Put The Hammer Down…Backgammon Lessons

Back in February, on our trip to Miami, I was fortunate to be introduced to a friend of a friend named “Phil”. Phil just happens to be one of, if not the, best backgammon players in the world.

Backgammon is a game I’ve played my whole life and with a pretty good track record if I may say so. I’m pretty darn good…or so I thought.

Over the course of a couple hours, Phil gave me a lesson in backgammon. And, I don’t mean by beating me; Phil plays for money and he very kindly refused to actually play me. Instead, we put different scenarios on the board and discussed what I would do. Then, he would say, “you’ve just given me a 1% chance of beating you” and show me the better play. It was immediately a very humbling experience.

Besides learning that I’m not nearly as good as I thought, there were two other key takeaways from the experience. First, the aggressive move is generally the smart one. It’s amazing how exposing yourself instead of playing safe leads to better outcomes.

Secondly, and probably most importantly, it’s all about the doubling cube. The way to success in backgammon is not winning every game. Nor, even 50% of the time. It’s about getting slightly ahead and then stomping hard on the opponent. If you have the odds in your favor, you double immediately. Increasing the value of the game leads to meaningful victories. Winning a game that has increased to 8X on the cube offsets a bunch of single game losses, right?

Once the lesson was over, and I was telling Mrs. TW about the experience, the analogies of playing backgammon versus micro-cap investing came immediately to mind. They are different universes but, at the core, are incredibly similar in game-plan.

For example, the doubling cube. When your opponent offers a double, it generally pays to accept it. The odds struck me strangely, but made sense in the end. If you have a 25% chance of victory, you’re at breakeven accepting the double.

(Think about it for a minute. 4 games played. If you pass each time, you have four losses. If you accept each time, and win once, you are down 4 as well. Anything over 25%, accepting the double makes sense. Plus, you then control the cube.)

Conceptually, a stock going down offers a chance to double the bet. Should you take the dare and add to the position? Generally speaking, the odds are in your favor to do so. Stocks are volatile and go up and down. Taking advantage of this volatility can greatly boost returns.

The more important analogy to investing, at least in terms of my personal investment style, was the concept behind the “big win”. Every potential trade is basically an opportunity to bet against someone else, right. When you buy, they sell.

But, as time goes on, if the odds start to move into your favor, in backgammon you double with the hope that your opponent accepts. You are now in position for a bigger win.

Investing is similar, but better. If a company is executing to plan, if everything is falling into place, you can easily double your position. The opponent can’t resign. There’s always a seller out there to give you more stock. And this is where micro-cap investing suddenly becomes much more profitable than backgammon.

Phil is a professional player. He knows the odds and makes his money off of suckers willing to play with him. But, as you get better, it’s tough to find them. And, when the game tips in your direction, your opponent can simply walk away.

I espouse a similar strategy. I look at many investments and, over the course of a year, will make probably 10-15 different bets. My individual track record, on a per-stock basis, is probably not as high as I’d like. Quite simply, with limited resources, one needs to walk away quickly when the odds are not in your favor. A small loss is just fine with me.

Because, the key to making money is to have your wins be meaningful. A stock that returns 5-10X can offset many, many small losses. And, if you know when the odds are really in your favor and make that position a big one, a single stock alone can make your year.

In backgammon, every player starts out with equal odds of victory. As each roll of the dice occurs, the odds change. That’s life and can’t be controlled. However, each move one makes also changes the odds. Some moves are simply much better than others.

Phil refused to play a real game with me. He’s a pro, I’m a neophyte to real backgammon. As such, he was doing me a favor.

The great news for investors is that the market is full of neophytes and one never struggles to find an opponent. Getting a game is the easy part. Knowing how to maximize returns on it is the hard part.

Understand the odds. And, when they are in your favor, put the hammer down.

