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No. of Recommendations: 46
Ted wrote:

NT: 161.57%
NTAP: 1444.31%
JDSU: 972%
QCOM: 1240.15%

OK, we should do a poll. Who caught Uniphase two summers ago before it became JDSU? Who caught most of the QCOM run since 1998? Who saw and caught NTAP when it was a 3 billion market cap and held through thick and thin?

This all sounds great in hindsight.

Depends on what kind of an investor one is in technology and what it is they are looking for. As I've used the theme on this board in terms of "broken" problems and "fixes" or solutions for those broken problems, that's really an abbreviation for something called a technology adoption life cycle. The risk/reward scenario of technology investing is that - although it sounds contrary to proper business sense - there are always a plethora of companies that have 'fixes', yet there is no broken problem. Or rather, the 'anticipated broken problem' never presents itself or the 'fix' is usurped by a better 'fix or solution'. All of the companies you mention above (Qualcomm, Uniphase, Network Appliance and Nortel) had already crossed the 'bridge' by 1998 and their 'fixes' were being applied to real, broken problems. Thus, the risk/reward scenario is much more in favor to the technology investor waiting for this situation to present itself. In terms of the technology adoption life cycle, we call that 'bridge' that a technology must cross the 'chasm'. A lot of carnage ends up in the chasm never to be heard from again. Once the 'chasm' is crossed, there is a funny portion of the cycle we call the 'bowling alley' from which a product or technology 'tornado' or 'hypergrowth' can emerge. It is in this area that the risk/reward scenario presents itself for investing in software companies. Enabling hardware companies meet the risk reward scenario for investment in the tornado stage. Going back to 1998, most were able to catch the types of growth one looks for in terms of confirmation of a tornado in those four companies. It may not show up in revenues right away, but it will be found in units shipped (Qualcomm is a good example of that in 1998).

Two classic examples of too high risk/reward companies which we all found out this year were Citrix and Echelon. It was too early to have invested in either as there was not confirmation of the growth either in units or in revenues to warrant investment. A classic example of a software company in the bowling alley at the moment (where one invests) is BEA Systems. This is the place Siebel Systems and i2 Technologies were located back in 1996 - 1998 where software investors would have been taking initial positions.

Although there is no 3 year chart available at Yahoo!, I provided the 2 year chart to put things in perspective even though all of those 4 equities you mention have come down a hefty amount. There in lies the rub of investing and letting compounding do its trick. Yet, in hindsight we could certainly ask these important questions as well?

Who sold Nortel at $89?
Who sold Network Appliance at $152?
Who sold JDS Uniphase at $153?
Who sold Qualcomm at $200?

I remember well a little private email discussion with Rat back in 1998. The 4 companies we discussed in terms of Broadband were Worldcom, Uniphase, @Home and something else I don't recall at the moment. At the time, Brian Finnerty (the guy with the voice that is always hoarse) was touting Uniphase on CNBC nearly every single time he was interviewed from his trading floor. Month, after month, after month. Perhaps his firm has a good research firm in fiber/optical, but he was on top of it. Plenty of discussion was around about the future of fiber and networking in 1998. Of the companies I was studying, Uniphase made a fairly decent risk/reward purchase for the longer term based on the principle of "picks, tools, shovels, etc..." and the location of their technology in the technology adoption life cycle. It was in hypergrowth - the 'tornado' where it still is today. Then the mergers, splits and attraction started to grow. Now, via the ETEK and SDLI acquisitions and the move to coverging inside the box of optical and electrical all under one company which will also include future integration on the chip - JDS Uniphase has become one of the most important companies to own in the space. In terms of the technology adoption life cycle, it is still early. There will continue to be consolidation in the space for those companies that have the strong currency to do so.

Although efforts were made on the Gorilla Game message boards to pursue Qualcomm in 1998, most 'gamers' waited until the spring of 1999 as the 'signal' to enter the stock. Had we known more about gorilla gaming in 1998 before the first book was written, we would have recognized the importance in the spring of 1998 as an important event when unit shipments of first generation CDMA hit the type of growth that we call 'tornado' or 'hypergrowth'. This was not reflected in the revenues, but in the unit shipments. That's sometimes difficult to spot, but in spite of that mistake many investors made, the spring of 1999 was also an important event which many did not miss.

Likewise, investors that were studying storage and the trends were well aware of SAN and NAS. If studying the "picks, tools and shovels" premise of what types of equipment was needed to fix the 'broken' problems of growing data and storage/transfer for that, once again - technology investors were well aware of the tornado/hypergrowth taking place at Network Appliance for their NAS solutions. It became an 'official' holding on the Gorilla & King investment message board throughout 1999 and ended up being in the ten stock 'index' simply because so many of us held the equity in our portfolios. Here again, based on the hardware/software game that NTAP plays and the growth they are experiencing - it remains a viable investment going forward (as does EMC).

You're next post listed quite a few smaller cap companies which I don't have in front of me at the moment while I type this post, but make sure you know where each of them lie in their technology adoption life cycle. Software must be in the bowling alley and enabling hardware must be in the tornado (at least 100% y/y growth in revenues/shimpments). Without those criteria being met, the risk is high, dangerous and could lead to severe capital loss.

This is not a recommendation by any means, but I simply point it out as an illustration of some of the thought processes I go through. I already mentioned BEA Systems as being in the bowling alley (where softare investments are purchased). I owned it in 1998, but removed my position because for me the risk reward was too high at that time. I have now entered the position once again over the past few months because of the network application bowling alley it has entered in the past 12 months. I left money on the table by being out of the stock from 1998 - 2000, but risk/reward was at issue and that money went into Siebel and i2 which performed quite well and had already passed the risk/reward criteria. In addition, there are about a dozen or so up and coming companies in fiber/optical that warrant watching in terms of once they reach the tornado stage, the risk/reward will be compelling to capture future returns. The market is much better at locating all of this now and hence, we see a lot of companies pumped up long before they reach the bowling alley (for software) and the tornado (for enabling hardware). That's why we saw 'speculation' in Citrix and Echelon way too early.

Most all of that is irregardless of the share price movement. Not much has changed for Qualcomm's future from the standpoint of $200 a share or $51 a share. Likewise, not much has changed at JDS Uniphase's shop in terms of the future from the share price of $153 to $49. If anything, the future looks brighter and clearer for both. So was there a disconnect from share price to technology with these companies? Sure. Yet they are up a heck of a lot in the past one, two, three, four, etc... years. Based on their future prospects, I'm sure we'll be saying similar things two, three, four, etc... years from now as well.


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