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Strategies & Market Trends : Gorilla and King Portfolio Candidates

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To: Uncle Frank who wrote ()	1/31/2000 6:14:00 PM
From: om3	Read Replies (5) of 54805

Hello all! I've been lurking here for about a month and have learned so much that I just signed up for real. I started investing about 10 years ago. After getting burned trading on random stock tips, I read several books like Malkiel's "A Random Walk Down Wall Street". These convinced me that the market is roughly efficient and that the optimal portfolio to hold for maximizing return at a given level of risk was a mixture of a risk-free asset and a broadly diversified market cap weighted portfolio (constructed from index funds). The stellar returns over the last decade of CSCO, MSFT, INTC, etc., however, have led me to question this approach. I saw Geoffrey Moore give an excellent talk at Stanford and that led me to "The Gorilla Game". I read it over Christmas and was blown away! I could finally begin to understand the rational basis for the huge P/E ratios of certain growth stocks. In the tornado, a gorilla grows exponentially at a rate greater than the market as a whole. If it were to keep this up forever, the present discounted value of future dividends would be infinite! If it has high growth for N years and then slows down to the market growth rate, then the present value of future dividends still depends exponentially on N. No wonder these stocks are so volatile! A one year change in the estimate of the length of the tornado can easily double the rational current value. The one step of simian logic that I don't yet really understand is why the market doesn't price gorillas correctly. In the RFM, p. 119 they propose that: 1. The stock market will underestimate the returns that a gorilla can earn in a tornado market because their GAPs are so deviant from those of market leaders in other sectors. 2. The market will underestimate the duration of the Competitive Advantage Period because their CAPS are so deviant from those of market leaders in other sectors. This just sounds like people might have been analyzing these companies incorrectly till now. Now that the book has been out for a while and that threads like this one are gaining lots of readership, won't the market figure it out? Doesn't it just take a single very well-heeled gorilla gamer to push prices to their proper levels? Or is it that the correct present values are just so high and so sensitive to unforseen future events that the market will always allow for extraordinary returns on these beasts? In any case, I've been learning a huge amount by reading all of your analyses of these companies and would be interested in participating as well. I'd also like to better understand how to build realistic valuation models based on our understanding of the dynamics of the companies and technologies involved (just started reading "Investment Valuation" by Aswath Damodaran which looks pretty good). Investmentwise, I've started moving out of mutual funds and into G&K stocks as well as some biotechs and some companies I've had personal involvement with. Looks like I'm still a lot more into diversification than most of you but maybe eventually I'll get down to just a few of these extraordinary stocks! Steve

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