In retrospect, if one of the companies I'd held came out with poor news I'd have sold, as I did in years past. But whether it was wireless, application software, interactive television, semiconductors or what have you... it all seemed to go bad pretty much all at once and had a paralyzing effect on me... I'd start to think, well hey, if it's everybody then it's not company specific and once the economy comes back or more specifically the tech sector... I'll be okay.
The paralysis is a pretty common factor within a bear market. We call it the 'deer in headlights' syndrome which we have all experienced at some point in time as a reaction to an event. I know I have. Hence, we have to attempt to 'beef up' our reaction to certain events when it comes to investing based on a variety of criteria. That's why I have spent the past year adding elements long overdue to my thoughts on investing/trading. A non-emotional response needs to be developed. For instance, each individual investor needs to set their parameters - be it for a trade or for an investment - regardless of how much one loves a company and their products. A company and their stock are two separate items often having little to do with each other. The goal being to protect the capital used to enter the trade (no matter what the time frame).
Sorry to use the spilled milk analogy, but we have all spilled some in our lifetime and cried. So we can relate. If you had a new carton of milk on your kitchen counter with a hole on the side of the carton near the bottom with milk spewing out all over the counter and the floor, at some point the reaction response would be to walk over and plug the hole with your finger to stop the milk from spewing out - or some similar action. In addition, one would perhaps locate a pitcher, thermos, glass or something else to pour the remaining contents in so you could use what was left of the milk in the carton. The paralysis reaction would be to stand there and watch all of the milk exit the carton that was located above that hole.
Now we could go on and talk about the number of possibilities of setting parameters prior to our purhase for how much milk we would allow to exit the container before reacting so that when the time comes and the parameter is hit, the reaction kicks into effect. All easy to understand on paper, but difficult to execute in the heat of battle. Those are the items that I have spent the past year trying to understand and add to my decision making.
However, in addition to the bubble up and bubble down of share prices for the technology companies as the demand for IT swelled and then contracted, it is important to discuss your decision to purchase Redback Networks. Remember, it was only one candidate in a game (network edge) with many candidates. Forget about the share price itself at the moment and focus on that particular game to understand where it came from, where it has been and where it might be going. Redback was only one candidate in that particular game. Important companies like Juniper and Cisco who dominate the core routing game continue to create new generations of core routing equipment. What is interesting about this is that their installed base of previous generations of equipment can be pushed out to the edge of the network as these new generations of products are introduced. Not so interesting for companies that were focused only on the edge of the network, however. This has been a dynamic element of Juniper's strategy and one that has evolved as the generations of network boxes come along. Juniper has an upcoming generation of core router that will again adjust the previous generations of equipment out to the edge of the network. This increases barriers to entry and will be interesting to watch. So, the dynamics of the game have not remained a 'constant' and playing a game which requires a closely watched 'basket approach' should not have led to the choice of only buying and holding one candidate in the early going. Not to mention, holding all the candidates in that game hit investors rather hard if they decided not to sell.
The basket strategy of playing an early gorilla game or royalty game comes with some information in the manual that is rarely discussed here as the majority on this thread have no interest in playing the basket game - and for good reasons. I do believe basket strategy was recently discussed in regards to BEA Systems, IBM, Oracle, Microsoft, etc... in the eBusiness application server market. In addition, comments in the manual about hedging and using more advanced investing strategies apply. In fact, they remain an important insurance element which leads us back full circle to why many choose not to involve themselves in a game that turns out to be royalty or gorilla in the earlier stages.
In the chapter "capturing the gorilla", page 181 - 182 talks about buyers and sellers remorse as well as says this:
"Success in the gorilla game demands having a good process for holding vs. selling high-tech stocks. In most other sectors of the economy, where tornadoes are not common, long-term holding is the best strategy. That is because the better companies, the execution leaders or kings, will tend to outperform the category year in and year out. Massive shifts in power are rare, and churning your stocks in pursuit of incremental advantages has proved to be unrewarding."
Hard to think a Home Depot, a Wal-Mart, a Coke, a Phillip Morris, a Boeing, a Harley Davidson, a General Electric, a Pfizer, a Caterpillar or whatever will just roll over and be hit by a massive shift of power without a protracted battle. It could happen, but these companies have been quite good execution leaders over the years.
It goes on to say:
In high tech, on the other hand, massive shifts of power are routine, so patient holding is not rewarded! Think instead of crossing a frozen river that is just breaking up - you have to leap from ice flow to ice flow to get across, always keeping your eye on the next configuration, never just walking straight ahead. You still hold in the model, but with nowhere near the faithfulness as in other sectors."
If we move on to page 187, it says this under the "taking your losses" section:
"Once you are reasonably sure that given companies are out of the game, sell their stock fast. Depending on what the market is doing at the time, you may well have to take a loss on these companies. This may make you want to hold on to them just a little bit longer, so they can get well and you can get your money out. Don't even think about it. Sell."
Aside from the expansion and contraction of the technology sector - as well as issued surrounding the bubble created by unrealistic projections of demand - each basket strategy will not always be a winning follow through and money will be left on the table. I was fortunate enough to have quality success with the royalty game basket strategy in the PC industry during a good portion of the 90's, but have not been so fortunate with the networking or the software procurement/eBusiness applications side of things as of yet. Other chances for baskets will come along and losses have to be accepted.
In addition, combing through the wreckage of the networking sector and the eBusiness application sector remains a valid strategy for identifying who and what kind of potential is left. Trying to get a handle on the plums within various niches going forward remains a valid use of one's time using gorilla and royalty gaming criteria. I'm not talking about former high flying stocks running to new heights, but the category leaders that have the end markets, cash flow creation and products to justify possible share price appreciation going forward. It's a long way from the tops of Brocade, Juniper, Cisco, Ciena, Intel, Microsoft, Oracle, BEA Systems, Sun Micro, Siebel, i2, Qualcomm, Network Appliance, EMC, Checkpoint, etc... and many of those will never be seen again. However, that doesn't mean each and every one of them has no future business, earnings prospects and respective games that could eventually drive their share prices to a higher level than current levels. Reality is for some businesses - if not many - things will turn even more sour before they improve to sweeter times. Yes, there will be other companies unknown to us as of yet that will emerge and become new leaders. No guarantees that former leaders will ever lead again, but we have to look under the hood to see what is or is not there.
Plus, I was on a phase III clinical trial of some heavy drugs for a year. I lost a lot of weight, some hair etc. I wasn't that sharp. And I pick a bad year to do it.
Sorry to hear about that, Straight Life. I think everyone on the thread would join me in saying we do hope that your health issues improve in the coming year.
BB |
