For Thursday, July 8, 1999 Drummer Column, Gibbs, 709 words

Gorillas in the missed

I hope you trust that I didn't simply accumulate a stack of mad money and then buy stocks based on rising charts, frenzy, and butterflies. Well, maybe a couple of butterflies.

If you know me, you know I am a nut for research. I read all the headlines, financial reports, and investor comments even when not planning a move.

I have also read five investment books since April. They are as follows: The Motley Fool Investment Guide; The Motley Fool's Rule Breakers, Rule Makers; Charles Schwab's Guide to Financial Independence; The Warren Buffett Portfolio by Robert Hagstrom; and I'm just finishing The Gorilla Game -- An Investor's Guide to Picking Winners in High Technology.

I enjoyed them all.

Allow me to condense the essence of their content. If you are a new investor, like me, perhaps some of this will be useful. If not, at least it's lighter than reading soup can labels.

I like the Fools best because they are successful, funny and their strategy is concrete and quickly applicable. They will help you create any type of portfolio depending on your own level of risk tolerance. They also publish their real personal portfolios at their web site www.fool.com. They tell visitors a week in advance before they buy or sell anything, so people can mimic them exactly if they wish.

Rule Breakers are those hypergrowth companies (Microsoft, Cisco, Starbucks) that have created their own industry and control the lion's share. They violate every conventional method of monitoring and need special metrics to be tracked. The Fools provide these metrics.

For Rule Makers, established large cap companies, the Fools also provide precise metrics. For example, they recommend buying companies that provide inexpensive products to a mass market on a daily basis. Buying soda and razor companies brings more profit than buying automobile and television manufacturers. In depressed economies people keep shaving and drinking, but they put off buying new cars and televisions.

Rule Makers also have the following: high gross margins -- they make at least 60-cents on the sale dollar; high net margins -- they clear least 10-cents on the dollar after all bills are paid; annual growth over 10-percent; 1.5 times more cash than debt; and their last metric is something Fools call Flow Ratio. The Fools see inventory and accounts receivable as liabilities rather than assets, and accounts payable as assets rather than liabilities, so they shuffle numbers in the quarterly reports to determine the Flow Ratio. Flow wants money coming in faster than it's going out.

Warren Buffett is the king of investors. He has had positive years since he started investing. He does not believe in diversification. He feels that is for people who don't know what they are doing. He's a focus investor. His Berkshire Hathaway portfolio only holds six to eight stocks. He learns his companies intimately and tracks their industry constantly. When a company shows great promise, Warren advocates throwing a lot of money into it. He doesn't own equal shares of every stock. For example, he owns 1.7 million shares of the Washington Post, but 200 million shares of Coca-Cola. Most importantly, Warren only buys strong, well-managed, undervalued businesses. Undervalued is his primary operative. He also does not buy technology stocks because he doesn't understand them.

For technology advice, surely pick up The Gorilla Game. They have an intricate nomenclature that takes getting used to -- gorillas, chimps, monkeys, kings, princes, serfs, chasms, tornadoes, bowling alleys, Main Street, and so on, but once you understand the paradigm, the book makes good sense. Essentially, they advise people to invest in companies that control the underlying standards that would require exorbitant switching costs for any other company to mimic or any customer to convert to. Established gorillas -- Microsoft, Cisco, Intel. Dell is not a gorilla because anyone can sell computers. AOL is not a gorilla because anyone can start an ISP. Dell and AOL are kings. Monkeys imitate gorillas and chimps try and usurp gorillas. AMD is a monkey. Apple is a chimp. The chasm is the birth of a new industry standard. The tornado is the initial adoption of the standard. Bowling alleys knock off the chimps. Isn't this fun?

O.K. enough. End of trilogy. See you next week.