Wednesday, September 15, 2004

Why I bought Oracle

Oracle was the first stock I researched and bought as an investment. At work, we use the Oracle database and I've spent several years learning how to use it.

Relational databases are designed based on a mathematical model invented by E. F. Codd, who was a researcher for IBM at the time. IBM didn't pursue the idea of relational databases because the assumption was they'd be too slow. The state of the art at the time were various designs that tried to match the data to the hardware that would be storing and manipulating it. What Larry Ellison, the founder of Oracle, attempted was to use the logical model pioneered by Codd to create a relational database.

It's a truism of computer science that you can't optimize for everything: if you make a program faster, it tends to be harder to change, for instance. Relational databases optimize for logically ordered data, rather than speed. But they also turned out to be fast enough, at least for most purposes. Over the years, Oracle has turned its early leadership in relational databases into huge profits, because there are now many more uses for databases than anyone could have imagined.

One of those applications, of course, was the internet, which drove Oracle's sales, profits and price to astronomical levels. So when the bubble popped, speculators panicked, and sold their Oracle shares down to under $8 from a split-adjusted high of over $46. It's obvious looking back that Oracle's price was far out-pacing its value. At $8 (where I bought my shares), it seemed to me there was plenty of room to grow. I like using the discounted earnings tool that Quicken provides.

So far I've been right.

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