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

To: Don Mosher who wrote (48061)	10/18/2001 11:11:50 AM
From: paul_philp	Read Replies (2) \| Respond to of 54805

Don, Magnificent. Bravo! Paul

To: Don Mosher who wrote (48061)	10/18/2001 1:53:55 PM
From: areokat	Respond to of 54805

Mauboussin, who is following Shumpeter's logic of cycles of creative destruction, believes that high technology GAPs are becoming steeper and its CAPs shorter. If Mauboussin is correct, then an investor's timely entry into a Gorilla's stock becomes ever more significant in reaping a maximal excess return. When the market panics, buy. When the market is ecstatic, sell. (Now, if only I could do this.) Another great post Don. My high speed printer finally finished printing it out for digestion this evening. Taking your two statements together (above) would indicate that the current time might be the best buying opportunity for the next few years regarding identified gorillas? Kat

To: Don Mosher who wrote (48061)	10/18/2001 2:01:36 PM
From: Mike Buckley	Read Replies (1) \| Respond to of 54805

Thanks for your post, Don. Parts of it inspire me to ask a couple of questions of others. Bruce, As Moore noted, after the pyramidal shakeout of the dominant company from the pretenders, the market itself can recognize the competitor who is left standing, the so-called 800 lb gorilla-as-dominant-market-share-leader. This "gorilla" may or may not be Moore's gorilla. On the one hand, if it is not, then its competitive advantage will be less deep and long lived. On the other hand, if it is, then the distinctive combinatorial and exponential power of its competitive advantages still may not be recognized. In the context of Don's comments about that, where does i2 fit? In the infancy of the supply-chain software business, you'll remember that my concern was that the product category might be subsumed. As the product category matured, I came to the conclusion that my concerns weren't realized. Now I'm wondering if I didn't come to that conclusion too soon, but don't follow the industry enough to have any opinions about it. Do you believe that i2's more recent problems are an indication that, indeed, the category is finally being subsumed? To the people who don't believe valuation can be helpful ... Valuation of the gorilla matters because its intrinsic value is a function of your estimates of the size of the double dose of under pricing. And this valuation is likely to be qualitative because increasing returns and leverage innovation often extends beyond our foresight and ability to quantify. Still, it is likely that using inexact measures is better than using no measures at all My follow-up: Does it not matter whether the price of a stock is $10 or $1000, and if not, why not? (Depending on all the relative factors, I realize $10 might be expensive and $1000 might be cheap. But I sincerely wonder why anyone would choose not to care about determining whether $10 or $1000 is cheap or expensive?.) --Mike Buckley

To: Don Mosher who wrote (48061)	10/18/2001 3:49:39 PM
From: ratan lal	Read Replies (3) \| Respond to of 54805

. When the market panics, buy. When the market is ecstatic, sell. (Now, if only I could do this.) Thats becasue you and I are the market (who panic) and the professionals (those who manage other peoples money) who are disciplined (most of the time) buy during panics and make the money.

To: Don Mosher who wrote (48061)	10/18/2001 4:22:24 PM
From: Pirah Naman	Respond to of 54805

Don: Very clear explanation of the concepts. Somewhat of a tangent, though not entirely - because your post touched on the judgement of the investor and the skill at applying the principles of the GG, I was reminded of the example portfolio in the book. As I recall, the authors made the point of saying that ORCL was rather past its prime, and the portfolio they made up included one part CSCO, one part INTC, and two parts MSFT, excluding ORCL. Now of course the dates don't match, but I just looked at the 1999 G&K Index. Looking only at the Silverbacks and ignoring the other companies in their example, since Silverbacks should be easiest to analyze) - if an investor had actually distributed money as described in the book at the onset of that index, their return to date would be -23%. However, if they instead distributed evenly over CSCO, INTC, MSFT, and ORCL, their return would be 6.5%. Please note, this is not to suggest that the author's judgements were wrong - it is too early to tell. But it does illustrate how our best GG judgements even on obvious Gorillas can result in an unexpected outcome. - Pirah

To: Don Mosher who wrote (48061)	10/19/2001 1:12:32 AM
From: chaz	Respond to of 54805

Don-- There's been some discussion here about writing the 3rd Edition. I think you've put that idea to bed...who needs to bother now that you've slipped in your two bits? I've printed four copies. One for me, and one each for my three sons. Thanks for a most significant contribution. If you want to put uf on "ignore" for his accurate but thoroughly unkind remarks about your punctuation shortcomings, you'll get no argument from me, or from Buckley either for that matter, because such nitpicking is usually his turf. Actually, I was kinda surprised uf got the knife in you first, considering Buckley's usual "quick-draw" record. Chaz

