Boring Portfolio

Management Matters
... Just look at Cisco
by Greg Markus
(TMF Boring)

JACKSONVILLE, Fla. (July 10, 1998) -- When you buy "shares" of a company's stock, you are quite literally purchasing a share of that business. And, as a Motley Fool participant reminded me in a note earlier this week, perhaps nothing affects a firm's future as much as the quality of its management.

Focus on "great management," wrote Keith Garner in an email, "experienced, ethical, deep, and respected in the industry."

I couldn't agree more.

True, there's only so much that even a great management team can do if industry trends are working against them. Applied Materials (Nasdaq: AMAT), for example, enjoys perhaps the most "experienced, ethical, deep, and respected" leadership in the semiconductor capital equipment industry. But if chip fabricators are delaying new orders in the wake of the Asian economic slowdown, Applied's business is going to be soft.

Once the recovery begins, however -- and it will begin eventually, no doubt about it -- Applied will quite probably be first off the mark, once again leading its industry to the next-generation of products. And Applied's stock will reflect that.

Looking at our own Boring Portfolio, Keith wrote that Cisco Systems (Nasdaq: CSCO) "is widely regarded as having the best management in the industry."

Once again, Keith, I'm with you.

Last year, annual revenue growth in the networking industry slowed to around 15%, roughly half of its long-term average as projected by industry analysts and barely a third of 1996's red-hot 45% annual rate of growth. Yet, Cisco negotiated a challenging year just fine, in no small part because Cisco's management has attracted (and purchased, and held onto) the very best talent in its industry while broadening the company's range of product offerings to serve customers well and protect Cisco from downturns in particular industry segments.

Cisco's CEO John Chambers is highly respected, not only in the networking industry but as a leader, period. As I see it, I've been able to profit from Cisco Systems in two ways: as a financial investment and as an exemplar from which to learn how a top-performing organization ticks. I've traveled to San Jose as a shareholder, to watch Chambers in action and to speak with him and members of his team.

Chambers seems to know intuitively when to be hands-on and when to stand back and let his team take the lead. He's legendary for listening to voice mail from his top sales staff nightly, listening closely not only to the information but also the tone in their voices. He also phones Cisco's top accounts regularly, checking to see if his company is serving them well.

On the other hand, people I've spoken with at Cisco tell me that once the broad outlines of an initiative are defined, they're given considerable latitude within which to operate. To quote a story published earlier this year in The Economist, "People who do well are given a lot of freedom; people who do not, leave. 'It's called accountability,' says Mr. Chambers with a glint of steel."

Cisco is perhaps the best-known of the well-managed companies in which the Boring Portfolio has invested, but it's hardly the only one. If you stop back here next week, I'd love to tell you about Carlisle Companies (NYSE: CSL) -- about as unlike Cisco as can be in some respects, yet surprisingly alike in some ways that really matter.

FoolWatch -- It's what's going on at the Fool today.

07/10/98 Close

Stock  Change    Bid 
 ANDW  +  1/16  17.94 
 CGO   -  3/16  37.06 
 BGP   -  5/8   38.81 
 CSL   +  3/16  45.44 
 CSCO  -  1/16  92.88 
 FCH   -  9/16  31.69 
 PNR     ---    41.63 
 TBY   +  1/8   8.81 
                   Day   Month    Year  History 
         BORING   -0.44%   2.50%   6.88%  34.49% 
         S&P:     +0.50%   2.69%  19.98%  87.31% 
         NASDAQ:  +0.17%   2.55%  23.73%  86.66% 
     Rec'd   #  Security     In At       Now    Change 
   2/28/96  400 Borders Gr    11.26     38.81   244.81% 
   6/26/96  150 Cisco Syst    35.93     92.88   158.47% 
   8/13/96  200 Carlisle C    26.32     45.44    72.60% 
    3/5/97  150 Atlas Air     23.06     37.06    60.73% 
   4/14/98  100 Pentair       43.74     41.63    -4.84% 
   5/20/98  400 TCBY Enter    10.05      8.81   -12.27% 
   11/6/97  200 FelCor Sui    37.59     31.69   -15.70% 
   1/21/98  200 Andrew Cor    26.09     17.94   -31.25% 
     Rec'd   #  Security     In At     Value    Change 
   2/28/96  400 Borders Gr  4502.49  15525.00 $11022.51 
   6/26/96  150 Cisco Syst  5389.99  13931.25  $8541.26 
   8/13/96  200 Carlisle C  5264.99   9087.50  $3822.51 
    3/5/97  150 Atlas Air   3458.74   5559.38  $2100.64 
   4/14/98  100 Pentair     4374.25   4162.50  -$211.75 
   5/20/98  400 TCBY Enter  4018.00   3525.00  -$493.00 
   11/6/97  200 FelCor Sui  7518.00   6337.50 -$1180.50 
   1/21/98  200 Andrew Cor  5218.00   3587.50 -$1630.50 
                              CASH   $5528.69 
                             TOTAL  $67244.32