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DeepBlue wrote:

I own a few gorillas, partly by accident and partly because I primarily follow a mechanical investing approach that seems to throw me into them from time to time.

Absolutely nothing wrong with your strategy. I assume that it works best via accounts that are non taxable. Being in and out of gorillas whether by accident or design has yet to prove to me a higher reward than the LTB&H approach. Cisco to date since April 20, 1990 is up over 160K %. Now that's a dream return, but I have yet to meet anyone who has bested it by trading in and out based on any sort of model. Perhaps there are some who did best it, but until they come forward - I remain skeptical.

Since you have not read the book you wouldn't know that the authors were trying to target a type of investor who doesn't have the time to adhere to a strategy of timing based on a mechanical approach. I'm not knocking the strategy, believe me. I'm just trying to clarify the gorilla strategy. Also, in times of hypergrowth in an emerging technology adoption life cycle, evertying involved gets thrown way up the beach by the wave to the point of 'extremes'. This, as odd as it sounds, is normal. Therefore, if and when an emerging technology adoption life cycle is created, a gorilla game investor looks for possible gorilla games and candidates within that cycle and either buys baskets which will later be consolidated into the eventual leader as the leader emerges - or another strategy could be used to wait until the leader becomes clear and buy at that point. You would hold the leader from that point and let the law of increasing returns that a gorilla provides go to work for you while you spent time looking for the next emerging technology adoption life cycle.

But I've got to confess, the valuations worry me. For instance, I've been reading about Brocade and it sounds like a great company, serious gorilla material, all that good stuff. The same good things can be said for I2, to pick another semi-random example. But these companies have PE's in the neighborhood of 1000. Seems to me these companies could go right ahead and have hypergrowth for 3 or 4 years and still be quite richly valued without any significant appreciation in their stock price. Is this addressed in the manual? Is anyone else concerned that the market is getting wise to this game and discounting spectacular future growth earlier and earlier to the point where it is very easy to be late to the party?

There is the catch 22. If a gorilla gamer researched these companies early on and took a position that on a cost basis is peanuts compared to the current price - what do they do? Sell because of valuation worries? Move the money into other emerging candidates? Sell a portion to take some profits? Short the stock? Pass on taking a position now based on valuatioin? Hold the candidate throughout the technology adoption life cycle regardless of valuation? Is it the greater fool theory? All are certainly possibilities and it is more up to the individual investor to make the decision based on their comfort level, goals and understanding of the business model going forward. Also, outside of the longer term examples of huge gorillas like Intel, Microsoft and Cisco in the PC and enterprise networking technology adoption life cycles - we don't have enough time tested data to have an exact answer to your questions. Emerging technologies bring about extremes, but how extreme is extreme? How far up the beach does the wave go?

Do you gorilla investors even consider valuation, or is the general philosophy that if it's a gorilla, you want it, regardless of price?

I think it is too much of a generalization to say that one worries or doesn't worry about valuation. Certainly the last five years has been a stunning shift to the technology arena as the importance of the industry has become ever more clear and the weighting of one's portfolio has generally been increasing on the technology front.

There will always be sellers along the way as there are as many reasons for selling as there are for buying. How many millions of shares have been sold of Cisco since 1990 even though the stock continued to go up 160,000+ %? Goals are met, valuations cause concern, diversification and portfolio balancing concerns, etc... . However, there is a certain risk aversion involved in gorilla gaming. This is not to say there is not risk, but if the game is played correctly - the risk can be less than if one is investing blindly in the broader technology arena.

My suggestion would be that after you read the book we revisit the valuation question and discuss it from that side of the coin. There are reasons why certain gorillas are appearing on some of your mechanical screens from time to time.

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