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No. of Recommendations: 39
The "Gorilla Game" is a fantastic book, and has a tremendous amount to teach about the Technology Adoption Life Cycle and how to pick out the tech stocks that will really have both large and sustainable competitive advantage. And the "Ten Rules" proposed sound so compelling. How could one NOT make terrific money this way??

Well, one POSSIBLE problem MAY be the enormous valuations of most promising tech stocks today. One of the premises of the book is that early in the hypergrowth phase, that the market will underestimate the future value of an emerging gorilla. But this has become very rare in today's market. Travelling back to 1990, when Cisco,arguably the best Gorilla of all, was coming on scene, it traded at a price:sales ratio of approximately seven and a price:earnings ration in the neighborhood of 30. It's market cap was a "mere" half-billion. And I'm sure at that time many thought that was an awfully risky valuation for this new upstart.
...high tech being risky and all. And if we'd of read the "Gorilla Game" back then and applied its principles, well, we wouldn't be wasting our time on this board, being multimillionaires.

But today, it seems that as soon as a tech company comes along with even the promise of possibly, some day "making it big", it already has an enormous p:s ratio (the p:e ratios are so absurd, no one even uses them any more) and an equally enormous market cap. There now is a conflict for a pure gorilla gamer. If one waits, as the book suggests, until a market is defitely in the tornado (or in the bowling alley for software applications) so as to avoid being left to die in the chasm, by then the price of the company is (often)way over-valued, at least if we use the histories of previous gorillas like Cisco, Microsoft, etc. (If you don't believe me, go look at the valuations early on for gorillas like those mentioned...and some great royalty game stars like EMC and Dell...and compare them to the likes of JDSU, PALM, or ARBA at comparable points in the Technology Adoption Life Cycle). This isn't to say that one may still not make SOME profit in these stocks, but the odds of coming even close to earlier gorilla returns seems remote. Now one can try to get in earlier so as to get a more attractive price, and maybe have a better chance at making a killing like early Cisco shareholders did. Then again, you could very well pick wrong, and lose a bundle if your stock either doesn't become the gorilla (the valuations are so high, that buying a "basket" of these stocks becomes even riskier), or worse yet,fails to make it across the chasm.

Now, I don't think all tech stocks are in this situation. But probably the majority are. And so one needs to look that much harder, and worthwhile gorilla games are becoming that much rarer.

Well, got to go...thinking about picking up some PALM at a P:E ratio of 1400...I know that's a high ratio, but this COULD become a gorilla some day, after all. And the P:S ratio is ONLY 68. And if we start talking about the price:vision ratio, it's a steal!!
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No. of Recommendations: 1
OnAJungleHunt,

Have you compared valuations of dominant non technology companies and hot growth outside of technology in 1990 with what their valuation metrics are in 2000 to see how they stack up in terms of the entire market's higher valuations at this point in time? It might be an interesting study....

BB



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No. of Recommendations: 0
One of the premises of the book is that early in the hypergrowth phase, that the market will underestimate the future value of an emerging gorilla.

I loved the book but this question kept popping up in my mind as well. As people read the Gorilla Game book, or just start to understand the premise (whether or not they even call it a GG or not), this principle becomes diminished.

But I guess even if the huge gains won't show up like in the past decade, the valuation of the company is still a "good investment".
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No. of Recommendations: 26
This isn't to say that one may still not make SOME
profit in these stocks, but the odds of coming even
close to earlier gorilla returns seems remote.


You've hit on a topic which has been a thorn in my
side since I read the book.

Take a look at Cisco's advances since 1990, a double
one year, a flat year thereafter, then a 70% gain,
then another double, etc.  In comparison a
possible emerging gorilla like Rambus nearly
quadruples in a couple of weeks!  Qualcomm has a 
2000%+ year, king JDSU nearly eclipses those gains.

In Rambus I can honestly say I feel I got in at the
bottom.  Barely.  I bought in the mid-70's a few weeks
before the price exploded.  Am I happy over the
advance?  Yes!  But I would far rather see a steady
Cisco like advance.

Here's the problem for the small-time investor like
myself.  I can ususally throw together about $1000-
$1500 per investment.
  
