Editor's Note: Be sure to read the first two installments of this four-part series.
Many of these managers, however, should have seen the change that the American tech industry went through in the late '80s. Managers with pride and smarts and a belief in the future moved into tech and took back the mantle from the Japanese. They figured out ways to make tech proprietary and give it value beyond the commodity productions that the Japanese excelled at. Microsoft created Windows.
created the Pentium.
created powerful useful servers with an open language.
figured out the best and cheapest way for computers to talk to each other. These companies instituted a rigor and financial discipline that older American companies had lost. They also became premier manufacturers. As I tell anybody, if you go to an Intel fab you will understand that the true strength of that company is its manufacturing prowess. These tech companies figured out how to make the most products the cheapest and the best. They are the logical extensions and the true heirs of what
did toward the mass manufacturing of automobiles.
And, most important, they had a will to win that wasn't going to be denied. They were willing to make hard choices and exit businesses they couldn't dominate. They created unassailable franchises.
Of course, the wave of personal computing would eventually have ebbed, if it were not for the Internet. But once the Internet came along, these companies were virtually assured longer-term growth. And they have seized the opportunity.
How Buffett, who actually pals around with the top dogs at these companies, didn't see it, is hard for me to understand. Did he think they were just blowing smoke?
But for most of the value camp, the misjudgment of tech comes from a dual misfunction of overreliance on price-to-earnings multiples when their basic worth was being questioned and an unwillingness to do the work.
Let's talk about laziness for a second. Rather than ascribe lassitude to others, let's talk about my own situation. Last year I felt that I was overreliant on the old models. I knew the
well, and I had transitioned to the Intels and the Ciscos with the help of my partner
. But we had to bring in
Matt "Dot-com" Jacobs
to take the next step and analyze all of the new companies that were being created. We just couldn't keep up ourselves. There were too many of them and the changes were occurring too swiftly.
Frankly, to me it seems that the Dremans of the world refuse to hire the Berkowitzes, let alone the Jacobses. They are believers, as I was, in themselves. But this stock game is a game of youth. You either get new blood in or you go bad. That's what I think might be happening at these stultifying value shops. Their insistence on "not changing stripes" is the equivalent of battling underperformance with lovey blankets. I can tell you it was very difficult for me, a devout believer in the true worth of the financials, such as the ones Dreman bandies about, to swallow my pride and bring in people younger than I am to help me understand what was happening. It would have been much easier for me to say that the young people didn't know what they were doing and would lose everything for you, and if you just waited around, my methods would come back in style. But I'm in the business of running money, and I didn't want to lose assets to those who were willing to analyze these new stocks, so I bit the bullet and brought youth in.
It was the right thing to do. It's the wrong thing to stay with your head in the S&L sand. Sure, I changed my stripes. To not change my stripes was to risk being put out of business. And to not change my stripes would have been the height of both arrogance and laziness. Believe me, contempt for the fundamentals had nothing to do with it. It was an embrace of the fundamentals that drove the changes in our shop.
Watch for Part 4 of this series later today.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Cisco, Goldman Sachs, Intel, Microsoft and Sun Microsystems. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at