Seeking El Dorado
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Seeking El Dorado
Finding the next Amazon amid all the hype
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This issue of Market Sentiment is brought to you by… Composer.
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Recently, I came across this viral tweet that tried to capture the various generation-defying stats of our time. The story is that Jeff Bezos left his high-paying job at a private equity firm to start Amazon after seeing that the internet was growing by 2,300% per year! The tweet prompted a lot of great examples of industries and tech that are growing extremely fast.
While not all of us can leave our jobs to follow a fast-growing trend, something we can do is invest in such companies/industries. For example, over the past 20 years, tech (QQQ) has given 2x the return of the S&P 500 while almost having a similar risk profile and max drawdown.
Another fantastic example is Moore’s Law in microprocessors. Gordon Moore, the co-founder of Intel, hypothesized in 1965 that the number of transistors that will fit on a microprocessor will double every two years while simultaneously costing less. More than 50 years later, we still observe Moore’s law in effect and it has left a lasting impact on both computing and electronics1.
The reason I brought up these two examples is to highlight the disproportionate returns you could have generated investing in these fields early on - Imagine getting into e-commerce in the early 2000s or microprocessors in the early 80s. So in this issue, let’s deep-dive into some of the fastest-growing industries of our time and see where and how we can invest in them!
Lithium-Ion Batteries
The price of lithium-ion batteries has fallen more than 97% in the last 3 decades. It is in ubiquitous use, in everything from our phones to electric cars. If you are still not convinced about the breakthroughs here, the fastest-growing 10-year-old company in the world is battery-maker CATL. The company has grown 125% in its 10th year with a revenue of $15 Billion. That makes it double the growth rate of Stripe, Facebook, and AWS when they were 10 years old!
This is literally comparable to selling shovels during a gold rush as all the electric car manufacturers trying to one-up each other using VC money have to buy batteries from these companies.
The accelerating rate of battery technology/demand is captured perfectly by LIT ETF where in the first five-six years of its inception it barely gave any return but in the next five, it has doubled the return generated by the S&P 500!
Gene Mapping
The cost of mapping a Human Genome has fallen from $100MM in 2001 to less than $1k in 2021. That’s a 1,00,000x reduction in price over a period of 2 decades. This has beaten Moore’s law and then some! If you are wondering about the applications of genome mapping, it can be used to identify genes that cause hereditary diseases, cancer, and can also identify favorable traits in farming and animal husbandry. There are broader uses such as in Forensics as well as in creating personalized treatments for diseases.
One of the largest ETFs that tracks Genomic improvements is ARKG. It has returned in line with S&P500 after its inception in 2014. But at its ATHs in 2021, the fund almost had 5x the return of the S&P 500!
Lab-Grown Meat
We all know that eating meat has a high environmental impact. But the good news is that the cost of lab-grown meat has dropped 90% in the last 2 years and it’s expected to drop another 99.5% in the next 3-4 years. Once/if the artificial meat develops the same taste profile as the real thing and costs much less than the current method of animal husbandry, there would be a massive shift in the dietary habits (especially in the case of fast foods where we are already seeing an increasing shift towards plant-based meats).
I could not find any active ETFs that have a stake in these companies as most of the players in this space are currently still private. The only one I could find was a London-based venture capital firm called Agronomics that focuses on investing in Cellular agriculture. It has returned 289%2 since its inception (Oct’20) when compared to 40% returned by the S&P 500 during the same time period.
Space Flight
The cost of space flight has also undergone an exponential reduction in the last few decades with the cost to send 1kg into orbit being more than $50k in the 1980s to less than $1k now with SpaceX coming into play, with its reusable stages and fairings.
It’s not just big players such as SpaceX and ULA that are in the race to reduce the cost of space flight. There are 100s of small players who are trying their hand at getting into orbit in a variety of different ways. All of this means that we would get cheaper access to satellite internet, more accurate GPS, and better weather and terrain mapping.
There are only limited ETFs in the space as its a pretty new field for private players. The biggest one I could find was UFO (Procure Space ETF) with $90MM+ under management. We do not have any meaningful backtests as the fund was launched only in 2019.3
Cyber Security
The number of cyber-attacks against companies and individuals is increasing exponentially. Ransomware attacks now cost more than $20B in damage every year. Companies going virtual due to the Covid crisis have only accelerated the trend. Adding to this, the number of IoT devices has exploded in recent years contributing to more weak spots for hackers to exploit.
What is more concerning is that there are more and more attacks against critical government organizations such as power stations, nuclear plants, schools, and municipalities. All of this means that companies in the cybersecurity field are expected to rake in a fortune in the next decade.
One of the biggest ETFs in the cybersecurity field is the First Trust Nasdaq Cybersecurity ETF with more than $6.5 billion under management. Since its inception in 2015, it has slightly outperformed the S&P 500.
