Winners Take All – Virtual Investment Portfolio

Applying The Lessons of ‘The 9 Fundamental Rules’ to the stock market:

- The Winners portfolio is UP 25.44%
- The Comparables portfolio is DOWN 19.60 %
- The Market is DOWN 17.85%

What’s the story of these virtual portfolios?

Sometime during March of 2005 my book agent asked me how I could prove (to publishers) that the 9 Fundamental Rules worked. That was a great question, so I decided to put together a virtual portfolio based on companies that I wrote about or thought applied the 9 Fundamental Rules. I called this the ‘Winners – 9 Rules’ virtual portfolio (short for ‘Winners Take All – 9 Fundamental Rules of High Tech Strategy’ of course.) I also thought I needed to have a comparison portfolio with companies that are competitive or comparable with the ones above (Apple vs. Sony, Google vs. Yahoo, etc). I called this the ‘Comparables’ portfolio. Finally I wanted to compare both with the market.

I ‘invested’ about $10,000 virtual dollars in each company on or around April 1st 2005. (No real money changed hands). The portfolios are displayed below. I want to remind everyone of the educational purpose of these portfolios. I hope it’s a learning experience for the readers as much as it has been for me. Please read the legal DISCLAIMER below. I also add some comments to the portfolios.

DATA below is as of January 2, 2009.

Comments on the ‘WTA 9 Rules’ portfolio.

Despite the bloodbath in the stock markets, the ‘Winners’ portfolio is in solidly positive territory. The portfolio gain is up to 25.44% which is about 45 percentage points above the market and 46 percentage points above the ‘Comparables’ portfolio. Furthermore, 10 out of 15 stocks are out-performing the market (which is -18.07% – see below.) Another interesting point: despite the market drop 3 stocks have more than doubled and 1 stock has almost tripled (in order: Netflix (174.04% gain), Salesforce.com (133.81%), Apple (115.61%).

Note: I only included public companies in the portfolio. However, many of my ‘Winners Take All’ book cases were private as of April 2005: Skype, StarMine, Clickability, Craigslist. Skype was acquired by eBay and Starmine was acquired by Reuters. We can only imagine the portfolio gains if I had added them!

I remind the reader that my book is about building winning products and great companies. It’s not about investing or about building stocks. This whole exercise was about testing the predictive power of The 9 Fundamental Rules of in real-life, competitive, fast-changing markets. One would hope that by building great companies the stocks will follow (although this is not always the case!)

Here’s what I like about the ‘WTA 9 Rules’ portfolio: 10 out of 15 companies are out-performing the market. Sure, the 25.44% portfolio gain is great and probably beats most investment funds out there. However, I really like the fact that the rules apply broadly as well as deeply. Just to compare: a portfolio will do well if one or two stocks are substantially up even when all the others go down. For instance, let’s assume you invest $10,000 in each of 10 different stocks. 9 go down by 90% each (so you get back ten cents on the dollar) and one goes up by 1,550%. The portfolio as a whole would be up 92%. If you are a portfolio manager you would be doing fine. However, if you’re a company manager, employee, or shareholder of one of the other 9 companies that went down, you would be out of luck (and probably out of a job!) The latter portfolio doesn’t show you know how to build a great company. The goal of my book is to have rules, strategies and tools that work across the board.

Comments on the ‘Comparables’ portfolio.

Both PalmSource and Siebel Systems have been acquired. The prices shown are as of acquisition time.
(1) PalmSource acquisition offer represented 83% premium over the market price Sept 8, 2005. See Press Release.
(2) Siebel acquisition price of 10.66 represented 17% premium over then market price. See news.

This ‘Comparables’ Portfolio at -19.60% loss is about on par with the market (-18.07% loss.) It’s also about 45 points percentage points below the ‘Winners – 9 Rules Portfolio’ (which gained 25.44% – see above.) There are 13 stocks in this portfolio, of which only 5 are out-perfoming the market and 8 are under-perfomers. PalmSource with a gain of 98.71% (83% represent the acquisition premium) while HP at 67.7% gain comes in second. Several stocks have lost most of their value (Palm has lost -87.82%, Borland 86.79%, Blockbuster 85.26% and Kodak 78.87%.) Two of the companies here were acquired vs. none in the ‘Winners – 9 Rules’ portfolio.

Ouch!

Comments on the ‘Market Indices’

The blended market is down 18.07%. This is the performance since April 1, 2005. The Dow at -14.36% 22.17% is outperforming the Nasdaq at -18.76% and the and S&P 500 (-21.47%).

This is a portfolio that accompanies the book “Winners Take All – 9 Fundamental Rules of High Tech Strategy” for educational purposes only. We do not recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this website, book, and newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.