The investment world is splitting in half. Now, more than anytime in the last 18 months, the winners are diverging from the losers. No more does a single macroeconomic event steer the markets.

We are back to individual fundamentals and microeconomic themes. That means it is a stock-picker’s market.

Perfect evidence of this phenomenon comes from two companies with similar product offerings but widely divergent business models, GameStop (NYSE:GME) and Gravity (NASDAQ:GRVY).

Shares of GameStop are down by over 5% so far today as the Street digests the firm’s latest earnings figures.

With wary consumers unwilling to open their wallets, especially on non-essential items like video games, the company’s top line shrunk by 3.7% over the past three months.

The $1.74 billion in revenues translated into $38.7 million in second-quarter profits, a plunge of over 30% from the prior-year period. Making the figures appear even worse, same-store sales dropped by 14%.

The figures prove that growth was nowhere to be found, which is bad news as the company prepares to enter the critical shopping period that is the fourth quarter.

With chances of significant growth running slim, executives were forced to lower their earnings expectations for the remainder of the year. GameStop now estimates a full-year profit of $2.64 per share, down from its previous prediction of $2.93.

While GameStop may be representative of the nation’s consumer spending, it is not indicative of the kind of revenue-generating power held by some of the gaming industry’s strongest, leanest competitors.

When it comes to running a lean business, few can do it as well as the Asians, home of almost all modern efficiency practices.

While GameStop wonders where everybody went, a growing competitor, South Korea’s Global Gravity, is celebrating the fast-growth it has found in the online gaming sector.

Thanks to the drastically reduced costs and increased exposure of the Internet, Global Gravity is poised to take over as a planetary powerhouse in the gaming industry.

Size doesn’t matter

With its Ragnarok Online product soaring in popularity across the globe (it has strong exposure in 62 countries on five continents), Global Gravity shareholders are wondering what the future holds.

Today, they are getting a glimpse of the possibilities as shares of their company are surging ahead by more than 20%, thanks to a strong, intra-day volume spike.

The diverging pricing action between these competitors teaches us an important lesson. As I mentioned above, when the nation pulls out of a nasty recession, corporate fundamentals will become more and more important.

Margins, debt, free cash flow and market share will show the obvious difference between winners and losers.

We know consumers will not be dumping their savings accounts anytime soon. That means companies will be forced to stretch every dime of revenues as far as they possibly can.

Efficiency is not a wildly common concept here in the States. GameStop proves it. For companies based in Asia, however, it is not only a way of life, it is a means of survival.

Gravity may only have a market valuation of $69 million (compared to GameStop’s figure of $3.9 billion), but we all know it is not the size of your company that matters.

It is how you use it.

Source: International Small Caps: Size Doesn’t Matter

Before we get into the ins and outs of this sale, we need to clarify what it means to actually buy one-fourth of the Internet. Of course, you can’t just own something as large and independent as the Internet. But you can buy a portion of its traffic.

We’ve been recently writing about international telecoms. If you bought up enough of these Internet Service Providers you could potentially own enough Internet traffic to constitute a quarter. But there will soon be another way you can invest in the traffic with just a single click.

About 50% of all Internet traffic is from file sharing– people sharing music, videos, games, and every other type of file you can think of. Regardless of how you feel about Internet piracy, 50% of all bandwidth on the net is made up of this type of activity.

Here’s where the story really starts heating up…

The Pirate Bay: 2009 Has Already Been One Hectic Year

Half of all file-sharing traffic is hosted on a single website. That’s a fourth of all Internet traffic in one place. That site is called The Pirate Bay.

TPB was launched in 2003, less than one and a half years after Napster—the pioneer in music file sharing— was forced to shut down because of court rulings.

TPB operates in Sweden, free from initial U.S. laws. But over the past several years, the European Union and many individual member-countries have cracked down on e-piracy.

In 2006, Swedish police raided TPB’s headquarters, temporarily shutting down its server. April of this year was an even worse time for the organization. Founders Peter Sunde, Fredrik Neij, Gottfrid Svartholm and Carl Lundstrom were sent to prison for one year and slapped with a $3.6 million fine.

