Today's Daily Reckoning takes a break from normal operations so we can bring you an exciting discussion on Port Phillip Publishing's latest investment service: Revolutionary Tech Investor.
Editors Kris Sayce and Sam Volkering sat down with us for a chat about living through this fascinating period in technology and business. The insights, perils and potential profits for investors are plenty, so please enjoy....
Left to Right: Sam Volkering, Callum Newman, and Kris Sayce
Callum: You guys have just launched your new service Revolutionary Tech Investor. Why now?
Kris: Any time is a great time to invest in revolutionary technology stocks. But that's even more so now. The world is at the cusp of a new technological revolution that's set to deliver untold benefits to the human race.
Right now we don't know what all of those benefits will be. It's almost impossible to accurately predict the future. However, we can make some educated guesses based on history and on the trends we see happening now.
For instance, one of the more outlandish predictions is for the human race to conquer space. And I don't just mean the odd trip up and back...or sending probes millions of miles into space.
I'm talking about tourist travel into space. I'm talking about commercial enterprises being established in space, such as asteroid mining companies. And if you think that sounds ridiculous, Sam recently spoke to the managing director of an Australian firm that plans to mine some of the resource rich giant rocks that zoom past the Earth every year.
But we're not just looking at the big and brash projects, we're looking at the small projects too - the medical and technological advances that are taking place at the molecular level. Specifically the work scientists are doing with stem cells and DNA.
When you get down to that level the innovations are mind-boggling, such as the potential for doctors to grow and repair damaged tissue or replace organs without the need for patients to go on lengthy and often futile waiting lists. That's revolutionary.
Sam: That's right. We're really at the doorstep of a huge shift in the way civilisation operates. We're talking massive leaps in biotechnology, robotics, molecular technology, energy, computing, all happening now and increasing at unbelievable speed over the next few years. That's why now is the right time to find out what are the best companies to be involved in for this upcoming revolutionary period.
Callum: As far as we know, there's no service like this in Australia. What should subscribers expect from RTI?
Kris: Most analysts and research firms have a two-dimensional view of Australian investors. They assume that because the Australian market is dominated by banking and resource stocks, that's all Australian investors are interested in.
Our feedback shows us that's not true. I've lost count of the number of comments I've received from readers saying this is just the type of service they've been waiting for.
As for what investors can expect, that's easy. It's Sam and my role to search the entire investing world for companies that are involved in revolutionary breakthroughs.
That's an important point. This service won't recommend big blue-chip companies that have already gained market dominance. So you won't see a tip for Google, Facebook or IBM - not unless these firms come up with a genuinely revolutionary new product that could transform their business.
Sam: We're bringing to readers a viewpoint that too many don't have in the Australian marketplace: a positive outlook. Technology and innovation drive the advancement of civilisation; we're looking at the here and now, but also for trends and technologies that will shape our future. The work we're doing is looking for technologies that will make lives better and bring something to the world that's never been done. That's why it's Revolutionary Tech Investor not Same-Same-But-Different Tech Investor.
Kris: Not only that, but contrary to belief, the Australian market is rich with revolutionary stocks. Sure, the depth isn't what it is on the US market, but there are many opportunities right here. Our first issue of Revolutionary Tech Investor highlighted this by recommending a stock that is set to be the global market leader in its field.
Callum: Can you elaborate on how you think Australia compares to the USA?
Sam: Sure. Australia sits in an interesting position. We've got great schools and universities, some fantastic scientists and researchers. We have some of the preeminent minds in medicine and medical research globally. But Australia has a problem of converting breakthroughs into commercial opportunities. There's a fair share of great technology companies in Australia, and we're doing our best to uncover them. But certainly we don't have the depth of the US in this space.
But over the coming years that will all shift as (hopefully) leaders of our country realise the full potential for this country to be a global leader in technology. PriceWaterhouseCoopers recently did a study for Google Australia on this. One of their findings was, and I quote, 'Australia has one of the best regulatory environments for entrepreneurship, and an engaged and strengthening culture of inclusion and openness.
However, we have a considerably higher 'fear of failure' rate than many other innovative countries (e.g. US & Canada) which is constraining the growth of our tech start-up sector.'
