Q: This is a concentrated fund that is subject to volatility due to its small number of holdings. Has it always been this way? A: Let me make one clarification. It is true that the fund holds more large-cap stocks, but that is the result of our investment process. We've never sat down and decided to structure the fund based on the market capitalization of certain companies. We have a process to choose stocks that tends to result in larger companies; but again, my largest position right now is a $3 billion company, a mid-cap company called UTStarcom. Q: The story about them is they do good business in China. A: I was at their analyst meeting. They sold a system that is being expanded in Taiwan, also in Vietnam. They have some contracts in India. They have two other businesses that they're doing very well in. UTStarcom is the largest maker of soft switches and the second largest maker of Eflaps. The company is growing very rapidly. It has a very conservative management. They only report GAAP earnings. The company has grown sales in the last 12 months at about 60% and earnings at 90%. Yet, it is a very cheap stock, selling at 18 times next year's earnings and 20 times this year's earnings. Q: How do you find such companies in technology? A: What we're trying to do in our process is to identify areas where there is fundamental growth and the dominant companies in those areas that are growing rapidly. We've done an awful lot of work ever since we've become aware of UTStarcom and it's become our largest position. Q: You own Linear Technology. Compared to Intel, it has an equally strong balance sheet and the ability to generate positive cash flow, yet it is often overshadowed. A: I think the whole semiconductor business is obscure to most people. Linear and Maxim Integrated have large product lines; unbelievably high margins. The rap against them is that they're expensive, but they've always been expensive. We tend to buy and hold really good companies. That is one of the reasons why we've done better than our peers. Q: The fund began in 1997 when it just started to ride the technology wave. How did you deal with the euphoria in 1999? A: The euphoria was everywhere. In a situation like that, what was difficult for a money manger was that investors are very clear that they want you to invest into whatever category your fund is concentrating in. Had we been very strict on valuation during that period, we would have been running a money market fund. It was a very difficult time. In one respect it was positive, obviously, because shareholders had phenomenal returns. It was difficult to be strict on valuation because everything was very, very expensive. Those who were able to go short, like the hedge funds, were decimated. Q: It seems now that investors are flocking to firms that do sell short, but the sentiment seems to have shifted again. A: I think so. There's a tendency to follow momentum. At the trough, the behavior of investors is very similar to what it was at the peak. At the peak, everybody was long because that was what was working the most. At the trough, people were short more than is typical. Q: You own Lexmark instead of Hewlett-Packard. Both make printers. Why Lexmark? A: That is not because of the printing business, but despite of the printing business. Hewlett's printing business is wonderful. I would not sell it short. We have problems with all the rest of Hewlett. If they could have stayed as a printer company and gotten rid of the computer portion, it would have been much more interesting. Right now, the company is being valued just as a printer company. Everything else is either worth nothing or is a drag in terms of valuation. Q: This would raise the eyebrows of the HP loyalists. A: I said that to Carly Fiorina. She wasn't too happy, either. When they were pushing the Compaq merger, she came by our offices. She is a very gifted salesperson. She is extraordinarily persuasive, very articulate, and a very strong leader. After the meeting, we really gave consideration to her arguments. But, after reviewing her arguments and Walter Hewlett's arguments, we still weren't convinced that this merger was going to add any value. So far, I think I've been right. Q: You have degrees in history and economics but you ended up managing a technology fund. How did this happen? A: Everything you learn can be an advantage. I won't say if I had to do it over it would be a mistake to get an advanced degree in one of the sciences. I will say, though, that investing is very different from engineering. In engineering, there are fundamental principles that are accepted anywhere you go. For example, if you want to build a bridge, and you've gone to a competent school in the U.S. or wherever, you're going to learn the same fundamental things about force and stress and load. The thing about Wall Street is no technique has consistently proven to work. Otherwise, there wouldn't be so many different approaches. I think that is one advantage, having come from the liberal arts background, is that maybe the pattern of thinking is more flexible. Q: Every little bell and whistle you hear about is not necessarily the next New Thing. Have you developed a thick skin to the hype? A: I think it's also very important to remember that we're not investing in technology, per se; we're investing in companies whose product happens to be a technology product or service. We're interested in them as businesses primarily. There are many instances of companies having the best technology that are not the most successful business. Microsoft and Apple Computer may be the best-known example of that. For 10 years, maybe, there was not a whole lot of disagreement that Apple's operating system was better than Microsoft's. It made zero difference to Microsoft's success, because there were non-technology factors that were