Other Promising Industries
I cannot possibly cover all the high potential industries and their performance in a single article. So here are some industries that I think have the potential to disrupt our world in the next few decades and some of the most popular ETFs associated with them.
Solar/Clean energy - A new solar plant is now 3x cheaper than a coal one and the cost per unit of solar energy has dropped by a factor of 5x in just the last decade (iShares Global Clean Energy UCITS ETF)
E-Sports - E-sports viewership has outpaced major league sports, and the prize money has grown more than 4,000x in the last 2 decades.
Crypto Adoption - Crypto adoption is closely following the internet adoption trend and the current trajectory predicts more than 1B users by 2027!
AI - The scale of AI models has grown more than 1,00,000x in just the last 3 years. This would be instrumental in creating self-driving tech as well a starting point for Artificial General Intelligence (AGI) (BOTZ - Robotics & Artificial Intelligence ETF)
Autonomous driving - This will be closely associated with the development of AGI. Whoever cracks this is going to have a monopoly over a multi-trillion dollar industry. Think about it. If you have fully autonomous driving, all Ubers can be driver-free, all inter-state transportation can be done without truckers, etc. The applications would be endless (iShares Self-Driving EV and Tech ETF)
Global Fertility Rates have halved over the past 50 years. This represents an unprecedented issue where the number of old people would overtake the number of young people leading to a demographic crisis. All our capitalistic systems such as Pension, 401K, healthcare, taxes, etc. are designed under the assumption that the number of people in the workforce would far outweigh the number of retirees. A sudden shift might be catastrophic.
Some Caveats
Before you try to invest in any of these industries/stocks, you should be aware of the following.
On Returns
While judging the returns, please note that most of the above would fall into the category of extreme growth stocks. As such, their returns would have taken an extra hit in the current bear market that we are in. The S&P500 is down 8.2% YTD. Growth stocks generally have a high Beta which would cause them to drop down even further. All these backtests would have looked very different just 3 months back - Remember, what Beta giveth, Beta taketh away just as easily.
On ETFs vs Stocks
I have focused on broad ETFs here because that’s the easiest and safest way to get exposure to these industries. There is definitely a higher likelihood of abnormal gains if you are willing to take the risk of finding an individual company that you can invest in for the long haul. For reference, over the past 2 decades, Nasdaq gave a 965% return but Amazon gave a 21,800% return!
On Hype
it's much easier to remember the technologies that succeed (we're surrounded by them) rather than the technologies that fail. - Michael Mullany
This is an excellent article that highlights hindsight and survivorship bias that we show while predicting the future. Not all the technologies that are hyped for their growth make their way into mainstream usage (Ultrawideband, RSS Enterprise, Desktop Linux), and technologies that were under the radar the whole time suddenly exploded into popularity (eg. Open Source, NoSQL, x86 virtualization).
Conclusion
It’s very hard to predict the future. For every Amazon, there are 100s of pets.com. For every promising industry that became mainstream, there were a hundred others that were equally promising and died out. Maybe we wouldn’t end up liking the lab-grown meat, or some phenomenal breakthrough in Nuclear Fusion could make all the other renewable energy like Wind and Solar obsolete overnight!
We are definitely minimizing the risk by betting on industries instead of single companies. I would like to think of it as running our own private equity firm. By making a lot of small bets on these upcoming industries, when we are wrong (which we would be the majority of the time), our losses would be small but when we get it right, the outsized returns would dwarf all our other small losses!
Making an investment against all of these uncertainties is certainly difficult. But then again, if it was easy, everyone would be doing it!
Comment below in case I missed out on any big trends that you think should be covered. I will keep adding to the list.
More interesting reads
Deep Work: I am generally not a big fan of self-help books but this one is an exception. Cal Newport delves into the ability and importance of focusing on something without being distracted. Think about the last time you worked for 2 hours without being distracted by either your phone or an email. This book shows you that you can get more work done in lesser time if you just focus on the task at hand.
Steph Smith: This article was made possible only because of her insightful thread. She has an amazing podcast as well as fun-to-read threads on Twitter that are a treasure trove of information. Check out this one where she compiled the best tools on the internet.
Footnotes
Microprocessors are ubiquitous now and are present in almost all the electronics we use. There are some arguments around how Moore’s law will end soon.
Please note that this company can be considered as a penny stock (valuation of around ~$200MM only)
Though it has significantly underperformed S&P500 since its inception
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Seeking El Dorado
Good post and like how you are using Composer for the demonstrations
Hey market sentiment! Another great article! I am currently looking at quant investing and would like to suggest a future article about simple trading estrategys like gary antonacci's dual momemtum investing or any other vs the good old buy and hold. Anyways, thanks for the great content!