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

To: Stock Farmer who wrote (46085)	9/2/2001 3:46:52 AM
From: Bruce Brown	Read Replies (1) \| Respond to of 54805

A good artilce from Greg Jones at Briefing: Updated: 31-Aug-01 Jackson Hole Memo: Beyond Greenspan When Alan Greenspan doesn't want to move markets, he knows how not to move markets. Friday's speech was a classic exercise in boring the audience to the point of unconsciousness when the moment finally came to lower the boom! Well...alright...the boom was never lowered, and it was just as well to gaze dreamily at majestic Mt. Moran through the whole thing. But that doesn't mean there was nothing of note at the Jackson Hole Fed conference. There was. We were there; we saw it. Normally, the Jackson Hole Briefing.com office is seen as an outpost, but on Friday, as we found ourselves stuck behind Vice President Cheney's motorcade (he was headed to the Triangle X) on our way to a gathering with Greenspan, White House advisor Larry Lindsay, and central bankers from all over the globe, it felt as if we were finally ground zero for global political and financial power. Sure, that power will pack up and leave on Monday, but it was a cool moment nonetheless. As for the conference, Greenspan once again opened the show, with a performance that was....how do we put this gently....less than scintillating. The discussion focussed primarily on the statistical treatment of capital gains, and how that might be distorting some measures such as the savings rate. He also spent some time discussing the magnitude of wealth effects, and came to the common sense conclusion that equity capital gains have a greater impact on spending than capital gains on homes. If you were looking for clues on monetary policy or even Greenspan's economic outlook, you weren't getting them from this speech. As Greenspan sat down, the market proceeded to quickly forget about this conference. After all, it's not about the conference, it's about Greenspan. At least that's the market view. But what followed was far more interesting from a market perspective. Former Treasury Secretary Larry Summers spoke about the new economy, and what the Nasdaq crash said about the new economy. This is an issue that we have been contemplating for some time. It is taken as a given in the media (your first red flag) that the whole notion of a new economy was clearly silly - the Nasdaq crash proves it. But in reality, the new economy was a theory about, well, the economy. The economy and the market are not one and the same - they certainly influence one another, but they are not synonymous. The new economy proposition was not that stock valuations no longer mattered, nor was it that every nonsensical business plan which ended in dot-com was guaranteed of future riches. The idea was that the transition to an IT-based economy would lead to accelerating productivity growth and a faster pace of sustainable, noninflationary growth. We have not yet seen anything to contradict this theory. What Summers brought to the table were some salient explanations of the divergence between the market and the economy. Two of his conclusions were as follows: "The long-run economic impact of the ongoing technological revolutions in data processing and data communications will be very large indeed." "The crash of the Nasdaq tells us next to nothing about the dimensions of the economic transformation that we are undergoing. It does, however, tell us that the new economy is more likely to be a source of downward pressure on margins than of large durable quasi-rents." If you'll excuse the econo-speak, there is some food for thought in those excerpts. The first makes the case in favor of a new economy. Speaking directly to the productivity issue, Summers made a straight-forward case for accelerating growth. He noted that you can divide the economy into two segments - the IT sector with its faster productivity growth, and everything else (the old economy) with slower productivity growth. By definition, total productivity growth will be the weighted average of productivity growth in these two sectors, and since the weight of the IT sector will continue to increase, productivity growth will accelerate. A simple, yet elegant, case for the new economy. Also interesting was the discussion about the message of the Nasdaq crash. What Summers is saying in the excerpt above is that the crash in tech stock valuations is not telling us that the new economy is a myth, but that its implications for corporate profits were greatly exaggerated. Even during the bubble days, it was noted that one result of the Internet and IT was a shift to more transparent pricing. More transparent pricing means more competitive pricing; more competitive pricing means downward pressure on profit margins; downward pressure on margins means lower corporate profits and hence lower stock prices. And what of those "large durable quasi-rents"? What Summers is saying here is that many had assumed that first-mover advantage in many new economy sectors was expected to create a sustainable barrier to entry. As it turned out, the barriers to entry have been remarkably low. Exodus (EXDS) is a classic example of a company awarded a huge valuation because its first-mover advantage was expected to be a source of those large durable quasi-rents. Instead, Exodus' business was easily mimicked by many a competitor. For an example of a rare case of a new economy company that does indeed enjoy a sustainable barrier to entry, see eBay (EBAY). What's the takeaway from this somewhat academic discussion? It is that investors must focus not on the macro-picture when investing in stocks, but instead on the micro-story: does the company enjoy a sustainable barrier to entry? This question was either not asked or was answered incorrectly in far too many cases. What's good for consumers and the broad economy is not necessarily good for corporate profits. That has been the Internet experience thus far. The new economy is alive and well, and it has been an almost unqualified boon to consumers. But its consequences for businesses have been far less uniform, and often unprofitable. Greg Jones - gjones@briefing.com

To: Stock Farmer who wrote (46085)	9/3/2001 12:45:18 AM
From: Mike Buckley	Read Replies (2) \| Respond to of 54805

John, I also think that a lot of folks read the Gorilla Game. And in the back of everyone's mind was the axiom that everyone else was under-valuing these stocks. With the net effect that they were bid up and up and up. Maybe I'm naive, but I wouldn't credit or discredit Moore & Gang so much as to believe their book so vastly influenced perceptions of investors. If it had been only the 100 or so stocks that meet the authors' Gorilla and wannabe Gorilla criteria that went through the roof in 1999, there might be some anecdotal evidence supporting your and others' theory about that. Instead, there was also a broad-based advance of the public tech stocks that don't meet those criteria. If the book had enjoyed such a huge influence on the outcome of the stock market, the companies that don't meet the criteria would have been left in a cloud of dust. I also give more credit to the readers of their book than to believe that everyone thought everyone else was undervaluing the stocks. And I don't believe that everyone agreed with the authors that Gorillas are always undervalued. Two points. The first is that one of Moore's original assertions in The Gorilla Game is that these beasts are undervalued according to any practical valuation method by their very nature at the very point in which you should be pulling the trigger. ... The second and contrary point is that just like a Gorilla is more valuable than a chimp, a ten dollar bill is unarguably more valuable than a one dollar bill. ... I don't believe it is possible to simultaneously satisfy the principles of these two points. I don't believe it's necessary to try. That's because I've never accepted the first point. Even Moore seems to have come around to not accepting it. --Mike Buckley