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Technology Stocks : Gorilla Game

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To: Jay Rommel who wrote (12)	3/18/1998 10:24:00 AM
From: Elmer	Read Replies (2) of 387

Jay, The reason that the game will probably work in providing great returns is that it ask the investor to violate two articles of investment faith. The first is the main lesson of "Concentration" of holdings, which is contrary to the desirability of "diversification" they taught me in business school. The second is based on the fact that gorillas and "gorilla candidates entering the tornado" almost always carry extreme valuations. So, the book is telling you to buy the extreme valuation and sell the other candidates which will usually appear more reasonably priced on a P/E or a Price to Sales basis. In other words, valuation doesn't much matter as hard as that is to swallow. To illustrate, look at Paul Johnson's rule in Chapter 9. It says that a company has entered the tornado when its growth rates exceed 100% and it is experiencing sequential quarterly growth. Based on this criteria, I2 Technologies is in the tornado. Manugistics is not. But on a valuation basis, Manugistics looks like the better buy. So you should overweight in ITWO. That's hard to do. These are very interesting challenges to the faith. Regards David

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