Saturday, June 11, 2005

Searching for a Reason to Buy Google - New York Times

Wouldn't you expect the New York Times to down-play the power of Google. The Times is a big, powerful, old media company. It has made forays into internet businesses but it is truly old media. The linked article quotes low ball estimates of earnings and then brings up the fear that MSFT will take over paid search. Not likely!

Google has millions of happy customers who have signed up for key word services. Even TWX decided to promote the new AOL portal through Google. TWX looked at the cost of a TV campaign versus a key word campaign and choose to get more results for less money.

There are few guarantees in the stock market and as a private investor, I cannot recommend stocks. However, Google is making high returns and gaining market share in the most revolutionary change to publishing since the invention of the printing press. Competitors will go all out to be one of the big survivors. Google, EBAY and Yahoo are the big three. All three are powerful franchises.

is perceived as an auction site. It is much more. The company is involved in low cost internet classified advertisement worldwide. This business is growing at dramatic rates and is playing havoc on old media revenues. Knight-Ridder, a large multi-city newspaper company, now competes by offering free classified advertisement. EBAY has the cash flow from the auction and PayPal businesses to support rapid classified growth in a growing stable of cities.

EBAY is perceived as an auction site but it is one of the largest financial firms in the world. The data are readily available--look it up. EBAY transacts millions of online payments, makes car loans at attractive rates and operates a big and profitable credit card business. EBAY owns or is buying companies like and Revenues at this company will likely grow faster than the average company for 40 years.

Yahoo has a whole stable of profitable income streams. The deft management has show the ability to monetize its many services. The company is well positioned to grow in the wireless market which will clearly be the high growth area for many years to come. Internet video is going to be very big for Yahoo.

These three market leaders compete with each other directly and indirectly. Microsoft, AOL and AMZN are all trying to find their footing in order to climb in amongst the big three of the internet world.

Jeremy E. Siegel and many others have made the accurate point that buying growth is not the secret to investment success. Growth buyers must buy growth at reasonable prices. The higher the rate of growth the higher the reasonable price. Furthermore, the price of these three leaders is so high that fast growth must last for many years to justify the high valuations. What is an investor to do?

If you own none of these socks, a good plan is to invest about 2.4% of your portfolio in each of the big three and vow to hold them all for the next 30 years. One may even choose to invest 2.4% in MSFT and TWX as well. These two are now value stocks versus growth stocks. They each offer a number of ways to win. If TWX is able to revitalize AOL, AOL can become one of the big 4. TWX has many other assets. There are competitive threats to each of the businesses but there is growth in each as well. MSFT will sell billions of operating systems in the years to come. Google is moving toward head to head battle with MSFT as are various Linux based companies supported in part by IBM. MSFT is king of the hill. MSFT will not grow as fast in the next 20 years as it did in the last 20 years but it is a solid business selling at a reasonable price.

My family has sold our MSFT but we continue to hold in order of size, GOOG, EBAY, YAHOO, and TWX. My sister recently asked if I plan to set a stop loss on our Mother's GOOG and I said, "Yes, at $100,000 per share". The point is that I see the big three as long-term holdings. We have large profits in all three but we all know growth in internet business has just gotten started. When Xerox was hot in 1963, it was a very controversial stock at $72 per share early in the year and an extremely controversial stock later in the year when trading at $340 per share. At the time, it was the biggest change in publishing since the invention of the printing press. Investors who bought at $340 made fortunes.

The following is the price at which my family purchased our most recent shares in the big three: GOOG $192, EBAY $32 and YAHOO $3.50. We should have added to our Yahoo holdings but we are happy. We purchased GOOG several times and EBAY maybe 7 or 8 times. We have never sold shares in these companies. Thirty years ago, an old time pro tried to teach me to sell half of a stock once it doubled in price. I have learned that when I am onto a winner, I probably should buy more anytime I own a stock that has doubled in price. Peter Lynch liked to hit home runs (400% gainers) and 10 baggers (1000% gainers). My family has hit a few of these (our best so far is a 120 bagger) and we are getting close on others. NXTL will probably be our next 10 bagger (I believe FON will be the symbol after the July vote). We do not believe in a blind buy and hold philosophy, but we do believe in holding market leaders for the very long-term.

BUY THE BULL MARKET! In the past several weeks the broad market has gone sideways. However, this market has leadership that is doing extremely well. The summer of 1982 is the last time we had an extended period of stock earnings yields exceeding bond yields. A reconciliation is coming. I hope you and your family take advantage.