Gaming Industry Investment Tip

Earlier today, a reader had asked if I was an investor (because of all of the company research and prediction posts.) As usual, my response ended up getting pretty long, so I just converted it into a full post. :)

If you ask me some interesting questions, sometimes you'll get some interesting answers. One of my other recent posts ("Playing the Long Con") also came out as a result of a reader question.

This post might really interest some of you, especially if have a stockbroker or you're looking for a way to predict stock changes.

So, to be clear, I'm not an investor and I haven't done any investing. I'm not involved in it because I don't know anything about how to do it.. probably like many of you. If I had a broker that could move fast, or I personally knew how to short sell stocks myself, it's something I would actually do. ("Selling short", by the way, is basically a way to benefit financially when a stock loses value.. so you're betting that a company will do poorly in the future. You might have heard the term "bear market" before, it's the same sort of field.)

I do recognize, though, that the kind of stuff I research or analyze does have in some cases a strong correlation with stock price changes. I'll give you a real world example of something that actually happened last year.

It's something that can be theoretically useful again in the future.

So, here's the investment tip: leaked video games. :)

If you know ahead of time that a game is going to get really bad reviews, you therefore know that it's going to have bad sales and you will know this ahead of other investors. When the first day sales come, the stock prices will react to the bad reviews and sales figures.

THQ's Homefront leaked publicly online two weeks early, and if you had played the game (or saw the reviews) you knew it was going to be TERRIBLE. At the time, I would have actually shorted the stock (if I had the tools and knowledge) knowing that THQ had invested a lot of money in this project and they were depending on it for the future.

Here's what happened to the THQ stock after the game launched on March 15, 2011. Remember.. two weeks prior to this, the stock hardly budged even though the game was leaked and gamers found it horrible.

This was a perfect opportunity to short the stock, because you would have known sales would be very poor. It was so bad, in fact, that the stock continued to tumble until they were even threatened to be delisted.

This also tells me that not a lot of investors follow these leaked games, or even play them themselves, which is a huge disadvantage for them. They invest in something that they don't understand, and probably rely on investment advice from others.

This isn't possible with all companies though. EA and Activision are hard to predict, so I would skip those. But, the more volatile companies are easy to predict. For example, THQ, Take Two, Namco Bandai.. they release less titles, have less regular income (like subscription based games) and they rely more on major titles.

A major title means major investment, and it means they're counting on it's financial success. If something goes bad, their stock cannot recover as easily.

(I would have loved to include Bethesda in that list, based on the RAGE leak, but they're a privately traded company so I don't know what happened internally.. I assume it was fairly negative though.)

When a game leaks, here are the signs to look for in the company:

• If it's a major title they're highly dependent on. This makes it a volatile release, which is what you want.
• It's being released in the absence of other major titles.
• If it's a new franchise and they intend on future growth for it.
• Hype of the game demonstrates high expectations.
• Look for high sales expectations especially from industry specialists since investors follow their advice.

You also need to be prepared yourself.

You never know when a game is going to be leaked, or how long before the game is officially released. Sometimes if the street date is broken, you might only have 2-3 days to make a decision.

If you can obtain the game, you need to be well familiar with the genre to know if it's going to do well or not. Don't bother guessing the success of a RTS game if you've never played one before. You also need to be a well discerning individual who can rush through and properly judge the game content as quickly as possible. There are a lot of factors to consider, like graphics, story, ease of use, and game length. Game length especially! With that in mind, you should always have a memory editing tool (like Cheat Engine) handy so that you can cheat through the game and experience as much as possible to make a quick but informed decision. (Trainers and in-game cheat modes won't be available when the game is leaked, so you have to do it yourself.)

Some of you might be thinking "Well, this is all just hindsight and there's no proof that you would have done this at the time." So, how about we do this for another future game leak? :) I'll make a prediction and we'll see what happens. From what I can tell, the next best potentials will be Max Payne 3 and BioShock Infinite. We have to see if any of those get leaked (or the street date broken), and I can make an educated guess how the stock will react. The other option is Guild Wars 2 (or another MMO).. these require beta-tester reviews. Only problem is, I believe they're protected under NDA.

So, this brings me to a concern. What I don't know is if there's anything illegal about doing any of this? If a street date is broken, or a game is leaked publicly, and there are public reviews about the game.. if you act on that information, is it considered insider trading since you have access to materials that aren't supposed to be public yet? If you are (or know) an investment broker, I'd like to know if it's legal to act on this sort of information.

There's always other public information to act on though. If you recall, for a long time, I had been saying to expect a release date announcement during the 3 days before the Q4 2011 shareholders meeting. There was a 80% chance that it would be made on the Monday (the most logical choice), but the chances would drop considerably as the call approached, and by then it would mean that the game would be delayed to Q2. (I put my faith in Blizzard though and trusted their "promise" of Q1.) After the call, ATVI's stock immediately tumbled 30 cents. Their stock is always fluctuating, though, so it's hard to say if it will recover or how soon. This is why I prefer other companies who put all of their eggs in one basket though.