10 replies to this topic

[thefirstimmortal]

Irreversible, noncyclical change (or what is known on Wall Street as “secular” change), more than any other economic power, creates the opportunity for profit.

[thefirstimmortal]

There are those among us who believe one can outperform the Standard & Poor’s 500 Stock Index by choosing stocks wisely. There are some who actually succeed. Among the success stories is that of a fabled six-year-old chimpanzee named Raven, who has been taught to pick stocks by throwing darts at the New York Times stock pages. This sharp-shooting monkey, whose portfolio selection is based entirely on the symbols penetrated by the darts, has allegedly outperformed 95 percent of all fund managers for each of the past five years. Whether Raven is a fable or a solid blue-chimp investor, he exemplifies the fact that there is a degree of uncertainty in pre­dicting the performance of individual stocks.

Predicting a stock’s performance is partly a matter of luck, partly a mat­ter of the prevailing political and economic conditions of the day, and partly a matter of careful due diligence. While an individual stock’s performance may be a difficult prediction best managed by a dart-wielding chimp, sector stock performance is usually somewhat more predictable. Sector stocks, which are collections of all stocks in selected industries, have the advantage of relying less on any single company’s performance and more on the gen­eral long-term trends of an entire industry. It takes only modest simian insight to predict that in the long run, some industries will expand while other industries will contract. It should come as no surprise that even Raven could have predicted that the compact-disc industry will continue to expand, while vinyl is headed for the museum.

Established industrial sectors are relatively easy to predict. They have the advantage of precedent, with histories, trends, multiple market players, and a well-defined set of consumers who have predictable behaviors. But the industrial sectors that do not yet exist and therefore have no track record, like nanotechnology, these are the more interesting sectors.

[thefirstimmortal]

At the end of the nineteenth century, there was an emerging industrial sector called the automobile industry. This industry was widely predicted to grow over time, and there was no question that early investors in automo­biles had the potential to make tremendous returns on their investments. However, if you can picture yourself as an investor in New York City in 1899, the fundamental question you would have had to resolve was which automotive technology to invest in. Turn-of-the-century technology gave you a choice of electric, steam, and gasoline power sources propelling vari­ous forms of modified buggies. The industrial forecasters of this time had a clear bias against gasoline-propelled automobiles because of the difficulty in finding the rare refined oil that was required to fuel these vehicles. Had you been sufficiently prescient to have placed your bets on gasoline-powered vehicles, virtually none of the companies that you could have backed would have survived the impact of the upstart Henry Ford, who, in 1903, created the company that dominated the automotive industry for decades. In the short span of 20 years, technologies that competed with the gasoline engine were abandoned, and most of the early automobile companies simply ceased to exist. The sector as a whole, however, did extremely well.

Recent scientific progress has left virtually no question that nanotech­nology will become a tremendous and significant part of worldwide culture. Likewise, there is no question that those who back the right technologies and the right companies at the right times will end up with pocket change sufficient to rival the gross domestic product of some third-world countries. So, as with the early automotive industry, the questions remain the same:

Which technologies? Which companies? And when?

[thefirstimmortal]

What are core issues of investing in nanotechnology. Like every early-stage industry, nanotechnology is ill conceived, full of potential technology pitfalls, and crowded with revivalist-style, bible-thumping evan­gelists. In spite of the many shortcomings that would drive a traditional investor to mutual funds, nanotechnology has already become a global industry consuming nearly $billions each year in investment from the gov­ernments of technologically advanced nations. Relying on some of the most sophisticated technologies the world has ever seen, nanotechnology has received the global sanction of virtually every government capable of fund­ing research and development (R&D). It has caught the attention of Holly­wood and has been subjected to scathing attacks from pundits of social conscience. The level of investment shared by many different governments, coupled with the high social visibility it has attracted, lends some credence to the thought that nanotechnology, whatever it is, is going to be big.

