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!

25 December 2007

VMWare/VMW: The actuality of virtualization

Mail comes flooding in asking my opinion re this or that trading opportunity. A trade, to me, connotes a short term time frame; days to weeks. Why even purchase an investment opportunity that has a specific, near-by price objective and finite life? And why purchase shares of secondary or tertiary opportunities? Would it not be better to trade, if trade you must, the shares of a leader that you view as a long term investment opportunity? This method assures the likelihood of larger gains and consistent success. In addition, the desire to trade one's portfolio, rather than invest, typically proves to be a treadmill to (investment) oblivion. Only one reason is that short term gains suffer an onerous tax burden when compared to long term gains. Another is that... well, as Stephen Swid famously remarked, "Being rich is having money; being wealthy is having time." My road to wealth recognizes the importance of time; I sure do not want to sit chained to a computer all day fearing the next tick, and the one after that.

Consistent investment success requires creativity, discipline, imagination, intelligence, patience, and vision. Proper money management is all about seeking maximum rates of return (return on investment, or ROI) while minimizing risk; some money managers reverse that objective to minimize risk while maximizing rates or return. An important difference between money managers is the style of investing; e.g., small cap vs large cap, growth vs value, the purchase of declines vs breakouts, etc. Each style has equal value; there are a 1,000,001 ways to achieve consistent success when investing.

Prices always oscillate, but one-way plummets are hard on the soul as much as the wallet. After the upside fireworks of October, November could be summed in one word, dispiriting. I took defensive action during late-October and early-November, selling almost all non-Core holdings, in the attempt to limit exposure to the downside and to raise cash for new opportunities. Despite the ferocity of the decline, I note with happiness that my Core Opportunities (AAPL, CMG, GOOG, ISRG, etc) declined only marginally, and now achieve new highs or, at worst, build short or intermediate term bases. This type of action from the market's leaders is very bullish. In the end, the markets' November decline increasingly appears to be the leading edge (left side) of a new base, and not a top as many investors fear. Declines allow investors the opportunity to identify new investment opportunities; certainly, several new opportunities tickle my fancy.

One of these opportunities is VMWare/VMW, which is "the world’s leading provider of virtualization solutions for x86-based servers and desktops. Through a pioneering approach to virtualization, VMware technology works to separate the software from the underlying hardware. This allows a single computer to run multiple operating systems and applications, delivering significant improvements in efficiency, availability, flexibility and manageability." Whew, that quote (from the company's website) might say a lot, but offers little understanding. (There also is a company fact sheet, available here.)

My explanation of virtualization, and VMWare, begins by way of telling a tale...

VMWare/VMW developed and marketed a virtualization solution. This means that a server can be made to function as many distinct "virtual" computing environments, but all inside one physical machine. Of course this means little by itself. The key to the company's success lies in understanding the problem that virtualization solves for companies. To do that, it is necessary to understand the information technology (IT) regimes that preceded it.

Approximately 15 years ago, the IT environment looked pretty much like a monolith. At that time, large corporate servers (or server farms) held all the large, server-based corporate applications and data. Sure, there were PCs on almost every desk, but these were for running personal applications. If a corporate department wanted resources for a group project inside the department (for example, large graphics files for an advertising campaign), then it had to petition the centralized IT department for space on the corporate server. Since IT departments were overwhelmed with such requests and had limited resources themselves, such requests could take a long time for fulfillment. This situation often would jeopardize key projects, unless upper management got directly involved, a solution that no department enjoyed. Failing that solution, the department would have to allocate space on somebody’s personal computer, and these rarely had the resources required to handle to storage and access needs of the group.

But, at approximately the same time, some especially tech-savvy worker, definitely outside the IT department, realized that the department, which typically had control over its own budget for purchasing desktop computers, could simply purchase a beefed-up PC and set it up as a departmental server. Since it had no need to serve as some worker's PC and since it could be purchased with larger than normal amounts of disk space, this machine could act as a server for departmental projects holding common files and projects that required coordination among several people in the department.

Thus was born the departmental server. While IT departments hated to see these things proliferate, they often had little ability to stop them from doing so, except for a refusal to support the machines. That became less and less of a problem since, increasingly, most departments had some people with enough technical capability to support the minimal requirements of a small server.