far more important in determining the behavior of buyers than the quality of the operating system. Q: What do you find attractive now in the sector? A: We have expanded our holdings in the healthcare area, broadly defined. We own biotech names, Amgen and Genentech. We own Zimmer Holdings. Those kinds of companies are continuing to show the kind of innovation we saw in technology over the previous 15 years. They're growing very rapidly and profitably. The outlook remains positive. We think we will continue to add to our exposure. Q: Despite criticisms that its balance sheet and earnings statements are mostly fluff, you continue to own eBay. What do you see in it that the critics don't? A: I don’t think that's true at all. There has not been a lot of speculation that I'm aware of about problems in their reporting. You can draw whatever conclusions you want about short sellers spreading rumors, but it is certainly fair to say that it is a very expensive stock. And, it will probably continue to be highly volatile because a great deal of the value on the company is sentiment. Having said that, we think it has one of the highest barriers to entry among any of the companies we own. EBay is really a market place. The nature of a market place causes a successful one to have such high barriers to entry that it is almost impossible for a competitor to be successful. The economics of a market place are straightforward. Buyers will always want to go to the market place that has the most sellers. There is a huge economic reason for them to do that. Now, how you get that, is difficult to know. It's a chicken and egg kind of thing. But, once it exists, it is very, very difficult to take share. Yahoo! has 30 million users. Amazon.com has 10 million users and neither has been able to get any kind of traction whatsoever from an auction. The New York Stock Exchange is still the dominant marketplace for securities. It’s been that way for over 200 years. It's hard to think of a country that's been in existence for 200 years. The issue for eBay is it's going to be volatile. There will be periods when it's going to grow faster or slower. The market is not going to accept any disappointments. But, I think they have a long way to go in terms of adding new categories or becoming bigger in the categories they're already in, and not having to struggle much against competition. Q: Wi-Fi is the big buzzword these days in Silicon Valley. Fund managers I've interviewed are skeptical. What is your view? A: I agree, and I'll raise another issue. Even if it is successful in terms of demand, it’s a whole other story about whether it's going to be successful from a business point-of-view for the suppliers. Even if there is a lot of demand for devices that can connect through Wi-Fi, the problem is there are too many suppliers already. We had someone from Intel in here, and he was quoting one of the company executives. The guy saIdent, 'This is the first time in history something has become a commodity before it has become a standard.' It could be very successful, but it is going to be tough to make money as an investor. When something appears that is really growing, people have capacity. They have to produce something. I think it is a reflection of the overcapacity and the lack of growth in the traditional markets. Q: What is out there in technology that might have a chance for broad application, by business or consumers, that could run counter to any consensus views? A: Our view is that, on a secular basis and in most cases, what we think of as technology is mature. I don't see any Killer Apps in traditional technology. If you think of what has caused technology to grow during the past 15 years or so and ending in 2000, there are basically two things, and they were both networks. One was a data network and the other was a telephone or communications network. Fifteen years ago, the only computer networks in existence were terminals attached to mainframes. When you think of how many different generations of applications were in order for the networks to go from non-existent to being ubiquitous -- it was phenomenal growth. The other sector that grew rapidly was telecommunications. After 1996, we had analog cellular being converted into digital, a lot of carriers being added throughout the world, the greatest build out in new phone systems since telephony first became a commercial product 100 years ago. All that is done now. Q: You've just informed the readership that they should view much of the technology industry as cyclical instead of as straight-out growth. A: There is a very interesting book that provides a useful historical context to what has happened: Machines That Make Markets by a former research director at Franklin Templeton. What's happened in technology is not unique. You could look at what happened to canal stocks after the railroads came into existence, what happened to the railroads when the autos came into existence. Those are all forms of technology. I never bought into the idea that the Internet had a more profound effect on the economy than anything else. I think the railroads had by far a greater effect. Certainly the mass adoption of electricity had an extraordinary affect on productivity. There were stock exchanges and publicly traded stocks in all these eras. It's inevitable all these things that we consider electronic technology will become mature. This is what happens; nothing grows forever. Q: If this is true, then what is the justification for having a tech fund? A: The answer is that we're a stock market. If we're to protect you from the bad parts of what happened in 2000 and over the last couple years, you need to be diversified. On a cyclical basis, tech will provide extremely powerful returns to investors. You need to own tech in order to balance the other parts of your portfolio.