How to play the gorilla game
Part two of Money.com's interview with market strategist and author Tom
Kippola
moneydaily.com
Everyone's gotten a hot stock tip at one time or another, often for some
sizzling technology stock. And some of us may have acted on that
information, not really knowing whether or not the company would benefit
from - or get beaten up by -- the lightning changes in technology
markets.
Market strategist Tom Kippola outlines a strategy for successful
high-tech investing in his book, The Gorilla Game: An Investor's Guide
to Picking Winners in High Technology. In part two of an interview with
MONEY writer Duff McDonald, Kippola laid down the law of the high-tech
investing jungle.
MONEY.COM: Just for review, What is the "gorilla game?"
KIPPOLA: The gorilla game is a type of growth investing that's focused
very narrowly in the high-tech markets and on very specific kinds of
technology companies. We look for companies involved in spaces that have
not undergone hyper-growth but will undergo hyper-growth. And when they
undergo hyper-growth, there will be a dominant player in that space,
which we call the gorilla.
MONEY.COM: How does an investor use the Gorilla Game to try and identify
companies that may become gorillas?
KIPPOLA: Well, I think the first thing they need to do is plot where
they believe certain categories are in their life cycle. Are they before
the chasm, are they in the chasm, are they in what we call the bowling
alley -- which is stage three of the life cycle -- are they in
hyper-growth? Where are they in their life?
Number two, do those categories exhibit the characteristics that we're
looking for in a marketplace that will ultimately have a gorilla, i.e.,
do the products have high switching costs in proprietary architectures?
If they do, the theory says that if the marketplace actually makes it to
hyper-growth, it will pan out to be a gorilla/chimp/monkey marketplace.
Number three is timing; knowing when to invest. I'm summarizing this,
but in general, we're suggesting to private investors that they wait
until a category has passed the chasm; that way you get rid of the
downside risk of the product category never making it to the mainstream.
But you buy before the tornado and, therefore, you're buying into lots
of potential upside.
And then, finally, we're suggesting that private investors don't
necessarily select the just one that they think will become the gorilla,
but instead look for the two or three gorilla candidates, the two or
three companies that have a legitimate shot at ultimately becoming the
gorilla. And invest in all of them.
MONEY.COM: So, for example, looking back in networking, that would have
been Cisco (OTC:CSCO), Bay Networks (NYSE:BAY), Cabletron (NYSE:CS) --
companies like that?
KIPPOLA: Yeah.
MONEY.COM: So you'd buy them all at first and then pare down when you
see the winner emerging?
KIPPOLA: That's correct. In routers, it was Cisco and Bay. In some of
the other networking spaces it may have been Ascend (OTC:ASND) and U.S.
Robotics (OTC:COMS), for example, in remote-access devices. In
databases, it was Informix (OTC:IFMX), Sybase (OTC:SYBS), and Oracle
(OTC:ORCL).
MONEY.COM: Is the Internet relevant at all here?
KIPPOLA: It is, but I think we have to split the Internet into
technology plays versus digital media plays versus electronic commerce
plays. I would argue that the latter two are not pure technology
investments. In fact, digital media is probably going to look a lot more
like a media play than it is a technology play. And since it's a game
that's based on brand and not necessarily proprietary architecture with
high switching costs, it doesn't fit as cleanly into the Gorilla Game as
networking, hardware, and software investments.
MONEY.COM: The ones that are sort of behind the behind-the-scenes
Internet companies.
KIPPOLA: That's correct.
MONEY.COM: Back to identifying prospective investments. How does an
investor identify the chasm -- the point at which it might make sense to
invest?
KIPPOLA: The chasm is a time in the marketplace when the early market is
relatively saturated. In other words, most of the early adopters who are
going to adopt the category have adopted. Yet the mainstream is still
holding back because it's not quite confident that it wants to adopt a
category yet. So there's a lull there that occurs for lots of
technologies sort of caught in a Catch 22.
MONEY.COM: So the best way to be trying to identify chasms might be to
make friends with a couple of guys that buy all the gadgets?
KIPPOLA: Well, that might be one way. I think the other way is really
just to scan the technology universe, reading a lot of the news stories,
to be able to separate the hype from reality. So there are categories
that will get hyped up in the press because they're new and they're
exciting and they have a lot of promise. Yet they don't quite meet the
expectations of the industry or the analysts. So being able to separate
hype from reality is an important part of what an investor has to do in
playing this game.
MONEY.COM: Is there an example that you could give me now of a sector or
a market space on technology that appears to be in the post-chasm phase
but no gorilla has emerged?
KIPPOLA: I think there are a couple of spaces that we talked about in
the book where it appears that a leading gorilla candidate has emerged,
but perhaps not a gorilla yet.
Supply chain management is an example that we use in the book where
there are a number of companies in the space, but there are two very
fast-growing companies: Manugistics (OTC:MANU) and i2 (OTC:ITWO). i2
certainly looks like it's the odds-on favorite to become the gorilla,
but I don't know if anybody's ready to make that claim yet.
The same thing can be said in the customer software arena where three
companies -- Vantive (OTC:VNTV), Clarify (OTC:CLFY), and Scopus-- the
latter recently have been acquired by Siebel (OTC:SEBL). Those three
companies have been really going neck-and-neck in revenues. It looks
like Vantive has a slight lead over the other two, but I'm not sure
anybody's ready to crown them the gorilla yet.
MONEY.COM: What's customer software?
KIPPOLA: Customer service and support software is a category of software
that service departments are implementing to reduce the bottleneck on
their support lines. Anybody who's called a high-tech support line in
the last two years knows that they have to wait on hold for 20, 30, 40
minutes or longer. This category of software helps service departments
manage service requests so they can increase the productivity of the
employees on the service desks and, therefore, get to callers' requests
much more quickly.
MONEY.COM: So this has gorilla potential because, once that system is in
there, you'd have to have a really, really good reason to change it.
KIPPOLA: That's right. And, therefore, the company that gets the
business the first time is probably going to get a lot of upgrade and
add-on business.
MONEY.COM: And the same goes with the supply chain management, just
because once you've got your inventory and your purchasing and all that
linked up, then there's no need to change it.
KIPPOLA: That's correct.
MONEY.COM: Anything else the individual investor should keep in mind in
terms of trying to use the Gorilla Game as their rationale for
investing?
KIPPOLA: Yeah, I think there are two things to say. Number one, this
space requires homework. The high-tech industry has perhaps the greatest
upside potential for investors for the next ten or more years. But it
requires that people understand it and know something about it. So this
is not a get-rich-quick scheme; you have to understand it in order to
play, and that means you have to do a lot of reading. There's a whole
chapter in the book that describes information sources.
Secondly, this distinction between gorilla/chimp/monkey and
king/prince/serf markets [where companies don't own a proprietary
technology or lock in their consumers - like PC manufacturers] is huge.
And the reason it's huge is gorillas, chimps, and monkeys lock their
customers in so that they get lots of add-on and upgrade business.
Kings, princes, and serfs do not necessarily lock their customers in
and, therefore, although they might grow as fast as gorillas, chimps,
and monkeys, they don't necessarily have lots of profits coming to them
for many years out. They're going to have to compete in a very brutal
marketplace. And gorillas, chimps, and monkeys just don't suffer the
same pressures that kings, princes, and serfs do. So understanding the
distinction and being able to determine whether a marketplace is one or
the other I think is crucial to playing the gorilla game.
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