Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in tech and biotech. Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here. I always enjoy hearing from you.
Jeff, I always look forward to the weekly writings from the Near Future Report. But your recent update inspired me to dig up two quotes that feel appropriate to the current market conditions: “Be fearful when others are greedy and greedy when others are fearful” by Warren Buffett, and “Buy when there’s blood in the streets, even if the blood is your own” by Nathan Rothschild.
The quotes are well known and have guided many through some rough times. As you’ve mentioned in your recent writings, these are rough times. But isn’t this exactly the kind of market those quotes describe in which one should be investing? Since it’s been shown that it’s nearly impossible to predict an exact bottom in any market, if not now, then when?
– Richard K.
Hi, Richard. Those are two great quotes, and like you, I generally agree with that mindset for my own personal portfolio. With that said, having a mindset like that also requires investors to have a higher tolerance for risk and a longer time horizon. Said another way, whether this investment approach is appropriate will entirely depend on the circumstances of the individual investor.
As you know, my role is as an analyst, and I produce investment research. I don’t speak with subscribers directly, and for that reason, I can’t and won’t know the circumstances of each subscriber. What I can do is publish general guidance to help inform my reader’s decisions.
For instance, an investor with a multi-year or even multi-decade investing horizon could absolutely do what Buffett and Rothschild suggest. With a long enough time horizon, buying when there is a lot of “blood” and things are definitely “cheap” will usually work out very well in the end. But the value of ridiculously cheap, high-quality assets can go lower and get even cheaper – we’ve seen this happen in the biotech industry, as an example, where some of the very best companies are trading at large negative enterprise values now.
Any investors buying now in growth equities should be comfortable knowing asset prices may go lower before they rebound sharply. For some, that may seem like too much risk. For others, that may be perfectly fine.
As I’ve been researching and writing, I am predicting that things will get worse before they get better. That’s the reason that I’m not actively recommending growth equities right now. Just being cheap or undervalued and a great company isn’t a strong enough reason for me to recommend a company. I want to see a strong pivot from the Federal Reserve’s current absurd monetary policy before jumping back into the market. These are not normal market conditions, and they are being heavily manipulated by government policy.
These are tough markets right now, arguably the worst I’ve seen since I started investing at 16 years old. I wouldn’t fault anyone for choosing to step aside from the public markets right now, from investing in general growth equities. But for those of us willing to weather that storm, I’m confident we would be very happy with our portfolio a couple years from now.
There have been some bright spots over the last year, though. Our diversifiers portfolio in The Near Future Report has performed very well as intended. As the old saying goes, there is always a bull market somewhere. Growth stocks have been out of favor for the last 18 months, but a small number of sectors have done well in this terrible environment, and that’s what the diversifiers portfolio was designed to do.
X-bonds (corporate bonds) of high-quality growth companies with strong financial positions have also been an excellent investment strategy in this environment. This has been a focus of mine in Exponential Tech Investor for quite some time. They have almost no downside risk, yet still maintain great upside potential. Fantastic investment class.
And investing in private companies during a market like this is also a very attractive asset class. These are the kinds of companies that I seek out in Day One Investor. For those investors with a longer time horizon, now is an amazing time to invest in private companies. Valuations are very attractive, and high-quality private companies with capital aren’t concerned about a short-term economic contraction. They continue to build and prepare themselves for the economic rebound.
As for Buffett, he’s known to invest heavily during times of crisis when valuations are low. He made an absolute killing during the financial crisis. Berkshire made over $3 billion from a $5 billion investment in Goldman Sachs back in 2008. And Buffett has doubled his money from Bank of America after investing another $5 billion in 2011.
And that begs the question, where is Mr. Buffett now?
It’s interesting that – during the recent bank failures – Buffett was nowhere to be found. We’d think he’d be buying hand over fist. Instead, here’s what he had to say at the latest Berkshire Hathaway annual shareholder meeting on the topic of wide-spread failure of the financial system:
It shouldn’t. I don’t think it will, but it could, and the incentives in bank regulation are so messed up and so many people have an interest in having them messed up. It’s totally crazy.
That’s a far cry from the optimistic Buffett who – in the depths of the 2008 crisis – told investors, “Buy American. I am.”
Can an investor allocate to high-tech today and see a great return in the years ahead? Yes, definitely. But I continue to believe we’re in for more pain in the months ahead. And when that final, gut-wrenching turn lower happens, it could be a perfect moment for investors to step back in and get “greedy.”