[thefirstimmortal]

Managing investment in an emerging industry is not a task for the faint­hearted. In a mature industry, you know what people are buying, what they are willing to pay, and which features they want. You know who your com­petitors are, and what the technical triumphs and hurdles are likely to be. In an emerging industry, none of these things are known. There is only cer­tainty that there will be a viable market, products, and revenues. Beyond that, take a lesson from history and count on your competition springing out of nowhere. Few guessed in 1903 that Henry Ford would own 50 per­cent of the automotive market in less than 15 years.

The major investment problem of emerging industries is not the tech­nology. Rather, it is the ability to capture intellectual property that has real commercial value. For example, if you are running a company in a mature industry, such as producing digital versatile disc (DVD) players, then the technology problems have long since been resolved. As a DVD player manufacturer, you can either purchase components on an original equipment manufacturer (OEM) basis, or manufacture them according to industry standards. The issues you have to focus on are keeping the costs out of the products, incorporating features that make the products attractive to con­sumers, and setting up marketing and distribution systems that ensure that consumers want what you have and can get it when they want it. Even if a better, cheaper, faster DVD replacement technology becomes available that can produce higher quality at lower cost, the inertia of the installed base means that current consumers and producers of DVD program material will take years to evaluate the new technology and consider whether to embrace it. As a mature player in a mature market, you must be responsive, but you have plenty of time and staying power to weather the occasional storms.

[thefirstimmortal]

What New Economy? There is no “New Economy,” as some called the post-1995 economic age started by the emergence of an ultracompetitive/ultraproductive global marketplace based on a common standard method of communication (i.e., the Internet). How do we know? Alan Greenspan told us.

[thefirstimmortal]

Years ago some had a daily argument with economists, investment professionals, and portfolio managers about the economic, industrial, and social ramifications brought about by the Internet and its single unifying system for data/voice/video/audio communications. Some used the term New Economy as a linguistic weapon in their defense of the assertion that we had entered an era with a new engine of economic growth.

But many took this concept way too far. We don’t have a New Economy per se.We simply have the Real Economy. But because of massive changes in its political, technological, and communication fabric, it really is different.

Today our economy is really more competitive, more global, really more inovative, more productive and faster-changing.

[thefirstimmortal]

New Economy morphed into the Real Economy, the building blocks are different. Today’s most valuable and value-creating assets are minds and intellectual properties rather than machines and real-estate properties. Our raw materials are often bits of data rather than atoms. Our freight trains are more likely to be packets of light racing down optical cables rather than cars on railroad tracks.

[thefirstimmortal]

For us investors, the most important facet to this latest version of the Real Economy is its improved fundamental capability to sustain inflation-resistant growth. This most current industrial revolution, built on the new exponentially faster and broader-based Internet Protocol (or IP) productivity platform, has the ability to grow faster with less inflationary risk than any economy of the past.

Since inflation is kryptonite to stock valuations, inflation-resistant growth is simply the best possible environment for your money to grow rapidly into real wealth via stocks.

[thefirstimmortal]

The Real Economy we live in is as vulnerable to the ups and downs of the business cycle as always, as the capital spending recession of 2000-2002 taught us.

History has proved that, no matter how powerful the technology, it will never be a match for the forces that periodically overwhelm the economy: interest rates, restrictive monetary policy, falling profits, shrinking consumer demand, plunging stock prices, too much debt, frightened lenders, and money-wasting government spending.

The business cycle is alive.

[thefirstimmortal]

In a sense, The New Economy is no more about technology than the Gold Rush was about shovels. Technology does not create change, it creates opportunities-in this case, for higher fundamental levels of productivity and lower costs of doing business. But these changes take time. For example, the studies of Stanford University professor Paul David found that while electricity was widely deployed in 1890 the effects did not show up in a meaningful way until the 1920s. Until electricity was matched with miniature electrical motors, the opportunity of fundamental change from electrical power was not realized.