Advanced Micro Devices
Margin Call

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By Grunchy
October 8, 2002

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Yep, I did a bad -- against the explicit advice of some members of this message board, I had bought AMD shares on margin... and seen the values sink like never before! Mid-way through August I had brashly predicted that within 6 months time, we would regret not taking advantage of the opportunity to buy at below $10. $10 was my break-even point, at which I could liquidate my holding and have 0 gain. Since the meltdown of last week, not only has my gain gone far below 0, my equity is now below 0 and I had the interesting experience of having my brokerage leaving a phone message on my answering machine, that I had better respond to them by "tomorrow at noon, at the latest, or else." Fortunately, I was able to pay out my margin, but still, not a good situation. The share price now has to triple, in order for me to be able to "get out" without loss. At 10% compounded per year, which is the best I can reasonably expect from a well-run company, it will take me 11.5 years to make back my investment. That much, lost in just 1 month.

First of all, to Poorbloke. A bet from BMG dated Sept 28 last year.

He said that Gateway would be selling AMD parts by Sept 27 this year, or else he would eat crow publicly on our message board and admit the innate superiority of Intel in all things, and he would do it within 10 days at the latest. Those 10 days are up, as of today.

The wager? PB, since you & I are on opposite sides, I suggest this. IF GTW picks up AMD again before 9/27/02 (announced or actual product), you post on this board that you acknowledge the superior product that AMD offers as being irresistible. IF GTW doesn't, then I will post on this board acknowledging that Intel has the superior product without question. Each of us will write at least a page describing the qualities of the opponent's company, without a lick of sarcasm (as we are both masters of it). It should be flowery enough to make the writer a bit queasy. We can ask the top 3 or 4 posters who support the opposite side on this board to be the judge to decide if the post is obsequious enough. We could each choose the judges for each other when it becomes necessary, and we have 10 days to post our letter.

I am confident in my company & our compelling products. I trust that you feel the same way for your company. Do we have a wager? I offer my electronic handshake on it.
Since BMG did not, and does not seem likely to, get around to actually going through with it, let me!

Intel has a superior product, without question. Its performance is higher, its reliability is less questionable, and its corporation is better managed. My chief complaint with AMD, to date, is that its management cannot tell the truth except when the truth promotes AMD. AMD's management always glosses over the truth when there are problems with its processes, its product mix, with anything it is doing. I can say that I finally understand, that when the management of AMD makes a public statement that the investor had better beware that they consider the worst-case possibility, since AMD's management will never give an honest warning about what is actually going on. And who has paid for that dishonest behavior from AMD? AMD itself. Because investors seem to be deliberately prevented from having much confidence in AMD's public statements, they correspondingly have to diminish their valuation in AMD's stock, to the point that AMD is now definitely liable for takeover. And the best consequence of that, my friends, is that the current management of AMD will be unceremoniously tossed out. The BOD should be furiously attempting to do just that right now, if it had any lick of accountability (and it may not).

Now, since I paid out my margin, I have to decide whether or not I will continue my investment with AMD, since I don't have much confidence with its management. How do I decide? Well, I have got a lot of confidence with its design group. The AXP 2800+ is supposed to arrive by the end of next month. Furthermore, UMC is supposed to be producing by Q1-03, with a corresponding drop in cost-of-goods-manufactured, and a higher quantity of better parts being manufactured. Lastly, the hammer; which is now supposed to arrive next year, but will it really get in production this time? In all these factors there is absolutely no knowledge how well any of them is working out, therefore the investor has to be careful. Furthermore, when working with AMD management, the investor has to be very suspicious that he is being tricked, and that once again AMD is going to fail to deliver. Let me state my meaning more clearly: it's not so bad if AMD fails to live up to its commitments, because these are very difficult projects, under very difficult conditions, and a certain amount of failure is expected and is in fact, forgivable... the WORST thing, which is definitely not forgivable under any circumstances, is that AMD hides its problems, pretends they aren't there, in an artificial bid to keep the share price high while it attempts to get its act together. The ironic thing, is that the consequence of that type of dishonest behavior, is even LOWER valuations than if it had simply been honest and forthright all along.

So, how did I decide?
I decided, like always in the past, that there is greater risk of NOT owning the stock if there's a chance that great things can happen. The current value of my investment is now just a few thousand, which is small enough that it's not really worth worrying about if AMD does go T.U. When you consider the (supposed) comparison by end of next month, it will be AMD's 2800+ vs. Intel's 3060 MHz, which is really not that big of a difference. If the 0.13 micron process is really shaken out now, and UMC is on the verge of volume production, then there's a possibility that AMD can start making back some market share. And the hammer will finally allow AMD to compete against Intel with very dissimilar products that aren't really addressing the same markets, and thus allow AMD to build up a customer base to whom Intel will not (currently) be able to offer a directly competing product. AMD will finally get some ground to stand on, that Intel will not be able to dilute with its vast resources, and may, finally, become a sturdy company.

It's a, potentially, shiny future... but how much do you trust AMD's management to tell you the real truth about it?

That's the big question.

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