A Primer on PRIMATES: The Gorilla Game: An Investor’s Guide to Picking Winners in High-Technology Geoffrey A. Moore, President & Founder, The Chasm Group by Praveen Asthana , Anderson & Mannheim At first glance, a high tech stock investment guide that relies critically on being able to tell the difference between gorillas, monkeys and chimps appears unlikely to be a serious money maker. Yet, if you had followed the investment philosophy outlined in Geoffrey Moore’s Gorilla Game at the beginning of this decade, you could have turned $10,000 into a couple of million dollars. You might even be able to buy that fixer-upper in Palo Alto. The stock market has attracted no end of charlatans and snake oil salesmen with unlimited advice on how to invest and grow rich, ranging from complex mathematical techniques such as chaos theory to fairly simple advice such as buy stocks in companies you know and like. In its simplest form, most of the advice boils down to “buy low, sell high” Ü though it is usually couched in more cultured language such as “buy at the peak of a stock’s dividend yield ratio, and sell at its trough.” Moore has no use for such language. In a straight forward and entertaining presentation, he outlined how some high tech companies grow exponentially to dominate the segments in which they participate. In other words, how they become gorillas. Generally, he provided a lay-man’s explanation of what has recently come to be known in economics as the Theory of Increasing Returns. Some of the high tech companies that best epitomize this theory are Microsoft, Intel, Cisco Systems and IBM in its heyday. These companies were able to get their proprietary architectures accepted as the standard (sometimes completely by luck), and they were smart enough to exploit this initial standardization and the high switching costs it entailed to gain market share rapidly and dominate their industries. In addition to the Gorilla, who is the dominant leader in a segment, there also is the Chimp (the challenger) and the Monkey (the follower). The chimp had a shot at being a gorilla but didn’t make it. Unable to get over this, he limps along muttering “I could have been a contender.” According to Moore, IBM’s OS/2 operating system is a chimp. The monkey has no such hang-ups and essentially mimics the gorilla’s product. An example of a monkey is AMD with its Intel-like chips. As Moore and his co-authors Johnson and Kippola point out, a monkey lives or dies on execution. From an investment strategy perspective, the rules are simple. If the company is a gorilla, buy the stock. If the company is a chimp, stay away from its stock. If the company is a monkey, it is probably a good trading stock (buy at the lows, sell at the highs). The Key Rules for Playing the Gorilla Game 1 Find markets entering the hypergrowth phase. The internet would be an example of this. 2 Identify the gorilla company. If a gorilla isn’t clear, buy a basket of all the gorilla candidates. 3 Hold gorilla stocks for the long term. 4 Once it becomes clear to you that a company will never become a gorilla, sell its stock. 5 Money taken out of non-gorilla stocks should immediately be reinvested in the remaining gorilla candidates. 6 In a gorilla collision, hold your gorilla candidates until there is a definite outcome. 7 Most news has nothing to do with a gorilla game. Learn to ignore it. Indeed, perhaps the best part of using the gorilla game as an investment strategy is that it is a low maintenance strategy, letting you make money without biting your fingernails on a daily basis. The hard part is finding new gorillasÜthey are not very common, and in many sectors they may never develop.
Geoffrey A. Moore, President & Founder, The Chasm Group