FOOL ON THE HILL
Successful companies aren't buzzwords, they're businesses. The hot stock stories of 1999-2000 were one word long: Technology, Internet, broadband, wireless, biotech! If you wanted to know more than that, fuggedaboutit. But if the coming years promise lower average stock returns than the 1980s and 1990s, investors will need more than labels. They must ask the tough questions and go beyond one-word hype if they're going to find the next General Electric or Berkshire Hathaway.
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You've read it here, there, and everywhere, from Warren Buffet to Little Miss Investing Muffet: The stock market averages have performed so well for so long -- even with the recent Nasdaq guillotine -- that investors should expect lower-than-average growth in their stock portfolios for the next decades. Yet the alert investor recognizes that in any average, some lead while others lag. Overall returns might be 6% for 20 years, but there will be winners. Where to find them? Not in the big investment stories of 1999 and 2000. Those one-word hypes named tech, Internet, broadband, wireless, and biotech (and genomics) were the siren songs, the Diors and Chanels of the age, the whispered "plastics" of our time. But buzz words do not a market-beating portfolio make. As buy-and-hold investment legend Peter Lynch puts it in One Up on Wall Street: "Before buying a stock, I like to be able to give a two-minute monologue that covers the reasons I'm interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path." Two minutes? In our hyped-up, coffeed-up, wired-up lives, we don't have two minutes. We want instant communication, instant food, instant election results, and instant money. We want it now, here, and plenty of it. We want no troubling details, an easy system, and hold the problems. Everything must work, all the time. Latte now, green light now, Instant Message now. Broadband, wireless, and biotech, oh my! We death-hugged wireless. Look at just three huge 1999 stories: Phone.com, now half of Openwave Systems (Nasdaq: OPWV), Qualcomm (Nasdaq: QCOM), and Pumatech (Nasdaq: PUMA), up 1,738%, 1,411%, and 2,700%, respectively, for the year. But wait. Phone.com, that was about WAP, right? What exactly was wireless application protocol, and how did it work? Qualcomm, it owns the intellectual property for the likely 3G -- third-generation network standard. When's that coming? And that 3G, what's that all about? CDMA, TDMA, GSM; EDGE, GPRS, and WCDMA. All this wireless alphabet soup. Then Pumatech. Wireless software. Oh, OK, it's about software to synchronize all your different wireless and wired devices. But is it out yet? To whom will it sell? And gee, Intel (Nasdaq: INTC) makes flash memory that goes in phones. Does that make it wireless? Zzzzzzzzzz.... We grasped biotech and genomics. Who cares if it's Amgen (Nasdaq: AMGN) or Affymetrix (Nasdaq: AFFX), Celera Genomics (NYSE: CRA), or Human Genome Sciences (Nasdaq: HGSI)? Don't bother me with the fact that Amgen is practically a big drug company, Affymetrix a biochip maker, Celera to date solely a bioinformation company, or that Human Genome Sciences is a drug company whose patent portfolio and research focus make it a leader in an entirely different drug universe, regenerative medicine, in which it may have only two real competitors? No time for details! How to fight buzzwords Non-label successes Conglomerates? Quickly slapped together collections of unrelated businesses. John Brooks' unforgettable The Go-Go Years, The Drama and Crashing Finale of Wall Street's Bullish 60s, chronicles the likes of ITT, Litton Industries, Gulf & Western, and Ling-Temco-Vought gobbling up once-proud and unrelated business names, stripping them of value, with management consuming perks and eventually impoverishing shareholders. The house-of-cards Go-Go years led to the 1970 market crash, from which average stock prices did not recover until the 1980s. Good conglomerates Fuel cells, DVDs, and computer memory? Insist on two minutes Tom Jacobs (TMF Tom9) loves working at the Fool, not least because it lives Thoreau's advice to "Distrust any enterprise that requires new clothes." At press time, he owned shares of these companies mentioned in the column: Celera Genomics, Human Genome Sciences, JDS Uniphase, Intel, Energy Conversion Devices, Pumatech, and Qualcomm. To see his stock holdings, view his profile. The Motley Fool is investors writing for investors.
With no time to spare, we embraced broadband. The easy answer was cable service to the home, with @Home before it became Excite@Home (Nasdaq: ATHM). If we took the time to look behind the label to the fiber optic networks that speed data worldwide, did we stop at "Fiber!" or know that Corning (NYSE: GLW) or JDS Uniphase (Nasdaq: JDSU) made components? That their customers Ciena (Nasdaq: CIEN) or Nortel (NYSE: NT) or Lucent (NYSE: LU) were systems vendors? That Harmonic (Nasdaq: HLIT) provided tools to upgrade cable systems to high-speed capability, but that its health depended almost entirely on AT&T's (NYSE: T) cable system capital expenditures? Time's up!
Dare to fight the conventional wisdom. Be strong. Question the folks at the office or gym or children's play group who nod in unison and solemnly intone the investing talismans -- buzz words whose underlying rationale no one remembers. Scare them. Try: "What do you mean by that?" "Could you explain what it is about the company's business model that will make it money? "What will drive future growth?" "Why is there air?" (Bill Cosby: "To blow up basketballs."). You're on your way.
History is on your side. Remember that at least two of the greatest investing success stories of the last 30 years are two absolutely label-defying companies: General Electric (NYSE: GE) and Berkshire Hathaway (NYSE: BRK.A). If you listened to the anti-buzz word of their times -- conglomerate -- you would have missed them.
The conventional wisdom eschewed any collection of unrelated businesses like GE or Berkshire, even if they were "good" conglomerates, according to Brooks, with real growth, non-hostile takeovers, and few accounting tricks. This excluded General Electric, arguably the best-managed, most compelling investment story of the last 25 years, the company with the largest market capitalization in the known universe. Is it aircraft engines, financial products, NBC, medical products? No label works here. While GE did receive some attention, the most-missed money was clearly in Berkshire Hathaway, dismissed either as Warren Buffet's "investment vehicle" or "a holding company," which would make Charles Munger and a host of Berkshire managers chuckle. It's a wonderful collection of generally unrelated and superbly managed businesses that print money, but it takes some time to understand.
While the investing world today knows GE and Berkshire due to their sustained successes, that's quite a threshold for any company without easy definition. Take just one example, Energy Conversion Devices (Nasdaq: ENER), which is way off the hot-stock radar. ECD develops technology and manufacturing processes for regenerative fuel cells, hydrogen storage, hybrid and rechargeable batteries, cost-effective solar products, DVD-RW devices (yup!), and next-generation computer memory to replace DRAM and flash. Any one of which is attention-getting by itself, but lost in the soup when mixed. Without a box, it's ignored.
The next GE or Berkshire undoubtedly exists, as does the next "CiscIntSoft," but I'll wager it's no one-word fashion statement. To make investment choices that will outpace average market returns in the next decades, there is no alternative to knockin' your noggin'. Listen to Lynch, and Think. Then propose your own non-buzzword companies on the Fool on the Hill discussion board!
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