TPB’s Next Giant Step Forward

With the founders in jail and facing serious fines, another Sweden-based company, Global Gaming Factory, announced plans to purchase TPB for $7.8 million. GGF intends to turn TPB into a legal, fee-based website. Users would have to pay a monthly fee to share files. This money would then be used to pay copyright fees for each file transfer.

This, again, might conjure up images of Napster, which was bought by Roxio Inc at bankruptcy auction. Roxio rebranded it as Napster 2.0, which began to offer legal, paid transfers. Best Buy acquired Napster last year for $121 million, but is struggling to see profits.

GGF’s plans for TPB, however, aren’t as small as Best Buy’s were for Napster. GGF, almost immediately after announcing its plans to buy TPB, declared its intent to take the website public… on Nasdaq.

If all the legal and technical aspects of this deal work out as expected, TPB’s intial public offering will take place sometime in 2010. This gives us less than 16 months to plan.

But before we start setting aside cash for this IPO, we need to take a serious look at what this deal will look like.

Why You Should Not Buy Pirate Bay… At Least With What We Know Now

It’s safe to assume TPB’s 25-plus million users aren’t all going to start paying the monthly fees. Instead, we can expect more than 75% of these users to stop sharing files. Possibly as little as 10% of TPB’s current user base will be left when GGF starts requiring fees.

This transition is expected to come very soon. On August 27, GGF is holding a press conference to go over the details of this reorganization, as well as its plans for the IPO.

GGF is also working on deals to turn TPB’s enormous share of Internet traffic into a second revenue stream. By setting up deals with ISPs, GGF will trade promised bandwidth usage for cash.

ISPs are starting to sell bandwidth to customers instead of offering unlimited packages. This means that users that transfer a large amount of data packets will have to pay considerably more than those that just us the Internet to check their email.

With this transition from monthly subscriber to pay-as-you-go, ISPs will have an opportunity to make more money off bandwidth use. GGF promises that TPB will provide this.

However, we’re not sold on this business model. Napster 2.0 has not been able to mount a significant attack on powerful rivals such as (NASDAQ:AAPL) Apple’s iTunes store. Even web giant Google (NASDAQ:GOOG) has not been able to effectively monetize its $1.65 billion purchase of the world’s most popular video sharing site, YouTube.

GGF’s plan might seem enticing to some—don’t buy into the hype. Music and movie pirates will go somewhere else for their illegal downloads. Avoid this IPO at all costs.

Sincerely,
Jim Nelson

Source: How You Can Own a Quarter of the Internet… And Why You Don’t Want to

Villains are created, emotions are stirred, and then the simple solution is offered. And the people think, “What idiots we were not to think of this idea before. Yes, surely if we kill all the Jews or Christians or Muslims or Buddhists or Hindus or the Red Indians or yellow-skinned or white-skinned or brown-skinned or black-skinned people the world will be a better place. Such a simple solution.”

Politicians and rulers appeal to the emotion of hatred. Societies that breed on these motions end up soul-less and eventually die. Historians are left to uncover and catalogue the mass graves and scarred hearts. A man in love does not appeal to the emotion of hatred. In fact, quite the opposite. The beautiful young lady casts a halo of possibilities to the impossible.

His income may be small, her spending habits may be large, but – when you are in love – it does not matter. Eating at expensive restaurants every day and shopping in the well-lit malls may not be affordable, but the person in love ignores it. This is only the courtship period, he consoles himself. Visiting her family and seeing her immersed in a life of luxury does not deter him. His love – their love – will see them through.

She will change, he thinks and we will move to a more modest lifestyle. He must have some hidden wealth to keep us going, she thinks, as she clings on to her lifestyle. Meanwhile, they cling to each other. And they cling to hope. When the lights are on, they are in love. When the lights are switched off, they swim in emotions of hope and optimism for the future.