This state solved immediate problems, but created others. The most important new problem, arguably, was that while these solutions worked for project-oriented departments they often led to a great deal of sub-optimization of corporate resources, since many such servers were grossly underutilized, and many came to serve projects that were long since either completed or abandoned. And all while the departmental managers were either unaware of the misuse of resources or more likely didn't care, instead preferring to hoard that resource to serve future needs. Thus begat a proliferation of departmental servers with attendant problems of uneven support and gross under-utilization of total corporate technology spending.

It is precisely this problem that VMWare/VMW solves. In effect, it allows for the quick provisioning of virtual departmental servers. They reside physically on the server farm run by IT, but beyond their provisioning and support should something go wrong. Instead, their utilization is under the control of the department to which that virtual server is assigned. This accomplishes several things.
1) It allows for quicker, less expensive deployment of departmental servers;
2) It automatically takes care of under-utilization, since resources are assigned dynamically to the virtual servers.

As the need for a server grows, so do the resources assigned to it; as utilization of that server subsides, resources are "virtually" removed. Virtual servers, running on much higher-end equipment, run faster and better than on physical departmental servers. And since it is the IT department’s resources that are physically used, IT departments are not forced into the uncomfortable position of dealing with problems that crop up due to inadequate support of physical departmental servers. Inefficiency is reduced, less manpower is needed, and better performance is achieved. All in all, a much better, if not elegant, solution to the problem.

VMWare/VMW has obviously hit the ground running. VMWare’s product is a solution that is much in demand and driven by the needs of IT departments that have the most clout when it comes to technology spending inside corporations. In fact, VMware’s customer base consists of more than 20,000 organizations of all sizes, including 100% of Fortune 100 companies and 91% of the Fortune 1000.
No denying the obvious: Virtualization is a very big area, and with a great deal of growth potential. This is readily apparent in the company's stock chart since its IPO of 14 August 2007...

[click on chart to enlarge]

Long time readers know I seek leaders as my investments; companies that are leaders in their field of endeavour, and whose shares act as leaders of the stock market. The few companies that pass my stringent filters comprise my Core Opportunities. VMWare, its products, and its stock (VMW) each appear to justify my investment interest.

The company's IPO price was $29/share; the lowest price subsequent is $48 on the offering day. The stock then enjoyed a powerful price uptrend (trend #1) that garnered a lot of interest among investors, me included. I believe the stronger the up trend, the better, but rarely purchase a trend that has become obvious to all investors. Stock prices always oscillate, so the market would grant me my turn, my time, to invest, which manifests itself as an intermediate term base within a long term uptrend. And, typically, at a share price less than when I first noticed the opportunity, despite the power of its price rise. Such is the case with VMWare/VMW.

What do I seek in the stock's trading behavior in advance of my purchase?
1) A powerful uptrend that exceeds expectations (trend #1). Check.
2) Price declines that fail to meet downside expectations (trend #2), Check. (I expected low $60s)
3) Subsequent price rallies that again exceed upside expectations (trend #3). Check. (I expected ~$90, possibly $95, but never $103!)
4) Subsequent declines that again fail to meet downside expectations (trend #4). Check. (At least, to date.)

The decline and subsequent basing action since 31 October has been all that. Now ~2 months into an intermediate term base, the stock could again decline as low as $71... and yet retain its bullish setup. I suspect, however, that dearer levels of price support (~$85-83, and ~$78), will stem deeper declines. Especially if the interior 123 pattern resolves itself bullishly, as I expect.

VMWare/VMW appears near the end of this portion of its base, despite its recent price weakness, and relatively weak when compared to the market's late-week upside fireworks. Nonetheless, I expect an upside reversal to occur soon, and a breakout above the chart pattern's internal setup.

Opportunity thus limned, the unresolved question re VMWare/VMW is how protectable is its solution -- are there proprietary components? It does not appear to be so. While specific algorithms might be patentable, the virtualization idea itself has been around for some time; other companies will almost certainly enter the field. In fact, Microsoft/MSFT announced recently the beta availability of its Hyper-V server virtualization technology, which came earlier than expected. Réza Malekzadeh, VMWare's Senior Director of Product Marketing & Alliances, offers his perceptions here re this topic.

