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

To: Mike Buckley who wrote (11497)	11/30/1999 4:11:00 PM
From: JRH	Read Replies (1) \| Respond to of 54805

Mike -- great post. It embodies the some of the questions I have regarding this investment philosophy. the market has tended to undervalue gorillas by a wide margin in the past Interesting comment. How does one determine that though? Have these "gorillas" returned more than the hurdle rate for their owners and only now have they approached "fair value?" I think the hard part is ascertaining whether these companies are fairly valued here -- which as you state later, is virtually impossible quantitatively. One thing you can say is: where do the profits need to be to support this price with a reasonable discount rate? Is it plausible? What needs to occur for this to happen (i.e. a continuation in a high stock price to maintain acquisition strategy, new revenue streams, etc.) Ryan (JRH's roommate)

To: Mike Buckley who wrote (11497)	11/30/1999 6:37:00 PM
From: Tom Ardnij	Read Replies (3) \| Respond to of 54805

Mike, Some thoughts on valuing gorillas. I can't help but notice that young simians and indeed newly crowned royalty outperform the silverbacks. I think that there exists a clear reason that is outlined in the field manual. It deals with threats to the CAP of some of the silverbacks starting to show up on the horizon. Not the type of threats that make for a sudden drop, but rather the gradual type that proceeds slowly. Disruptive Technologies abound to change the importance of desktop computers. Certainly, handheld wireless devices throughout the home and office lessen the focus on the microcomputer. The desktop operating system and indeed many applications overshoot the day to day needs of most people. The internet combined with large application servers stand to disrupt further the importance of sophisticated desktop computers. It appears that new gorillas deserve a higher valuation because they are typically found in those arenas that enable the use of data anywhere. Thus the importance of wireless, optics, storage, and in general investments in bandwidth. George Gilder of course calls this the Telecosm. A couple of weeks ago I attended the Disruptive Technology Conference with Gilder and Clayton Christenson, author of the Innovator's Dilemma. Paul Jacobson, President of Qualcomm's Consumer Products Division addressed the group, in a session with the Director of Intel's communications development. I left the two day conference concerned that a series of disruptive technologies are coming into place that will gradually tear at the CAP, specifically of Intel and Microsoft. Nothing sudden, but certainly paradigm shifting as to where and how we access communications and technology. I think this shift is a large part of the outsized valuations of Qualcomm, JDS Uniphase and smaller companies that chip off a part of the microcomputer value chain. Sorry about the length of this post. Best Regards, Tom

To: Mike Buckley who wrote (11497)	12/1/1999 12:27:00 PM
From: Eric Jacobson	Read Replies (1) \| Respond to of 54805

Mike and Malcolm, with regard to valuations, I think the two of you are on to an important topic that I hope we don't drop. I haven't had much time to think this through thoroughly or do any research, so for now I'll just put down a couple of thoughts and hopefully I can get to it in more detail in the coming months. Clearly, each time Q doubles, it comes closer and closer to being fairly valued relative to other gorilla opportunities. You said that the manual gives no clue as to how to do a quantitative estimate of value. I'm not sure I agree. Somewhere early (Chapters 1 or 2) in the FM (I don't have a copy with me now), the authors state the obvious - that the value of a company is equal to the stream of future earnings. I believe they even cite a proprietary model that they use to make these estimates. So, I believe the problem isn't that we lack a method, it's that we (as individual investors) have access to only a limited set of information and have difficulty estimating future revenues and earnings and, therefore, the fair value of a gorilla. In short, it is hard and our estimates might be wildly inaccurate, but it is not impossible to make an educated guess about these valuations. there MUST BE some price over which it would be madness to buy. 300earnings or 30sales,using the trailing values? There are some potential gorillas out there selling at a price of about 800 to 1500 times sales. Maybe that should be the limit. :) I agree at some point it would be madness to buy a gorilla or potential gorilla relative to other opportunities. However, I wouldn't make this determination based on trailing metrics. You really need to be able to make estimates about the future - the size of the market, market share, pricing power which may yield higher gross margins, etc. An interesting case study would be to take the 10-20 years of data we now have available on the silverbacks - MSFT, INTC, and CSCO, and maybe a few gorillas that haven't achieved silverback status, and try to estimate at what point it would have made sense to switch (some or all of your portfolio) from one gorilla to another. At some point, it would have made sense to sell INTC in favor of CSCO, just as we now know it made sense to sell MSFT about a year ago in favor of QCOM. At some point, it will make sense to sell QCOM in favor another gorilla. This is the exception to the Russian Army strategy - especially since it involves a timing strategy - that I think makes people uneasy about relatively concentrated portfolios. Perhaps history can teach us something about these inflection points. Pick the best two or three that in your opinion have the most upside potential and remain abreast of the changing fundamentals. I agree with this premise. Not only do I think it's important to stay abreast of fundamentals, but I also think it makes sense to have some rules of thumb about fair valuations so that you can make informed decisions about when to switch some or all of your holdings from one stock to another. Eric