However the report also found that the technology, entrepreneurship and innovation could contribute over 500,000 jobs and over 4% of GDP to the economy over the coming years if enough time and resource goes into developing our brilliant minds and technological capabilities.
Kris: Let's hope so. But right now Sam and I have identified a number of technology and biotechnology stocks on the Australian market that are worth running our slide rule over. We've already recommended what we believe is the best Australian biotechnology company, and we're now researching and analysing others for upcoming issues of Revolutionary Tech Investor.
But also remember that this is an investment service without borders. Today it's much easier to invest in international markets than it was even just five years ago. While most of our focus will be on the Australian market, if we see a revolutionary opportunity on a foreign market we'll look there too.
If investors want to make the most out of their returns they've got to look at expanding their exposure to non-Aussie markets. That means looking at overseas technology stocks and other sectors. It's also a great way to protect your wealth against a falling Australian dollar - as the Australian dollar falls the value of your foreign assets should rise (all else being equal).
Callum: Your first report had some fascinating research. Can we expect this in every RTI issue?
Kris: Of course. The name of the service sets a high benchmark. [Laughs] Whenever we're researching a stock it reminds us that we need to look for revolutionary technology stories.
It's a great reminder to eschew mundane and everyday technology stories so that we can focus on the truly revolutionary stories.
During our weekly meetings Sam and I will discuss a number of opportunities. Almost all of them are great companies, but at the end of each discussion we ask a simple question of each stock - is it revolutionary? This usually results in us filtering out at least half of the stocks we've discussed.
It's not that the companies are bad, it's just that they don't meet the criteria. And if a stock doesn't meet the criteria of being revolutionary then it's not likely investors will achieve the kind of big returns they're looking for.
Sam: The most important thing is to understand the technology, its real world application and the trends of the next 10 years. So we're drilling into the technology, the science behind the technology, the people behind the science to get a real understanding for what's going on, what it means for the world and where it's heading.
Callum: OK. One point. 'Technology' is a pretty broad term. What trends are you focusing on?
Kris: That's a great question. You can split this into two subgroups: computerised technology and biological technology. The first is obviously has to do with bits and bytes, the type of technological advances that rely on computing innovations.
The other - biological technology - is to do with the human aspect. This includes biotechnology firms...companies that are doing things to help improve your health such as extending your life or helping to repair body parts and tissues biologically rather than with prosthetics or transplants.
Sam: Yeah, one of the biggest trends we're seeing is the nano-isation of things. By that I mean everything is going Nano sized, less than the width of a human hair. Whether it's computing, medicine or robotics, things are more complex on a smaller level than ever before.
Kris: As Sam says, the nano-isation of technology is a key feature of our early research. I highlight some of these in the Sixth Revolution report. To take one part of that report, I talk about mind over matter and the ability in the near future for scientists to cure diseases before they happen. And I don't mean through vaccinations which involve giving the patient the disease to improve immunity, I'm talking about scientists 'hacking in' to the genetic make-up of your body and flipping a switch to make sure you never get a particular - or any - disease.
Or there's the potential for scientists to grow replacement body parts or organs in a laboratory and then transfer them to the patient. Unlike normal transplants it doesn't need a donor patient to die, or in the case of kidney transplants leaving the donor vulnerable with just one kidney.
In fact the way science is going medical donors as you know them today will cease to exist. In the future donors will simply donate a key 'nutrient' from their body without leaving them in a weakened or adverse state. This is set to be a major revolutionary breakthrough for the healthcare industry and for the health of everyone.
Sam: Kris and I agree that we're seeing everything being connected, too. You might hear us refer to it as the 'Integrated World'. It means literally everything you come into contact with on a daily basis will be linked and be able to 'talk' with everything else. It's an interconnected world like we've never seen before.
Callum: And that flows onto a world of unprecedented data right?
Sam: That's right. There's so much data being created, collected and communicated that it all needs interpretation to make sense of it all. So what you see is that one trend affects another which affects another. It's a shift in how society interacts and operates with each other and their surroundings.
The other thing that's going to turn our world on its head in the coming future is Space. I have no doubt as Space is commercialised entire new industries will be created.