The question might resolve as to whether VMWare/VMW can capitalize on its first-mover advantage to create a brand sufficient to keep IT departments insisting on the VMWare solution over its competitors. For investors, the November share price decline and subsequent presumed base assuage a large measure of price and time risk, and help to create a maximum reward opportunity.

The likelihood exists that Q4 will be a barn-burner, but with increasing competition comes decreasing profit margins, so the risk is very real to the company... and its stock. Recall that just as capitalism bids away excess returns via increasing competition, so too does certainty serve to bid away opportunity via, perhaps paradoxically, an increasing share price. Conversely, the greater the uncertainty, the greater the potential reward. Thus, I am a buyer soon of VMWare/VMW, despite the prevailing level of uncertainty. Well, really, because of the uncertainty. I am, after all, an investor.

Full Disclosure: Soon to be long the shares of VMWare/VMW.
-- David M Gordon / The Deipnosophist

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24 December 2007

Will Apple/AAPL's Q4 surprise?

LoopRumors reports "Amazon's number 1 top-selling computer for Christmas 2007 is Apple's MacBook. Amazon offered rebates between $75-$100 propelling the white 120GB MacBook to the top spot on the list. The MacBook beat out some stiff competition from two other machines with twice the memory at lower price points. The other bestsellers are the 80 GB MacBook and the 120 GB MacBook Pro.

"This new information is further evidence that Apple's market share is rapidly increasing and that Apple is poised for its best quarter in the company's history." (Italics mine -- dmg)
-- David M Gordon / The Deipnosophist


21 December 2007

"50 Places to Discover Financial News Before It Goes Mainstream"

Hi, David,

We just posted an article "
50 Places to Discover Financial News Before It Goes Mainstream."

I bring it to your attention in case you think your readers would find it interesting.

Thanks for your time! Happy Holidays!

No, thank you, Amy.

Yes, I do, and just now have (done so)!
-- David M Gordon / The Deipnosophist


17 December 2007

The Bible according to Google Earth

I enjoy photography as much as the next person, but digital manipulation of photographic images seems somehow wrong to me. Unless, that is, the manipulation is merely a means to the end objective, Art. For example, these photos. I must admit, these particular 'photos' tickle my appreciation and enthusiasm!

And, I realize, a return to the topic of process as a means to the end objective, especially in the quest to create Art, is necessary.
-- David M Gordon / The Deipnosophist


Cloud Computing and Google

This NY Times article (site requires free registration to access) re Google's increasing penetration (read: stranglehold) of cloud computing (search this blog's archives for previous posts re Google and cloud computing) is informed, informative, excellent, interesting, entertaining, and worthy of your time. Especially so for long time Google investors, as the article's author also manages to squeeze in some crucial insights/updates re Google's progress to a fully-formed business leader from former "one-trick pony"...

Early this month, Google released new cellphone software, with the code-name Grand Prix. A project that took just six weeks to complete, Grand Prix allows for fast and easy access to Google services like search, Gmail and calendars through a stripped-down mobile phone browser. (For now, it is tailored for iPhone browsers, but the plan is to make it work on other mobile browsers as well.)

Grand Prix was born when a Google engineer, tinkering on his own one weekend, came up with prototype code and e-mailed it to Vic Gundotra, a Google executive who oversees mobile products. Mr. Gundotra then showed the prototype to Mr. Schmidt, who in turn mentioned it to Mr. Brin. In about an hour, Mr. Brin came to look at the prototype.

“Sergey was really supportive,” recalls Mr. Gundotra, saying that Mr. Brin was most intrigued by the “engineering tricks” employed. After that, Mr. Gundotra posted a message on Google’s internal network, asking employees who owned iPhones to test the prototype. Such peer review is common at Google, which has an engineering culture in which a favorite mantra is “nothing speaks louder than code.”

As co-workers dug in, testing Grand Prix’s performance speed, memory use and other features, “the feedback started pouring in,” Mr. Gundotra recalls. The comments amounted to a thumbs-up, and after a few weeks of fine-tuning and fixing bugs, Grand Prix was released. In the brief development, there were no formal product reviews or formal approval processes.

