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The future that nobody is talking about

Market Summary – 2nd Quarter, 2018

“If I had asked people what they wanted, they would have said faster horses.”

                                        ~Henry Ford

There is a human tendency to put excessive emphasis on what’s directly in front of us – the here and now. This is a habit that is easily exacerbated in today’s headline-driven, media-saturated world. For example, this summer we’ve seen seemingly endless news coverage about many political and economic issues. Like the attraction of a shiny object, these dramatic headlines can, at times, distract us or overtake our capacity to see what lies further down the road. One reason that this is the case is because of another human tendency, to think in linear terms, processing information sequentially. Quite simply, we often put too much focus on facts directly in our view without being able to think “outside the box”, or consider other possibilities for the future.

What is striking about this reality of human nature is how many investors are overlooking a key story that’s not in the headlines – the emergence of one of the most innovative and transformational periods in history. Life, as we know it, will change dramatically in the coming decades due to a wide range of scientific and technological advancements. In a time when it is easy to get lost in the headlines, it is essential to note that forward thinking is essential for successful investors.

The pace of human advancement over the past century-and-a-half has been nothing less than mind-boggling. Consider that within the span of a single lifetime (66 years) we went from the Wright brothers at Kitty Hawk to landing men on the moon. It is a reminder of how quickly things can change, and how concepts that would be considered unimaginable just a few generations ago are almost taken for granted today.

If you thought the breakthroughs of Thomas Edison, the Wright brothers, Robert Goddard, and Bill Gates were impressive, we believe that the best is yet to come. Breathtaking achievements are evolving at an amazing pace.

Patience before profits

It isn’t unusual for innovators to be met by waves of skepticism about their ideas. A number of the greatest advancements in U.S. history were not readily marketable because they were so ahead of their time. The seeding and nurturing of what ultimately transforms into breakthrough technologies that define a generation and change the way we live often require public investment at the outset. The government often underwrites the incubation stage of ideas that will later thrive through private investment. There are numerous examples of industries that changed the direction of the U.S. economy with initial government support. For example:

  • Railroads transformed 19th century America, but it wouldn’t have happened without the land given by the government to railroad companies, equal at the time (in the 1860s) to more than 5% of the country’s land mass.
  • In the 1920s, the government encouraged development of commercial airline services by paying private companies to deliver air mail. Government incentives ultimately encouraged the private sector to pursue larger, safer and quieter planes that would spur the commercial aviation industry.
  • President Dwight Eisenhower promoted the interstate highway system in the 1950s. This and government investment in highways and streets at the state and local level had a major impact on our car culture and the booming automobile industry.
  • Silicon Valley is considered the cradle of American technological innovation, but again, many initiatives, from chip technology to the development of the Internet to today’s pursuit of new advances in quantum computing were nurtured with the help of government funding

While public investment in the infant stages of certain industries can be critical, the reality is that government is generally not effective at guiding new technologies to commercial success. Nor should it be. This is where capitalism comes into play, and provides an avenue for investors to profit.

Riding the cost curve

As nascent technologies evolve and mature, the costs associated with innovative ideas are reduced, making private investment more feasible as the technology achieves the potential for commercial viability. The free markets shine when innovation meets capitalism to help move advancements even further, creating practical applications that attract consumers and businesses and advance society.

For investors, the initial skepticism of the markets toward innovative concepts can represent an investment opportunity. Like any kind of value investment, attractive firms that have not yet achieved fair value in the market offer long-term upside potential. The key is not to invest in fantastical stories, but rather to invest in attractively valued businesses that are positioned to prosper from new developments.

The current surge of private space ventures is a prime example of innovation reaching the potential for commercial viability. It all started with NASA. It is notable that the phrase “exploration leads to commerce” was written into NASA’s founding charter when it was established in 1958. NASA ended the space shuttle program in 2011, but handed out billions of dollars in new contracts to private companies to move people and materials into space. Now the space “industry” is beginning to make its mark. What is now an estimated $350 billion market is projected to grow to nearly a $3 trillion market over the next 30 years1. The Wikipedia entry for private space companies is eight pages long, something unfathomable at the time of the Apollo 11 space landing nearly a half century ago.

