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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: JohnKouba who wrote (7427)	10/4/1999 3:01:00 AM
From: tekboy	Read Replies (1) \| Respond to of 54805

<<One of the basic premises of GG is that the market underestimates the future earning power of Gorillas. However, over the past few years, I have watched the PE of CSCO rise as its growth rate falls. (I believe this is also true with MSFT and INTL). Isn't the market starting to discount the future earnings potential? Is it possible that the market may eventually completely discount this growth or more importantly "over-discount"? Shouldn't we then consider skewing our portfolios towards "new" Gorillas?>> IMHO, this is a hugely important point, Lotusjohn. The GG is NOT simply about making money by investing in "companies with locks." It is about making money by investing in "companies with locks whose true value is underappreciated by the general market." From TFRM, pp. 126-127: "Let us close this section by summarizing the key principles of investment that we have illustrated. 1. For any company listed, the stock market consistently seeks equilibrium around a market capitalization that accurately reflects the net present value of the company's projected future returns over and above its risk-adjusted rate of return. This economic value added is in effect a measure of the 'good deal' an investor gets. 2. In the short term, however, the stock market is not good at pricing the stocks of companies in tornadoes, or the stocks of gorillas on Main Street. In both cases the correct valuation appears drastically overvalued. So instead, investors price these companies 'closer to the mean.' Since this mean consists of a mixture of a few companies in hypergrowth markets and a whole lot that are not, it seriously misrepresents the dynamics of hypergrowth. 3. The consequences of this misrepresentation are wonderful indeed for gorilla-game investors. It means, essentially, that we can buy low and sell high. That is, because the market does not anticipate the full power of real tornadoes, it does not fully price these phenomena into the valuations of the participating companies, at least not until very late in the game. And because it does not anticipate the persistence of the gorilla's competitive advantage going forward onto Main Street, it persists in underpricing the gorilla relative to the chimps and monkeys, again until very late in the game--usually only after one or more chimps have died off. THIS DOUBLE DOSE OF PERSISTENT UNDERPRICING PROVIDES THE FOUNDATION FOR THE GORILLA GAME. CAPTURING THE HUGE APPRECIATION THAT GORILLA STOCKS ENJOY AS A RESULT OF IT IS THE REWARD FOR PLAYING THE GORILLA GAME WELL. [emphasis added]" EVERYTHING depends on taking advantage of market misperceptions. To the extent that GG principles become widely known and understood, the prices of gorillas will start to approach their "true" value--and thanks to momentum players chasing anything that moves, widely known gorillas could even become overvalued. (To think otherwise would be to believe that markets are persistently inefficient in detectable ways over the long run, a dicey proposition.) Moreover, as the GG becomes more widely understood, more investors will fan out to search for, and place bets on, promising gorilla candidates. The best payoffs in the future, therefore, will almost certainly come from being able to identify gorilla neonates one step or two ahead of the crowd, and then leap in with both feet in order to catch the (ever-quicker) acceleration. I may be getting paranoid here, but according to the little I've read (please correct me!), the history of investing "strategies" is depressingly consistent: good ideas work, become popular, then stop working. The practical conclusion I draw from this, interestingly, is that communities like this thread become EVEN MORE IMPORTANT--because that's where we can a) hear about new candidates, b) evaluate them collectively, and c) do so quickly enough to profit from the analysis. tekboy@upsetatbeinglatetothegame.com