Motley Fool: Dell forms winning strategy

Shares of Dell (Nasdaq: DELL) dropped recently, when the computer builder reported disappointing quarterly earnings. Investors must not have noticed that management has high earnings expectations for next year, and that Dell’s strategy is firing on most of its cylinders.

Dell has lost its grip on the skimpy-profit-margin PC market it once ruled. New competition is coming up from the likes of Acer and Lenovo, companies close to Asian manufacturing centers. Dell and competitor Hewlett-Packard can’t win that war and turn a profit at the same time.

That’s why Dell is assembling a facsimile of the IBM business model, aiming to offer businesses the (higher-profit-margin) tools they need to run a data center, from consulting services to servers and storage boxes. Every acquisition Dell made in the last few years has moved the company closer to this ideal.

In 1993, IBM was a struggling PC maker with a $20 billion market cap. Six years later, a strategy shift into the current enterprise computing buffet had produced a 1,300 percent return. It’s no wonder that Dell – and others – want to copy that performance.

There’s no free lunch on Wall Street, but short-term haircuts in the face of properly executed long-term plans often mark buying opportunities.

(The Motley Fool owns shares of IBM, and its newsletter services have recommended writing covered calls in Dell.)

Ask the Fool

Q: What’s a mock portfolio? – M.R., Port Charlotte, Fla.

A: Mock portfolios are terrific for new investors and those who want to test investing strategies. With them, you go through the motions of investing, stopping short of actually plunking down your hard-earned cash.

Research companies that interest you, decide which ones you’d buy, and then set up a pretend portfolio, either on paper or online (at sites like finance.yahoo.com/ portfolios and dailyfinance.com/ portfolios.) Record details such as when you “bought” the shares and at what price. Then track your performance over time and see if you beat the market.

My dumbest investment

Back in the 1970s, inflation was so high that commodities made more sense than stocks as investments. A friend and I pulled together $5,000, formed a partnership and opened a commodity account. We made a little in beans, then we lost a little in bellies, and then started buying potato contracts. Spuds went up, and then sharply down.

For those who don’t know, it’s possible to lose far more than your original investment in futures contracts, due to the leverage involved. It’s also possible that you can’t buy or sell when the market is going against you. We ended up lucky, losing very little. Later, I learned that the potato market had been manipulated by a potato baron. The moral of this story: When the elephants fight, only the mice get trampled. – R.T., online

The Fool responds: You were indeed lucky. Commodities have severely burned many investors, which is why most of us should avoid them. If you’re intrigued by commodities because they might make you rich, remember that you can build great wealth with less risk in strong blue-chip stocks.