The expense of sending rockets, and eventually, people into space has dropped considerably. Colonizing Mars is clearly on the agenda of some prominent entrepreneurs. India’s government recently spent about $70 million to launch an unmanned rocket to Mars. Incredibly, this was less expensive than the reported cost to produce the Matt Damon movie, The Martian, just a few years ago (about $100 million)2. Yes, it is now cheaper to fly to Mars than to make a major motion picture about it.

Q218 cartoon

John O’Brien/The New Yorker Collection/The Cartoon Bank

The future begins today

Space may be the “final frontier,” but it only scratches the surface when it comes to scientific breakthroughs that will change life as we know it. Physicist Michio Kaku is someone we admire greatly; he is not only an innovator in his own right, but also a great communicator about the possibilities of science. He will be our featured speaker at MPMG’s 2018 Speaker Series event in August. We can think of no better spokesman for the future than Dr. Kaku. His desire to become a physicist emerged at an early age because he determined that physicists “invent the future.” Dr. Kaku emphasizes that while he writes about the future, “I’m not a science fiction writer. Every technology I write about has a prototype.” Here are just a few examples of major breakthroughs he sees on the horizon:

Cancer treatment that really kills cancer

According to Dr. Kaku, “In your bathroom, you will have more computer power than a modern hospital, so that your toilet will pick up proteins emitted from cancer colonies of maybe 100 cancer cells 10 years before a tumor forms.” Carrying this idea further, Dr. Kaku notes that “something called nanoparticles, which can actually zero in and kill individual cancer cells like smart bombs,” will become a routine and relatively painless form of cancer treatment. It will deal with issues far in advance, and be far less invasive and more effective than chemotherapy.

The fountain of youth

We are on the verge of expanding lifespans. In the future, says Dr. Kaku, our medical records will include a rundown of our genes. It will make it possible for researchers to compare the genes of young people with those of older people, subtract the genes of older people, and determine which genes control the aging process. Already 60 genes that control human aging have been discovered. Future generations may have the ability to reach the age of 30, and then pause the aging process for perhaps many decades.

More practical application of solar energy

Solar energy has evolved from a fringe energy source to a far more practical and competitive one. Like many other examples cited above, the industry was once highly dependent on government subsidies. A major limitation was the lack of an effective way to store the energy generated. If the sun doesn’t shine, solar power is an inefficient energy source. Dr. Kaku tells us that we’re on the cusp of “super batteries” that will make storage far more efficient, making wind and solar fully competitive with fossil fuel technology.

“Smart” contact lenses

It was once considered eye-opening when contact lenses were invented that could alter eye color. Dr. Kaku speaks of something far more dramatic. The lenses of tomorrow will allow you to blink and see a biography of the person you are speaking to, or translate from different languages. These are just a handful of the examples of innovations that are on the horizon and the kinds of breakthroughs we expect to hear more about from Dr. Kaku at his appearance.

Are you ready to capitalize on the future?

There was a time when most people couldn’t conceive of railroads, airplanes, automobiles, or space flight. Now we’re talking about advancements that, to many of us alive today, may seem fanciful – such as virtually curing cancer, altering the aging process, and even colonizing Mars. Some of this may be closer to reality than others, but there is no lack of effort to move humankind forward through the force of scientific breakthroughs.

Investors shouldn’t discount the potential that science will help resolve some of the biggest challenges we face as a society. The brainpower and inventive thinking behind today’s scientific quests are unprecedented. There are thousands of upon thousands of great minds, across the globe, making contributions to our new age of advancement.

As Dr. Kaku points out, over the past century lifespans have expanded dramatically. We’ve seen an explosion of wealth and prosperity. It can be credited in large part to scientific advancement. There is a constant effort to improve life, whether it is through robots or computers managing the more mundane tasks of life, or helping us enjoy more active, healthier and longer lives. It may mean resolving challenges related to climate change or more effectively feeding the hungry of the world.

News that’s fit to print….but isn’t

Given the barrage of headlines that confront us on a daily basis, it is always easy to find reasons to feel less confident about the future. The point of this letter is simple – that just like the visionaries who conceive of what the future may be with a specific technology or advancement, investors must also take the long view. It is easy to think in a linear fashion, or to make decisions based on the immediate risks and rewards that we can clearly see. Investors who are caught up in this are lacking a sense of the big picture. They fail to approach the future with a vision of what’s possible.

