Pokémon Go and Diversification

 

Understanding the latest craze and its impact

 

Unless you have been living under a rock, you have undoubtedly witnessed the new Pokémon Go craze. Packs of kids roaming neighborhoods with their phones guiding their movements, sometimes running from place to place, laughing with each other, getting exercise and generally getting along with one another. And grown men and women walking down the street staring intently at their screens, screaming out strange names in what sounds like a foreign tongue, followed by furiously jabbing at their screen in some sort of ritualistic dance. It’s the Pokémon Go craze and it’s hard to believe it only started about two weeks ago.

 

For those of you who don’t know, let me try to explain the Pokémon Go phenomenon. Pokémon Go is a free-to-play, location-based, reality mobile application developed by Niantic – a former Google owned company – and offered by The Pokémon Companies, which is partly owned by Nintendo. Essentially, Pokémon Go allows players to capture, battle and train these cute little virtual – yes virtual – creatures called Pokémon, each with really cool names like Pikachu, Dragonite, Spearow, and Pidgey.

 

But to understand Pokémon Go, let’s go back to the beginning, in the days of the original Pokémon, which was over 20 years ago. Originally played on the Game Boy, Pokémon Red and Pokémon Blue were the first two games in the series. New players would find themselves in a world where all animals were replaced by Pokémon. At the beginning, a new player had the option of owning one of three signature Pokémon – Squirtle, Charmander or Bulbasaur. As a Pokémon “Trainer,” a player would travel with their Pokémon in a virtual world based off of the real life location of Kanto, Japan.

The ultimate goal was to become the Pokémon Master and to reach that goal, one would improve their Pokémon as well as find new Pokémon to train. And to improve one’s Pokémon, a Trainer would battle against other Trainers as well as against other wild Pokémon. From here, a Trainer would create a team of six unique Pokémon and try to challenge the eight “Pokémon Gyms” that were part of this virtual world. Defeating the eight Gyms – each led by a powerful Trainer known as a Gym Leader – then granted one the right to challenge the Elite Four. The Elite Four are the four strongest Trainers in the Kanto region, led by the Grand Champion. Defeating all Elite Four then granted you the title of Pokémon Master.

 

Now, let’s fast forward to today’s Pokémon Go. While there are not as many nuances to Pokémon Go compared to the original game, the premise is basically the same. A user starts out with one of the same three Pokémon and walks around trying to catch as many wild Pokémon as possible. And these wild Pokémon are everywhere – they’re in your backyard, at your church, at the baseball field and in grocery stores. Real-life locations have become virtual PokeStops and Pokémon Gyms, attracting real-life players armed with their smart phones.  And in case you’re wondering, PokeStops give out needed resources for the game – such as PokeBalls – to capture wild Pokémon and potions to heal your Pokémon. Pokémon Gyms can be captured by Trainers and a strong enough Trainer can become the Leader of that Gym, with the ultimate goal of becoming the Pokémon Master. Sure I’m leaving a lot of the details out, but hopefully this gives you a sense of how the game is played.

 

Now in the spirit of full disclosure, I learned all of that by asking someone else.  I have not to spent any time playing Pokémon Go, I can recognize some of the ancillary benefits of the game.

 

For one, it’s easy to see how Pokémon Go can potentially improve the mental and physical health of players, since it gets kids off of the couch and moving around together. Sort of like when I used to roam the neighborhood on my dirt bike. There are also reports of Pokémon Go bringing law enforcement and the public closer, which is needed now more than ever. And finally, the release of Pokémon Go was a boon to the stock price of Nintendo, which saw it’s price soar by more than 55% and its market capitalization increase by more than $9 billion. In fact, Nintendo’s meteoric rise has allowed it to easily outpace its competitors with many Wall Street analysts saying the stock still has a lot of room to grow.  In fact, according to today’s Wall Street Journal (7-26-2016)  “Nintendo stock slid 18% after the firm said the ‘Pokémon Go’ game would have little impact on earnings.”   Pokémon Go does have some risks and that brings me full circle to diversification.

 

So here’s my message: owning an individual stock can be great when you get the timing right, but remember that every story like Nintendo’s can be followed up with a dozen that were almost the complete opposite. Like other fads, Pokémon Go won’t likely fuel Nintendo’s stock growth forever.   You need to be careful not to have too much of your retirement portfolio pinned to the success – or failure – of a single stock.

 

Diversification, on the other hand, allow investors to spread the risk across multiple investments. So while owning a diversified portfolio that happens to own Nintendo won’t allow you to fully enjoy Nintendo’s recent stock increase of 55%, it will help protect you in the event the stock recedes to more reasonable levels.

 

To be clear, Pokémon Go is a wonderful phenomenon and is trending to become one of the most used apps of all time. It might revolutionize the way social gaming is enjoyed and it clearly brings additional benefits to its users and the public at large. But does that mean you should call your financial advisor today and buy thousands of shares of Nintendo? I’ll go out on a limb and say probably not, knowing of course that the real answer depends on your long-term financial goals and your tolerance for risk. We can help you understand your personal risk number. Get started by clicking “Get Started”. 

 

Now, be careful walking down the street looking for more Pokémon…there are risks playing the game.

 

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or Herr Capital Management, LLC and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.

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