Tuesday, November 27, 2007

How Foolish of Me

I have been thinking for a while about writing an article about my mistakes and the learning process that made me turn 180 degrees. I hope my personal experience may help other investors. I have written about my screwups several times, especially in the recent article "Exploration", but this subject has not been covered comprehensively. Anyway, I was a bit too ashamed to really get done with it, waiting in hopes to get a bit of vindication from the market, which happened recently. Also, somebody posted a comment for my last post pointing out some of my mistakes, the author actually did some research of old posts of mine, and his help giving me a cue has been "the straw that broke the camel's back".

I began as an "staunch" AMD supporter and wrote profusely about the chances this company had to displace Intel, both in technology and finances. Nevertheless, Eventually I renounced my own opinions, after losing lots of money and having several changes of mind. I finally settled at pretty much the opposite opinion, that AMD is collapsing, although I have been very consistent about AMD's deterioration this whole 12 months. I also anticipated the market with my investments, which recently led to significant gains, so, I got half vindication, perhaps I am not a total fool after all.

Still, the most expensive mistake in my whole life has been to be dismissive of the Core µarchitecture from late February to October of 2006. You may go back to my posts explaining why I made the mistake, but from July of 2006 on, the process of discovering how wrong I was is very well chronicled in this blog and you may find a good summary in "Exploration". There is one thing I have been half-right about Core, though: I said that Intel will be relying solely on shrinks to improve speeds and performance, which has been half-true, it hasn't been just shrinks, but overall silicon process improvement, and a new µarchitecture with substantially different features like point to point interprocessor communication and integrated memory controller is approaching. Anyway, I think this subject has been well covered in the blog, so, I am going to concentrate on other aspects:

The fellow commenter quoted from "Third Factory" (late May of 2006) this list of reasons for "AMD to get to over 50% market share":

  1. Good, proven management
  2. Good, proven, exciting technology
  3. The brand name has appreciated significantly, creating a loyal customer base
  4. Technological leadership assures media exposure, free good publicity, public awareness, toghether with the enthusiasm of partners in the ecosystem
  5. The ecosystem itself
  6. Production Capacity!
I was right on several of these items, or at least there weren't too many reasons to think otherwise:

Was AMD's Management good, up to May of 2006? -- Yes!. For the most part, the people in high positions at AMD are either those who saved the company and succeed big time with Hammer or their chosen successors. Hammer was quite a gamble, full of technical and market very hard challenges at which AMD triumphed. With the good work this people inherited, they broke barrier after barrier, taking the company to a position of undisputed leadership. But, as I explained in "Exploration" and many other posts, they later demonstrated to be clueless about how to capitalize on the leadership AMD attained and overstretched the company's resources for tragic consequences. In late May 2006 there weren't many indications of the catastrophic decisions to come, if anything, only the dull launching of AM2 and the insidious denial of the Core µarchitecture threat. Yet, as I explain in "Exploration", I had every intellectual tool to suspect that AMD's management could fail miserably with AMD in a position of leadership, that was terrain unfamiliar to Management, thus, on top of making a huge mistake, I missed my unique opportunities to realize it before it was too late.

AMD still has the exciting technology. You only have to read "Cove3" posts in the Investor Village AMD message board to get convinced, Cove3's unfailing hopes on an eventual AMD superiority still have a bit of chance due precisely to the design superiority.

How is it that AMD still holds to a larger than historic market portion, especially now that every single AMD processor is very far from Intel offerings, that Intel is providing better value, and the new processors are as mediocre or worse than the old generation?: AMD enjoys the inertia from the massive momentum it generated the days of K8's rule, the brand awareness expansion, the opening of business with all major OEMs, etc.

How was I supposed to predict that AMD's management was going to kill the "Virtual Gorilla"? I am still puzzled by the irrationality of the ATI acquisition!

Regarding production capacity, at the time AMD had a credible schedule of capacity growth and having production sold out, even after Core-based processors were launched.

So, I wasn't quite wrong from the point of view of my analysis of the possibilities of AMD, just that Management did very weird things with those possibilities. Conversely, what I identified as Intel mistakes turned out to be Grand Slams because AMD made turds of its possibilities, I still don't think that I was all that wrong regarding Intel. That was yesterday, things now are totally different, Intel rules and AMD tries to follow.

Also from "Third Factory", I was quoted this:
Confirming that AMD is closer to the bleeding edge of technology than Intel, there is the potential of things such as Z-Ram (Zero Capacitor RAM with 5 times higher densities than regular six-transistor flip-flops). I don't know about the introduction rates for semiconductor technology, but it seems that very soon, like in the scale of one or two years, AMD will be able to include Z-Ram either as L2 or L3 cache memory. All that separates AMD from glory (and Intel from demise) is 8 Mb of cache internal to the µ-proc. Z-Ram may be precisely that. Remember that the gigantic L2 caches is the snorkel that prevents the already shit-submerged Intel from drawning, Z-Ram may nullify that...

