The recovery of account values and the stock market in general from the September and October lows has been spectacular. The New Year got off to a great start with belated strength in Gillette, Disney, Enron, Autodesk, and Qualcomm.

However, the 360° route the market has taken in the last six months leads us to a question, one which contains an important investment lesson: Is it possible to time the market? If the past six months does not convince us that timing the market’s emotional cycles is next to impossible, I don’t know what will!

Of course, this applies to other investment crazes, too, such as Internet stocks. Indeed the Internet will grow to be a huge retail market and, as a mode of communication, will permanently change our lives. To allow that to cause one to pay $30 billion for a company doing under $500 million in revenue and losing money is folly. (Amazon’s market value as of this writing was about $30 billion.)

A similar speculative fever developed over biotech stocks in late 1991 and early 1992. These stocks ran to incredible levels as investors dreamed of all the new miracle drugs this industry would produce and sell to an aging population. The apparent unlimited growth possibilities provided a fertile market for new issues. In order to determine the results of participating with the crowd 1991 and 1992, we studied the performance of approximately 200 of these issues, comparing their current stock prices to their highs at the peak of the biotech craze. Twenty-four companies are trading higher today, the rest are trading lower or not at all. Buying these when the emotional consensus was at the peak of optimism proved to be a difficult way to make money. Some of these companies, such as Amgen and Agouron were great successes, now trading at between two times and five times their 1991 prices. (Coke did better than the average of biotech's best.) However, the companies stock prices underperformed the growth of sales and earnings over this period because so much of their success was already factored into 1991’s inflated share prices. And remember, in 1991 we did not know which of these would end up surviving and succeeding. Buying a diversified cross section of these companies assured the investor of losses, while the odds of buying one only and hitting the right one was negligible. Other crazes, such as the oil stocks in the late 70’s, the international stocks in the 80’s and 90’s, and innumerable smaller crazes ended the same way. In conclusion, when the consensus is overwhelmingly positive, prices will be dangerously high; and one should run for ones investment life.

As stated before, the most reliable approach to wealth accumulation offered in the public markets is to own businesses that grow steadily. These companies should generate lots of cash to reinvest at good rates of return into the one business they know best. Ideally they will own a product that others find difficult to compete with, that customers find inexpensive and difficult to replace, and that customers are in a habit of buying.

Wireless phone system operators worldwide say that strong demand for mobile internet and other multimedia services – particularly from 2000 onwards – will necessitate the early implementation of International Mobile Telecommunication – 2000 Networks in order to keep pace with customer demand. In Paris on December 18, 1998, world wireless system operators voiced their hopes to set up a global mobile communications platform based on a single technical standard, with the technical parameters selected by March of 1999.

The transmission and reception of "packets" of information enable communication between computers via the Internet. This can be understood by comparing a phone conversation with loading a Web page. While a voice conversation can be described as a small steady stream of data, opening an Internet page is a momentary deluge of packets of information. A small pipe can handle the stream from a phone call while a large pipe is required for the deluge. Of the several wireless transmission technologies in operation today, only one, CDMA, handles "packets. CDMA is the large pipe.

GSM and analog networks are not capable of handling packets. World telecom operators, after several years of searching, have chosen CDMA as the core technology that will enable wireless Internet access, because CDMA can handle "packets." However, a vociferous debate currently exists regarding specific technical parameters that will ensure worldwide compatibility and usability. The debate pits Ericsson versus Qualcomm. While Ericsson is a larger and more powerful company than Qualcomm, the ETSI (European Telecommunications Standards Institute), of which Ericsson is an influential member, has verified that Qualcomm owns Intellectual Property Rights to CDMA. Ericsson is a big supplier of GSM equipment and the only large telecommunications supplier that does not have a licensing agreement with Qualcomm. To protect itself and its clients it seeks to make sure that the third generation CDMA parameters chosen preclude the upgradability of current CDMA networks to third generation CDMA. Qualcomm has responded by offering its IPR’s only if third generation standards are open -- compatible and upgradable from as many as possible of the current wireless technologies, providing it does not cause degradation of performance. Unfortunately, GSM is not easily upgradable. Since infrastructure costs are intense in the wireless business, an operator who spends considerably less upgrading to third generation CDMA will have a lower cost of operation, allowing it to make more money while charging customers less. Current CDMA networks have a large potential cost advantage.