There will be an abundance of new jobs and opportunities as we start to treat space as a stepping stone out into our solar system and the further galaxies. I was just last week talking to the Director of Mining and Processing of an Asteroid Mining company. And from what we talked about I've never been more excited about the potential the commercialisation of Space holds for the world.
Callum: The big picture stuff is awesome but great technology doesn't mean a great company. What are the key things you'll be looking for?
Kris: Sam wrote a great article about this recently so I'll leave it up to him to explain it. But in short, just because a company has a great technology it doesn't mean it will be successful. For example, Apple didn't invent the smart phone. Nokia designed and built a fully functional smart phone in the late 1990s. But it never went anywhere because they didn't have the vision to market it at that time.
Also, it was just the wrong time. The internet was still in its infancy and mobile phones were just that, a phone that was mobile. The idea that a mobile phone would someday become a portable entertainment device was almost unthinkable back then.
Sam: You're right Kris, it is a good question. The crucial need for a great technology company is a game changing technology and the ability to sell it to a big enough market.
We're looking at companies that have great technology, an unmet market and the ability to tap that market. Importantly, the people that drive the company are almost more crucial to making a great company than a great technology. Think Gates, Jobs, Page & Brin, Musk, Branson. These are visionaries that inspire and create great things.
Callum: Yeah, and technology companies can sell to a global market. What are the potential returns from this sector?
Kris: That's another great question Callum. The returns for revolutionary technology stocks can vary. Take Apple as an example. Today it's not a revolutionary company, but ten years ago it was. If you had bought Apple shares in 2003 and held them until today you would have clocked up a 4,093% gain.
That's a pretty good return by anyone's standards. [Laughs] Of course, I can't guarantee every stock we recommend will bag a big return like that. And in reality in some instances we may look for more modest gains such as 100%, 200% or 500%.
The expected returns really depend on the company and its ability to engage the market at the right time. If a company is too early or too late in meeting consumer demand it can mean the stock price missing out on its full potential. But if the company gets the timing dead right then triple- or even quadruple-digit percentage gains are possible.
Sam: That's right. There are some companies that have seen returns over the years in excess of 10,000%. I mean go back to March 1986 to now, look at Adobe over 19,800%. Apple of course, over 12,900% in the same time frame, Microsoft over 33,300%. These are companies that in just 27 years have made ridiculous returns, but they're all real.
Callum: Of course, but we also had the technology bubble. What are the major risks to investing in technology stocks?
Sam: Waiting is one. Take those 3 stocks above. If you'd have waited until January 1995 to invest you'd now be seeing returns of 1,072% [ADBE], 4,028% [AAPL] and 789% [MSFT]. Now that's nothing to shy away from, but you get the point.
Kris: There's no secret to this. All stock investments are risky so technology stocks are no different in that respect. Just as a high street retailer can fail by not understanding its market, a technology stock can fail by not understanding its market.
The difference is that investors tend to have higher expectations for technology stocks than they do for other companies. You usually see this reflected in a higher price to earnings ratio. Investors always price technology stocks for growth, so if the company doesn't meet those expectations the stock price can take a big drubbing.
By contrast, investors tend to have lower growth expectations for retail stocks so you tend to see lower PE ratios and share prices that don't climb as high.
But really it comes back to what I said before. The big risk for technology stocks is that the company doesn't understand its market or gets the timing wrong. Competition can also hurt an unprepared company. In saying that, competition is also a positive as it confirms to a company that it's on the right track.
Sam: I'm sure Kris would agree that the other major mistake people make is not properly understanding the technology and its real world application. It comes back to maybe having a great technology but not having anyone to sell it to. Likewise you might think a company has great technology but it's really just mutton dressed as lamb. You need to dig in and understand the technology, the science and it potential to change the world or at least be sold to lots of people.
Callum: You touched on it earlier, but what kind of timeframe do technology investors need to factor in for RTI's strategy?
Kris: That's one of the beauties of investing in revolutionary technologies. You can never know for certain when the big revolutionary changes will happen. In some cases we're looking at a 6-12 month timeframe, in other cases it's a long-term trend that may not play out for 5-10 years.
