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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Barras target market is money managers with assets under management of a half a billion dollars or moreDispensing the Investment Tools of the New Market Culture Chapter 3 explained that investors must adopt a realize, capitalize, customize approach to investing, similar to the new models being adopted by businesses. For investors, this system involves realizing what their objectives are and then testing whether they are realistic. The testing process requires an analysis of the different styles and asset classes that compose the financial market and formulating mathematical judgments about which combinations of these are required to achieve a certain rate of return. Assessments of how much risk any of the combinations produce are necessary to ensure that the prescription for the portfolio that is proposed to the client is appropriate for the situation. As mentioned earlier, this process is called optimization, and it is practiced in the laboratories of financial institutions. Optimization has been practiced for 25 years but proliferated late in the twentieth century as the pools of money needing professional advice swelled. We have delegated considerable wordage in earlier chapters to the purpose of impressing on you that in the new investment culture, an investment methodology utilizing optimization is a prerequisite for success. But the level of sophistication of the tools used to practice optimization exceeds that of the analytical tools used in any medical laboratory. Who manufactures these complex investment tools? Where do they come from? Barra, Inc. Barra (see Figure 7.9) was founded in 1975 (the first years of the incubation interval) and went public in 1991. Barra is the global leader in delivering risk management systems and services to managers of portfolio and firm-wide investment risk. Since its inception, Barras single vision to empower its clients to make strategic investment decisions has made Barra the industry standard in investment risk management. Headquartered in Berkeley, California, Barra has offices in all major financial centers around the world. Clients include many of the worlds largest portfolio managers, plan sponsors, risk managers, and asset management firms. Barras core business is focused on the development and delivery of risk management technology. Its products include software and information services that are indispensable to the process of analyzing and managing portfolios of stocks, U.S. bonds, derivatives, currencies, and international bonds. In 2001, a difficult year for most of corporate America, Barras revenue growth was 20%. Barras perceptive decision to sell products on evergreen contracts that renew until canceled, has contributed to its recurring revenue stream. Alarge portion of this revenue is used for research and development. Barras target market is money managers with assets under management of a half a billion dollars or more. Some of these utilize another product produced by Barra, enterprise and portfolio-level software called TotalRisk, which is used by clients like the California Public Employees Retirement System (CalPERS), which has assets of more than $165 billion under management. CalPERS uses TotalRisk to implement a risk-budgeting strategy by aggregating and tracking its risk on a plan-wide basis. TotalRisk enables CalPERS to decompose risk into its driving factors, allocate risk optimally across assets, and communicate more effectively with its asset managers. In the late twentieth century it was nice to have Barras tools. In the twenty-first century, they are indispensable. Barras investment technology is donated to 100 colleges and universities, the Wharton School and Cornell among them, so students will be able to enter the financial world with an understanding of their use and identification with the brand. The stiff competition within the financial services industry, coupled with the need for smaller investment managers (assets under management of $500 million to $2 billion) to manage their assets using the strategies espoused in this book, has enlarged another channel for Barras products. The mutual fund mass marketers like Schwab or Fidelity must eventually be able to provide customized optimization risk management techniques to their clients. Barra can provide solutions. Second, because Barra is such a respected industry brand, any investment management firm in competition for new business will have a leg up if it can say they use Barra products. DEFENDING THE DOW A potent opportunity presents itself when the stock of certain companies, which gained such strength during the incubation internal that they enabled the construction of the framework of the new business culture, sell at a fraction of the value they attained during the discovery phase. The waves of panic that initiate the formulation phase always depress the stocks of many architects of a new investment system, but in todays new investment culture two in particular need to be singled out. These were the only two NASDAQ stocks that were part of the Dow Jones Industrial Average as it ended its term as the icon of the old dominant investment system. In fact, the growth of these two companies helped to disguise the poor performance of other Dow stocks and allowed the Dow to keep on posting stellar returns near the end of the twentieth century. We are talking about Intel and Microsoft. Because they belong to the new investment culture, they are likely to provide the Dow with returns it would not otherwise be expected to have during the formulation and acceleration phases. Intel Intel (NASDAQ symbol: INTC) was founded by Gordon Moore and Robert Noye in 1968 to make silicon computer chips. Moore became famous for Moores law, which predicted in 1965 that the number of transistors that can fit on a silicon chip will double every couple of years. Because silicon chips are the building blocks of the communication and computing infrastructure and because Moores prediction was correct, Intel has been instrumental in the process of incorporating digital technology into our lives, becoming ubiquitous in ways most of us could not have foreseen even five years ago. Some have lumped Intel into the category of a mass marketer whose strength will wane as computer chips, and their prices, can shrink no further without severely limiting the companys growth. That this view is incorrect can be explained by the fact that Intel is built around a realize, capitalize, customize philosophy that adds a dimension beyond that of a mere purveyor of product. Right now a short list of Intels products include central processing units (chips) that process data in computers, servers, and workstations; optical components; embedded control chips for laser printers, imaging products, and automotive systems; and hardware and software for cellular headsets and handheld computers. We can read the list of items, but as is true of many products produced by the companies of the new business culture, it does not register with us how much our lives now depend on them. What makes Intel a twenty-first century company is its ability to customize these products to the needs of its customers. These include equipment manufacturers, individuals, and all sizes of business. It is Intels commitment to research and development that gives it this edge. During the economic downturn of 2001 the company spent $7.3 billion, nearly as much as the previous two years combined. This has special significance now. Intel has always believed that digital electronics will penetrate every level of human enterprise. Their new commitment to research and development proves that they are moving to a new phase, creating the building blocks for the next generation of customization. Intel believes that in the new computing era computers will be directly connected to the physical world and will anticipate what users want to do next sometimes taking action on their behalf.13 Cribs will monitor a babys breathing, and a bracelet will monitor a diabetics health and trigger an internal system to release insulin. Crop conditions can be monitored down to individual plants; motors will tell you when they need maintenance.14 Intels wireless embedded platforms will facilitate these devices that can sense and act on the world around them. Another set of applications stems from the merging of biology, organic chemistry, and traditional silicon technology. Minute devices will be created that can physically sense and alter organic substances. The productivity gains that this offers health care, agriculture, and the pharmaceutical industry are immense. Just one innovation in any of these new frontiers would provide Intel with extraordinary growth prospects. But when so many innovations are underway, and so many developments that already exist still have not yet fully penetrated the economy, Intels most rewarding years are still ahead. |
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