REUTERS/Jonny Hogg
Way back in 1998, before I started working as a Bay Street stock analyst, I read a book that forever changed how I invest in high-tech companies.
That book was The Gorilla Game by Geoffrey Moore, Paul Johnson and Tom Kippola. I'm still benefiting from the lessons in this forgotten classic and wonder why more investors don't make use of its insights.
The book's key observation, which holds true today just as much as ever, is that technology tends to be a winner-take-all game. A single company — what the book calls a gorilla — dominates most computer-related sectors. The gorilla begins by disrupting a market and then goes on to gobble up most of the sales and profits. Back when The Gorilla Game was published, Microsoft was the classic gorilla.
To uncover future Microsofts, you find an area in technological upheaval and you invest in all the companies that stand a reasonable shot of becoming that sector's gorilla. You ideally invest during what the book calls The Tornado, a period of hypergrowth when the new technology is winning customers but it's still not clear which company will be the long-term winner. Initially, you hold a handful of contenders. Every time it becomes clear that a company in your portfolio no longer has a shot at becoming the gorilla, you sell its stock and invest the proceeds in the remaining contenders. Eventually you wind up focused solely on the gorilla.
Right now, there's a fascinating gorilla game playing out in streaming video. Amazon, Hulu and many others are using the technology to disrupt traditional TV. To my mind, though, Netflix is already the obvious gorilla. It will likely stay that way until new technology comes along to change the game all over again.
That brings us to one of the gorilla game's key tenets: Hold on to your winners.
Current gorillas in my portfolio include Netflix, Facebook (social media), Google (search and video), Amazon (e-commerce) and Apple (mobile devices).
I'll own these stocks until new technology threatens to destroy their leadership positions. This happens from time to time. BlackBerry was the gorilla of the smartphone market until Apple changed everything. The moment you're no longer sure a company merits gorilla status, it's time to sell. But otherwise you hang on because gorillas can thrive for years.
All that's required to implement this strategy is an interest in technology and a working knowledge of how to value a stock. To find out more, I recommend reading The Gorilla Game. Meanwhile, ponder what new gorilla games are emerging. Virtual reality? Electric cars? Someone will dominate each area, and it's not too early to start speculating on whom that will be.
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