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Cisco Systems
Foolishness in 2001

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By Jhutchinson
January 4, 2001

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This is a longer post than I thought, but I encourage you to read it anyway, for I am going to tackle several issues that seem to be rampant lately on the message boards.

First, we need to return to the era of civility among posters at this site. This is not Yahoo!; this is a community, and its purpose is threefold: to educate, enrich and amuse, not to attack, berate and deceive.

If your own posts are not meeting any of those mission statement guidelines, kindly select the 'cancel post' button, and rethink your statement. Additionally, each message board is intended for investors to share information and to ask questions.

Those who are knowledgeable investors have a responsibility to help those who are not; that's why they are here, to become knowledgeable. That too, is a purpose of this site and these boards.

For those who are not knowledgeable, you truly need to access all parts of the site, and understand what it is that is meant by "Foolishness" and "investing". Based upon recent posts I think that is clearly in question.

I know what the Gardner's definition of Foolishness is, having read several of their books, having deeply scoured this site, and having experienced it. But here is mine.

Foolishness is turning a blind eye to the daily gyrations of the disco-dancing market; it is turning a deaf ear to recommendations of the Wise; it is turning your back on your worst enemies, doubt and pride; it is taking an amazing power in your own hands and wielding it responsibly and intelligently; Foolishness is you.

That power is the control of your own financial future. I am still learning it, daily. I still have learning to do and decisions to make.

A strange statement to be sure; but to be Foolish is to understand that you can and should rely on yourself. You don't need CNBC to tell you what to do with your stocks. You don't need Alan Greenspan to decrease interest rates. You don't need the Florida Supreme Court to order a recount of your latest stock price plummet.

You only need you. (And please spare me the Smokey the Bear jokes :) )

That said, you only need you to:

1. Learn and understand how to invest
2. Learn and understand what you are investing in
3. Make intelligent decisions about investing

Now, many of you may be thinking long and hard about #3. Is Cisco, for instance, an intelligent investment choice? (or, is anything right now, for that matter).

Perhaps it is. Let's consider first that what has happened this year is not a freak of market-nature. It was certainly harsh and probably, to many, unexpected. But, the substantial decline in the Nasdaq was overdue. I have previously remarked, and others have too, about the incredible doubling of the Nasdaq from 1997 to 2000 - it didn't just double, it double doubled. (or is that double squared?)

And there's a reason:
The internet was in its hyper growth stage in that same time frame. Internet users double-quadrupled (or something like that) from 97 to 00. Computers in homes grew. Businesses adding the Internet as an additional business layer, or strategy, grew. Many companies evolved solely because of the Internet.

And then came the truth. The only companies that could make money on the Internet (reliably) were either: infrastructure-based (hardware, software, networking, telecommunications; or existing giants (Yahoo!, AOL, Amazon).

The former filled corporate demand - you need all of those 'industries' things in order to build the Internet; the latter, being consumer driven, met demand by providing needed services (connections, community, products and information).

But the gazillion other companies that grew out of the Internet's growth did not meet either of those demands. They met niche demand. And niche demand is never good for long-term sustainable growth, or for investment growth (long-term). Oversupply, too, affected every company. Juno, Netzero, Bluelight.com, AOL, Earthlink, etc etc etc etc; so many companies to choose from just to connect to the Internet. It is clear, or it should be, that investments in .coms were dubious, questionable at best because they could not become profitable powerhouses. (And I will admit that, although I did not invest in any I was certainly attracted to them in a greedy investment sense)

One need only compare the Dow and the SP500 to the Nasdaq's plight. Where the Nasdaq is down 50%, neither of the other major indexes are.

But that truth existed all the time. Those who watched and listened to the "experts" pounding the .com's of the world down our throats, failed to follow the first two definitions of Foolishness: turn a blind eye, and a deaf ear. And Wall Street took them for a ride.

Valuations were certainly out of control. But perhaps now we have seen a swing to the polar opposite - some companies are nearly under-valued.