Mr. Gundotra joined Google in July, after 15 years at Microsoft. He says that he always considered Microsoft to be the epicenter of technological development, but that the rise of cloud computing forced him to reconsider.

“It became obvious that Google was the place where I could have the biggest impact,” he says. “For guys like me, who have a love affair with software, being able to ship a product in weeks — that’s an irresistible draw.”

Another draw is Google’s embrace of experimentation and open-ended job assignments. Recent college graduates are routinely offered jobs at Google without being told what they will be doing. The company does this partly to keep corporate secrets locked up, but often it also doesn’t know what new hires will be doing.

Seems to me that we, as investors and consumers, can continue to expect a platter full of exciting new products for a good while to come. Talk about (the pace of) accelerating change!

Full Disclosure: Long the shares of Google/GOOG
-- David M Gordon / The Deipnosophist


12 December 2007

Online storage and Google

DigiTimes reports that Google could make "very real profits" via the offer of online storage -- even if it were free (advertiser-supported). In fact, Google could make even more money than the storage makers.

Complete article below, and link to DigiTimes here.

-- David M Gordon / The Deipnosophist

Has Google cracked the code for storage profitability? asks iSuppli
Eric Mah

Google's rumored plan to offer an online storage system has been called "the virtual hard disk drive (HDD)." However, such a virtual HDD system could mean very real profits for Google, earning a much higher margin than the actual hard disks sold by Seagate Technology and others, according to research firm iSuppli.

Media reports indicate that Google is set to offer a service that allows users to store files from their hard drives on its servers. Not only could the service provide much-needed storage space for users whose HDDs are clogged with music, video and images, it could also allow subscribers access to their files from any PC, simply by entering their password on the Google site.

Reports indicate Google plans to provide some free storage, with additional space allotments available for a fee. While pricing isn't known, the Google storage service reportedly could be released within a few months.

While such a service would be useful for consumers, it could be very lucrative for Google.

"Google's plan has simple economics: It can make more money in the storage business than the companies that actually make HDDs," said Krishna Chander, senior analyst, storage systems for iSuppli.

The concept of online virtual storage is not exactly new. Yahoo, Xdrive and others have been offering similar services, typically 5GB of free storage, with more space available for a fee.

However, Google could one-up these competing services by offering as much as 50GB of free storage, Chander estimated. Google could generate significant returns from this free service by placing advertisements on the storage-service website. Chander estimated that about 4.2 million users eventually may employ the Google online storage system. Assuming Google collects US$50 per user per year in advertisement revenues collected from users of the free version of the system, the revenues potential is about US$210 million annually.

On the expense side, Chander estimates that it would cost Google US$0.25 per gigabyte for those 50GB of free storage. Google may have to install storage capacity of about 210,000TB. This will require the purchase of about 210,000 1TB-capacity HDDs, representing a gross expense of about US$52.5 million.

"This would represent a good return for Google," Chander said. "While a typical HDD supplier makes about an 18% gross margin for a desktop PC-class hard drive, Google could command a gross margin of 75%. This would give Google more than four times the rate of return compared of the HDD suppliers."

Google's profits could be significantly higher, depending on its fee structure for storage exceeding 50TB.

Google could also pursue other avenues associated with this free storage capability. For example, users could rent ruggedized PCs with minimal storage at airports, coffee shops and malls, and then access all their personal files from the Google service. This would allow users to reduce the amount of lugging of notebooks across cities and during travel.

Google could charge a rental fee of about US$0.05 per minute for using the rental PC and accessing the Internet. Such a system could be feasible if Google buys out the telephone booths or kiosks that AT&T and other telcos will abandon in 2008 due to lack of profitability.

Google faces some challenges in implementing such a service, including files that lack configuration control and privacy, password and security protection.

However, Chander said Google should prove to be a quick learner and will resolve these challenges as time progresses.


11 December 2007

The Story of Stuff

I stray away from sharing with you any overtly political content; for example, you will not find included my favorite for next year's (US) Presidential election. Despite this disinclination, I feel duty-bound to include, amid the investment recommendations, some consideration of the other side of the investments equation. "With all thy getting, get understanding."

Begin here socio-politics comments...

