It's no coincidence that on a bad day for the
markets I'm posting like crazy - I'm just giddy
in times like this.
I want to clarify my post on Mike Murphy's book.
I like his underlying approach, but he doesn't follow
his own advice with his stock picks. And I don't
quite believe "growth flow" although it might point one
in the right direction. He has good reviews of the major
industries, and the strategy is there. Looking over his
own picks, he doesn't follow that 15% ROE rule very well.
Nor does he follow his <50% downside risk rule well.
That said, here's something about the book and him
that makes him sound like Wade Cook and may dissuade
anyone here from buying the book. It's from the Boston
Globe in February.
Michael Murphy is a man with a message: The "New Economy" is technology,
and investors stuck in the "Old Economy" are destined to be left behind.
It doesn't matter if you buy technology stocks or technology funds, says Murphy, the
founder and editor of the well-known California Technology Stock Letter. The point
is to buy technology - and BUY IT NOW!
Murphy was in town yesterday, hawking his vision and his book, "Every Investor's
Guide to High-Tech Stocks and Mutual Funds" (Broadway Books), which is getting
good ink in places such as The New York Times and Business Week. We know
Murphy from his daily CNBC ads, and somewhere along the way yesterday we
asked him what kind of numbers his newsletter put up last year and how it stacked up
against the competition.
"I'm not sure. I just haven't seen them," said the 56-year-old Murphy curiously. An
investment letter writer not able to cite his most recent returns is a little like Wade
Boggs not knowing his batting average. What's the chance of that?
Let's just say the numbers aren't what you want to take out on your next book tour.
In last year's roaring bull market, Murphy's model portfolio produced a loss of 36.7
percent while the Wilshire 5000 was up 31.3 percent. That ranked Murphy's letter
number 140 of 142 newsletters followed by Hulbert Financial Digest, which has
long tracked the advice business.
The numbers get better over the long term, but not a lot better. Over 10 years, his
letter was up 135 percent, vs. 405 percent for the Wilshire. Hulbert says over 15
years the California Technology Stock Letter is up 124 percent, compared with 911
percent for the Wilshire, ranking it 24th of 30 letters over that period.
We're going to pay $27.50 for the book or $295 a year for the newsletter for this?
Murphy's record illustrates perfectly what a few stinko years can do to an investor's
bottom line. The California Technology Stock Letter did do very well for a decade
starting in 1986, and was in fact rated the number one newsletter by Forbes in 1996.
But the letter was a loser from 1983 to '85 and has had a couple of bad years of late.
The result is what you see.
In picking stocks, Murphy focuses on research and development spending and an
unusual approach he calls "growth flow."
Murphy says his growth flow concept is a little like tracking cash flow. But instead
of using depreciation as analysts use in valuing "the old industrial economy," growth
flow combines earnings per share and R&D per share as a way of capturing the
intellectual capital that is so important to New Economy companies. He then divides
growth flow per share by the price of the stock to determine the "crucial ratio" for
buying cheap stocks.
"That's all there is to it!" Murphy tells us on Page 137. Well, maybe not quite all.
Murphy says Michael Metz, Oppenheimer's chief investment strategist, has started
using growth flow. In an interview, Metz said growth flow is "a beginning," but adds
that it has "many shortfallings."
High-tech companies, in particular, can spend hundreds of millions on research
only to have an entire sector leapfrogged and become obsolete overnight, he says.
"Suddenly the whole thing goes down the drain," Metz says.
Certainly the world has not been going Murphy's way.
Three mutual funds he started late in 1996 did poorly last year. The Murphy
Technology fund was down 17 percent and Murphy New World Technology
managed a bare 0.35 percent gain; meanwhile, the Morgan Stanley High Tech index
was up 17 percent. The Murphy Biotechnology fund was up about 1 percent, topping
the Standard & Poor's biotech index, which was down about one-half of 1 percent.
Murphy says his mistake in '97 was betting big on biotech in all the funds and doing
it on margin, which magnified the losses. "We thought 1997 would be a year of
biotech," he says. "We think this year will be the year for biotech."
The good news for investors: There is just $ 5.5 million in the three funds.
Besides California Technology Stock Letter, Murphy also publishes Overpriced
Stock Service, which he touts as "the premier short-selling investment advisory
newsletter in the world." Hulbert's numbers for that newsletter: down 16 percent for
one year, down 85 percent for three years, and down 89 percent for five.
What's Overpriced? You can figure it out. Here's hoping the book sales are going
better. |