I screwed this up. But still, the greatest single contributor to Core superiority is the large shared L2 cache. AMD, due to its pathetic incompetence to both evolve the K8 architecture towards shared L2 cache and to manufacture large caches, led to the cache architecture of K10 with its performance hits of inefficiency (half the cache, the four L2s are not shared), small size (2 MB shared L3, 4*512 KB L2 not shared/L1 exclusive, 8*64Kb L1 total for a quadcore), and the introduction of a third level with its associated latencies. I may have adopted the thesis that the shared cache could led to race conditions, but I think I quickly grew out of it, the shared caches are superior, period. Another thing is that I had faith on Z-Ram, only recently I lost confidence on it, the same way I lost confidence on SOI (more about this in a minute).

The commentator wrote the following:
And here's a secret for you - EVEN if AMD implemented high K, immersion litho ADDS NOTHING TO PERFORMANCE - it is merely another technique to print the same size 45nm features (Intel chooses a 2 pass process on the critical steps instead). In the end the feature size is the same. Immersion is just another PR gimmick to make it seem like AMD is ahead, while the scary truth is Intel has far superior litho capabilities as they are able to EXTEND AND REUSE the older dry litho one generation further. Sorprisingly even with a 2 pass process, it is still cheaper than a single pass immersion process as the immersion tools are nearly 2X higher price, run at slower speeds and are less mature than existing dry litho technologies.

I never said that immersion would give AMD any performance edge. It is true that, if anything, immersion gives production costs advantages; but my thesis has always been that AMD should prioritize performance over everything else, then power efficiency and only then production economies. Unfortunately, the company chose, apparently, exactly the inverse order of priorities. Recently I have hypothesized about the reasons: AMD assumed it was going to be capacity-bounded, even after the early warnings regarding the Core µarchitecture, and kept executing plans that assumed extraordinarily strong demand for entry level/mid level performance even in the face of mounting evidence that Vista was a flop, the market was saturating due to Intel's "osbornization" of Netburst and AMD-specific demand deteriorating fast.

AMD's management insistence on prioritizing efficiency over performance always stroke me as "fishy", being production costs easy to misreport and power efficiency an easier goal than absolute performance. Then, when the highly anticipated 65nm launch happened late, in scant quantities, fat (75nm equivalent shrink), slow, worse IPC, and saying bullshit to explain the worse IPC, I finally got conviction for the Bear case.

Until then I had trusted AMD's Management. I had increasingly stronger disagreements with Management regarding strategy issues like not launching the "coprocessor revolution", not being decided to make the Linux market an stronghold, but I always gave them the benefit of the doubt. I took the assumption of the "triple challenge", together with its difficulty and its "unnecessariness" as evidence that AMD's manufacturing capabilities were superb. I couldn't conceive that Management could be so irresponsible as to commit the whole company to this without having guarantees of success, but the bad 65nm process was overwhelming evidence to the contrary. This had staggering implications: If AMD's management could be that irresponsible, there was no reason to suppose they knew what they were doing when they acquired ATI, the single die quadcore couldn't possibly be any good, no new good processor would be launched this year, ATI would hemorrhage its Intel-based market share to nVidia without mitigating increased AMD-based market share, the finances of the company would deteriorate to the point of mortgaging the R&D and capital expenditures necessary to accelerate the development of Fusion and to escalate the investments the 45nm and beyond feature sizes would require. This would become a vicious cycle, an exponentially accelerating decline, and, finally, the kludge-but-practical approach of the double-duals would become a great instrument for Intel domination and a bridge to architectures that would close the design disadvantage. Metaphor: AMD tried to jump ahead of Intel but stumbled and fell, suffering life-threatening polytraumatism.

I was yet to be disappointed once more by AMD's management: the Analyst's Day last year in December. I got fooled because I still thought Management could not lie so shamelessly as to promise all the things they promised. The market was fooled too, the price momentarily shot up, but very soon reality took over.

When AMD's 90nm process was no worse than Intel's 65nm process in early '06, there were reasons to think that the upcoming 65nm process would be vastly superior, and that SOI had inherent advantages over strained bulk silicon. Within that frame, "65nm is Intel Marketing" made sense. The key argument there was that there is a problem of "diminishing returns" for ever smaller feature sizes, and I misidentified Intel's strained silicon as more vulnerable to this problem than SOI. I still would like to know what is so special about AMD's 90nm process that makes it superior to its successor, but given the evidence, it seems that the diminishing returns in SOI are more acute than strained silicon, perhaps the heat dissipation disadvantage of SOI aggravates more than the inherent advantages of smaller feature sizes, and I realized very late the significance of Intel's R&D muscle when applied in full force, the great advances of metal gate/high K transistors.

