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Author: foxhedge Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 677  
Subject: Thoughts on Gilder Effect Date: 5/17/2000 8:18 PM
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The year 1999 was one of great success for Gilder companies. As is common in the business of investing money, Gilder has grown in popularity given these results, and his subscribers have, I believe, quadrupled in the last six months as a result of this great publicity. This phenomenon explains why stocks mentioned on the report, or added to Gilder's telecosmic list, spike within 15 minutes of the report's release. It is impossible to read AND understand a Gilder report in 15 minutes. Recent experience with these stocks, XLA, MOT, AVNX and A have seen the stock prices spike only to come back to earth. Blind Gilder following can make you money; it can also lose you money.

It is useful to review what Gilder is and what Gilder isn't. He is a technology visionary. He describes big shifts in direction, paradigms. He is NOT a market timer (thus, when he adds a company, he is not making a statement on its valuation), and this is generally well-recognized by followers. What is less well recognized is that Gilder touts companies that will contribute to the telecosmic world, but some of these companies, while making contributions to the telecosm, may not necessarily turn those contributions into wealth creation for their shareholders.

Take Motorola, for example. They make good CDMA handsets. Gilder is a big fan of CDMA. In my opinion, MOT makes the best CDMA handsets; this is why I own a Motorola phone even though I am a NOK and QCOM shareholder. But MOT has had a long history, which continues, of execution lapses which has resulted in Nokia to basically eating their lunch in the handset business. Motorola has not turned their superiority in CDMA handsets into wealth creation for their shareholders...every quarter they talk about component shortages causing them to miss earnings estimates, while NOK, operating in the same environment, significantly exceeds estimates every quarter and does not dwell on component shortages. Gilder has MOT on the list because they are contributing superior CDMA technology to the telecosm, but he does not take into consideration the long history of execution lapses at this company. Those that bought when Gilder added them to the list are currently suffering significant losses.

A similar word of caution is appropriate for the most recent addition, Agilent. Gilder likes their new optical cross-connect device that uses bubbles instead of mirrors. I don't follow Agilent closely, but the truth is that Hewlett Packard's old instruments business is a big playground, and before the spinoff I think it was considered somewhat of a dog keeping HP's stock price down. This is not to say that A's new optical cross-connect technology is not exciting and promising, but the whole of Agilent has had some execution issues in the past. Again, I don't think this is taken into consideration in Gilder's world.

I've been reading Gilder for over a year and I think his stuff is very good. In fact, it's the only research that I pay for. I have not found anything that is as good in reviewing broad trends in telecommunications. However, I think Gilder's writings are a starting point for research on a specific company, not an endpoint. Just because a company has a technology that will advance the telecosm does not mean that its management will be able to use it to increase shareholder wealth.

It is also less well-understood that Gilder's technological fetishes are sometimes replaced by newer technologies, and sometimes in relatively short periods of time. Gilder will drop companies, sometimes not too long after he adds them. When he added Terrabeam to the telecosm list in January, he ran from Teligent and Nexlink, previously telecosmic companies, like a bad disease. Nexlink had been added less than a year earlier. In that short time span, Terrabeam developed a technology that, in Gilder's view, renders Nexlink's and Teligent's radio frequency technology obsolete. Again, blind following can hurt...TGNT is down 70%.

--fox
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