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Ideas Rule in the "Knowledge Economy"

Written by Brian Hicks
Posted November 22, 2006

When Isaac Newton published his seminal work, "Pricipia Mathematica," in 1687, it set the foundation for the classical mechanics that would rule physics for the next 300 years. But as good as classical mechanics was in predicting the actions of relatively large bodies such as planets, its laws proved wholly inadequate to account for the motions of the newly discovered subatomic world.

For that, there was Einstein's quantum theory and later quantum mechanics, a sub-branch of physics. It was the type of outside-the-box thinking that led to whole new worlds within the scientific community as its new ways of thinking replaced the old.

It is the perfect example of what happens when the power of a new idea challenges orthodox thought. No one can predict what will arise from new ways of thinking that we only later see as being transformational.

It is the same type of thinking that is embodied by the new Ocean Tomo 300 Patent Index (OTPAT: AMEX). And while it will certainly never be seen in the same light as Einstein's brilliance, it does challenge the way that we have thought about stocks in the past.

That's because-unlike its older and better known cousins, the Dow Jones Industrial Average and the Standard & Poor's 500-the Ocean Tomo 300 focuses not so much on the tangible assets that a company possesses, but rather on intangibles such as its intellectual property.

It is an evaluation process based upon the premise that the idea is the product. The value is no longer simply in the ability to produce something, but in the innovation itself. It's a world where intellectual property has changed the boundaries of valuation.

Launched last month, the index is the first major new broad market indicator in 35 years. It is the result of the belief that our new information-based economy is not only different from the industrial economy it replaced, but that it also requires a new way for investors to accurately evaluate a company's worth.

"When the S&P 500 started in 1975, 80% of the market value of companies consisted of tangible assets: factories, machines, and inventory," says Ocean Tomo managing director Keith Cardoza in a recent Chicago Tribune article.

"Now tangible assets make up less than 20 % of a company's market value. Today when I buy 100 shares of General Electric, it's not so I can own their vast inventory or factories. I buy that stock for the innovation and technology at GE, and that's embodied in their patent portfolio," he adds.

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In compiling its index, Ocean Tomo uses a proprietary formula to determine which patents are more valuable than others. Its analytical engine, the Patent Ratings Software, evaluates the worth of its intellectual property universe. It calculates the relative worth of the more than four million patents issued by the U.S. Patent and Trademark Office since 1983.

The result is an index that represents a diversified portfolio of 300 companies that own the most valuable patents, relative to their book value. Its "Knowledge Economy" portfolio includes such heavyweights as Eastman Kodak, General Electric Co., IBM Corp., Motorola Inc. and Proctor & Gamble Co. It is an impressive group.

In fact, inclusion in this list has prompted two of its members, Garmin Ltd and InterDigital Communications Corp., to issue press releases trumpeting their place in the index.

But intellectual property valuations are nothing new at Ocean Tomo LLC. It has dealt with them since its founding in 2003, pioneering auctions that allow creators large and small to monetize their intellectual property by selling them to the highest bidders.

Tomo's Fall 2006 Live Intellectual Property Auction, held on October 26, hauled in some $23,903, 000 for sellers as they sold off not only patent rights but also copyrights and domain names. Amazingly, the domain name 1800yellowpages.com sold for $1.32 million.

It is this type of expertise with the winners of the knowledge economy that has allowed the new index to beat the major averages in its short existence. In fact, its creators claim that using their formulas the index would have outperformed the S&P 500 by over 300 basis points annualized over a ten year time period between September 1996 and September 2006.

That is the type of performance has the creation of an exchange-traded fund based on its weighted index well underway.

The Ocean Tomo 300 represents just part of the ride that company founder James Malackowski began when he started the business with a flash of insight and the help of a $1 million line of credit.

Where it all ends, of course, is anybody's guess. But this much is for sure: Like other creative tinkerers before him, Malackowski has helped change the way we think.

The "knowledge economy" is as different from the industrial economy as the planets are from subatomic particles. Evaluating this economy takes new metrics.

Just ask the guys that sold YouTube to Google. That idea was worth $1.6 billion.

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