Bet on Transformational Technologies to Trump Political Ideology

Emerging transformational technologies, as economist Joseph Schumpeter pointed out, do not advance the economy by consistent predictable increments. Rather, they disrupt and destroy, bankrupting entire industries by offering clearly superior alternatives.

Historically, however, these technological advances have rarely been recognized and welcomed when they first appeared. For the most part, they have been doubted by the general public. Most people didn’t understand the specific technology and believed, despite all historical evidence, that scientific progress had finally leveled off. Often, powerful institutional forces resisted and attacked these emerging disruptive technologies.

Progress, however, cannot be contained. This was true even when the technologically advanced world comprised only the United States and few other developed nations. Today, with an international economy growing more rapidly than America and looking for ways to catch up, it is even more true.

Take, for example, nuclear power. While reactionary anti-nuclear Luddites have managed to slow deployment in America, they failed in France and Russia. Now these states are moving rapidly to the next level, exploiting the vastly superior thorium nuclear potential to serve a rapidly increasing worldwide demand for electrical power.

Think about that. People who have more oil than they could ever use are developing nuclear energy. America, which imports vast quantities of petroleum, is squelching domestic oil production and nuclear power deployment.

Recently, we’ve learned that China, which is already building 25 new reactors, has launched a thorium program as well. By 2020, China plans to have 40 mega-reactors that will produce more electricity than all of America’s 104 plants combined.

In America, you can already sense a growing anger directed at the new age fantasists who promised us an economy powered by windmills, solar panels and corn ethanol. When gas prices hit $5 a gallon, you’ll see, up close and personal, how market forces trump ideology.

If, however, half the money that had gone into worthless climate research and ridiculous subsidies for disastrous technologies like corn ethanol had gone toward nuclear energy production … well, never mind.

Governments and social forces have never, ever succeeded in bottling the genie of innovation permanently. Railroads, automobiles, electrification, telephones, radio, television, computers, the Internet and mobile electronics were all mocked as temporary or unimportant fads when they first emerged. Then, seeing they weren’t going away, these technologies were declared a mortal threat to civil society by powerful interests vested in the old technological status quo.

My associate Ray Blanco, whose ancestors are from Spain, likes to cite a common invocation used by the privileged aristocracy of that country. Toasting or saying goodbye to a friend, they would assert, “Que no haya novedad.” Roughly, this translates as, “Let no new thing arise.”

This was the unstated, but futile, motto not only of the old aristocracies. It was the sincere desire of the print media as the Internet destroyed the newspapers’ monopoly over ad revenues. It’s, evidently, the core philosophy of the existing educational establishment as it fights a bitter losing battle against decentralized new-media education. I could go on.

The real danger involved in trading transformational companies does not come from fluctuations or macroeconomic trends. Innovation always overpowers business cycles.

The danger is that a new technology will be leapfrogged by some unexpected newer technology. In fact, this is the danger inherent in all transformational investing. A transformational technology can be made irrelevant by an even more transformational technology.

Let me give you a theoretical example. We know that thorium nuclear power is set to leapfrog conventional uranium-based reactors. Of this I have no doubt. On the other hand, there are some very smart people working on small-scale fusion. Many of these people are so obsessed with this quest that it borders on a mental disorder, so there’s no way to judge their odds of success. If they do succeed, however, it will make thorium far less important.

(It would also, incidentally, be enormously beneficial for other companies in our portfolio.)

We know that some of our stocks will fail, but a diversified portfolio of true transformational companies is, historically, the surest source of true transformational wealth. Moreover, we know from studying the great investors of history that those who implemented this strategy most successfully were long-term investors. They bought and ignored their holdings even during periods of severe fluctuation.

They understood that, ultimately, market forces always win out over politics and the unpredictable psychology of the stock market. Science moves forward, and those who have faith in human innovation reap the benefits.

Patrick Cox
Whiskey & Gunpowder

February 25, 2011