Much of this is true, and I agree to a large extent with your first post. My question for you is this: how do we pick out those Hi Tech companies with better, smarter software engineers, and distinguish them from those companies with average engineers. I mean, how can we as G&K investors see the difference between Sycamore and Juniper, short of being on the inside early, or being on the outside late, if the main difference between these companies is the quality of talent. I've given a hypothetical example, but I am asking you how can investors judge the talent differences between competing companies, prior to when the better company's stock price explodes?
The answer is simply that you can't know the quality of the specific talent in a particular company. Sure, you could look at the IPO filing and check out the backgrounds of the founders, but they're all going to come from fairly similar backgrounds.
The strategy isn't to single out the one horse which is going to win the race. The idea is to find entire racetracks where all of the horses are a new breed, and bet on the best 2 or 3 out of the field. The best companies will have the best engineers passing in and out of their companies at various times. The cross-pollination helps the companies as well as the engineers. Paying attention to a specific company's selection of talent is focusing too much on details.
If you invested equally in Sycamore and Juniper, does it really matter what Sycamore does if Juniper increases 30-50 fold in 5-10 years (or 18 fold in 1)? You can only lose 1x your investment in Sycamore!
I can't tell you about the engineers at specific companies, but it's pretty clear to me, and just about anyone, which sectors are inevitably growing at incredible rates. And within those sectors, it's fairly clear who the leaders are and who the almost-leaders are. Buy an equal amount of each one you think has a good chance to be around in 10 years. Chances are, even if it winds up being the 4th or 5th top company in the sector, you have still experienced phenomenal growth.
Once people begin to figure this out, P/E's will be even higher for young companies, and established new economy companies will also command a larger premium.
FWIW, companies such as Juniper and Amazon are still mired in the old economy. They are manufacturing/distribution based. They touch on the new economy, and are the foundation builders. They will benefit from the growth of the underlying structure. But that structure will support even more amazing companies in the future, ones which do not have their bottom line tied to physical resources.
To measure the 'new econominess' of a company, compare its human intellectual labor costs versus its physical costs (shipping, goods, warehouse, inventory, manufacturing, etc.) You may consider Microsoft one of the very first new economy companies. They are about 90% human resources and 10% manufacturing and distribution. In the next 5 years, we'll see many companies with 99% human resources and 1% physical costs (gotta buy computers and cubicals for those people). And, of course, you have to consider their product. If your company is 99% human resources specializing in baby-sitting, then you have a 1-to-1 worker to customer ratio. However, if your company is 10 guys who write the next killer PALM app, then your worker to customer ratio may be 1-to-400,000, but is essentially infinite. Amazon is a poor example of a new economy company because their human capital is wasted moving books and CDs around a warehouse and into boxes. Each worker can serve perhaps 100 or 1000 customers per day. Whatever the number is, it is a hard, physical limit. If a single person can serve 400,000 customers or more, and you pay that person 10 times more than the one who can serve 1000, who gets the rest of the money? The company does! Where does the money go? To hire more people and grow the company!
So, what's the limit? Well, the limit is on the education level of the world's population, and the imagination of those people. Those people will command a premium for their services and abilities. You'll see younger and younger talent playing key roles in the new economy. But by tieing their fortunes to stock options, you have a direct correlation between financial capital and human capital. The premium demanded by these new economy workers will be paid by us, the investors. And what we get in return is the services of a rare, talented and highly educated individual and exponential effects of the new economy.
El Guapo |
