I Will Not Assume That I Know Best in 2012

I'm sorry, dear reader. My ego got the better of me in 2011. Let's not do that again.

I've been a long-term bull on camera-chip designer OmniVision Technologies (Nasdaq: OVTI  ) . At the core of my thesis was the assumption that other sensor makers were years behind OmniVision in the manufacturing of backside illumination chips.

The relatively unknown pioneer took a "science project" and made it commercially viable before anyone else; I didn't expect Sony (NYSE: SNE  ) or then-relevant rival Micron Technology (Nasdaq: MU  ) to catch up to this production efficiency lead for years to come. Micron has since sold its Aptina-branded camera-chip operations to a private equity consortium, though Aptina continues to develop new chip technologies. (Note to self: double-check Aptina's BSI progress right now.)

As safe as houses -- or rickety shacks
But catch up, Sony did. And as the evidence mounted for Sony's BSI chips making it into Apple's (Nasdaq: AAPL  ) iPhone 4S, my stubborn neck remained stiffly unbowed. There was just no way Sony or Aptina could provide BSI chips at a cost that was acceptable to Apple. Too soon. Forget about it. Come back next year, perhaps.

Then the iPhone 4S hit store shelves, was ripped to pieces by curious third-party analysts, and... well, every unit I've seen disassembled so far has had a Sony chip inside.

Game over. I was wrong. That seemingly enormous technology moat shrunk faster than I ever imagined. Along the way, I invested real money in the idea that I knew better than the analysts who saw this change coming. Worse, this error of judgment may have cost you, dear reader, real money.

The silver lining
If there's an upside to this sad story, it's the fact that OmniVision shares are stunningly undervalued with or without an iPhone boost. Shares are selling for just over five times trailing earnings with a deep-value PEG ratio of 0.57. That's before backing out nearly $8 of net cash per share from the $12.20 share price. The company needs to absolutely croak for these numbers to make any sense. Patient long-term investors will likely make money from these bargain-basement starting prices.

But I no longer believe that OmniVision deserves a $35 share price, as I did when that moat looked impossible to bridge. Crawling above $20 or so seems more reasonable given Sony's unexpected BSI gains.

The next time I see the odds stacking against my opinion, I promise to investigate the situation with a truly open mind. I'd like to believe that I did that in the OmniVision drama, but the cards are on the table. And you know what happens when I assume that I'm right, even in the face of very reasonable arguments.

The next impenetrable moat on my list of dearly held investing beliefs is that nobody will ever challenge robotic surgeon Intuitive Surgical. The company bought out the only real competition years ago and is surrounded by patents like the king's castle might be guarded by mutant alligators swimming in radioactive sludge. There's just no way Intuitive could face serious competition until its core patents expire, right? And by then, the company will surely have landed a ton of fresh patents to replace the obsolete ones.

With this object lesson fresh in my mind like a massive paper cut, I'm diving back into these assumptions right now. I could be wrong, you know. Our CAPS system tells me that I'm right less than half the time, after all (though I'm still beating the market). My single largest stock position may be at risk here.

Truly bulletproof moats make for fantastic retirement-account investments. While I figure out whether or not Intuitive Surgical belongs in that category, check out 7 ideas that have already been vetted by The Motley Fool's top analysts.

Fool contributor Anders Bylund owns shares of OmniVision Technologies, Micron Technology, and Intuitive Surgical, but holds no other position in any of the companies mentioned. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and Intuitive Surgical, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


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  • Report this Comment On January 05, 2012, at 1:06 PM, millsbob wrote:

    yeah, you made a mistake.

    still my favorite analyst at TMF (or anywhere else).

    best in the New Year, Anders.

  • Report this Comment On January 05, 2012, at 11:48 PM, xnicholas wrote:

    if experience has taught me one thing, it is that i have no idea what in the hell i am doing.

    but i am trying to improve. i am trying to listen to the market, and reasearch many many many stocks, to make sure i never get married to a single loser stock.

    if a stock goes down too much, i sell it, probably the wrong decision, but so is buying it in the first place.

  • Report this Comment On January 06, 2012, at 1:28 PM, TMFZahrim wrote:

    As it turns out, Aptina actually has an 8-MP BSI chip too with specs very similar to the Sony unit inside the iPhone 4S:

    http://www.imaging-resource.com/press-releases/2011/11/28/ap...

    OVTI cannot afford to rest on its laurels. The competition has caught up.

    Anders

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