For argument's sake let's assume I buy Hotstock.com.
Hotstock becomes a 58 bagger for me...wow!  These days
maybe it only takes 4 years for it to happen.  That is
realistic...considering it is "only" a 2.76x (376%)
yield per year.

          Contribution   Yield   Total
Year 1    $1500          2.76    $4140
Year 2    $1500          2.76    $15566
Year 3    $1500          2.76    $47103
Year 4    $1500          2.76    $131505

That's a lot of money - $131505!  

But let's slow things down to a more historical growth
and spread the 58 bagger over a 10 year period.

          Contribution   Yield   Total
Year 1    $1500          1.50    $2250
Year 2    $1500          1.50    $5625
Year 3    $1500          1.50    $10688
Year 4    $1500          1.50    $18281
Year 5    $1500          1.50    $29672
Year 6    $1500          1.50    $46758
Year 7    $1500          1.50    $72386 
Year 8    $1500          1.50    $110830
Year 9    $1500          1.50    $168495
Year 10   $1500          1.50    $254993

The slow and steady method allows you to contribute
and "average up" and therefor produces a net worth
from this holding nearly twice that of the more
explosive pace.
 
An argument to the contrary might be, 'Yeah, but you
made so much money in only 4 years!  You can gain more
efficiently if the market is recognizing gorilla power
quicker.'

My arguments against this are -

1)  The explosive pace of the current market makes it
exponentially more difficult for you to enter near 
"the bottom."  Since it is near impossible to find
these companies at the very beginning, assume you found
them after 1 year.  Your 3 year growth would leave
you with $47103, while the 9 year growth model would
give you $168495, 3.5 times greater worth.

2)  How easy is it to keep finding gorillas or very
powerful kings over and over again?  So many of us are
profiting richly from this bull run.  Is this the way
the next decade will go?  If so, I am going to be one
rich mofo.  But logic tells me this is an aberation
and things will slow down.  I mean, is it really so
easy to find 50 baggers?

I believe the gorilla game is very viable.  I
feel a need to be more aggressive and grab companies
prior to the tornado, but that is my choice.  Waiting
for the tornado, as you put noted, seems like a 
guaranteed missed 10-20 bagger.

A great example of the unbelievable bullishness is 
Juniper.  They look great but for now I won't touch
them.  A next generation Cisco?  Maybe.  But Cisco
has a lofty P/S of 30+.  Juniper's is well over 200.
It looks to me like the market has priced all of the
near term growth in already.

Dan
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No. of Recommendations: 21
Is it not likely that the increasingly greater numbers of individual investors (and therefore well-researched individual investors) is the cause of the quicker rise to hyper-valuations.

It seems to me that investors are simply saying about JNPR (much like you said) "hey...this stock will be worth this much in ten years...so why wait, lets just price this baby up now!"

Of course JNPR is not the only one.

The major culprit is unfortunately a blessing as well.
We are blessed with a freedom, or independence if you will, of investing like never before. Online brokers, and advances in computer technology have made this possible.

Now any Joe Investor can hook up his computer, send a check to (blank-trade) and be in business for himself in a week or less.

The idea of getting rich quick in America is alive and well, and that is the cause for the momentum traders which help accelerate the growth of Gorillas and Kings.

Gorillas and Kings succeed first and foremost b/c they are the leaders, technologically, in their field.

So their stock price goes up.

Momentum traders see this, and bid it up more.

The REALLY uneducated momentum trader sees this and bids it up higher still.

Meanwhile the daytraders keep buying and get ready to sell at a moments notice.

Ahh...the technology volatility.

Tech stocks are sexy too.
James Bond movies and pulp fiction do not sell on themes such as utilities and paper.
No!
Give the characters the latest gadgets, send astronauts to Mars, discover the cure for Cancer.
That is what the masses want!!

Anyway, I have a good idea why the markets are moving faster.
And I also agree, that it is making it harder to apply certain systems, b/c you seem to get into the action too late.

The problem is...I do not have a clue what to do about it.

Except...

Well, if technology is always changing, and new paradigms are constantly created, then there will always be new Gorillas and new Kings, etc...

So if all I ever get is the last 10 bags of a 40 bagger....is that really a source for concern?

Maybe I will not be able to kick back and sit on a stock for 5-10 years anymore.
Maybe I can only sit on it for 1-3 years, and then I need to put my money elsewhere.