To: Don Mosher who wrote (48061)	10/19/2001 12:02:05 PM
From: Stock Farmer	Read Replies (9) \| Respond to of 54805

Don - that was a great post. And it exposes what I think is the Achilles heel of the Gorilla Game. Which is that one can reliably harvest disproportionate gains merely by systemic identification of Gorillas. There are three factors which determine the price of any stock: (a) time value of money (b) estimated future profits (c) future-risk As you so clearly set forth, the Gorilla's dual advantage acts to increase future profits and reduce future-risk. In the pleasant world of homogeneous behavior, one can apply Vanilla rules of thumb to an existing business and ballpark future profits; then apply a Vanilla estimate of future-risk; then discount to present value. Which for a given company will result in a Vanilla valuation. Without question, if one applies Vanilla criteria to the evaluation of a Gorilla then yes it will be undervalued. And before a Gorilla is identifiable amongst the other shiny pebbles, it is hard to argue that it deserves anything but Vanilla valuation. And so, when it emerges and attracts proper Gorilla stature... we see disproportionate investment gains. Very true. And a very seductive conclusion follows: all we have to do is identify the Gorilla while the market is switching from Vanilla to Gorilla. And Moore offered up a method. A checklist and a process. Which he called the Gorilla Game. The flaw however is that it is only reliably practicable in hindsight. It is not as valuable in advance as we might want it to be. Or more to the point as it needs to be in order to be successful. I am not disputing that an investment in a zygotic Gorilla should deliver above average returns. No, such an investment should attract stellar returns. I am disputing the thesis that we can reliably identify these zygotes before the rest of the market. Or that once they are identifiable as deserving of non-Vanilla pricing that the market will get it wrong and we will get it right. That would make us consistently smarter than the market. This is quite appealing from an ego perspective. But the difference between a Fool and a Genius is that each believe they are the other. Can we identify Gorillas early enough? So far, this thread hasn't had too spectacular a track record. Individuals perhaps. But the thread as a collective has not. Are we immune to false positives? Well, the composition of the GKI changes considerably from year to year. Which is hard to rationalize against the thesis of "long term sustainable competitive advantage". And even if we are graced with heads the size of a planet and we can consistently beat the market... what happens if a bunch of dummies thinks they are just as smart and in aggregate they incorrectly practice the Gorilla Game on everything that smells tech? What if they bid the price up on everything from small and shiny to large and silver backed, and we are forced to pay unfair and high prices? Or what if company management, venture capitalists, evangelistic technophile cheerleaders and the vast marketing arm of Wall Street conspire to fabricate legions of impressive and realistic Gorilla costumes and proceed to drape them on anything that moves? Yikes. What I am saying is that when repeated often enough and by enough people, the practice of Gorilla Gaming should attract enough spectacular failures so that in the end one's net returns turn out to be average!!! Because the market is a very efficient machine. The cynic in me would say it is very efficient at moving capital from less sticky pockets to more sticky pockets. But its greatest efficiency is the balancing of risk and reward. Any mechanical method (e.g. checklist of characteristics) of securing a favorable risk/reward imbalance is not sustainable. Indeed, the market will rapidly adjust so that the degree of risk is appropriate for the returns. And Moore's book has been out for a few years now. It's not exactly a secret. What this means is that by now we should expect that Gorilla Gamers who are attempting to attract disproportionate rewards also face disproportionate risks. For example, the "it's undervalued" thesis has nothing but the thesis to hold it together; offering no impedance to upwards price drift and an overvaluation spiral. People are willing to pay more for something that is seen as undervalued. If the price that the market quotes is "under valued", then the market price has a tendency to rise until such time as the value is fair. Which is to say, until such time as the assertion of de-facto overvaluation is no longer held to be true. The theory of risk allows eToys to have been priced above its fair value of zero. But what justification is there for Cisco? The myth of "it's undervalued" acts to exacerbate its own falsehood. Alternatively stated, we should expect an inflection point of proportionate returns that lies precisely at the moment the Gorilla is identifiable as such. Earlier purchases will attract greater returns, later purchases will attract lesser returns. A purchase at the inflection point should yield real returns at the rate that the market applied at the time to discount future-risk. This has implications worth pondering in periods when the market is using a higher-than-normal rate of future-risk. An investment in a Gorilla that emerges in such a period should deliver higher-than-normal real rates of return! And vice versa. Indeed, one of the characteristics of the Bubble was the expectation of substantial gain, even from dubious enterprise. Or, lower than average "future risk". No wonder that emerging Gorillas purchased during the bubble are likely to deliver lower than average rates of return. Established gorillas purchased in this interval are likely to fare even worse. Silver lining: as long as the future looks dim, then in a kind of perverse kind of way, we should expect any Gorillas that emerge today to attract above average rates of return! John.