Keeping Things in Perspective
Today, many investors are worried about the presidential election in 2020, US/China prolonged trade war and the associated market volatility, we remind ourselves that stock investing is a long-term activity and represents partial ownership of dynamic, real-life businesses. A good business with a capable management team should be able to navigate and adapt over time to any new political environment and tax regime. Any investor with less than 3 years of investment horizon should not be in stocks and should focus in bonds instead. However, I believe that most of us have an investment horizon much longer than that.
In fact, our individual investment horizon is likely going to be longer than we think given the advances in medicine and we are likely to live longer than we anticipate. As such, there is little need to worry too much about short-term market fluctuation when our portfolio needs to fund retirement spending for the next 20-50 years. Investment success is often about controlling one’s emotions to refrain from reacting to short-term market fluctuation. This last part is very easy to say but very difficult to do for most people. As always, buying a stock is easy, but making money from the trade is more difficult because of our emotions.
Bullish as Ever on the Innovation Economy
We are bullish as ever on the innovative economy and its long term future. Global economic prosperity is increasingly driven by technology and business model innovations. As mentioned in our last blog, we have confidence that the US will not face the same demographic/economic challenges that Europe and Japan are facing today thanks to US society’s propensity to try new ideas/things and adopt new technologies/business models.
Today, we are seeing upwards of hundreds of billions of R&D dollars being spent each year by large and small technology and biotech companies. Established innovative companies typically spend 15-20% of revenue annually on R&D while smaller ones often spend above 30% of revenue. Our government incentivizes these investments by offering R&D tax credit to these companies. US technology companies earnings would have been substantially higher and P/E much lower if they had not invested so heavily on R&D in pursuit of future growth. Below are some of their focus investment areas:
- Data & Software – Data is the new oil in the digital era of AI, software is the refinery and hardware is the storage/pipeline. Automation and machine intelligence are possible because of vast amount of digital data available and the software used to analyze and process it. Software can be applied to any industry from banking to construction that run any routine processes on a regular basis. As with cloud computing today, most of these automation and intelligence will be delivered in real-time through the cloud as an utility service.
- Biotech – In human biology, there is still very little understanding of what causes many incurable diseases like cancer or Alzheimer’s. Today’s drug discovery process is mostly a trial and error one with long iteration cycle and incomplete understanding of the disease-causing mechanism. Recent advances in cost-effective DNA sequencing and gene-editing technologies are important breakthroughs and will open doors to a vast future of better treatment methods and new drugs.
- “Hard” Technology – this is an broad category that covers many basic science and building block technologies including areas like optics, material science, physics, chemistry and space technology. Future advances in smart glass, holographic display, communications, semiconductor, energy generation/storage, space rockets all depend on progress of these base technologies.
- Quantum Computing – Quantum computing is a good example of a “hard” technology that shows lots of promise. While still an early stage technology that still requires a ton of engineering work and investments, quantum computing promises around 7-8 orders of magnitude (a million times) improvement in hardware processing speed compared to semiconductor-based computer chip today. This technology will allow future computers to process a lot more data in a much shorter time. We imagine that training an AI model with exabyte of data would take only seconds with quantum computers. .
Vision of the Future
Driven by the above investment and research efforts, we envision the following changes happening to our lives over the next 10-20 years:
- Global e-commerce/payment network – Cross-border e-commerce and global payment will become seamless and effortless;
- Autonomous vehicle everywhere – People movement and goods/produce/food delivery will be conducted by a network of autonomous ground/air/marine vehicles; humans will take control of these vehicles remotely in real time only when necessary
- Food on-demand – Meals will be prepared by robot chefs in central kitchens and delivered on demand
- Bioengineered Food – There will be more genetically modified food like non-browning apple, pest-resistant cash crops, fast-growing cannabis for both human and animal consumption
- Robot helpers – Elderly and children will be cared for by robot domestic assistants
- Virtual gatherings – More social, entertainment, educational activities will be carried out virtually in integrated VR/AR environments
- Automated decision-making – Many low-level business decisions will be made autonomously by AI based on historical data and algorithms. Human will focus in making high-level and strategic decisions that involve judgement, perspective and vision.
- Paperless automated office – Office will become paperless as most routine business processes such as accounting, HR administration, order processing, customer support will be automated by software; human employees will supervise the process and get involved only as problem arises
- Automated factory/plant – Most manufacturing operations will be conducted by software-controlled robots; most utility and chemical processing plants will be run by software; human employee will get involved only when problem arises
- Multi-sensor, multi-interface computing – In addition to smartphones and monitors, employees will use their voice, body movement, wearable device, smart glass, holographic display as interfaces to computers
- Human-driven innovation – Employees will focus on creative design, sales & marketing, brand building, UI /graphics design, R&D innovation, productivity tools and team leadership
- Aging Population – More people will live beyond 100 years old given the advances in medicine and global health care standard
- Early detection of disease – Smart toilet will analyze our stool/pee daily and alert on any deficiencies or abnormal conditions, wearable devices will monitor our glucose/blood pressure/heartbeat continuously to detect problems early.
- Personalized medicine – Drug therapies will be personalized and custom made based on each person’s DNA code
- Artificial body part replacement – Similar to artificial hip and knee today, replacement bones/organs will be tailor made and implanted by robotic surgeon assistants.
- Brain-Computer interface – Neurological device will allow paralyzed/disabled persons to control computer using their thought without mouse/keyboard/speech
We don’t believe these innovations are too far flung as early versions of these products/services are already available today in many countries. Investing has always been a forward-looking activity and it is especially true in our fast-changing innovation economy today. As we help our clients invest in stocks and venture capital, we try to mimic the approach of ice hockey legend Wayne Gretzky. While he is not the fastest ice skater, nor does he have the best technical skills, he became “The Great One” in ice hockey simply by:
“Skate to where the puck is going, not to where it has been”
Like an air traffic control radar system Gretzky would take a visual snapshot of all of the players on the ice, map out the projected paths of each player (or relevant players to the play) and then overlay those moves against the puck direction and flow of the game. To win a ice hockey game, he needs to figure out where the puck is going and more importantly how all the players in both teams are likely to move. It’s such a great concept that can apply to so many aspects of business and life.
The Bottom Line
In summary, we are bullish as ever on the innovative economy and its long term future. Global economic growth is increasingly driven by these technology and business model innovations that are being deployed globally, not just in the US. However, we believe that investing is not just about finding the best technology or the fastest growing economy, sector or company. It is a much more complex process involving studying where things are going, what other players and investors have done and might do or not do in the future, more similar to playing an ice hockey or chess game. I look forward to working with you to embrace and execute this philosophy in our investing or company building journey.