Hi Rory,
The difference in opinion you cite isn't unique. And it's not like each of the perspectives in this debate haven't been reiterated numerous times. Perhaps the issue shouldn't be a polarizing "who thinks what", but a more synthesizing "what can we learn as a consequence"?
Maybe start from the basis of agreement? Such as the wisdom of buying "good companies". We have both listened to old men of very similar opinion.
It seems to me that there are individuals who believe that buying "good" companies at whatever price the market offers is a recipe for long term capital gains.
There are other individuals who believe that buying "good" companies when they go on sale is a recipe for long term capital gains.
I fall in the latter camp.
Another piece of the puzzle is the Gorilla Game. And again, there is basis for agreement. I hold the view that Moore took some fundamental marketing knowledge and packaged it up in clever lingo and situations specific to technology companies. It occurs to both of us therefore that the fundamental basis applies to all companies. Integration into the value chain and the positive network effects of channel domination is as important for alcohol and tobacco as it is for routers. Works for credit cards and cigarettes and breakfast cereal. In that respect I have no disagreements with you or Moore and have always suggested that there is much merit in some of what he has written.
Although folks seem to think it applies only to technology, Moore took something well understood by marketing gurus and made it both understandable and appealing to us techies (and other non-marketing gurus), with the neat twist that we techies could apply it to what we know best (tech companies) to what the techie-heavy boomer-dominated general public was doing with their excess capital: buying tech stocks hand over fist. Good example of alignment of the value chain, and some pretty good marketing too. No wonder it became a best seller!
A week or so ago someone on this thread broached the question whether or not the Gorilla Game itself was worthwhile. I found the answer proffered to be superficial and highly biased in presentation (precis: "If we dismiss any pejorative evidence, then the jury has no basis to rule"). Which brought me from a long lurk and seems to have stirred up a bit of dust in the process.
I don't disagree that folks who buy and hold stocks that later turn out to be Gorillas make handsome returns on those investments. In fact, I'd be an idiot to do so because plainly this has been the case. However, that's not to say that applying the gorilla game has led many poeple to make handsome returns on all of what they thought would turn out to be Gorillas. That's a big difference.
I do not believe that Moore's methods and proscription would be very helpful to investors. Except insofar as to provide a useful framework for bragging at cocktail parties later when it turns out one has selected a Gorilla and is given the opportunity to explain why. <gg>
Not useful that is if they aren't applying the information in ways that Moore did not suggest and indeed counseled against: quantitatively. Which is where Moore and I diverge in thinking. [See also my reply to mathmagician].
Yes, I've invested in "gorillas". Mostly however for the same reason that I've invested in consumer product distributors: because I liked the combination of the business model, channels, management and integration in the value chain. And because I could construct for myself a scenario where the net present value of future profits was in excess of the price of admission.
I've also invested successfully in turkeys because I could construct for myself a scenario where the net present value of future profits was in excess of the price of admission. Or where I expected to unload an issue in the future for more than I was paying for it.
And every time I've missed an opportunity or (worse) attracted a negative profit (some of them quite serious), it's been because of this price of admission versus price at exit thing. Not because of the taxonomy of the beast.
So unlike some on the thread, it seems to me that the fundamental determinant of a successful investment isn't the nature of the company, but the degree to which I am able to estimate and secure a "fair price" and then extract a later profit. Which is why it figures so prominently in my investment thinking.
For example, Qualcomm is today exhibiting the same simian characteristics it had when the price was four times as high and when the price was half as high too: the ticket price went from X to 8X [other non GGame specific attributes have changed, mostly due to macro conditions for which the game makes no allowance - another topic perhaps].
Although we don't know now what it will be, it's safe to say that the price of QCOM will be Y in 2010, at which time we will be able to look back on a profit during this period that varies between (Y-X)/X to (Y-8X)/8X. Depending on what Y ends up being, this could be quite a significant range, and might even include some negative returns.
Nothing to do with it being a gorilla. That's actually irrelevant. What's relevant (in this example) is what the price is now and what we expect it will be in 2010. And more important, perhaps, "why".
Indeed, unless one can extrapolate the implications of the characteristics that Moore explained on the future business of the company relative to current business activity and then compare to market expectations, then it is stopping quite short of the mark to discover for ourselves that yes, we are in a tornado and then assume this means the stock is priced below parity and therefore a "good" investment.
Seems to me this topic would make good fodder for the thread. It's not just WHETHER a company is a gorilla, but the DEGREE to which we should expect the characteristics will influence the BUSINESS MODEL on a go-forward basis that are important.
So far the thread has been very qualitative in its assessment. I suggest that to transit from an academic exercise into something useful, then we might want to broaden the discussion on this forum from "whether" something is a Gorilla to addressing a more quantitative "so what". |