The importance of seeing the possibilities of the future is especially vital for value investors. Attractively priced stocks of quality, well established companies are typically overlooked due to the human tendency toward linear thinking. Having confidence in the future of a company that is out of favor is a big part of identifying good quality stocks as attractive, long-term investments. Just as important for investors is the ability to remain patient, and not let the short-term movements of a company’s stock distract them from the fundamentals of potentially undervalued businesses. Stocks that represent good value are of companies that, at a certain point in time, are not aligned with mainstream thinking and the current fashion. But we believe that this puts them at an attractive price point that creates significant wealth-creation potential, with less risk, for investors.

No matter the challenges we may face in the current environment, the story that isn’t being covered is that we’re on the precipice of an extraordinarily innovative period of history. Major changes are in store for our world that will move humanity to unprecedented heights. This is a story that investors need to hear and heed.

2018 MPMG Speaker Series Event

Today’s Innovations Generate Tomorrow’s Profits

MPMG is excited to welcome Dr. Michio Kaku, one of the most widely recognized figures in science in the world today, at our 2018 MPMG Speaker Series event. Dr. Kaku is a theoretical physicist, bestselling author, acclaimed public speaker, renowned futurist, and popularizer of science. As co-founder of String Field Theory, Dr. Kaku carries on Einstein’s quest to unite the four fundamental forces of nature into a single grand unified theory of everything. In addition, Dr. Kaku is an internationally recognized authority in the prediction of trends affecting business, medicine, finance, and our way of life, based on the latest research in science.

Dr. Kaku has written three New York Times Best Sellers: The Future of the Mind, Physics of the Future, and Physics of the Impossible. He also appears regularly on national and international TV programs, such as the Larry King Show, Nightline, 60 Minutes, Good Morning America, CNN, ABC News, Fox News, BBC, PBS’s Nova and Innovation, Tech TV, the David Letterman Show, the Colbert Report, the Connan O’Brian Show, and the Bill Maher Show. He has appeared on numerous science specials including PBS’s Steven Hawking’s Universe, Science Odyssey, and Einstein Revealed, the BBC’s Future Fantastic, Parallel Universes, The Big G: The Story of Gravity, the Discovery channel, the History Channel’s Universe series, and many science documentaries. He has also written for the Wall Street Journal, Time Magazine, Discover Magazine, Wired, as well as many other publications.

Given today’s headline-driven culture, there is perhaps no better time to hear about the big-picture events that will shape our future as investors and as a society. And we believe there is no better person to discuss this future than Dr. Michio Kaku. We look forward to celebrating our 13th annual event with one of the world’s most respected scientists.

~MPMG

 

1. BofAML Global Research based on various sources.
2. Freeman, David. “Michio Kaku Foretells Humanity’s Extraordinary Future.” NBC News. https://www.nbcnews.com/mach/science/michio-kaku-sees-amazing-things-our-future-except-those-scary-ncna851226. March 2, 2018.

Established in 1995, Minneapolis Portfolio Management Group, LLC actively manages separate accounts for individuals, families, trusts, retirement funds, and institutions. Our proven value-oriented investment philosophy has created long-term wealth for our clients.

Visit our website at: www.MPMGLLC.com

Although the information in this document has been carefully prepared and is believed to be accurate as of the date of publication, it has not been independently verified as to its accuracy or completeness. Information and data included in this document are subject to change based on market and other condition. All prices mentioned above are as of the close of business on the last day of the quarter unless otherwise noted. Market returns discussed in this letter are total returns (including reinvestment of dividends) unless otherwise noted.

The information in this document should not be considered a recommendation to purchase any particular security. There is no assurance that any of the securities noted will be in, or remain in, an account portfolio at the time you receive this document. It should not be assumed that any of the holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable. The past performance of investments made by MPMG does not guarantee the success of MPMG’s future investments. As with any investment, there can be no assurance that MPMG’s investment objective will be achieved or that an investor will not lose a portion or all of its investment.