If I am constantly doing my DD and constantly staying on top of things (not in the day-trading sense, mind you), then I do not see where the lost profits come in.

It seems what we should be worried about is our exit strategies.

We should define what signs to look for to know the end is near.

We should define how to realize an industry is being replaced or how a technology is being replaced.

We need to replace our mentality for GREED into a mentality for sustainable growth in our portfolio.

I am going to sleep now.
I bought JNPR recently, and it is up about 30% this month or so.

I will not stay awake thinking about what I already missed.

Aridian

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No. of Recommendations: 0
My background is predominantly Mechanical Investing, but I've noticed (also on BRK) that stock strategies tend to select stocks of certain risk/reward levels, rather than be absolute "end all" selection criteria.

<< Well, one POSSIBLE problem MAY be the enormous valuations of most promising tech stocks today. >>

One thought is that these tech stocks, like JDSU and PALM, have a different risk/reward than gorillas like CSCO and MSFT. IMO, Today's sexy tech stocks are very high-risk / very high-reward stocks, while gorillas are "just" high-risk / high-return. Likewise BRK-style value stocks are low-risk / low-return.

So, IMO, there's nothing wrong with GG or BRK. Just do the usual diversifying by risk. For your high-risk / high-return stocks, choose GG. For your other risk levels, look elsewhere.


Washu! ^O^
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No. of Recommendations: 1
Aridian stated: "So if all I ever get is the last 10 bags of a 40 bagger....is that really a source for concern?"

Now, I'm only an amateur student of stock market history, but it seems to me that when an average tech investor starts thinking like this, that every investment is going to be a 10-bagger (in more normal times, people used to dream of one or two 10-baggers in a career of investing!), trouble can't be far away....
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No. of Recommendations: 1
Aridian,

as you correctly pointed out, the exit strategy is becoming the crucial part of this game.

In years gone by, you could have bought a stock like Cisco, and if they grew 30% then fine, if they grew 50% even better - it would drive the stock up.

Nowadays it seems, you buy a stock that's priced for maximum growth already and after that it can only be a matter of matching or failing expectations - hardly exceeding them.

I've been caught twice now:
One example is BEAS. In autumn 98 they warned that Y2K might slow things down a bit and the stock halved more or less over night. Thankfully :-))), that spike is hard to detect on the chart nowadays but that's only because BEAS didn't have the sexy E-Commerce tag in those days. What happened is that all the growth investors jumped ship and the stock tanked. Now BEAS was priced very reasonably in those days - I shudder at the thought what the same announcement would mean at today's valuations. Incidentally, BEAS still managed a 74% and 61% growth rate in 98 and 99.

Second example is DELL which I bought a year ago and which hardly moved since then. Granted, they had an earning problem off late, but essentially it's the same story: What, only 30% growth now, after the 40% we're used to? Dump that old-economy stuff!

As we move to buying on HOPE instead of reality, we may have to start selling on FEAR instead of reality, too. I'm not very happy about that development and the one question I keep asking myself is where to draw the line between gambling and investing. Suddenly I feel like a conservative investor when I buy Cisco at today's prices, because they may be expensive, but they've shown they can do it.

Eckhard

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No. of Recommendations: 0
Luciuse wrote:

"I've been caught twice now:

......
Second example is DELL which I bought a year ago
and which hardly moved since then. Granted, they 
had an earning problem off late, but essentially 
it's the same story: What, only 30% growth now, 
after the 40% we're used to? Dump that old-economy stuff!"

I bought Dell last April (when I inherited some 
money equivilent to 2 1/2 years of my retiree 
income) and it's hardly moved. I checked its ten 
year chart:

http://quote.fool.com/chart/chart.asp?uf=0&time=13&maval=0&compidx=aaaaa%3A0&comptick=&symbols=DELL&currticker=DELL&submit1=Draw+Chart

Most of its growth relative to today's valuation 
took place between the middle of 1996 and the end 
of 1998. Since then it's been essentially stable.

I bought it because I believed that the number 
of computer makers would shrink drastically and 
that Dell would be one of the winners. I bought 
it to hold it for at least three to five years. 
I will make a judgment then concerning whether 
or not I've been caught. I think stocks sometimes 
hit a plateau, maybe for a few years, and 
if they are the stock of a great company, they 
can take off again.

