One of the sectors I have been writing about intermittently for the past few years is biotechnology. Although I try to review the sectors, companies, ETFs and ADRs, I try not to do so with biotechnology because of its volatility. Although the stock prices of companies and ETFs in the sector are subjected to the same myopic forces that drive the broad equity markets, the businesses are super cyclical.
They are also largely detached from the economic events and expectations that shape the revenue and earnings potential for most members of the S&P 500. I view this space and the companies within it as very long-term holds that should not be evaluated based on current economic or market events.
I last wrote about the biotechnology in the April column, Biotech Stocks Have Enormous Upside. Companies in the sector had experienced substantial declines in their stock prices during the first quarter of this year. This was most evident in the performance of the two largest ETFs, SPDR S&P Biotech (XBI), and iShares Nasdaq Biotechnology (IBB), which had declined about 22% and 17%, respectively, from their highs just a few months earlier.
In keeping with classic financial media fashion, just as the discussion about the recent past performance of these ETFs being indicative of a bubble popping in the space was reaching a climax, the share prices of both were near their near-term bottoms. Since I wrote that column, XBI and IBB have both rebounded and are up 18%, and 15%, respectively, which puts them back near their all-time highs of this past February.
All of the macroeconomic and technological events that I've written about previously and that have been driving biotechnology for the past few years are still in place with no indication that anything is going to derail.
One of the issues with respect to the sector that precludes speculators from participating in it is the belief that it is too complicated for the average person or analyst to figure out. Therefore, prudence mandates that it be avoided, even as a long-term growth play.
The problem is that this sentiment and belief can apply to almost anything today. Technology is everywhere and being implemented internally by companies in all sectors, which makes trying to understand their business models increasingly difficult for anyone, even those who believe themselves well versed on technological issues.
And it is only going to get more complex and at a faster-than-exponential rate. Advancements in artificial intelligence, the Internet of things (IoT), nanotechnology, bioinformatics, biometrics, quantum computing, molecular computing and many others will all begin to converge and merge toward the technological singularity. As it is adopted by the companies involved, we will delude ourselves into believing we understand.
No area of the publicly accessible markets will escape being dramatically affected by this acceleration in technological advancement and adoption. The integration of these technologies at increasing scale for the emerging S-curve (technology life cycle) will dramatically reduce marginal costs in the "leading sectors" but will simultaneously destroy existing financial wealth, employment, and business and household income, reducing output per capita indefinitely.
In this environment, Peter Lynch's famous advice from the 1980s to "invest in what you know" is the surest way to find yourself either perpetually behind the investment curve or frozen into inaction. For practical purposes, from the perspective of the vast majority of us not steeped in the technological revolution, the technological singularity has already arrived. Technological advancement and the adoption of it by even basic sectors (such as food manufacturing and distribution) is making it nearly impossible for even the best financial analysts to determine the impact it will have on companies in those sectors.
The entire domestic and global economy, along with the capital markets and all of the companies in it, is becoming a giant black box. Spending time trying to understand it is futile.
Both speculators and investors are better off focusing on the long-term trajectory of technological advancement, acknowledging the probable outcome of it, admitting they don't understand it. It will also be necessary to accept the cognitive dissonance this causes, allocate capital to the companies creating it and ignore almost anyone writing about it -- because they don't "know," either.