Hi Jeff,
Well done over there. I am really enjoying all your writings about the latest technology devices. Although I am a newbie in the area of cybersecurity, I read years ago that when the blockchain is fully developed and operational, no hacker will be able to hack anymore. Is this not true or relevant to the cybersecurity topics under discussion? I need more enlightenment because I want to follow the latest cybersecurity technology.
– Okunade I.
Hi, Okunade. This is always a popular question, and it’s also a complex topic. At a high level, the marketing message that we often hear about most blockchain projects is that they are highly secure and can’t be hacked. While generally accurate, there are very rare circumstances in which a blockchain could be hacked.
We can think of most blockchains as a “distributed ledger.” That means there is no “central committee” or CEO of Bitcoin that maintains the network. Instead, the Bitcoin blockchain is maintained by – and transactions are approved because of – willing participants that contribute to the network. For Bitcoin, we know these participants as “miners.” And these miners are incentivized by a monetary policy literally hardwired into the blockchain’s code.
The result is a network that is immutable (nobody can change it), transparent (everybody can see it), and secure (nobody can hack it). And it’s that last point that is important for your question.
The beauty of a well-designed blockchain is that there is no single point of failure. A single node can be taken out anywhere, and the network will still be fine. There are no Bitcoin employees that can be tricked by a phishing email. And there are no central servers that can be hacked. The only way a hacker could infiltrate the Bitcoin blockchain would be to take control of more than 50% of the miners contributing to the network. While this is technically possible, it is extremely unlikely.
Different blockchain projects are naturally designed differently. But in general, securing the network happens as a result of cryptographic security and decentralization. Blockchain projects that do both well are basically impossible to hack with today’s existing technology.
Quantum computers, once fault tolerant and powerful enough, will present a threat to most blockchains; but this isn’t a threat right now. And blockchain technology is software, which means that it can be upgraded to be quantum resistant in the future when quantum computers do become a real threat.
Hi Jeff,
I know you are bullish on nuclear fusion, but what are your thoughts on small modular reactor (SMR) fission?
– Brendan V.
Hi, Brendan. You’re absolutely correct that I’m very bullish on nuclear fusion technology (the power of the sun). But, yes, I am also closely following the developments around small modular reactors. It is fantastic technology that should be adopted if “we” really care about clean energy. The issue isn’t about the SMR technology. It’s about the irrational positions taken by those who claim to care about clean energy yet fanatically oppose safe technology like SMRs.
For the benefit of newer readers, these are small reactors that can be mass-produced at a central factory and then shipped to sites for installation and deployment.
The advantage here is that it would make the construction of nuclear reactors much easier and far cheaper than it has ever been.
For comparison, every nuclear reactor up to this point has been a massive, custom-designed plant that was manufactured on-site and pieced together. That’s why nuclear fission reactors have been so incredibly expensive to build (billions).
And there have been some interesting developments in this area from a company called NuScale.
Back in January, I told readers that the U.S. Nuclear Regulatory Commission (NRC) just certified NuScale’s small modular reactor (SMR) design. This allows power generation companies to apply for permits to construct power plants utilizing this new SMR design.
This had been a long time coming. NuScale was founded in 2007 and based on work spun out of Oregon State University. These kinds of certifications are rare… In fact, there have only been six other kinds of nuclear reactors that have ever received this certification. And this is the only SMR design to have ever been certified.
To give us an idea of what one of these facilities might look like, here’s an artist’s rendering:
NuScale’s Small Modular Reactor
Source: NuScale
Here we can see that the SMR design is very different from the nuclear power plants we are used to seeing. Everything is sleek, compact, and relatively low to the ground.
And notice that we don’t see any large cooling towers. That’s because this design can produce electricity with far less heat. Therefore, they require less cooling capacity.
And think about this – each module can produce about 50 megawatts (mw) of electricity. That’s enough to power about 45,000 homes.
But power plants can consist of as many modules as necessary. So to increase power production, plants can simply add as many modules as they need.
That said, it will still be some time before we see facilities like this. NuScale is on track to turn on its first small modular reactor at a power generation plant in 2029. It will be in Utah. So we’re still six years away.
To answer your question, I am interested in the developments around SMR technology. But in my view, the ideal long-term solution for truly clean, abundant energy is nuclear fusion. When this technology is finally commercialized, it will mean cheap, virtually unlimited energy for the world with little to no radioactive waste to contend with. In terms of politics, I see this as a more likely path towards commercialization compared to nuclear fission technology. I wish that weren’t the case as nuclear fission technology is available today, but that’s the reality.
Either way, we are just a few short years away from incredible breakthroughs in clean energy development. Whether it’s SMRs, pebble bed reactors, thorium reactors, or nuclear fusion, we have so much to look forward to.
Regards,
Jeff Brown
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
