ʺAs we look ahead into the next century, leaders will be those who empower others.ʺ – Bill Gates
Tech Trends are Shaping Everything
Not so long ago, much of the excitement that came along with travelling was the idea of uncertainty and discovery. Today, Google Maps provides the ability to drop a virtual person to your exact location of interest for a full 3D immersive experience – you are no longer required to leave your home to discover a new destination. Technology has, and will continue to transform our lives and the global economy as we know it. Contrary to popular belief, the tech trend is just getting started as a multitude of emerging technologies such as robotics, artificial intelligence, biotechnology and blockchain continue to mature.
Disruptive technologies continue to enter the market superior and cheaper than their predecessors with the ability to threaten stable businesses faster than ever. Virtually every industry today, from retail to financial services, is undergoing major changes. Those that choose to embrace new technologies will thrive, while others risk being left behind. In other words, big winners and losers will emerge within the capital markets. Our goal, at KJ Harrison, is to help navigate the investment landscape in order to capitalize on the profitable opportunities and avoid the unprofitable ones – while paying close attention to each clients’ investment goals, risk tolerance and time horizon.
Digital Platforms will Define our Future
The key is to own “the” next digital platform and not focus on the next innovative product company – we want to own the de facto monopoly vs. a company with exposure to the product cycle. A digital platform is a software and networking infrastructure able to build multiple revenue streams and extract the majority of profits from the industries it services. Recent examples include: Amazon, Google, Facebook and China’s own Tencent. These platform companies will have the opportunity to create disproportionate shares of profits based on the success of the other companies that directly or indirectly use their services. Think of a company like Apple, which offers the newest technology products including iPhones, Macs and iPods. Apple, however, will also generate substantial revenue from its vast services segments such as: iTunes, iCloud, Apple Music, Apple Pay and the various App Stores.
Of the 50 public companies that have created the most wealth since 1926, the youngest technology companies are those that are creating the most value for investors through substantial compounded annualized stock return.
The graph below (Appendix A) offers a good depiction of the disproportionate amount of wealth creation coming from technology companies. The sizes of the bubbles indicate the companies’ compound annualized stock return. Amazon, Facebook, Google and Microsoft – located to the left of the chart – noticeably demonstrate the largest bubbles.
Appendix A: The 50 Companies that created the most wealth from 1926 to 2016.
Source: Prof. Hendrik Messmbinder (W.P. Carey School of Business at Arizona State University) By Karl Russell/The New York Times
Throughout our lives we have seen incredible technological progress but it is the speed of the current breakthroughs that has no historic precedent. In this issue of Wealth, Health & Kids™, we focus on some of the many disruptive technologies that exist today including Artificial Intelligence and Autonomous Driving, Blockchain and Gene Therapy. In doing so, we will highlight some of the emerging technologies that can shape our future and that of our children’s and grandchildren’s.
Artificial Intelligence is No Longer a Fascination of Science Fiction
It may sound outrageous but with the introduction of virtual assistants such as Apple’s Siri and Amazon’s Alexa we have begun communicating with our devices on a regular basis. Technology companies are now looking to take it even one step further by building not only autonomous but also sentient robotic machines. How would you react if you were told robots could become citizens and coexist with humans? Well, recently Saudi Arabia granted citizenship to Sophia, a social robot that is capable of processing emotional and conversational data through the use of AI software developed by Hanson Robotics. Stephen Hawking, Bill Gates and Elon Musk have all voiced their concerns regarding the runaway speed of growth within artificial super intelligence, known as “technological singularity”. AI is becoming so competent that there are rising fears there will be no functions left for humans to serve.
Today, we are entering a new age of artificial intelligence that will inevitably transform many aspects of our social and working lives. A recent report by Price Waterhouse Cooper (PWC) has found that 38% of U.S. jobs could be at high risk of automation by the early 2030s[i]. As an example, Alphabet’s Waymo has already started testing fully autonomous cars, threatening the livelihoods of millions of truck and taxi drivers.
The automobile industry is experiencing a technological transformation; electrical vehicles have become a viable means of transport and various companies have started testing self-driving cars. Along with a diverse range of radar technology, AI is used in self-driving cars in order to collect, process and perform specific actions – in other words to help the car navigate without any input from humans.
Enterprises are Jumping in on AI
At the forefront of AI and deep learning is NVIDIA Corp. (NVDA). As a result, it has been one of the best preforming stocks over the past year. Its core technology, the graphics-processing unit (GPU) used in the machine-learning, powers Facebook’s AI and machine learning tasks, allowing Facebook to detect faces in pictures, and personalize your news feed.[ii]
Truly accentuating the investor interest in the technology field is the success of SoftBank’s Vision Fund. After raising a staggering $100 billion earlier this year, the fund is now the largest technology focused fund of all time. The tech conglomerate has made investments in the fields of artificial intelligence and robotics. SoftBank CEO Masayoshi Son, believes smart machines have the potential to create an “even bigger gold rush” than the first internet companies of the early 2000’s. Some of the world’s largest public companies are also hoping to take advantage of the thriving technology sector and have committed capital to the SoftBank Vision Fund.
The Fastest Growing Asset Class Ever Seen
Bitcoin has garnered much attention as of late – and for good reason. The value of all cryptocurrencies has surged tenfold this year to more than $175 billion. Since January, bitcoin prices were trading around $800 USD. By November, they were sitting around $8,000 – up more than 1000%[iii]. The gains in other cryptocurrencies are even bigger. Ether (the token traded on the Ethereum platform), as another example, was up from $10 in January, to more than $350 in November 2017 – a gain of over 3500%[iv].
What is Bitcoin?
