Is now the time to buy?
The role of exponentials in a world of greed and fear (of missing out), and why innovation strategies can outlive the (corona) crisis.
On the question, if there’s ever a right time to buy, we suggest: focus on the “what”, split the “when”.
Here are our conclusions on the current COVID-19 crisis and market situation:
- What to buy: Innovative companies that capitalize on applied exponential technologies are promising assets in times of extreme pessimism. Think Zoom and Netflix.
- Why innovation: Exponential technologies that entered global markets have been unimpressed by historic caesura like the Great Depression, World Wars and financial crises. They don’t mostly just outlive, but are solutions to crises. Innovative companies create value through technology across all sectors — and value is what we look for in investments to brave times of crises.
- When to buy: We do understand that the regret and fear of missing out (FOMO) on an eventual market recovery can be as dispiriting as another drawdown. As it is impossible to precisely time the market bottoming, a sensible approach involves gradually and systematically buying over the next months and quarters according to a well devised plan. Stocks have always bounced back stronger, and interest rates are at historical lows.
“Be fearful when others are greedy and greedy only when others are fearful.” Warren Buffett
Exploring Exponential Progressions: Friend and Foe
Technologies that have changed the world have always shown exponential adoption rates. Moreover, they have often contributed to solving the crises of their times. We believe progressive companies that leverage exponential technologies will demonstrate resilience and continue to innovate into a successful future. For instance, we now see video conferencing, home office services, and cloud-based solutions as vital tools in keeping businesses operational. What investors should look for especially when prices are low remains “value for money”: After and in a fear-driven sell-off, many companies are justifiably priced for distress, but there are some gems in the bucket, selling at a discount. Leading companies applying exponential technologies like Artificial Intelligence (AI) e.g. for cancer detection and treatments, represent safer bets even if this crisis shows a slower recovery.
Media: In the media-scape, we again see an exponential increase in the volume of data — and corresponding noise — related to COVID-19. When SARS was first identified in 2002 and spread in 2004, WhatsApp and Facebook were non-existent. The rise of social media has hugely influenced the pace with which information spreads and has increased public reactions. The WHO has named this phenomenon “Infodemic,” a side-effect of the pandemic.
The spread of the virus exhibits exponential characteristics. The human brain is wired to think linearly, which is why numbers usually get underestimated as the process unfolds. All efforts made to “flatten the curve” reveal the underlying principle: exponential developments stay exponential only as long as they can realize their potential without being disturbed. “Social distancing”, travel bans, and other measures are all “disturbances” for an exponential development. In other words: society is not at the mercy of the virus. The sooner we rewire our thinking and act accordingly, the more we can thwart the spread.
“Nature is exponential. Technology is exponential. Human thinking is linear.” Evelyne Pflugi, CEO of The Singularity Group (2017)
The Resilience of Innovation
A cursory look through history offers interesting perspectives and insights on how innovative technologies have behaved in the context of their time. We see below that since the First Industrial Revolution innovative technologies that were adopted by the market and showed viability had grown exponentially — despite two wars, depression, and several financial crises and epidemics. More importantly, we see that innovative technologies are raising especially fast in crisis.
Here we see what happened to companies that adopted new technologies: they themselves showed exponential growth.
Many innovative technologies directly contribute as a solution to the current situation and might surprise on earnings calls two quarters from now. We don’t offer single stock recommendations but to give you a taste of the kind of companies we are able to identify in our Singularity Fund, here’s a short list of some likely beneficiaries of the current situation and aftermath:
- NIDEC Corp engages in the development, manufacturing, and sales of high-precision components and electrical systems essential for unmanned/autonomous robotic systems such as delivery robots and disinfecting robots widely used in China during the shutdown period and likely to be deployed in the west as measures unfold.
- NVIDIA Corp is the leader in specialized Graphics Processing Units (GPU) needed in computer vision, motion control and positioning essential in similar applications as mentioned above. NVIDIA is one of the best scorers on our screen for top notch innovation, also benefiting from mid- to long-term developments in AI, Internet of Things, and Virtual Reality, all areas needed for any unmanned systems supporting humans in times of social distancing and beyond.
- Eli Lilly and Co. is amongst a few companies ramping up efforts to come up with a cure, while AI- and Big Data-driven drug discovery is spurred by companies like Peptidream Inc..
Market volatility is as old as capitalism itself, and so is the Buffettarian wisdom that equities always yield profits in the long run
Looking back over more than 60 years of stock market history, we have seen 10 bear market episodes in the S&P 500 including the current one in which stocks have declined more than -20% from their previous peak. The average drawdown sustained during these periods was -35.5%. More importantly, when we consider investment performance from the time the market exceeded a loss of -20% we find that, on average, investors who entered the market at that point achieved a positive performance over the following 3, 6, 12, 18, 24, and 36 months.
Which leads to a rather subjective observation: seasoned investors tend to keep calm and carry on when markets stumble. They draw on an inner archive of experiences that spans decades. Jim Fullerton, former Chairman of Capital Group, summarized this phenomenon in 1974 during the longest bear market since the Great Depression:
“One significant reason why there is such an extreme degree of bearishness, pessimism, bewildering confusion and sheer terror in the minds of brokers and investors alike right now is that most people today have nothing in their own experience that they can relate to that is similar to this market decline. My message to you, therefore, is courage! We have been here before. Bear markets have lasted this long before. Well-managed (mutual) funds have gone down this much before. And shareholders in those funds and the industry survived and prospered.”
Takeaway
While exponential growth induces fear in the context of crises, it is the hockey stick shaped wave greedy investors actively seek. Technologies impact markets exponentially no matter the circumstances, that’s why filtering for applied exponential technologies is at the core of our investment philosophy. We do not know, if and when the bottom is hit. It is certain, however, that valuations are low. We therefore believe that time has come to start a staggered investment approach in innovative, value-for-money titles.
