Playing to Win

Gamestop has popped up on the Magic Formula screener from time to time over the past year. I didn't buy it a year ago because it had a little too much debt, but I gave it another look last week and saw that they've been on a debt-retiring tear. Adjusted debt to shareholders' equity was 97%, 82% and 75% in 2007, 2008 and 2009, respectively. I dug deeper and found a lot to like:

• Valueline rates its financial strength B+.
• Valueline also notes that "the digital and online units are rapidly expanding, and should account for a substantial chunk of sales growth" and calls the online segment "a strong long-term growth opportunity." (Had Blockbuster taken this tack sooner with movies, it might have been a threat to Netflix. Not only were they late to the game, but they charge more than Netflix.)
• Gamestop has been aggressively repurchasing stock and retiring debt.
• They're closing some stores to save money.
• Several value mutual funds have bought this stock recently.
• Gamestop is the biggest video game retailer in the U.S.

Games are serious business. "By the age of 21, the average young American has spent...more than ten thousand hours playing computer and video games, " asserts Marc Prensky, CEO and founder of Games2train.com.(1)

With all this in mind, I purchased some shares of GME with the intent of holding them indefinitely.

(1)Richards, C. "Teach the world to twitch: An interview with Marc Prensky, CEO and founder Games2train. com." Futurelab (Dec. 2003); http://portal.acm.org/citation.cfm?id=1378719

Invest in Stock or Pay Down Debt?

I'm getting ready to refinance my mortgage. I never thought I'd take out an adjustable rate mortgage, but a 7/1 is 3.625% at ING. And since seven years is all I have left to pay off my existing loan, in my case that ridiculously low rate will be for the life of the loan.

It will also knock down my required monthly payment by two-thirds. What if I made the minimum payment and invested the rest?

On the up side, I could really get ahead if I did well in the market. Joel Greenblatt's Magic Formula has worked very well for the past few years. If it continued to do well, in just seven years I'd be ahead tens of thousands of dollars.

On the down side, those returns aren't guaranteed. If the market tanked, I could end up behind. Historically, there have been decades when stocks went nowhere. Plus, I'd only pay down my mortgage by a few thousand dollars, and still be making mortgage payments in my seventies. That's depressing. Having refinanced to a 15-year loan seven years ago, I've paid down my mortgage by almost half. That feels great.

I'll have a mortgage burning party in 2018.

I have another loan that's about to be paid off in a few months: my car loan. I'll start taking the monthly car loan payment and buy stock.