We just concluded the 7th annual University of Virginia Investing Conference (UVIC). For the first time in seven years, I (and many veteran participants) emerged from the conference rather buoyant. Professional investors tend not to be wild-and-crazy personalities: phrases like “prudent fiduciary” and “careful analyst” appear with some regularity at our conference. Therefore, the optimism among keynoters, panelists, and the audience arrested me. Let me tell you why…and what caught my attention.
The Context
We chose the conference theme of “Investing in Innovation” to recognize that the only real economic recovery for America would come from the creation of new value. And ultimately, innovation in products and services is what creates new value. Thus, we asked the range of speakers to brief us on some themes that represent promising investment opportunities.
For the past six years, investors have struggled with the Global Financial Crisis, Great Recession, gridlock in Washington, and sequestration. And just in the past few months, the news has not been the happiest: market volatility, plunging commodity prices, deflation in Europe, geopolitical uncertainties, ISIS, and ebola. Some pundits have been forecasting that this decade would echo the “lost decade” of 2000-2009. I was rather prepared for another dour narrative.
Instead, what we heard was simply tonic.
The Themes
Energy renaissance. Bob Craine, an independent producer, and Barnes Hauptfuhrer, a private equity investor, argued that horizontal drilling techniques are revolutionizing the production of gas and oil in the U.S. Energy independence and the export of hydrocarbons, will strengthen America’s trade balance, increase the Federal budget, and permit America to reduce its dependence on nation-states in the Middle East and elsewhere. Low prices and the location of gas fields near industrial centers will stimulate a manufacturing renaissance in America. The impact of these developments will have a long duration. However, recent declines in the price of oil will have an asymmetric impact on the energy producers and will affect M&A activity in that field. Investors should focus on the most efficient producers, who can make a profit even if oil drops to $70/barrel.
Digital healthcare. The high cost of health care will be ameliorated by digital technology—this isn’t just digitization of medical records. Digitization entails making biology predictable through the collection of data, the subsequent analysis of each patient’s health, and the delivery of therapies to treat the specific needs of patients. Medicine will become “personalized.” The sense of panelists Bob Hugin, Sam Isaly, Bryan Johnson, and Bob Hariri was that Obamacare is here to stay, though we are likely to see significant amendments to the healthcare legislation. Bryan Johnson said that “the returns in programmable biology will be astronomical,” as if the operating system of the medical system were completely rewritten.
Cybersecurity. Kathy Warden asserted that one of the biggest issues in technology is how to defend against cyberattacks. Everyone is at risk for these attacks, launched by both individuals and nation-states. Therefore, investment in “predictive threat detection” will be needed and well-rewarded. CEOs will find the budget to cover such investments because the consequences of failing to defend against such risks are huge.
Abundance. Peter Diamandis, the founder of the X-Prize, told us that the news media overemphasize negative news, when in fact human existence is getting better and better at an exponential rate. He offered a host of metrics in areas such as digitization of information, dematerialization, democratization, and demonetization. “100 years old will become the new 60.” Healthcare and education will experience “massive disruption.” In the process of realizing this new abundance, whole industries will be disrupted: “linear thinking companies will be disrupted by exponential-thinking” innovators. Diamandis plugged his new book, Abundance: The Future Is Better Than You Think, which elaborates on the thesis. A question from the audience prompted Diamandis to say that his two favorite investment areas are human longevity and planetary exploration—he is actively exploring the possibility of mining asteroids.
Information technology. Ned Hooper said that some pundits had decried the decline in R&D by corporations. Yet he showed data that the rate of innovation in information technology had in fact never declined and instead had been growing exponentially. Microprocessors, solid-state storage, cloud computing, mobility and wireless (“everything connected everywhere wirelessly”), cloud software platforms, and data gathering and analytics—all of these areas show breakout rates of growth. A panel including Hooper, Charles Cory, John Siegel, and Michael Sola identified some specific sectors of information technology for special attention: the cloud (such as Amazon Web Services), software as a service (SaaS), and security. In response to a question from the audience, John Siegel said that he expected four firms to emerge as significant players from the current tech environment: Google, Microsoft (yes, a turnaround under the new CEO), Amazon, and IBM. Memorable quotes: “One thing you get in tech is a very short memory” (Ned Hooper); “Find a seam in a large growth market and work it hard” (Hooper), “Strategy is for amateurs; operations is for professionals” (Hooper quoting General George S. Patton), “we’ve seen a dramatic decline in the risk premium for investing in growth” (Hooper), “as costs of computing and storage go to zero, security becomes more important” (Cory), “ CEOs will find funds for security because being vulnerable to hacking is a risk for which CEOs can get fired” (Cory), “Amazon has great staying power; it’s not about generating earnings but about disrupting markets” (Sola), “Amazon is really the most advanced distribution company in the world, an interesting merchant enabled by technology rather than a tech company” (Cory). In response to a question from the audience, the panel asked for a show of hands: “are you more concerned about cybersecurity or privacy?” The audience voted heavily for cybersecurity.
Big pivot. Nancy Lazar urged us to close the book on everything we know. We are paying too much attention to the bad conditions of the past few years. Instead, the fundamentals point to the fact that America is at a turning point toward prosperity, much as it was in the early 1980s. She said, “I am exceptionally bullish on the U.S.” These fundamentals include the plunge in the price of hydrocarbons, the decline in global short-term interest rates, deleveraging of the U.S. economy, growth in U.S. bank loans, growth in U.S. government spending, growth in real private GDP and capital spending, a “smarter” U.S. consumer, a moderate housing recovery, the manufacturing renaissance, and the “huge strengthening” of the dollar. I cannot remember having heard a more buoyant economist.
Argentina. Kyle Bass lent a surprising close to the conference with a presentation on the attractiveness of investing in Argentina’s sovereign debt. He is an event-driven investor who looks for outsized returns based on an assessment of probabilities—in the case of Argentina, these assessments consider the resolution of court cases, the actions of “hold-out” investors, and the outcome of a forthcoming Presidential election there. Bass said that he, too, is “bullish on the U.S.” and believes that we will see a massively strong dollar. He also quoted a statement by Ben Bernanke in a private meeting that “interest rates will not normalize in our lifetime.”
Advice to students.
1. Learn to code—not to be professional software coders, but to be able to talk to those who are. (Cory)
2. Develop an ability to think creatively (differently and faster). (Johnson)
3. Think hard about risk: evaluate it, assess your appetite for it. And be careful of the obvious: to be in a “low risk” job in a firm and industry that are “low risk” may mean that you are ripe for disruption and therefore in an extremely risky place. (Hooper)
My take
Are happy times here again? Maybe. All this talk about disruption means that we may face a rather volatile era: winners winning a lot; losers losing a lot. Some folks are likely to wind up worse off. As automation and artificial intelligence displace workers in the middle of corporate organizations, we’re likely to see some arresting developments—I’ve blogged earlier about this point and referenced a book by Brynjolfson and McAfee who provide a longer discussion. During a break, one participant said that the vaulting tech forecasts seemed a bit arrogant in the face of the possible human cost.
All of the forecasts at this conference suggest to me that America may be where it was in, say the mid-1930s or late 1870s: times of enormous technological, political, and social change. In such times it is better to be relatively young, well-educated, with a strong social network, and relatively risk-tolerant. These are interesting times—which reminds me of the apocryphal Chinese curse, “May you be born in interesting times.”
We’ll convene the University of Virginia Investing Conference again next year. Watch the website of the Richard A. Mayo Center for Asset Management for forthcoming details. And if you find these notes interesting, join us next year!