"The Story of Stuff is a 20-minute, fast-paced, fact-filled look at the underside of our production and consumption patterns, with a special focus on the United States. All the stuff in our lives, beginning from the extraction of the resources to make it, through its production, sale, use, and disposal, affects communities at home and abroad, yet most of this is hidden from view. The Story of Stuff exposes the connections between a huge number of environmental and social issues and calls for all of us to create a more sustainable and just world. It'll teach you something. It'll make you laugh, and it just may change the way you look at all the stuff in your life forever."

[Please left-click on graphic above, and be patient while movie loads!]

Although many facts included in this brief movie seem open to discussion, perhaps even interpretation, its harrowing nature cannot fail to disturb each of us. The movie carries my strongest recommendation as being worthy of your time... and action.
-- David M Gordon / The Deipnosophist

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10 December 2007

Oases are fixtures, mirages purely ephemeral

Yet another excellent essay for investors by Eric Miller; it includes such gems as...

"There are still way too many analysts who expect too many companies to generate annual long-term earnings growth of 20% to 25% or more. Analysts pay too little attention to how easily such a rapid rate of growth can fade after just a few years. Research departments aren't shy about putting out lists of companies they expect to generate annual earnings increases of 15% or more for at least five years. One value of Leuthold's work is the reminder it provides that such high sustained earnings growth is truly rare."


"But we've been reminded of corporate life cycles and that no growth is permanent."

Really, you must read the entire essay to understand Eric's argument, and mine. Well worth your reading time, the essay is especially for the readers here who believe my unstinting bullishness re Google/GOOG makes the stock somehow a hold into perpetuity. I sure do not hold such a belief; I have offered many times my exit strategy, or price and value objective, for Google/GOOG.

Full Disclosure: Long the shares of Google/GOOG.
-- David M Gordon / The Deipnosophist
Random Gleanings: Ever More Fleeting?
Monday, December 03, 2007
Eric Miller

Growth companies may outperform. But what counts as growth?

The conventional wisdom developed over the past year seems to be that large-cap stocks will outperform small- and mid-cap, and that growth will outperform value. This view will probably dominate the year-end forecasts due from the sell-side shortly. The logic seems formidable. A distinct economic slowdown seems underway; most economists put the chance of recession at somewhere between 30% and 50%. Decelerating sales and revenue growth, continued dollar weakness, and a thinning stock market would all seem to help big growth stocks. Plus, so-called value stocks have not done well for a number of months.

Then comes to the tougher issue of which companies qualify as growth companies. Some of the best macro work we've been acquainted with on the topic comes from Steve Leuthold and the Leuthold Group in Minneapolis. Earlier this fall, they published an update on prior work on growth company longevity they began almost three decades ago.

Their original report was called "Is IBM Forever?" Their answer then was that "you'd better not bet on it." The same general theme was repeated in 2002, when Leuthold released a new version entitled, "Is Microsoft Forever?" These were timely studies because considerable doubt had arisen in the investment community as to whether strong growth was assured in both the case of IBM and Microsoft. The title of the latest version is "Are Google and Cisco Forever?" The important subtitle is ". . . No Growth is Permanent."

None of the three studies included a detailed analysis of these four companies, but rather contained historic market data tracking the shifts in total assets and market capitalizations of America's largest and most acclaimed companies in the decades preceding. Steve Leuthold was influenced early in his career by the work done by Mansfield Mills who studied the typical life cycle of companies. Some companies might succeed in becoming growth leaders, but then would reach mature growth before slipping into earnings cyclicality and then earnings decline. Most veteran investors have experienced this, but are not always prepared for it. Many are familiar with the old refrain that every business eventually becomes a commodity business, but many just ignore the evidence when they see it first-hand, and often ignore the inevitability of life cycles, as well.

There are still way too many analysts who expect too many companies to generate annual long-term earnings growth of 20% to 25% or more. Analysts pay too little attention to how easily such a rapid rate of growth can fade after just a few years. Research departments aren't shy about putting out lists of companies they expect to generate annual earnings increases of 15% or more for at least five years. One value of Leuthold's work is the reminder it provides that such high sustained earnings growth is truly rare.

Who Was Big in 1960?

