Most NASDAQ stocks will participate in the acceleration phase

The index is not meant to be a list of top picks and factors such as current earnings, and stock price are disregarded. The four criteria that companies must meet to be included in the index are as follows:

2.14 The Great Acceleration of the Dow Jones Industrial Average Note: Shown is the Dows acceleration phase from 1920 to 1929.

1. Capitalist Toolbox: Artfully organize and implement the follow

ing tools:

Learning interfaces were coined by computer scientist Alan

Kay and refer to the method of collecting data about consumer needs in order to enhance relationships.

Partner interfaces connect manufacturers, warehouses, sup

pliers, shippers, haulers, wholesalers, or retailers to organize information more effectively.

Brand-consumer links touches the consumer at many lev

els TV, print, etc.and links the Internet with bricks-andmortar businesses.

Transaction links facilitate frictionless methods of payment

or delivery of products.

2. Expandable Platform: Can easily evolve from its core compe

tency. A trucking company, for example, must be able to expand into services like consulting, risk management, or logistics services.

3. Customize Products: Be able to make changes to products and

services after they hit the market and individualize them to consumers or consumer groups.

4. Relentless Growth: Can be organic through acquisitions, ex

pansion of market share, or mergers.

A study of the companies of the Digital Dow2 index adds the comfort of specifics to our list of reasons why we can look forward to the formulation phase rallies and eventually the acceleration phase. Many of these stocks have been compartmentalized under the heading of tech stocks by those committed to obscuring the facts of the new environment. As you get to know these companies (see Table 2.1), you will learn that they are far from being just tech stocks and are actually important agents of our working economy. Chapter 7 describes the economic sectors in which some of these companies operate.

An example of how a Digital Dow2 company operates differently from its twentieth-century counterpart can be found in Pharmaceutical Product Development Inc. (PPDI). Its visionary chairman and chief executive officer, Fredric Eshelman, realized that PPDI could do more than sell its research services on a contract basis to drug companies. Today, PPDI is an indispensable link in every stage of drug development from initial research to patient consumption. Because it has no sales force or manufacturing facility, it cost-effectively performs functions that the large drug companies cannot. It is small $1.2 billion compared to Merck at $157 billion or Bristol-Myers at $112 billion only if you define size in twentieth-century terms. In the new dominant system assets are overhead. PPDIs smaller size is a strength.

PPD Discovery isolates chemicals, compounds, and genes; dis

covers their functions; and tells manufacturers what optimal combinations can be used for a particular purpose.

PPD Development provides clinical and laboratory trials help

ing drug companies determine how a new drug is best utilized.

For example, when working on a new compound for Eli Lilly, PPDI discovered that its best use was in preventing premature ejaculation. This did not fit into Lillys product portfolio or marketing plan. The compound was sold to Alza instead in return for a large up-front payment and royalties. The Intellectual Property Discovery Group continues to develop this part of the business.

PPDI partners with its clients to share in the profits from new

drugs.

From communication centers on both coasts, PPDI has a cus

tomized process for monitoring patient use.

For example, you have a serious condition, but after two weeks you stop taking the drug because (1) you forget, (2) you experience side effects, or (3) you feel better. PPDI alerts your pharmacist that you have not had a refill. PPDI prepares a communication for your pharmacist and physician, and you will be contacted until the issue is resolved.

By leveraging its resources, PPDI posted a 21% increase in revenue and a 43% increase in earnings during the economic slump of the second quarter of 2001. By year-end 2002, earnings growth was expected to climb another 30%. Its stock performance left the S&P 500 in the dust during the first formulation phase correction, as shown in Figure 2.15.

Most NASDAQ stocks will participate in the acceleration phase. It is likely that smaller companies will do better than the largest. It is likely that stocks that fit the mold of Digital Dow2 companies will outperform those that do not. It would be beneficial if we could give more mathematical weight to these companies when performance of the commonly used indexes is calculated, instead of giving more weight to the very largest companies as we do today. If we could do that, and if the NASDAQ mirrors the Dows acceleration phase, it would put the NASDAQ at 30,000 by 2011.

If that sounds like a long climb in just 10 years from a level of 1,600 in 2002, consider this: In January of 1988 the Dow Jones Industrial Average was 2,015. Eleven years later (1999) the Dow reached 11,000. Most people did not see that in the future either.

Those vested in the old dominant investment system have made some major miscalculations lately about this financial frontier we have begun to cross. There is an anxiety that things are spinning away into unfamiliar territory and that this can be controlled with tariffs, embargoes, unions, political action committees, protectionist legislation, regulation, more bureaucrats, corporate welfare, and more oversight. Fifty years from now, the arrogance of thinking that any of these things will do much more than temporarily slow things down will appear rather silly.

One doesnt control a frontier; the frontier does the controlling. The sage and the visionary adapt to the new environment by welcoming the new idea, watching for openings, and heading for the horizon. That is how we have always done it. Not only are the opportunities intriguing, but it is invigorating to think that the future will change us in ways we do not yet know.

Investing will be as different from the twentieth century as the Internet is from the telegraph. That we know for sure. What is needed is an investment method that can anticipate the future and signal what steps to take. That method is set out for you in the next chapter.

NOTES

1. Jerry Korn, ed., This Fabulous Century (New York: Time-Life Books, 1969), p. 69.

2. Terry Porter, Video Renaissance, personal communication, Sarasota, Florida, June 2001.

3. Mary Greenbaum, Gauging the Markets Prospects, Fortune Magazine 107 (1983): p. 97.

4. Presented at Symposium held at the Plaza Hotel, New York, November 2000.

5. Robert D. Arnott and Ronald J. Ryan, Death of the Risk Premium, Journal of Portfolio Management (2001, summer).

6. Robert D. Arnott, Partners Message, unpublished paper, May 2001. 7. Robert D. Arnott and Peter Bernstein, What Risk Premium Is Normal? unpublished paper, May 2001.

8. Sydney Homer, A History of Interest Rates (New Brunswick, NJ: Rutgers University Press, 1963, 1964), pp. 314-316.

9. Ibid.

10. Ibid., pp. 314-316. 11. Ibid.

12. Ibid., p. 239.

13. DuPont is an example.

14. Sydney Homer, A History of Interest Rates (New Brunswick, NJ: Rutgers University Press, 1963, 1964), p. 239.

15. IBM stock sold at $85 on December 29, 2000, and at $114.35 on June 30, 2001, for a 34.52% increase.

16. David Hackett Fischer, The Great Wave (New York: Oxford University Press, 1996), p. 184.

17. Business This Week, The Economist (2001, April 21): 5.

18. Milton Friedman and Anna Jacobson Schwartz, A Monetary History

of the United States 1867-1960 (Princeton, NJ: National Bureau of Economic Research, 1963).

19. David Hackett Fischer, The Great Wave (New York: Oxford University Press, 1996), p. 184.

20. Ibid., p. 184.

21. A New Economic View of American History: From Colonial Times to 1940 (2nd ed.; New York: W.W. Norton, 1994), p. 510.

22. See Appendix F for calculation.

23. Richard Schmalensee, dean of MIT Sloan School of Management.

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