The .com revolution was originally about building a global community, and morphed into a global business. But profitability via the internet was always suspect. Consider AOL. Think they didn't know that their "profitable" time was limited? Why else would they eat up a media corporation? Diversification. How about Amazon? Used to be books and music, right. Now it's appliances, electronics etc. Again, diversification.

And therein lies a lesson. Companies that can achieve profit from multiple sources or from greater scale are better positioned to grow, more capable of surviving hard times, than are those reliant on a single source of income (read: advertising).

Think Cisco here. One product? Nope. Many. One avenue for profit? Nope, several. Diversifying? Absolutely. And the interesting thing is that while Cisco's price has fallen, there are no indications that their basic business model is in any way flawed. (though some may argue the accounting thing) In fact, Cisco is poised to take advantage of the failures at competing companies, and to look forward five to ten years from now, so as to be well-positioned, yet again, to continue realizing profitable, sustainable growth.

And we should all realize that we do not yet know what the next "thing" will be; in the early 20th century it was the automobile; then, television; today, the Internet. What's next? Who knows?

So while many bemoan their portfolios today - the larger questions are:

1. How many will revel in their portfolios five years from now

2. How many will bemoan dumping Cisco (potentially)

I don't know those answers yet (ask me in five years), but I do know that I would rather invest in a company that can withstand the heat of a roaring bear, maintain profitability (or grow profits), branch out its business, and look to the future of its industry. And Cisco fits that model.

The .com's, however, failed that test. They fail largely for two reasons: they can not achieve consistent profits; and they can not achieve scale - that is enough customers to produce the former (uh, ahem, the Fool excepted, of course).

Remember all that talk about the "new" economy replacing the old one? Well right now that old economy is beating the pants off the new one. But only because the old economy companies found a way to incorporate the new economy into their existing structure.

Pretty intelligent, isn't it.

And therein lies a lesson for every Fool; and the nine thousand previous words lead up to this thought for the new year:

Intelligent investing.

It is time to return to the world of intelligent investing. That means doing one's homework (or DD for the acronymically inclined); it means research; it means learning and practice, failure and success. It means not expecting that every investment will grow 1200% in one year. It means looking far forward, with a detailed plan focused on a singular goal.

How to grow your own money.

With that thought, I have devised my own plan; and I have, after great deliberation, decided to share it with you fellow Fools, for your input (but no derision - see paragraph two if confused).

The 2001 Plan

Goal: revise holdings to reflect diversified investments

Here's the 'hutch' plan:

Cisco, American Express, Pfizer, Southwest Airlines, Pericom Semiconductor, Intel, Nokia, International Paper, GE, or Microsoft.

These will comprise 85% of my investment dollars in 2001, in descending order. And I will be holding them for the entire year, and reevaluating them in December of 2001. I plan to hold them for five years; however, any substantial profitable return, or, any disastrous turn of events may countermand that plan.

The remaining 15% will be cash holdings, and small caps selected through monthly research ( I gotta use that Foolish 8 spreadsheet somehow!). These stocks will be used to achieve 20-25% gains (or better); when a stock is purchased and rises more than 10%, it will be protected by stop-loss orders; the more it rises, the closer the protection will be (on average of 4-10%).

Realistically, I'm looking to achieve a 12-15% annualized return. Considering where many of those companies are right now, I believe it can be done. And yes I realize the market is down, the economy is slowing, and that we have yet to feel the full effects of the 6 interest rate hikes, however, each of those companies have international markets (which is good and bad), multiple products, and consumer scale.

Cisco is my first stock, however, for two key reasons: one is fear. The price decline that Cisco has undergone is largely driven by fear, not numbers. Cisco continues to make profits, with gross margins in the 60% range. That's outstanding. Secondly, their visions to future markets make them attractive - they can profit today and tomorrow.

When the bear returns to hibernation market players will be putting money into market leaders heavily. And Cisco remains a market leader (in various respects).

Whatever your plans are for the next year, or the next decade, remember that you control your destiny now (Luke); learn to do so Foolishly.

Happy New Year to everyone. May it be a great deal more prosperous than the last one.

hutch