Wednesday, March 23, 2011

Red Hat - 28%

Back as a graduate student in the mid to late '90s, I noticed large empty boxes with the word "Dell" stamped across them.  Everywhere I looked, stacked up in all the corners of each and every professor's lab.  What was this Dell?  Well, I soon learned they were basically a mail order, build your own desktop (or laptop) computer company, and they were being purchased in bulk by most every research advisor at my university.  I talked to my uncle who was a bit ahead of the computer curve (he had had a Prodigy email account when they first came out) and told him "Dell" is the computer company of the future. He scoffed at me and informed me that, no everyone was buying Gateways.

Six months later, I saw my first Dell TV ad.  A hip young lady was showing off how she had custom built this computer and ordered it online.  Because she was young and hip, the computer was of course designed with sate-of-the-art music software and we, the television viewing public, were privy to all her hip young tunes.  Gateway fell off the map and I learned an amusing and interesting lesson: look at what the professors were buying with their grant money.  Whatever they were buying, basing their career on, using what massive funding they had procured for the sole purpose of building their ideal labs, was bound to be of the highest quality and endorsed by those in that field.  So, soon after the Dell mania spread, I looked at what the next wave might be.

Now at this time, we were using HP and SPARC workstations with unix, but like most of the younger professors, my advisor was upgrading and switching semi-regularly.  Like everyone else she was buying Dells, stripping them on the pre-installed Microsoft OS, and loading them up with Linux - Red Hat Linux.  Thinking back to how great it would have been to buy Dell when the boxes were first showing up, I immediately investigated the prospect of buying Red Hat. 

Alas, Red Hat was not at that time public, but its IPO was on the horizon, indeed within a few months of my brilliant brainstorm.  I looked into it, decided the $40 offering was above my pay grade, and that I couldn't get in at the IPO anyway.  Riding the wave of the dot-com tech boom, Red Hat proceeded to rise to $120, and then when the bottom fell out, Red Hat went with it.  Now was my time to pounce.

As a poor graduate student, I had little spare cash to buy anything, but whenever I could, I stockpiled Red Hat, buying between $3.60 and $8 over the next couple of years.  Incidentally, this went against the advice of every person I spoke with, many of whom were told by their stock advisers that "Red Hat can't make money".  By 2003, Red Hat had posted its first profit and now, many many years later, Red Hat has proven to be resilient, recession proof, and is still being loaded on all the scientist's Dell workstations.  They give their product away and charge for premium services or premium versions of their free product.  Many companys and governments pay for this service or for their premium products because it's about and order of magnitude cheaper than other IT solutions and because it's open source, it may be customized for each individual business.

Now, at 28% of the total portfolio, I am well aware that I am way over-invested in Red Hat, primarily because I bought it early and often when it was cheaper.  I know I would be advised by any risk management expert to de-invest and spread some of that percentage around and that I will in the medium term future.  The only reason I don't right now is that I don't particularly want to suffer the tax consequences all at once, especially as I have two major sell-offs planned this year.  Furthermore, although it has dropped recently to around $39, I fully expect it to bounce back at least to $45 in the next 6 months to 2 years and would probably wait to sell some when it reaches that target.

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