Why doesn't the Rule Breaker Portfolio own "tech" stocks? Good question. It would be easy to say something really annoying like "Oh, tech's been hammered. Boy were we smart!" But it wouldn't be true.
Because, while we're very good looking, we're not necessarily smart.
Start with the term "tech." If held at gunpoint and forced to eat Spam or define tech, I would say "anything for which the core business is making or selling computer software or hardware, networking equipment, semiconductors, communications technology, or flubber." A fairly large universe.
Tech we've bought
We have owned tech companies since 1994, when we launched the original Fool Portfolio. The port has held long positions in such companies as 3Com Inc. (Nasdaq: COMS), KLA-Tencor Corp. (Nasdaq: KLAC), Innovex (Nasdaq: INVX), Iomega (NYSE: IOM), and over a half dozen more. A review of the port's trade history reveals much tech Foolishness we follow today.
What's beyond the cool gizmo?
To wit, the Iomega Buy Report, May 16, 1995:
"Armed with a hot new product and industry recommendations that would look good even read in reverse, Iomega has drawn the attention of the technophilic public and done some brisk sales in the first and (especially) second quarter."
"Technophilic." To love technology. If a company has a product that technophiles love, it's going to take some work for an investor to understand the technology and be able to identify and evaluate the competition. And even that may not be enough.
Then, the Iomega Sell Report, December 16, 1999:
"Profitability levels are rarely high in the cutthroat data storage industry, and new technology is a continuous threat. In Iomega's case, however, management seemed to make the biggest missteps....
"The Zip drive has been marketed past its peak. Iomega needs a new product that could garner at least half the excitement that the Zip did in its prime. There doesn't appear to be such a candidate on the horizon. The Jaz has played out its role perhaps as well as possible, the Clik drive has been disappointing, and the aging Zip is still the main source (nearly 70%) of Iomega's revenue."
Lesson? Competition and new technologies will appear as long as we have death, taxes, or belly-button lint, and a tech company needs a sustainable advantage to build beyond the "hot new product" -- the technological leap that made it attractive in the first place. We say in the Rule Breaker Strategy in Brief that "true sustainable advantages come from brand and visionary management, not necessarily from technological advantage." Here, Iomega had a great brand, but management misstepped.
Non-consumer tech
The port brought it all together in the 3Com, Innovex, and KLA Tencor Sell Report, November 28, 1998:
"[D]ue to the nature of their businesses (at least in their present incarnations) we find them the three hardest stocks to follow and understand. In each case, when we bought the stock we felt we had a fairly good understanding of each business and its challenges. But following them has been more difficult than we thought. Whether it's 3Com's difficultly worded press releases (we'll grant them the technology is complicated), Innovex's announcements that come few and far between, or KLA-Tencor's equipment, which we will never have the benefit of using for ourselves, these are basically not consumer businesses.
"If you want to generalize about a lesson we take away from all three, it is NOT that they're bad businesses or bad stocks. Rather, it's that networking gear, lead-wire assemblies, and yield monitoring equipment just are not consumer businesses, making it very difficult for average-guy investors like us to figure out WHY things have gone wrong when they do go wrong. The act of selling these stocks and moving [the money] into more consumer-oriented businesses (or at least, simpler businesses to understand and to follow) is a generally good one. And we will of course expect to be investing the money in more profitable prospects, to boot." (emphasis added)
In short, the reason we like consumer businesses is not because they're any inherently better or worse than tech, but because we have a better shot at knowing when and why "things go wrong," and how well management responds. Life is simpler.
And today, half of our portfolio reflects this learning. It was not difficult to understand Starbucks (Nasdaq: SBUX), eBay (Nasdaq: best EBAY), or Amazon (Nasdaq: AMZN). Drink coffee, buy and sell stuff, order a book, CD, or DVD (or more, but that's a problem I'm not touching). It's not as hard either to analyze the threat McCafes from McDonald's (NYSE: MCD) pose to Starbucks, or Yahoo! (Nasdaq: YHOO) and Amazon auctions to eBay, and how effectively management responds.
We can understand acquisitions better, too. When eBay makes the key move to buy Half.com, we have a shot at figuring whether it's a good move. It's a lot harder to know whether any of networking equipment makers Cisco Systems' (Nasdaq: CSCO) or JDS Uniphase's (Nasdaq: JDSU) myriad acquisitions make sense.
The curious insistence of tech
Yet tech keeps calling, whispering in your ear, like the memories of a first love or car. Though those two can provide, as the economists like to say, important psychic income, tech can be more financially rewarding.
That's why we've sniffed around some tech stocks such as Akamai Technologies (Nasdaq: AKAM), USinternetworking (Nasdaq: USIX), i2 Technologies (Nasdaq: ITWO), Phone.com, now Openwave Systems (Nasdaq: OPWV), Echelon (Nasdaq: ELON), InfoSpace (Nasdaq: INSP), Rambus (Nasdaq: RMBS), American Superconductor (Nasdaq: AMSC), Wind River Systems (Nasdaq: WIND), and Energy Conversion Devices (Nasdaq: ENER). We've asked, among other things, what will sustain these companies beyond their first cool innovations? And we will continue to do, as long as there's money to be made from potential tech Rule Breakers.
What about biotechnology?
By now you're asking, what about the other half of the portfolio -- all those biotech stocks? Amgen (Nasdaq: AMGN), Human Genome Sciences (Nasdaq: HGSI), and Celera Genomics (NYSE: CRA)? I'll be back tomorrow to attack that question.
Until then, Fool on!
Tom Jacobs (TMF Tom9) wrote this column not least because he owns shares of Celera Genomics, Echelon, Energy Conversion Devices, Human Genome Sciences, JDS Uniphase, Rambus, USinternetworking (sniff...), and Yahoo! and is thinking seriously about whether he should own so many tech stocks. To see his entire stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
