If this is the folder in which shiny pebbles are discussed, and if I'm right that there are some folks who might be new to process of learning about emerging industries, I'm going to take up a few bytes of cyberspace to explain using my real-life examples of how I came to know the front office software space and how that work helped me enjoy enormous profits (so far.)
STEP #1: Read a lot. When something strikes you as being potentially big, think about why.
EXAMPLE: In February, 1997, I came across the front office software space in an article in Forbes. In that article, the former CEO of Vantive was quoted as saying, "If corporations worldwide are willing to pay $10 billion annually for bean-counting software, then they should pay at least as much to keep their customers happy." That made sense to me.
STEP #2: Once your interest is piqued, use 10K filings to determine the players.
EXAMPLE: I already knew about some of the leading players from the Forbes article. I looked up the 10K of every firm mentioned. From the section that discusses the competitors, I made a list of them. As I learned of competitors, I looked up their 10Ks until I was no longer getting any more competitors showing up.
STEP #3: Determine the leaders.
EXAMPLE: I used WSRN to look up the 12-month trailing revenue. (Use any source you prefer.) I listed the companies in order of revenue.
If I remember correctly, I had assembled a list of about 15 or 20 companies. I narrowed it down to the ten leading companies because there was a point that #10 was so far ahead in revenue of #11 that I was compelled to draw the line there. It was a judgement call about revenue; the notion that David Letterman might have cbosen the top ten was a coincidence, nothing more.
STEP #4: Go back to the 10Ks of the companies still remaining on your list. Learn everything you can about the company's area of specialty, the typical profile of their major customers, the managers of the company, and the financial statements. Write all of it down and keep it handy.
EXAMPLE: I created a computer file containing information about every company in the following categories:
Trailing revenue
Link to the home page
Link to the most recent 10K
Product types
Marquee customers
Significant Marketing/Sales Partners
Notes about Management
Highlights assessing the company's operating fundamentals
Financial Highlights (reminding me of significant issues learned perusing the financial statements)
NOTE: If I were to go through this exercise now, I would add a special category about opportunities and obstacles to becoming the gorilla.
STEP #5: Discuss your findings online. Ask for comments. (Corollary: I could be very wrong, but it's my opinion that the people who are lurking are missing out on some tremendous opportunity.)
EXAMPLE: Because the front office space was relatively new, there were no forums I was following that contained folders dedicated to the space. At my request, the Fool opened a Front Office folder.
It was in that folder that I came to know some of the people I am gratefully still in touch with here at SI and through e-mail. It was also in that folder that I first learned of Gorilla Game and the case history of the front office space found in the manual. BINGO!!!!!!!!!!!!
Armed with that knowledge, the Fool was kind enough to open yet another folder for me on AOL, the Gorilla Game folder. Much discussion ensued and that is where I met some of the people (Lindy, for one) who have gravitated over here.
STEP #6: Act on your convictions. If the industry you are researching is deserving of your savings, decide upon your strategies and invest!
EXAMPLE: Beginning in June, 1997, (before Game was available) I invested in Software Artistry, a small company, #10 at the bottom of my list, that was an apparent value play. Six months later IBM announced the acquisition of the company and I sold at a handsome profit.
Two days later (December, 1997) I moved half those funds into Remedy, also a value play. One month later the company developed a strongly negative change in the fundamentals and I sold at a huge loss.
It was at this point in time that I was fortunate to develop a wonderful relationship with one of my online cohorts. I was still a dyed-in-the-wool tradition-based value investor despite my enthusiasm about Gorilla Gaming. I just couldn't make the stretch to Siebel's high valuation despite what Moore & Company told me about that. My friend understood my conundrum and suggested that I compare Siebel at that point in time with PeopleSoft's development at their respective point in time years earlier. He offered no opinion but suggested that I form one based on that research. I did. Having been out of the front office software market for two months (not feeling any pressing need to rush!)I bought shares in Siebel in March, 1998.
In September, 1998, I returned to my roots as a traditional value investor and bought Remedy using funds I had set aside as a relatively small part of my portfolio allocated for short-term use. I sold at a handsome profit in January, 1999 (when it was two-thirds the price it is today.)
Using those same short-term funds, in May, 1999, I shorted Pegasystems based on my perception of the fundamentals. Exactly two days later I covered at a substantial loss.
Today I am still holding all of my Siebel shares. Having begun investing in the front office space 2 1/2 years ago, my average annual return is 173% (not including taxes) compared to the S&P's return of 21% (not including dividends.)
I'm not bragging. Only a slightly more astute person would not have made the horrible mistakes I made. The point is, armed with the knowledge of tons of research and sound information from online folks who are extremely helpful, we can make all sorts of huge mistakes and still enjoy dramatic profits.
Just my story 2 1/2 years in the making. So far.
Hope it helps those considering emerging industries.
--Mike Buckley
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