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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Mike Buckley who wrote (52217)7/19/2002 6:00:57 PM
From: paul_philp  Read Replies (1) of 54805
 
Mike,

I have done some thinking about the question of whether or not the Gorilla Game methodology is still valid. I think that everything in the book still stands except for the idea that Gorilla are always undervalued.

I also think that there is a very simple fix to this problem. It requires a little background. Although Moore does claim that Gorillas are always under valued, an unfortunate statement, the statement happens in a context and it is worth understanding that context. He is arguing the the market does not understand and value the competitive advantages that lead of the long length of the Gorilla CAP. The market discounts the GAP so that it resembles other technology companies. A better statement would have been -

"Markets always misprice the relative CAP of technology companies. When a category is in favor the market over estimates the CAP of the entire category and assigns large CAPs to all companies in the category. The Gorilla may still have the largest CAP but the relative proportion is much too small. When a category is out of favor the market under-estimates the CAP of the category and assigns small CAPs to every company. The relative CAPs are still wrong because the Gorilla CAP is overly reduced."

A Gorilla Game investor must pay attention to the CAP being assigned a particular category. If the category CAP is too high then all stocks in the category are likely to be overvalued. If the category CAP is too low then the stock of the Gorilla will be undervalued.

The only time the market correctly prices the category CAP is when the market is mature (on mainstreet) when there is a more predictable level of earnings growth and the relative share of the earnings pie is stable.

Paul
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