I am particularly ashamed of "Good time to buy AMD", published in October 19, 2006. That the price actually went up until December is besides the point, that article reflects doubts about the Bear case/optimism, like trusting Management on several topics ranging from the merits of the ATI acquisition to seeing them capable of great initiatives like the "coprocessing revolution" while they already had farted the "Quad FX"; seeing strength of AMD demand while all there was was simple inertia; not understanding that although Intel was in a reactive position, AMD's successes and failures at so many innovations gave Intel a clear view of what to prioritize, just what it needs to allocate its resources efficiently to ultimately bring formidable competition.

I wasn't clueless in the AMD-Intel periphery: Dell crashed, the Dell-AMD deal apparently turned out not so good for AMD, Vista flopped, Sun solved its personality complex, VMWare turned out the sensational IPO (although I was too timid to join in early and tried to milk volatility at the worst moment), Apple is triumphant with its iPhone, Google has gone stratospheric,... I developed a partial model concerning price manipulation that actually boosts my already successful and proven "money pump" system... But I can talk about those subjects with concrete predictions in subsequent posts

6 comments:

JumpingJack said...

Amazing post my man.... I have always said, the color of one's character is painted by his ability to look inward and face their mistakes or where they are mistaken.

It is when we make these mistakes that we learn the most, the many I have made over my years, some very humbling, have taught me volumes that no textbook, no amount of study, no college course could equal.

Jack

Eddie said...

Thanks for your comment.

I hope this post may be of use to you. Sometimes I get criticized of over analyzing things, that leads to predictions too remote or extreme; but the process of analyzing things to their ultimate consequences at least allow to appreciate their consistency. I flipped and flopped on AMD before stabilizing on a model that is really working; like you said, this whole process has "taugh me volumes that no textbook, [...] no college [...] could equal". The good thing about learning how to do analysis, is that you get an edge for investment that eventually leads to more gains than any initial losses

Anonymous said...

I applaud you for being so forthcoming about your experience.

Maybe as a result, you can help others be more cautious when deciding to risk their moneys in the market on a single stock like AMD.

As always, financial due dilligence is a prerequisite.

Perhaps people on the Yahoo and Investor Village AMD boards will learn a thing or two.

Kudos!

Kudos

GFOR said...

I just found this blog and spent the last several hours (has it really been that long?) reading it. Informative, well-writtend and provocative.

Anonymous said...

Unfortunately it’s quite obvious in your posting that you put emotion somewhere you should never have, your pocketbook. You should looked at the fact instead of tying up emotion in the underdog. Because of that emotion you chose not to look at the perfect storm brewing for AMD but instead held on in dear faith that your heart could never be wrong, AMD is the moral right! It is very obvious that you still feel that AMD can out engineer Intel when that was never the case to begin with. On top of that they definitely can’t out manage them.

The overwhelming fact is that AMD has never been able to design a competitive product on their own. They have had to have it dropped in their lap to have a chance at success.

AMD’s history is thus:

1) AMD is given the contract to co-supply the original set of x86s along with Intel for IBM.

2) AMD decides to trade yields for higher speeds and bins following generations up to sell at a lower price than Intel. This gives them a slight end in some markets. AMD still has to rely on information from Intel as well as some reverse engineering

3) Intel refuses to given AMD the designs for the 486. AMD sues Intel for breach of contract. The settlement results in Intel handing over the IP for the 486 and their first cross license agreement.

4) Intel releases the 486DX incorporating a math-coprocessor and higher clock speeds and blows AMD’s 486SX copy out of the water.

5) AMD makes the K5 which is a complete failure.

6) AMD makes the K6 which is again a complete failure (in the meanwhile Hector Ruiz while at Motorola loses the lucrative Apple contract for the PowerPC because they couldn’t deliver future generations that would perform to promised specifications)

7) AMD recruits a large group of engineers from the dying company DEC to take over the microprocessor group and releases the much improved K6-2 with their expertise.

8) AMD releases the K7 with their microprocessor team led by one of the two former leads of the DEC Alpha project Dirk Meyer. All previous K6 work is scrapped and a RISC core similar to the Alpha is put in place.

9) AMD’s Hector Ruiz signs a new cross license agreement, and ultimate poison pill, with Intel. They then are free to release the K8 and K8 Opteron with large portions of IP from the DEC Alpha project leading to Hypertransport, IMC and other improvements.