The biggest news last week came from INmune (INMB) as they announced the repurchase of warrants representing 10% of the shares outstanding. I wrote extensively about that here (Warrant Repo Is A Coup For INmune), so won’t go into it in great detail at this time. Suffice to say, the confidence in the significance of their upcoming Alzheimer’s data is unreal.

That data is unblinded and known to management. This is when you turn the doubling cube, in my opinion. Management certainly did so last week.

TFF Pharma (TFFP) held a KOL call to discuss thin film freezing, particularly in mRNA, vaccines and inhaled Tacrolimus.

About a month ago, I published a piece called Resetting Expectations for TFF Pharma. In this note, I discussed how expectations for a covid-vaccine play had gotten ahead of themselves and the stock was subsequently selling off as investors realized this event wasn’t imminent.

Disappointment over the lack of a Pfizer or Moderna deal is now behind us I believe and the market should start focusing on the future. The KOL call did a good job of hinting as to where one should focus; in my opinion, that’s on Tacrolimus.

In their TAC program, you have a product about to enter a pivotal trial. The current version in the market has 90% market share in lung transplants and also some market share in kidney, liver and heart transplants. It also has very meaningful side effects and is difficult for doctors and patients to manage.

TFF’s Tacrolimus has shown equal (or better) efficacy at lower dosages, thus reducing the toxic side effects. Importantly, TFF controls this drug and are in solely in charge of development. The timelines and the future sales are fully under their control.

And, the future sales are very promising. A less toxic Tacrolimus could easily get 50% market share, making it a $500M drug. That is a base case scenario.

The upside potential is that it demonstrates lower risk of death and/or increased efficacy beyond lung transplants, in which case this would almost immediately become a billion dollar plus drug.

Tacrolimus alone justifies the current market cap of TFFP. The KOL call was very positive about the future potential of the drug and there should be more data coming out of their ongoing phase 1 trial in the near future. As this happens, investors could very well turn their attention here and, in doing so, turn the tide on TFF’s trading activity very soon.

Last week I suggested that all the bad news from Avenue (ATXI) was likely priced into Fortress Bio (FBIO). Well, I was certainly wrong on that as Monday morning Avenue announced another CRL from the FDA and Fortress stock took it on the chin.

I guess the good news is two-fold here. First off, since the news came on Monday pre-opening, no one could have bought Fortress on my call prior to the CRL. Secondly, the news is definitely, 100%, priced into Fortress.

The lows for Fortress, in my opinion, appear to be in place as the fall is setting up for a lot of positive catalysts. With so many shots on goal, the Avenue-related selloff could be a great buying opportunity.

I spoke with Greenbox (GBOX) recently. I remain very intrigued by the company but am not sold on the platform yet. I’ve also been wrong in not buying it, as it has acted great. Kudos to those on board.

Ondas (ONDS) is another company I’ve been tracking and with whom we had a Zoom call last week. This appears to be a very well positioned company in the near term, for their rail opportunity, and the long term, in drones. More to come on this one.

On a more personal note…if you’re interested.

We recently joined a country club and the member-guest tennis tournament is this weekend. Harris was kind enough to join me for the tournament. A thankless role as we are good enough to be, basically, the worst team in the strongest pool.

The “Wimbledon Draw” happens to include two current touring pros, two former NCAA singles champs (from the last few years no less) and several other D-1 college players. Ouch.

The term sacrificial lambs comes to mind when looking at Harris and I. We will lose epically, but I intend to take selfies with the competition for my photo album.

If you think you’re a good backgammon player, download the XG Games backgammon app. It’s a free app and you can play in Tutor Mode. Basically, every move you make, that is not the best available move, the game offers you the chance to reconsider or get a hint.

I’ve played this a lot since February. I’m getting better but still find myself making many errors (I’ve overcome most blunders and “huge blunders”, as they call the really bad moves). This is where it’s become painfully obvious that the best move is almost always the most aggressive. You get ahead and put your foot on your opponents throat. Period.