I think of the Industrial Revolution as an example. Most historians pinpoint the start of the Industrial Revolution around 1750. For the capitalists who invested in the new iron, milling and manufacturing companies in the immediate years leading up to 1750 they could have made a lot of money.
But think about the capitalists who had visions about an Industrial Revolution in the 1710s or 1720s. They had a lot longer to wait in order to get a return on their investment.
So where are we today? Are we in '1710' or '1749'? Based on the research we're doing and the companies and ideas we're digging up, I have no hesitation saying we're currently living through '1749' all over again.
Sam: Remember, revolutions don't happen overnight. They happen progressively and sneak up on you until one day you realise it's just a natural part of life. That's kind of how Google has found their way to the pinnacle of the internet. Most people struggle to remember what the internet was like before Google was around.
Callum: Yeah. [Laughs] Speaking of Google, will RTI be looking at companies with existing operations and cashflow or more speculative plays? Or both?
Sam: Both. Our main focus is on the technology and the potential it has. It's a similar mind set to how companies are built in Silicon Valley. If you've got a compelling idea/technology and it's genuinely good enough then it's easy to build a business around. The hard part is the right technology and the idea. If it's good enough it will sell itself. And you can look at companies like Atlassian and Palantir that perfectly illustrate that great technology sells itself.
Kris: It sure does. We're not just looking at brand new start-up companies. We're also looking at companies that may be established but which are only now tapping into a new trend.
A perfect example is one of our US stock tips. This is a 100+ year-old company (hardly a dot-com start-up) that is developing leading-edge revolutionary technology.
It's one of the few examples of an established market leading company that has positioned itself to take advantage of a new technological boom. Most established companies in other industries are more interested in protecting their existing market share rather than looking to establish an entirely new market. Not this company.
Callum: Are technology stocks volatile like resource shares can be?
Kris: Well, there are some similarities. A junior resource company typically has all its eggs in one basket. It's investing in uncovering a resource that could make the company and its investors millions or billions of dollars combined. But if the resource company doesn't uncover the resource they're looking for it can have a bad impact on the share price. Resource stocks tend to rise and fall on any given day based on investor confidence of whether the company can find the resource.
As for technology stocks, they tend to have all their eggs in one basket too. They're investing in creating a product or service that could make the company and its investors millions or billions of dollars combined. But if the technology company gets the consumer mood or demand wrong it can have a bad impact on the share price. Like resource stocks, technology stocks can rise and fall on any given day based on investor confidence. So yes, they are similar. Resource stocks are hostage to commodity prices while technology stocks are hostage to consumer demand. Both can be fickle at times!
Sam: Biotech stocks, absolutely. Like resource stocks they often 'bet the house' on one particular technology/cure/treatment. If it gets knocked down by the FDA or poor clinical trials are released, then you can see a company go from hero to zero overnight. Something like software and computing is a bit different.
By the time it gets to market it's a proven technology, so then it's about securing contracts and sales. That tends to mean not as high volatility but still typical risks of any listed stock. The thing is there isn't a regulatory body that will say 'no you're software is crap', and stop it from being sold. It tends more to be industry related performance, not regulatory related.
Callum: Right, I see. You've said that RTI will hunt all over the globe for opportunities. Does that mean buying stocks listed overseas?
Kris: Some of the stock tips will be overseas companies, but I expect most of them to be Aussie stocks. However, it's important that investors have exposure to non-Aussie assets. Buying foreign shares is one of the easiest ways to do it...certainly easier than buying property overseas.
There are two ways to get exposure to foreign stocks. The first is to open a US brokerage account. Commsec, ETrade and Westpac Online Broking all offer this service at reasonable rates.
Sam: The downside of the Australian market is it's just a speck in the ocean. There's an abundance of Australian stocks, but the Aussie market only makes up about 2% of global markets. There's so much more happening outside of Australia we couldn't just look domestically all the time or we'd miss out on pioneering technologies elsewhere. Again, that's not to say there aren't opportunities in Australia, it's just there aren't as many when you look at the US, London or Hong Kong. Again our search is for Revolutionary Technology. And that means looking offshore sometimes.