10) AMD fails their conversion to 65nm because IBM is late delivering (almost 10 years earlier Intel stated that SOI in the form of SOITEC wafers was going to see diminishing returns under the 100nm range) and ends up shipping 65nm products that run slower than their previous generation 90nm.

11) AMD releases the first processor in the K10 family. Low yield, low ASP, and low performance, the chip disappoints the world after it was severely hyped by AMD management.

12) AMD releases the K10 Phenom with similar results.

There a total of 3 successes in AMD history associated with the microprocessor world. Their 386 clone, their K7 Athlon and their K8 Athlon and Opteron. That is a pretty small rate in comparison to Intel considering their virtually equal starting point.

Hector’s track record should have been enough of a warning to begin with. After destroying the semiconductor divisions of Motorola how would one expect anything else as the CEO of AMD? If you look at the stock charts for Motorola during Hector’s tenure and compare to AMD’s as CEO it’s EXACTLY THE SAME PATERN. That is pretty telling.

On the other hand Hector Ruiz has taken home quite a bit more bank than has Otellini.

Eddie said...

Brainhurtz from Yahoo seems to have written the previous comment [ Yahoo post here

I posted a reply there, that is different from this comment.

Brainhurtz mentions several things of importance:

<<
it's [...] obvious [...] you put emotion [in] your pocketbook
>>

Not really. The decision to invest on AMD was rational, wrong, but not emotional. The passion with which I wrote about its possibilities are a different story, though. See why I invested at the end of this comment.

<<
you chose not to look at the perfect storm brewing for AMD
>>

There wasn't any perfect storm brewing for AMD. While it is true that Intel put its shit together, AMD would still be doing fine if it wouldn't have chosen several disastrous tactical and strategical moves. I have written long and in detail about them:

The ATI acquisition killed the ecosystem and destroyed both ATI and AMD in one blow, you may read "ATI for the record". There is another disastrous consequence of the acquisition, to turn nVidia from second best partner into second most dangerous direct competitor. I wrote something interesting about this: "AMD's reaper"

You may search for "triple challenge" in this blog, this is K10/Barcelona/Phenom, a totally unnecessary risk the company took and lost, big time.

Read my posts critical of AMD regarding the introduction of 65nm for the Desktop segment rather than mobile, perhaps anticipating huge Desktop demand due to Vista [ AustinRocks ], to bend over backwards to sell to Dell [ Disaster ] even at the cost of pissing off loyal customers in the channel, HP, SUN and others... the list of the screwups of AMD management is long [ Catastrophe, Strategy ]; on the other hand, Intel just put its @#$% together. If AMD wouldn't have acquired ATI, just because of the combined creativity of ATI and nVidia working like crazy to get a larger share of the AMD-based segment, the AMD-based platforms would be so good that they would be a good reason to prefer an otherwise inferior processor to Intel. And both nVidia or ATI may have had unleashed the coherent hypertransport consumer coprocessor market... I could go on and on.

<<
you still feel that AMD can out engineer Intel
>>

Don't put me to defend AMD, but anyway, it can be said that AMD did out-engineer Intel for years, not only that, the same management you critize so much brogh this company to a position of command of the market despite being so small, by becoming the viable alternative to the treacherous Intel. That they didn't know what to do once they were not the perennial underdog, but screwed things monumentally, is another story. Like I very clearly said in my articles, I should have at least suspected this managerial team could not be prepared for the "big leagues", though.

<<
5) AMD makes the K5 which is a complete failure.
>>

Agreed. Barceloney and Phenomenal dissapointment are even worse, I think.


<<
7) AMD recruits a large group of engineers from the dying company DEC to take over the microprocessor group and releases the much improved K6-2 with their expertise.
>>

You are skipping the acquisition of NexGen that had enormous implications, like getting the services of Fred Weber, who eventually got to be the CTO of AMD, one of the single most important contributors to the success AMD experienced later.

<<
There a total of 3 successes in AMD history
>>

Yes, you are right, but that's not the point. If you look at the entire history of AMD, this company just hasn't made any money for its investors, etc. But in late '05 the role inversion in the technical leadership (AMD on top for the first time, and very clearly!) could have expressed into a gigantic market realignment, that's why I invested AMD bull side and aggressively; I should have known early enough why the market realignment wasn't going to happen, and then, why it was more probable that a market backlash would happen, and even then, I should have had more conviction that a total market reversal (for AMD) will happen; the article is about that, the signs that I overlook. I think you are not evaluating how close AMD was from consolidating a duopoly, or even to get to parity!

Now, it is too late, obviously.