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Ups and Downs

Why the volatile gaming industry is not for everyone

Ups and Downs

It’s called volatility.

And investors don’t like it.

They don’t like stock prices spiking and plunging any more than most casino operators like the volatility of whales betting six figures a hand, winning or losing a million dollars or more a night.

Barry Sternlicht, the hotel owner and developer, got out of casinos because of the volatility. Slots are a good business. You can predict a smooth revenue flow. But not casinos, he said, referring to high-end joints like Caesars Palace.

And Harrah’s CEO Gary Loveman once explained his decision to quit going after whales by noting that 10,000 or 12,000 people can be having fun in the building, but you sweat out how one guy will do in the high-limit room.

Likewise for investors.

There’s a reason the Chicago Board Options Exchange Volatility Index-the VIX-is called the fear index.

And my, have gaming stocks been volatile the past year, with even the most glamorous names dropping more than 90 percent from autumn to spring, then rebounding several hundred percent.

Sometimes, the big swings come in a single day.

Consider investor reaction to earnings reports a few weeks ago from what we call the Triplets-Wynn, Las Vegas Sands and MGM Mirage, companies concentrated on the Las Vegas Strip and Macau.

All three reported essentially the same results-significant cost reductions, weakness in Macau, very significant weakness in Las Vegas. And their outlooks were the same-business has stabilized and signs of an upturn are starting to appear.

So how did investors react? Wynn shot up 13 percent. LVS plunged 16 percent. MGM nudged up 3 percent.

Why such different reactions?

Some say it was the expectations game. Wynn did better than expected. LVS missed. MGM expectations were all over the place, so reaction was a little muddled.

But expectations alone don’t answer the question. No matter that WYNN did better. His numbers and outlook followed the pattern. The reaction diverged.

Proof of that came just days later when LVS jumped 12 percent on a better-than-expected national unemployment report, and no fundamental change for the company itself.

Simply put, investors reacted to ephemera.

This tendency for dramatic swings up or down on often-trivial or just tangentially relevant news is driven by fear, in an uncertain market that follows one of the worst and longest bloodbaths in Wall Street history.

And so, when volatility reflects fear and
uncertainty, investors should stay away from stocks, we’re told.

And yet, volatility can represent opportunity for those who want to buy low and sell high.

The bear market has given a bad name to buy-and-hold investors, leading some even to criticize the Oracle of Omaha, Warren Buffett. And the most storied value investors, who by definition must be long-term as they wait for the market to recognize the value of their holdings, have gotten their clocks cleaned.

One problem with buy-and-hold is that it became too popular.

Naïve individuals jumped on board almost thoughtlessly, much like day trading attracted so many amateurs during the tech bubble nearly a decade ago.

Then, when they flamed out, they gave long-term investing a bad name. It didn’t help that the likes of Kirk Kerkorian and Sheldon Adelson saw billions of dollars in value disappear. Or that the legendary value investors did the same.

Yet, long-term investing still works if an investor keeps two points in mind:

  • You are buying a piece of a business, not a stock. If the company and its prospects remain sound, volatility allows you to buy it cheap.
  • You’ve got to be prepared to admit a mistake and get out if you no longer sense the company has the value or the prospects you saw before. A caveat on this point is time horizon, because, as the old saying goes, the market can stay irrational longer than you can stay solvent.


Perhaps the best example of long-term investing in the gaming industry is Wynn Resorts. And perhaps the best practitioner is Steve Wynn himself, as he has demonstrated he knows how to take advantage of volatility, selling additional shares when the stock is high and buying back when it is low.

When WYNN IPO’d in 2002, investors had the opportunity to both invest from day one and rely on a track record. That is because Steve Wynn had both a financial track record, at Golden Nugget-Mirage Resorts, and a well-practiced, well-known mode of operation.

And, despite all the ups, and this past year’s steep downs, anyone who bought WYNN at its IPO price of $13 a share has been handsomely rewarded.

Indeed, the volatility of this year’s market gave investors the chance to buy more WYNN very cheaply in the spring.

Put another way, the old adage still applies-buy low, sell high.

There’s a reason that “buy on the dips and sell into rallies” isn’t a similarly regarded slogan. That is because no one knows if the latest dip isn’t just the start of more, or if the rally won’t be followed by more after a stock gets away.

That kind of investing is more for the VIX followers and those who respond to every breathless debate of sound bites on CNBC.

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