<THE RULE MAKER PORTFOLIO>
Cisco and Microsoft?
By
ALEXANDRIA, VA (August 27, 1999) -- The two greatest technology companies in the world -- and certainly two of the greatest companies in the world -- are in our portfolio today. In alphabetical order, they're Cisco Systems (Nasdaq: CSCO) and Microsoft (Nasdaq: MSFT). They happen to score highest on our Rule Maker ranking system. And, they also happen to be our two best performing investments. Cisco has risen 138% for us; Microsoft has climbed 117%.
For all the controversy about their businesses, I believe that these companies are the leaders of the most profound, most transformative commercial, cultural, communicative, and technological revolution in the history of our species. Our journey today from analog to digital, from centralized to decentralized information, from being national to being global, from contributions of the few to that of the many far surpasses in significance the invention of the printing press; the storming of the Bastille; the Treaty of Paris; the advent of the power loom, the steam engine, and the factory system; the mass popularization of the telephone; the development of desktop computing.
While each of those has, directly or indirectly, led to another invention, another inch of progress, the culmination of all that swirling change -- the Internet -- is the greatest modifying force in history. It is a technology that allows me to exchange e-mails with a gentleman in Nigeria interested in establishing and expanding a single African stock market. It's a technology that allows the world's top brain surgeons to share data instantly. It's a technology that -- once it has seamlessly integrated interactive text, audio, and video -- will put the purest form of leadership into the hands of people in every corner of the globe.
The creation of this new "universe" brings with it limitless possibility, the threat of a near-total loss of personal and professional privacy, the certain improvement of education, a furious growth in new ideas, an encrypted communications network for the transportation of legal and illegal substances, and the greatest chance ever for a world of the people, by the people, and for the people. The Internet is certainly, at once, introducing things most wonderful and most terrifying -- though more of the former than the latter. It's being laid down as the world's marketplace, the basis for local, national, and international exchange. It is a new foundation.
The majority of investors around the world agree. They've backed the infrastructure and its applications with an unmatched wave of capital. The public markets have tagged eBay, Amazon.com, and Yahoo! -- companies that barely existed five years ago -- with a consolidated capitalization of $80 billion. America Online, priced at $115 billion today, is valued more dearly than the combination of Disney, Nike, The New York Times, and The Gap.
The wealth created by the Internet in the 1990s surpasses the wealth generated by any single industry over any period of time this century. Add up all the value created by the automobile industry over the past 99 years and the figure will not equal the amount of wealth created by the Internet over just the past nine years.
And we, mon Fools, hold in this portfolio the Internet's two leading forces: Cisco and Microsoft. Cisco today is valued at $227 billion. Microsoft weighs in at $485 billion. They are among the largest commercial ventures in the history of humanity. I believe that, five years from now, they will represent the world's two largest corporations -- the two richest, most substantial, and most influential commercial firms in the history of our planet.
Put plainly, Cisco is providing the software and equipment that helps machines link into worldwide, nationwide, statewide, citywide, cross-town, floor-to-floor, desk-to-desk networks. Complementarily, Microsoft provides the software that helps users search out, track down, and use the new information, new services, and new forms of communication available from (increasingly, but not entirely) any place on the globe.
And in our free market system, both companies have rigorously amassed so much liquid cash (more than $20 billion combined) that the probabilities are they will be able to buy their way through the transitions in their marketplaces. Cisco will be able to fund, duplicate, or acquire the stuff that lets every sort of machine -- from handheld device to server, from laundry machine to television set -- link into a network. Microsoft will be able to fund, duplicate, or acquire the stuff that lets billions of consumers use those networks for information, communication, and advice.
My inclination is to continue adding our $500 monthly allotments into Cisco and Microsoft until it becomes apparent that 1) their operational efficiency and the demand from their consumers is flagging, or 2) that others have emerged as equally or more attractive businesses to own for the long term. In other words, I vote either for Cisco or for Microsoft -- with my belief that a company like Yahoo! is inching its way toward a similarly high degree of commercial excellence.
In for a penny, in for a pound.
Tom Gardner, Fool
