The Real Tech Boom Is Still Just Beginning

 | Apr 02, 2013 | 3:00 PM EDT
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At the end of last year I wrote the column "The Real Tech Boom Is Just Beginning," which provided a sweet and sour view of the next generation of technological advances and their impact on humanity, as well as the opportunities provided to investors.

I will expand on those issues here and start with a review of the past quarter's performance of the equities discussed: Amgen (AMGN) is up 20%, Celgene (CELG) is up 50%, Biogen Idec (BIIB) is up 31%, Teva Pharmaceutical (TEVA) is up 6%, and Synageva BioPharma (GEVA) is up 19%.

Real Money subscriber heywally also added in the comments section the exchange-traded funds (ETFs) iShares Nasdaq Biotechnology (IBB) and SPDR S&P Biotech (XBI), which are up 19% and 14% respectively.

By comparison, over the same time period, the Nasdaq Composite index is up about 9%, and the S&P 500 is up about 11%.

So, with the exception of Teva, the returns have so far this year been well ahead of the broad markets and technology overall. The natural question that arises is, can this continue?

The trailing 10-year average annual rate of return of Apple (AAPL) has been about 36% annually, for the S&P 500 it's 3.5%, and for the Nasdaq Composite, it's 4.5%. There's obviously a big difference between those returns.

I think it is more logical and reasonable, however, to anticipate that the experience of Apple is more in line with what investors should expect from the biotechnology space over the next 10 years.

The only pullback in Apple's stock price during that period occurred during the 2008 financial crisis, when the stock fell about 50% in the four months between Lehman failing and early 2009. Other than that, investors would never have been provided an opportunity to position capital to buy on a pullback.  

I do, however, expect that there will be episodes over the next 10 years that result in substantial declines in spot prices for the markets broadly and for the stocks in this sector. But I don't know when they will occur.

A strong argument can be made that the S&P 500 is currently overvalued by between 35% and 60%, as determined by the long-term average price-to-earnings relationship. I will discuss that in more depth in another column, along with other issues that could cause equities to decline.

Although I believe these issues are very important for investors to be aware of with respect to index funds, being overly cautious with respect to the biotechnology area could cause investors to incur one of the greatest lost-opportunity costs over the next 10 years if they don't participate now.

Although the technologies being created will at first appear to provide tremendous positive application for life extension and the enhancement of biological functions through the use of manmade hardware and software, these technologies will also in short order advance beyond the need of human interaction. The human being will become the limiting factor.

This has been true for the past few decades for advanced military fighter aircraft, which are capable of maneuvering well beyond the limits of human pilots.

Investing in such areas should be viewed not just from a profit motive but from a defensive position, because these technologies and others are advancing to a point where they will be used to replace humans for perhaps most functions and displace jobs for human beings permanently.  This is the sour part of the "compensation thesis" that I discussed in the previous column.

Technology destroying more human jobs than it creates may be the result of the continuing acceleration in technological advancement, even as it makes human experience better.

The economy that future generations will experience will be structurally different from what we have today, though, and the transition will most certainly not be harmonious.

Investing in these technologies now may supply investors with the means necessary to help support their children and their children's children as the process unfolds.

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