More recently I've studied the Gorilla Game. 
still have about $15,000 which I would be willing 
to risk in stocks and I think I'll use it in 
carefully researched gorilla plays.

Fortunately without knowing it I invested in 
some stocks that have since done reasonably 

well (Apple, Cisco BEOS Intel), and although 
my investment (well or over-diversified 
in 20 stocks) has only increased 30% and 
not 30x, I am not disappointed concerning 
my rookie year as an investor. (I would have done
better had I put it in QQQ but I would not have
learned anything.)

Of course I have the advantage that I am doing 
this for fun and not out of need because my 
pension plus social security is enough for my 
modest needs. If I do very well in investing 
that will mean even more lovely travelling in 
my late sixties and my seventies and, hopefully, my eighties.




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I bought it because I believed that the number
of computer makers would shrink drastically and
that Dell would be one of the winners. I bought
it to hold it for at least three to five years.
I will make a judgment then concerning whether
or not I've been caught. I think stocks sometimes
hit a plateau, maybe for a few years, and
if they are the stock of a great company, they
can take off again.

More recently I've studied the Gorilla Game.
still have about $15,000 which I would be willing
to risk in stocks and I think I'll use it in
carefully researched gorilla plays.


Arlekeno,

After having read the book, you now know that since the tornado in the market to which Dell belongs is over, and since they did NOT emerge as a Gorilla, rather more like a strong prince, you would have learned from the book to sell DELL after the period of hyper growth was over.

That's not MY recommendation necessarily, it's what we will have learned from the book.

So that would leave you with $15K PLUS what you had in DELL to invest in Gorilla candidates. That's roughly what I started the year with and if things keep going like this (but how COULD they??), I feel like I'll be able to retire in about three years.

Since you plan on being around into your eighties, it's not too late to make sure that they'll be golden years, indeed.

Happy trails

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No. of Recommendations: 2
I just wanted to add to tjbd's comments concerning Dell.

After having read the book, you now know that since the tornado in the market to which Dell belongs is over, and since they did NOT emerge as a Gorilla, rather more like a strong prince, you would have learned from the book to sell DELL after the period of hyper growth was over.

That's not MY recommendation necessarily, it's what we will have learned from the book.


What the book has defined for technology investors is that Dell is a member of the value chain surrounding Intel and Microsoft as well as other operating systems in the server market and desktop market (Linux) - not to mention many elements in the semiconductor market used for computers and other parts needed for assembling a working computer. Money can be made in the value chain members as witnessed by Dell's 70,000% increase in the 1990's which topped Microsoft and Intel's appreciation for the same period.

As tjbd noted, the point in the growth curve for Dell itself is certainly beyond the left side of the bell curve. What this means is that when compared to the gorilla companies - the GAP/CAP extended returns favor them more than the royalty value chain members going forward. That is certainly not to say that management and the well-oiled machine at Dell is a 'bad investment'. They have executed about as well as could be done within this technology adoption life cycle called the PC Era. However, now as gorilla game investors have learned, we know where Dell fits and what to expect in terms of growth and risk aversion in relation to the gorilla companies of the PC technology adoption life cycle. Intel and Microsoft need Dell just as much as Dell needs them. Hence, the relationship will stay favorable between them.

As investors seek growth that is on the front end of the bell curve of a technology adoption life cycle, many move money out of companies that are more mature in their cycles to invest in the other side of the growth curve. We are now in year 21 of the PC technology adoption life cycle. I would argue that it certainly is not over, but the growth rates are beyond the hypergrowth segment. Yet, they remain steady. Dell's multiples have come down over the past year while this adjustment was completed. It appears that the financial industry believe Dell's growth would justify a share price in the mid $60's range over the next 12 months. For growth investors, that's not a bad return if Dell moves from the mid 40's to the mid 60's over the course of the next 12 months. A 45% - 50% return in 12 months certainly is nothing 'bad'. In the current utopia where we have been getting that in a few days, a week, a month or a quarter - it may pale. However, investors just need to understand why Dell is no longer giving a 100 - 200% annual return.

The good news for aggressive growth gorilla game investors is this - there are opportunities that will offer previous 'Dell like' returns going forward. The trick is to find them and invest in them.

BB
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