But one day, the lover boy wakes up. He has bills to pay. Conquering his weakness for his love, he begins to suggest that they eat out less often, at more modest places. How about some home cooked meals? Very soon, love evaporates. Other emotions set in. The bills are still to be paid.

And the peasants wake up. They have no one left to kill. They have knocked out all the people they were told were their enemies. But they are still poor. The rulers are still rich. They begin to think of who the real enemies are. They think rationally. And a new emotion sets in.

So there is nothing surprising when investors use their emotions to make money. After all, we use our emotions to vote, to fall in love and find our life partners. So why not use our emotions to make money. Emotions are the reasons we have failures. “Life”, said the divine Buddha “is suffering.” It is these emotions and expectations that we have which cause that suffering.

But who cares what the late Buddha has to say. We all need our quick fix. We all have our dreams. If someone walks in and sells you a dream, you will grab it. You will buy it. You will then preach it for him. Your greed will take you in that direction. Buddha or no Buddha, you have chosen the path.

Markets, they say, are ruled by fear and greed. And they are. Everyone wants to make money. A lot of it. And not work for it. So when the TV news channel tells you to tune in for the “expert’s best buy or strong recommendation”, everyone stands around waiting. With great expectations. Emotions are charged. Greed rules. Salvation is soon to be upon us.

And the expert gives his view. They give you a name of a hot stock. And it rises. Money has been made. The expert becomes a guru. More followers flock to him for counsel. His calls get more outrageous. More bold.

In a “bull” market – which, by definition means that everything you buy is going up – all the calls of the great guru will always rise in value and give profits to his followers. The guru becomes a mega guru – the TV channels beg for his presence. And then the tide turns. For reasons out of the guru’s control, the markets turn sour. There are more sellers than buyers. More people have fear, they wish to sell. The number of people who are greedy declines, there are fewer buyers.

When there are more sellers of anything and less buyers, the price of that product will always decline. The same logic of demand and supply applies to the price of a share.

The followers lose money. Sometimes they lose all their money. The mega guru’s views are no longer hailed by anyone. But the TV channels have to keep their 24×7 electronic bombarding of our brains. They analyse the history of the guru. What did he say, what made him right, what did he get wrong? The analysis is meaningless. It merely helps the TV channel fill in another 30 minutes of garbage to numb your senses. Meanwhile, they look for another guru to present to their viewers. Surely there must be some guru who can make money for all of us when markets are going down?

The internet makes everyone vulnerable to deceptively easy ways to make money. And the invitations to get rich pour in via email. Of the 500 million people with internet email ids, you have the honour of being discovered as a “badly needed friend”. Someone in Africa – who was the wife of some deceased leading politician – writes to you. “I know you will help me”, she writes,” recover the money that my late husband left for me in a bank account in Switzerland. Please send me your bank account details”, she urges you.
“I can use your bank account to get the money out of there and then share those millions with you”, she writes with honest simplicity. “By the way”, she asks innocently, “can you also send me your credit card details?”

The email promises you the impossible. It appeals to your emotion of greed. Just like the guru’s hot tips appeal to your desire to make millions and do no work for it. There is a sucker born every minute, said the legendary circus master, P T Barnum. The gurus know that. The brokers know that. The 24×7 TV channels know that. That is why the TV channels have to always chatter and promise you something. They have to appeal to the greed in you.

Emotions are more powerful than rational thinking. Emotions are more powerful than a calculated risk. For every fool who accidentally made it rich by being a sucker, there will be hundreds with tales of woe – those who lost all they had. For every fool who accidentally made it rich by being a sucker, there will be many more people who followed a simple disciplined approach to investing. That is why you will never find a disciplined investor who is poor. The disciplined investors leave their emotions out of investing. The disciplined investors know that making money is hard work.

Keeping emotions out of investments is hard work. But who wants to work hard these days? There is so much money to be made every where. So much easy money. Look at the geniuses on Wall Street. They lost billions for the banks and finance companies they work for but they got their rewards and their personal profits.

Maybe people are waking up from these illusions. They are poorer, we suspect. And hopefully wiser.