Know What You Own - The Big Money

Excerpted from
The Big Money: Seven Steps to Picking Great Stocks and Finding Financial Security
By Frederick R. Kobrick

Some people today have heard of Molex, and many have not. Almost nobody had heard of it many years ago when I first invested in it. I became familiar with it and bought it on the company's initial public offering in 1972. I made a lot of money and owned it more than once.

Over time the stock gained almost 20,000 percent or 2000 its initial price, so the stock performance made it a "Cisco" long before Cisco appeared. Some specific things about the Molex management and business model made it similar to Cisco. That helped me to recognize what Cisco could become when I was studying Cisco as it went public almost two decades later. This is one of those great examples of why certain things in history create the basis for recognizing tomorrow's big-money winners.

Molex, located amid cornfields in Lisle, Illinois, was a tiny electrical connector company that went public in 1972. I was then working at Washington Management Company and was assigned to be the analyst on this company. Although I knew little about technology companies, what I had read about tech companies and stocks interested me. I was a bit nervous, of course, because I did not fully understand the factors that made technology companies and products good, or what made them successful.

What I quickly found out is what most individual investors need to know: if you look at BASM and the factors that make any company good or great, you will be able to invest in technology with greater ease and better results. You do not need to be an engineer, and you should not go down the "let's play engineer" route and thus get confused by so-called techie language.

I did not stay nervous all that long. I read some more and found that the specific technology products a company sells can be less important than how the company manages the development and evolution of that technology, how it works with its customers, how it markets its products and services, and finally, how it manages itself. There were, and there are, a lot of good technologies, but very few good, let alone great, technology companies.

I do not want to minimize the importance of great technologies, new or old. But think of the technology as the "ante" to get into the "game"-the competitive battle for customers and market share. Think of BASM as the way those companies that win are able to do so. Good technology companies, like all other types of businesses, rank very highly on the four factors of BASM. That leads to the most important aspect of high stock valuations: repeatability. Many, if not most, tech investors are attracted to companies with "hot" products. They become trapped in the stocks as companies fail to carry the great product successes forward and achieve repeatability. Then investors end up with disappointing profits or even lose money.

When I first went to see the management of Molex, I will never forget how convincing the top people were. They didn't try to sell me on their company, but they did convince me that they really knew their mission and how to achieve its objectives. They had great credibility with me, and over the years that turned out to be warranted. They were not promising the moon, and they were not announcing technologies that would conquer the world. The Krehbiels, the family who ran Molex, were a solid midwestern family management team who had worked together for years to grow the company, which had been founded in 1938 to manufacture inexpensive molding materials for toys and flowerpots.

Now they wanted to use their great storehouse of manufacturing knowledge and years of experience to enter a more dynamic market. They had chosen electrical connectors, because they looked a few years ahead and believed that electrical connectors would have a great future.

This is a great example of the assumptions component of BASM. Molex made assumptions about why electrical connectors would be a great business to be in, and those assumptions were critical to its success. (Years later, Microsoft made assumptions that the marketplace would want standard software and would not hop around from one hot product to another. These assumptions made the company willing to make no profit at all on some early offerings just to "lock up" customers.)

The proliferation of electronics that use connectors, from autos and VCRs to Pepsi vending machines, meant a huge moment of opportunity.

You have probably seen connectors-components made of plastic with wires coming out of them. You will find them in just about every electrical product you can think of. Using sophisticated connection devices instead of, say, soldering parts together makes manufacturing cheaper and more competitive, allows for upgrades, and improves product performance.

Connectors are used to connect a personal computer's hard drive (major memory storage, or disk drive) to the rest of the PC, including the "brains," or central processing unit. They do much the same with a long list of things in your car, including the engine, dashboard, and headlights. From televisions to vending machines, the machines that use connectors represent a huge market.

Most of the time, great companies are not limited to serving little niche markets, but correctly pick product or service areas that will have enormous if not unlimited markets to sell into.

This end market is made up of companies that manufacture all sorts of things. Ever since connectors replaced old-fashioned soldering, the pressure has been on the connector companies to make devices that are progressively lower in cost yet significantly improve product performance. Companies that do this win the juicy contracts.

I held these connectors in my hand and could see that manufacturing had to be expert and keep to fine tolerances. It was easy to see that you had to have a low failure rate and had to be very competitive on the cost. (If a connector was defective, you couldn't put it in the "refurbish" bin-you trashed it.) I looked at some of the customer order ledgers management showed me and could see that the customer had started with small orders, showing that they were "trying out" Molex in the days when AMP, the biggest and most prominent manufacturer around, was the leader in this industry. (AMP is still the biggest, but is now part of the Tyco conglomerate.) I see Molex, which is growing faster than AMP, as the innovation leader.

The company's statements and reports seemed consistent with what was going on in the world. The folks at Molex wanted everyone to know them, to read about them, and to understand their business models, assumptions, strategy, and management strengths. They knew that doing this would show us that they wanted to be the best-and that they really could be.

Acquiring in-depth knowledge leads to genuine confidence. Both are essential to make the big money. Knowledge was an early key to investment success for me. It became the first of what I eventually thought of as the Seven Steps to successful investing.

I learned in high school physics the old story about the bird flying past the window. An unsophisticated observer might assume that the bird would just fly on and on in the same direction indefinitely, but a thoughtful person would not extrapolate that way. So I did not assume that what I observed would just continue on indefinitely. Analysts extrapolate as much as they analyze in some cases, using earnings as well as corporate product cycles. This is one of the all-time greatest pitfalls that prevent people from making big money: assuming too much.