unless I had information that the market had I was just buying a fairly valued stock. If I had predicted their new processors would dominate the market and steal market share, that would be different and I would be able to profit. Once the news is out and the trend is out, people can easily figure out at consensus forecast that prices in the most likely outcome.

Two things happened that were not priced in:

1) AMD bought ATI, a company worth equal to its own market capitalization at the time. They bought it for strategic reasons that were long term, and correct but they could not predict that shortly after the financial markets would be in turmoil just after. They had high debt, no profits, and a terrible environment to raise new capital. They sold off most of their fabrication capacity at very discounted prices.

2) Intel offered their customers financial incentives to discontinue the use of AMD processors. This was illegal and AMD later won the court case, but the damage was done. AMD lost market share literally over night, was forced to heavily discount their products, and this caused a serious financial problem for the company with the point above.

 

The reason I am bringing this up, is that over the weekend someone was pitching AMD and citing currently public information as reason to invest. This is a plan to lose money. Real investors take a position either short if they believe consensus to too high, or long if they believe that the underlying market trends are stronger than they currently forecast. This happens often, but the regular person who picks up investing does not have the skills to do the valuation models or is not informed enough on the underlying macro economic conditions. Their are other ways to do this such as long-short investments, but this is not what is normally talked about. Most of the “retail” herd simply invests in low dollar denominated stocks, and “trades” short term market oscillations.

As a ending to this article, I will play devil’s advocate and list the bear opinion on AMD.

1) AMD sold off their fabrication capacity, they have a long term disadvantage in that they no longer control the platform. Their are successful fab-less companies but they are in high margin markets developing niche products.

2) Europe (one of AMDs largest markets) is in tatters.

3)Interest rates are going up. Intel has no debt, and as such AMD is at a competitive disadvantage.

4)Windows 8 upgrade cycle is in progress and is priced in. New consoles are not significant profit drivers.

 

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