If we were to examine a list of the 100 largest companies by market capitalization in August of this year, how many of the 100 would have been included among the 100 biggest back in 1960? Actually, only 11. Even going back just to 1990, only 36 of today's 100 largest-cap companies were on that 1990 list. The 11 who were also among the largest in 1960 were: Chevron, Coca Cola, Dow Chemical, DuPont, Exxon Mobil, General Electric, International Business Machines, Merck, Procter & Gamble, 3M, and Wyeth.

By 1990, those 11 had been joined by the following, who now comprise the remainder of the 36 which comprised the biggest in 1990: Abbott Labs, Altria, American Express, American International Group, Anheuser Busch, Bank of America, Baxter International, Boeing, Bristol Myers Squibb, Walt Disney, Eli Lilly, Emerson Electric, Hewlett Packard, Home Depot, Intel, JPMorgan Chase, McDonald's, Microsoft, Motorola, Pepsico, Pfizer, and Schering Plough. The expanded representation came primarily from the growth in the drug and health care industry and technology, as well as the mergers that took place in the banking business.

So who among today's largest 100 didn't qualify by size in 2001? You can probably name most of them, but it's good to be reminded, just to maintain perspective regarding change. Today's relative newcomers are Amazon, Apple, BHP Billiton, CVS Caremark, Carnival, Caterpillar, Corning, Devon Energy, eBay, Exelon Corp, FedEx, Franklin Resources, Gilead Sciences, Google, Kraft Foods, Las Vegas Sands, Liberty Global, Marathon Oil, Met Life, Monsanto, News Corp, Nextel, Occidental Petroleum, Prudential Financial, Publix Super Markets, Schlumberger, Sprint, Time Warner Cable, Travelers Corp, Valero Energy, and WellPoint. Looking at the additions to the list you're reminded of the growth in the media and leisure/entertainment industries, and also of the role of investment bankers taking companies public for the first time. You're probably also a little startled to see some of the companies identified as among today's giants.

Has There Been Safety in Size?

There really hasn't been. If you look back to 1917's list of largest-cap companies, you likely won't recognize the overwhelming majority of the names. Oh, you would spot General Electric and Exxon Mobil and recognize some others that have merged with companies to remain relative giants. But GE and Exxon have been the real exceptions. One study shows that if you had invested in the 100 largest stocks by capitalization at the beginning of each decade you would not have outperformed the market average most of the time. The exception was in the decade of the 1990s. In the 1960s, 1970s, and 1980s you would have underperformed the S&P 500 if you only owned the 50 largest companies, and you would have also lagged since the end of 2001 through this past August.

On the whole, underperformance was not by a lot, but still a measurable amount. The only double-digit gains over a decade since 1960 was the decade of the 1990s, when the 50 largest provided a 16% annualized return. But in three of the decades, the average returns were less than 5%. The Leuthold study shows that, on average, only 35% of the largest stocks were able to beat the S&P 500 over the 10-year period.

Which Have Been the Dropouts?

Anyone looking back to the list of 100 largest-cap companies in 1917 would be hard put to recognize more than a handful of the names on the list. Thirty percent of the largest 50 industrial companies in 1917 were in the metal and mining industry. Today, only two of the top 50 are metal and mining companies. Obviously, the complexion of the American economy continues to undergo great (and probably accelerating) change. Commodity type companies that were among the largest 100 companies in 1917 included American Cotton Oil, American Sugar Refining, American Woolen, Cambria Steel, Central Leather, Chile Copper, Cuba Cane Sugar, Lackawanna Steel, Midvale Steel and Ordnance, Magnolia Petroleum, Pittsburgh Coal, Prairie Oil and Gas, and United Verde Extension Mining. Familiar to you? Meatpackers who were also among biggest-cap companies are probably more readily remembered. Change on the list accelerated after World War II and is still gathering pace given the rapid changes in the world of technology and globalization.

It's hard for young people today to recognize the importance of the roles played by Polaroid and Eastman Kodak in photography, those of the blue-chip phone companies, and the attention that had been accorded Burroughs and Sperry Rand in the computer business. A study by McKinsey and Co. referred to in the book Creative Destruction by Richard Foster and Sarah Kaplan illustrates the shortening life expectancy of the components of the S&P 500. In the 1930s, a company joining the S&P 500 list might expect to remain there for 65 years or more. But only 50 names that were on the list in 1957 remain. McKinsey estimates that, by 2020, the average tenure of a component of the S&P 500 will have shrunk to 10 years from what has been running recently at about 15 years.

