The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

27 February 2006

Tempo Rubato, part 2

Well, the aforementioned WSJ interview appears delayed to this week. Part of the reason for the delay is Kevin Delaney's (the WSJ reporter) interest in knowing precisely why I had purchased Google/GOOG. What was my original motivation -- had I consulted other research commentary? (No, there was none; the company had yet to IPO.)

Unfortunately, I can give many reasons -- and have -- as to why and when I purchased but not how I knew the stock would zoom from ~$100 to ~$500 within 18 months (as if that qualifies as a big move). The truth, I believe, is a matter of perspective; for example, how do I know that from $339 (my most recent purchase) the shares will return to $475 (the former high trade)... and higher? It is so easy to look backwards and see from where we have come; it is entirely different to stand on the hard, right edge of a chart, and embrace uncertainty. Investors do that all the time.

So here we stand, once again, beset by uncertainty -- the rising force of increasing competition! the deceleration of profit margins from diversifying into less-rewarding lines of business! etc -- and I am a buyer. I see higher highs in the months and years ahead. Nonetheless, there remains that elusive answer to Kevin's question; herewith, my answer of sorts...

Over the life of my investing career, I have seen too many long-term success stories -- successes both as company and stock -- pass me by. Sometimes I was aboard them, but always for a trade only, never for the enduring ride. Perhaps the poster child for the type of long term investment I prefer is Johnson & Johnson/JNJ. My first purchase was in 1983, immediately before the Tylenol lacing incidents. I promptly lost 50%, but learned an invaluable lesson: true growth companies and stocks frequently endure 50% declines, and then come charging back (higher).

But that lesson didn't stick; at least not immediately. I watched Microsoft/MSFT come and go, mostly without me aboard. From its IPO in 1986 to its all time high in late 1999, the stock had an amazing run; once again, I only traded it. In 1989, when Cisco/CSCO came public, I joined the chorus (aka, the crowd) in belittling the investment bankers for the seemingly 'sloppy' IPO. Once again, I fixated on the wrong item, and thus missed a stunning opportunity.

My perspective and perceptions have been forged by (missed) opportunities such as these, and others. I vowed that if ever again presented with such an opportunity, I would seize it, and hold on. I firmly believe that opportunity was and is Google/GOOG. I saw and see all the same signs -- massive success (although the true size of that success was not known until the IPO papers were filed; the company kept it as its biggest secret), and in an arena that was growing like weeds.

Simplistically (to posit merely a tenet), as an investor you needed only to glom on to one truth during the 1980s, "desktop computing." You could purchase a parcel of companies -- MSFT, Intel/INTC, Dell, etc -- and make gobs of money. There were failures but the successes more than made up for those. During the 1990s, you only needed to think "networking" and/or "connectivity", and then purchase shares of Cisco/CSCO, Ascend, Bay, Broadcom/BRCM, etc, and again make gobs of money.

And now, for this decade, the computers are in place (desktop, laptop, cell phone or other wireless appliance), the network is built out (more or less), and now comes its usage. So sites that bond users into a community (MySpace, etc) are a natural. ("Walled Gardens" likely will soon be a thing of the past.) And advertising; where people gather, advertisers are sure to follow. Google/GOOG is magisterial in this field, sui generis. Yes, other companies also will succeed -- Yahoo/YHOO, Microsoft/MSFT, others still incubating in a garage -- but I believe Google is this generation's and iteration's and opportunity's Microsoft or Cisco equivalent. Long term success will prove a long, tough row for the company to hoe, but it will. Surprisingly successfully. Despite the many challenges, past, present, and future.

How did I know Google/GOOG would be the star (at least, too date)? Call it a feeling, or wisdom that piles one atop another from gleaned experience; I just knew. And this is the moment at which Kevin balked -- as would I. What the hell does that mean, "I just knew"? But really, how do you know something when there is no empirical evidence to vouchsafe what amounts to opinion? (Although I prefer to perceive it as experiential wisdom.)

I did not purchase the shares on the IPO; that specific process was too cumbersome for me. But my initial purchases soon after the IPO cluster between $100 to $110, then another cluster between $175 and $210 during March and April of 2005, and then more purchases at ~$300 during October 2005. My last purchase, and most recent, was at $339 on 15 February 2006, as you know. If you prefer to see it in black & white, my blog records my vociferous pounding of the table at each purchase; just check the archives for the appropriate months.

I did not believe then, nor do I now, that Google/GOOG was "overvalued" when it traded at its all time high of $475. In fact even now, I suspect that most investors still do not 'get' this story. Consider the company as akin to a black hole -- it sucks into its blue event horizon the best employee talent, the most advertising $$, at the lowest costs (which will rise, but will nonetheless remain less than its competitors'), as it creates a vortex about itself not dissimilar from the health care vortex that surrounds the Mayo Clinic in Minnesota, or the wireless vortex surrounding Qualcomm in San Diego. This is a good thing, lousy descriptor notwithstanding.

Perhaps oddly, I import terms such as "overvalued" to describe the stock's chart. A good understanding of a stock's dynamics -- patterns do reoccur! -- helps one to lessen risk and embellish return. So, for example, in late-June 2005, I began to warn of a stagnant chart to come, thereby dashing hopes and cries of "$400 by Labor Day!"...

Even at $475, the chart, as I view(ed) it was not "overvalued", so it seems obvious (to me) that this recent decline is and was another stunning buying opportunity. The share price might be higher, but its value is lessening due to the stunning numbers the company continues to report. And risk is assuaged via two methods: price and/or time. (I will discuss this topic in greater depth when I finally write "On a darkling plain.")

I care little for the argument about the reliability and validity of technical analysis. Hell, I think most practitioners of the 'art' should immediately cease & desist as in truth they know only enough to be dangerous to themselves and their followers. This rubric applies equally to me, no matter the basis for my perceptions.

It is possible, perhaps probable, that Google/GOOG will become increasingly transparent to the analyst community. (See note below.) The company might never provide guidance in the typical fashion Wall St adores, but less obfuscation would prove helpful to everyone's agenda. I suspect the company has received this message loud & clear.

Google to Host Analyst Day
MOUNTAIN VIEW, Calif., Feb 24, 2006 (BUSINESS WIRE) -- Google/GOOG will host an Analyst Day meeting on Thursday, March 2, 2006 in Mountain View, California. Presentations by Google's management team are scheduled to begin at 10:00 a.m. PT and conclude by approximately 2:00 p.m. PT.

This event will be made available via Webcast at
The Webcast version of the presentation will be available through the same link for approximately two weeks following the presentation, after which time Google will include the Webcast in the "archive" section of the Google Investor Relations website.
As always, I welcome all comments.

-- David M Gordon / The Deipnosophist

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