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Lynch, SAP and my first Option Play

January 19, 2010 4:56 pm by Dean Morel

The year was 1994. I’d finished my second stint at University in ’93, graduating with a Bachelor of Applied Science in Information Management. I was a graduate consultant at SAP. Not that anyone knew SAP then, even though it was then the world’s eight largest software company. I recall my final interview, the one with the national consulting manager. He said “there’ll be a lot of travel and hotel rooms, I won’t apologies for that, you need to expect it as it’s part of the job.” I thought he was joking about apologising. Travel and hotel rooms sealed the deal for me. It wasn’t until years later I finally realised that he was serious and while travelling and living out of a suitcase has a fleeting appeal it soon gets tiresome. After ten years or so! Your millage may vary.

To the point. Buy what you know. If you’re new to investing start with that. Look around you at the companies in your life and pick the best ones. Then some easy fundamental checks quickly lets you know whether you may have found a good investment.

I started investing in October 1987, days after the crash, but hadn’t invested since arriving home in 1990 after exploring North and Central America for a couple months. During that first foray into investing I’d been stockbrokered (synonym for words not suitable in general public), so I decided to go it alone. I still had to use a real broker, nice guy, explained the basics of options and European warrants, but it was execution only. RTFM was the catch cry of the day, so I started reading investment books. The first book was probably Peter Lynch’s Beating the Street. It was recently published and I no doubt grabbed a copy from an Airport bookshop on one of my countless flights. Lynch makes investing seem simple, I devoured Beating the Street and then his first, One Up on Wall St.

Lynch said buy what you know. There was no company I knew better than SAP, it’s potential was clear to all employees. The executive board  rewarded all SAP employees with long dated European options, called warrants. Unfortunately the head of SAP USA, which Australia reported to and our warrants flowed through, decided only executives in his regions should partake in this generous sharing of wealth. There was a huge uproar amongst the worker bees, especially those with many years experience and direct access to senior Walldorf staff. One of the most outspoken, Richard Ford, was also a solution oriented guy and shared how to invest in SAP warrants directly.

I had never bought an option and only had a basic understanding. However I did recognise that SAP was inside the Tornado before Geoffrey Moore had named it that. I invested heavily in SAP warrants. At the time I didn’t understand the leverage options provide and invested as much as I would in a full equity position. Fortunately that ‘mistake’ made a good story great and I felt like I’d taken the first step on Lynch’s path of a few good stocks to make a lifetime of investing worthwhile. My first option, European warrant no-less, was a multi-bagger.

Investing was easy, I’d read a couple books and then a few more, it was plain sailing until 1999. Selling out while the market is in the progress of doubling is neither easy nor sensible, it was a painful underperforming year for me, everyone around me were seeing their shares go up multi-fold, everything I sold quickly went on to greater highs. Then buying in too soon on the downside hurt as much. Still by that time I’d backed SAP up with a couple other multi bag winners and with my peak earnings pouring in I continued to plough cash into the Nasdaq market all the way down and back up again.

Since then I’ve invested in and still own part of every company my partner has worked for. All either worked are working or may work out. Though I no longer believe investing is easy, it’s certainly made easier by reading the wisdom others have generously provided us.

You may have heard that investing in the companies you work for is considered ill advised. I’m certainly not advocating everyone invests in their own companies. Many companies are terrible and you shouldn’t invest in them. What I will advocate for younger readers is  that as soon as you can in your career you should work for a growth company that you would invest in. It’s fantastic you’ll learn heaps and get to work with some of the brightest people around. A total blast which has you jumping out of bed in the morning excited about what you’re doing.

Whether you work for it, buy from it, eat at it, see it’s shops, buy it’s products or read a lot about it, you increases your odds of success buying a good growth company early in its growth. You’ll also get more chances when prices fall back close to their historic value lows. Buying what you know also makes it easier and more interesting to follow the story and have an edge on analysts.

If you don’t know the growth story of SAP, it’s a good one. Four German programmers left IBM to write a business program for ICI. SAP became a de-facto finalist in all large and medium business solution purchases. Like IBM in it’s day the choice always came down to SAP or. We were in the final running for all deals and always blew away our targets. IIRC, I was employee i2303, the 2,303th international SAP employee and there were around 3,000 employees. Now, 16 years on SAP employs 44,000 people. Those were extravagantly wonderful days to work in software business consulting and I was fortunate to work with many wonderful companies and people.

The following charts of SAP illustrates another Lynch point. “Time is on your side when you own shares of superior companies. You can afford to be patient –even if you missed Wal- Mart in the first 5 years, it was a great stock to own in the next 5 years.

I invested in SAP late 1994 or maybe early ’95. I’d missed the first six years years of SAP as a public company and it was up 10x times by then, from .50 to five. Over the next five years SAP again went up another 10 fold, before peaking in 2000 up 15,000%.

Is that chart clear? The lower blue chart is an expansion of a five year subset from the chart above.

So where am I now on Lynch’s path of a few good stocks? Home runs like SAP, Amgen, Omega Health and Biota, ably assisted by many singles and a few doubles papers over the many mistakes. It’s been a wonderful journey with a great partner, the ancient catholic within this agnostic frame feels blessed. The arrogant me thinks it’s the product of a little knowledge and smart hard work, the kid within giggles and thinks great game. The realist looks forward to the next adventure.

Disclosure: Long Amgen and Biota. If anyone ever buys a book from Amazon by clicking through a link on this site I should get paid. It hasn’t happened yet, I’ll let you know if it does.


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