Not all the companies that drop off the list stay off. Most never return, but some, such as Boeing, Honeywell, Lockheed, Pfizer, and Texas Instruments do return. Others, such as Macy's and Philip Morris, come back in different forms.

Simple Lessons

This study doesn't imply that you should forget about Cisco or Google now. They've recently joined the 100-biggest list and seem to have a lot going for them. But we've been reminded of corporate life cycles and that no growth is permanent. We've also been reminded that the rapidity of change has accelerated because of technology and the flattening of the world. And we have one other factor that is larger than ever before, which is the activist role played by investment bankers, hedge funds, and private equity in forcing or inviting change. The only thing we can count on is that future market leadership will be different and that we have to be increasingly alert in spotting it before everyone else does.

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06 December 2007

Here Comes Another Bubble - The Richter Scales

Regular blog reader, Michael McConachie, reports...

"Ran across this video on Techcrunch, and thought you might get a kick out of it. I sure did."

-- David M Gordon / The Deipnosophist

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05 December 2007

Is Google Headed in the Wrong Direction?

The eWeek article, "Is Google Headed in the Wrong Direction?", argues several interesting points. For example...
1) "But doubts about the company's fundamental approach, and the specter of ads taking over small mobile device screens, raise the very real possibility that Google's offering may fail to live up to expectations."
2) "Google was expected to make a splash in social networking when it acquired wiki vendor JotSpot in October 2006, but that has not worked out—not yet, and perhaps not ever."
3) "This is the most recent in an impressive spate of announcements by the search market leader. This week alone, Google launched a multimillion-dollar effort to create renewable energy in a matter of "years, not decades," according to co-founder Larry Page. Also this week, Google all but confirmed its intention to offer storage as a service. This is not to mention the introduction of Android, Google's open-source-based mobile platform, a scant three weeks ago."
4) "Not that Google is a stranger to failure."

And so on. I believe the article to be worthy of your reading time, but I also believe the author, and others of his ilk, do not truly understand Google's corporate culture. His most telling point is #4 above. Google embraces failure as axiomatic; failure is merely a starting point, and not necessarily the end-point, as the company attempts to improve upon the 'expected' outcome.

This methodology is akin to my investing effort. As long time readers know, I enter each position with the knowledge and expectation that I could be wrong rather than have the market first ratify my investment thesis by waiting for prices to rise before I act (chase a rising market). This methodology -- for Google, for me -- is incredibly liberating. No longer must I, or Google, be correct from the get-go, which affords us each the ability to take risks -- with long term objectives always in mind. Doing so almost always equals flying into the headwinds of prevailing sentiment. To buy when all others sell; to take risks when all others see no possible reward...

"If you can keep your head
when all about you
are losing theirs ...
If you can make one heap
of all your winnings
and risk it all on one turn of
and lose, and start again at your beginnings
And never breath a word about your loss..."
So, really now, is it any wonder why I like Google/GOOG?

Full Disclosure: Long the shares of Google/GOOG since its IPO.
-- David M Gordon / The Deipnosophist


04 December 2007

Google, Android, and Verizon

In a story out yesterday after the market closed, BusinessWeek reports that, in yet another sudden shift, Verizon Wireless plans to support Google/GOOG's new software platform for cell phones and other mobile devices. Given the stunning U-turn Verizon Wireless made Nov. 27, when the company announced its plans to allow a broader range of devices and services on its network, CEO Lowell McAdam now says it makes sense to get behind Android. "We're planning on using Android," McAdam tells BusinessWeek. "Android is an enabler of what we do."

In an open-access model, though, Verizon Wireless won't offer the same level of customer service as it does for the roughly 50 phone models featured in its handset lineup. The open-access approach may enable Verizon to tap into niche mkts that haven't been worth targeting. But with "outside" devices developed under Verizon's new policy, handset makers will bear most of the development costs.

Complete Business Week article here.

Full Disclosure: Long the shares of Google/GOOG
-- David M Gordon / The Deipnosophist


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