Kris: I'll add another option is to invest using contracts for difference (CFDs). Not every stock we tip will be available as a CFD - two of the four current stock tips can be traded as a CFD. And CFDs have their own set of risks that you don't have as a share investor. If you decide to use CFDs just make sure you check out the risks. Reputable firms like IG and CMC Markets provide prospective clients with thorough information guides.
Callum: There's one thing investors might like to know. Are traditional financial ratios any use with technology stocks?
Kris: Yes. Anything that lets you compare one stock with another is useful. However (and this may surprise you), the financial condition of a company is the last thing we look at when analysing revolutionary technology companies.
When you're looking at big trends that could happen over the next 5, 10 or 15 years, looking at the current balance sheet or income statement is almost irrelevant. In fact, it can be a hindrance. Knowing that a company has falling revenue, debt or that it quickly burns cash can cloud our vision of the big picture.
Kris: I'm not saying we don't look at these things, it's just about prioritising things. If we look at the financials first, there's a danger we could disregard the company without having looked at it in detail.
By looking at the technology and the opportunity first it reduces our risk of discarding a potentially revolutionary company due to current (and perhaps irrelevant) financials. Once companies make the first few cuts and we're left with a shortlist of about five stocks, then we'll consider the financials.
Sam: Take Tesla motors for instance. Their market cap is a tick over $12 billion dollars and they've only just turned a profit last quarter. Their P/E ratio is somewhere just north of 800.
Now that makes no sense, does it? You'd be terrified of a P/E at that level. But they've just paid back a US government 'green' loan, they've turned a profit, sales are picking up, they're innovating like mad-men and it's estimated their revenues will grow to over $3 billion by 2015. The technology they have is changing the entire auto industry so the share price is a reflection of that, not necessarily their current financial performance.
Callum: Economist Joseph Schumpeter coined the phrase 'creative destruction' to describe how capitalism drives change. RTI will obviously focus on the companies creating wealth but will it suggest companies likely to be hit negatively by developments in the tech space, like newspapers for example?
Kris: If you're asking if we'll recommend short-selling stocks then I would say no. Short selling from a fundamental angle involves just as much effort as recommending stocks to buy. And with so many revolutionary stocks on the market, I'd rather stick to analysing the positive and potentially ground-breaking technologies that could make investors a lot of money.
Besides, when you short sell your maximum possible gain is to double your money if the stock goes to zero. More likely you'll only make between 20-60% as most short sellers get out of a trade long before the firm goes bust. So when you compare the potential returns of short selling dinosaur stocks with buying revolutionary stocks, it's a no-brainer.
Also, picking a dying industry and betting against it isn't as easy as it sounds. Punters who short-sold the New York Times Company at almost any point over the last two years are sitting on losses today. We may look at short selling in the future, but at this point the numbers just don't stack up.
Callum: Your thoughts Sam?
Sam: We'll highlight the companies we think are opportunities and great investment options. That means we'll be looking at competitors and discounting them. We're looking at the bigger picture when it comes to the technology and the industry they operate in because with revolutionary tech comes a change and attitude in how industry operates.
We want game changers not run-of-the-mill companies. For instance, to touch on Tesla again, if we think that's a winner, then we're talking about a potential future of cars not needing petrol...ever. That has a flow on effect for oil companies and combustion engine manufacturers doesn't it? Likewise, green energy and advances in things like solar, wind and geothermal power mean bad long term news for oil companies.
I'm not saying oil companies will cease to exist, but in the future it will be a different world to what we're all used to. That's what we mean when we say we're on the doorstep of a new era, and new age. Things will be vastly different to what you see now, and that in itself will bring opportunities like never seen before.
Callum: So Kris, where can people find out more about Revolutionary Tech Investor?
Kris: Investors should check out the Sixth Revolution report. I'm sure you'll provide a link to this report when you print a copy of this transcript. In that report investors can find out about what I believe is the beginning of the biggest wealth-creating opportunity in human history. It also includes the four stocks that are perfectly placed to take advantage of this new monster trend.
Callum: Sure, I'll make sure we link to that report. Until then, this has been great. Thanks for your time guys.
[Ed note: To get your hands on Kris' Sixth Revolution special report click here. You'll read why the world is on the cusp of the biggest wealth-creating opportunity in human history and how it could transform your life, your health, your wealth and your future...]
Editor, Money Morning
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