There is a good chance that a standard will be decided on by the end of this year’s first quarter. However, a delay may prove to benefit CDMA network operators. Qualcomm progressively improves the current generation of CDMA. It is approaching the performance objectives of third generation CDMA. For example, Sprint PCS will soon introduce a "Palm Pilot" phone, manufactured by Qualcomm in Brazil, that will connect to the Internet at a rate of 2 Mbps, close the rate proposed by third generation CDMA. This landmark device will also serve as a phone and a personal digital assistant. CDMA’s relentless march forward is likely to eclipse the goals of third generation CDMA in about two years. That may diminish the incentive to move forward with an unproven new generation of today’s reliable CDMA technology.

To quote Jorma Ollila, President and CEO of Nokia, "The global market for mobile phones is already larger than that of personal computers. Data too will become increasingly mobile and the next generation of handsets will include media phones. They will be web optimized and communicate with a combination of letters, words, colors, graphics and still or moving images. We believe that, at the end of the year 2000, more media phones will be sold than portable personal computers." In keeping with that theme, Nokia has acquired Vienna Systems. To quote Mr. Ala-Pietlila of Nokia, "Nokia and Vienna Systems share similar visions of two rapidly developing trends – ubiquitous use of IP as a universal communications platform and the increasing use of wireless networks for transmitting data, video, and voice."

Clearly, wireless phones with extended capabilities will be the most popular Internet Devices. These hybrids combine many of the capabilities of a personal computer – word processing, calendar, email, and Internet access – with those of mobile phones. Above we mentioned Qualcomm’s new pdQphone that includes a Palm Pilot personal organizer and wireless modem that connects to the Internet at up to 2 megabits per second. This combination cell phone, email device, and personal organizer browses the Internet about 30 times faster than your big, slow, Wintel PC connected to the wireline telephone network. At these speeds, wireline connections become obsolete. With such a device, your phone will be capable of full-motion full-screen streaming video, but your computer may not! (Your PC will need a cable connection to compete.) Qualcomm’s pdQphone will be offered by Sprint PCS this quarter, and should be followed soon by similar products from companies such as Nokia and Motorola.

Many Internet devices will be much simpler than you might imagine. Broadly called Internet Appliances, they will be characterized by ease of use and dedicated to a single purpose. Examples include set-top boxes, Internet game servers, net servers, file servers, Wireless Local Area Networks, and connected home appliances that can be controlled from your office computer or pdQphone.

An interesting observation is that few, if any of these devices use Windows or an Intel processor. Windows requires an excessive amount of resources for a handheld device, while Intel processors are currently too expensive for these devices. Microsoft is addressing its problem by forming a joint venture with Qualcomm called Wireless Knowledge. The objective for Microsoft is to get help with the acceptance of Windows CE in the Internet device area, while Qualcomm hopes to boost the sales of CDMA wireless devices.

This is a bit of a tough period for this grand technology company, widely admired for its excellent corporate culture. Revenue growth last year slowed to half of the rate of the previous four years, but hiring did not. Now, HP, which abhors workforce reductions, has an excessive level of employment expenditures. With $47 billion in revenues, it is difficult to get revenue growth back into the teens. In fact, company guidance for 1999 is for revenue growth of 8 to 10%. Management is working hard to control expenses, and has the objective of growing revenues 10% faster than expenses. This computes to earnings growth in the low teens in 1999. Compared to 1998’s earnings per share of $2.86, we project 1999 at $3.20 to $3.30, assuming a decent consumer economy in the US. Cash flow production remains excellent, with 31 million shares repurchased in fiscal 1998 for $1.6 billion.

Hewlett Packard produces some terrific products, all of which are rapidly followed by new products from the competition. The usability of HP products is enhanced by the superiority of the software that makes them work in our computer networks. Product excellence is matched by excellence in service, and HP seeks to grow its service business as a revenue and profits base.

We are hopeful for a return to sustained mid-teens earnings growth for HP, but our conviction is tempered by the intense competence of its competition.

Steven L. Re¢ , CFA

January 16, 1999, updated February 3, 1999