Created in 2009, Bitcoin is one of the first-ever digital currencies to use peer-to-peer technology. A digital currency is an electronic payment method or medium of exchange that can be transferred between computers or smartphones. Bitcoin promises lower fees, instant transactions with peers, and unlike traditional government issued fiat currencies such as the U.S. Dollar, it is not controlled by a centralized authority[v]. With Bitcoin, you can now send and receive money anywhere in the world within seconds, without the need for an intermediary such as a bank.
We, at KJ Harrison, have been asked numerous times about our view on Bitcoin as an investment, so let us address this question first. There are many inherent risks when it comes to Bitcoin: government intervention, unregulated Initial Coin Offerings (think IPO for a digital token) as well as scalability issues. As such, we have seen tremendous volatility in crypto prices. Just as quickly as prices rise, so too do they fall – and we may very well see a huge shakeup in cryptocurrency down the road.
The question is when?
Demand for the currencies has been resilient, and bitcoin is worth $8,000 USD because enough speculators are willing to pay that amount for it – simple supply & demand. The more our society believes in the transition towards Bitcoin and digitalizing currencies, the faster it will be accepted as a legal tender, and the more demand will increase.
It is important to note that crypto prices are not justifiable based on their underlying premise, business or uses – they are now purely in speculative territories. In short, buying cryptocurrency is by no means an investment. There are no revenue streams, no assets, and no underlying value. Furthermore, Bitcoin is only one of thousands of cryptocurrencies already available, making it hard to predict which one will survive.
“Serious investing consists of buying things because the price is attractive relative to intrinsic value. Speculation, on the other hand, occurs when people buy something without any consideration of its underlying value or appropriateness of its price, solely because they think others will pay more for it in the future”. – Howard Marks, Oaktree Capital Management, L.P.
Despite the lack of clarity when it comes to Bitcoin, the technology behind it is here to stay and has the ability to change our lives and businesses for the next decade.
So what is it?
Don and Alex Tapscott said it best: “Blockchain is the ingeniously simple technology that powers Bitcoin. But it is much more than that, too. It is a public ledger to which everyone has access, but which no single person controls. It allows for companies and individuals to collaborate with an unprecedented degree of trust and transparency. It is cryptographically secure, but fundamentally open. And soon it will be everywhere.”
Blockchain, also known as distributed ledger technology, provides a decentralized database of transactions visible by everyone on the network. The network is essentially a chain of computers that must collectively approve an exchange before it can be processed. Within the network, not only can information be exchanged but also money, identification, music, art or intellectual properties.
For example, there are few things that are more valuable than documents showing your birthdate, SIN or marital status – information that open your rights to all sorts of privileges. With Blockchain this privileged information can be secured and encrypted within the network empowering citizens to access and give access to this crucial information only on a needs basis.
This new technology is so important that major financial institutions have decided to collaborate on the development of Blockchain. This can be seen with the Enterprise Ethereum Alliance (EEA), a not-for-profit organization that includes members such as Microsoft, J.P. Morgan, Intel, Deloitte, ING, Credit Suisse, and the National Bank of Canada[vi].
The second largest Blockchain is Ethereum. Often misinterpreted as one and the same, Bitcoin and Ethereum are actually fundamentally different technologies. An important difference between them is Ethereum has the ability to run “smart contracts”. A smart contract is self-enforcing digital contract that will only transfer funds or information when the stipulated conditions are met. Those conditions are agreed upon and enforced by computers globally. Most importantly, smart contracts have the potential to virtually eliminate the middleman from any transaction.
While Bitcoin focuses on payments and was invented as an alternate to traditional fiat currencies, Ethereum has developed a virtual economy. This economy uses the Ether – an Ethereum based digital currency – as a token of trade. The ability to write code and develop applications on the Ethereum Blockchain allows for many different use cases such as crowdsourcing, voting, gambling and even new forms of currency. Often cited as the more advanced Blockchain platform, Ethereum’s real life uses are limitless.
Gene Therapy: A New Exciting Area in Biotechnology
Gene therapy technology is a medical breakthrough, offering a new spectrum of medical potential. Recent promising lab results have shown that it is now possible to modify cells and implant them back into the human body. Effectively removing unhealthy genes and replacing them with healthy ones, providing the potential to cure rare and deadly diseases from cancer to HIV. The potential one-time gene therapy treatments can eliminate the need for ongoing treatments. Imagine the possibilities.
CRISPR, a form of gene therapy, and a very precise way of editing DNA, has been called the start of a new era of genetics. CRISPR gene-editing technology edits out serious disease-causing genetic mutations. New DNA is inserted directly in a patient’s genes using a cut-and-paste method[vii]. The new genes are designed to integrate with the patients’ existing DNA. CRISPR technology may even be used on embryos, to cure people from a wide range of genetic disorders before birth. This technology will change the way we think about genetic engineering.
There has been a growing interest in gene therapy from big drug companies, such as Pfizer and Gilead, who are keen to take advantage of the new commercial opportunity. Most recently, Gilead Pharmaceuticals obtained FDA approval for a new CAR T-cell therapy (chemical antigen receptor) called Yescarta. Yescarta is manufactured by Kite pharma, an Israeli-founded company acquired by Gilead in August 2017[viii]. Yescarta is a highly tailored gene-altering treatment for patients suffering from lymphoma, and will revolutionize the way cancer is fought. Through immunotherapy, the patients’ infection fighting T-cells are extracted and genetically modified with a new gene to pinpoint and attack malignant cancer cells.
Although there are inevitably ethical issues and safety concerns, these new technologies present an incredible opportunity to alleviate human suffering and eliminate life-threatening disorders.
The technologies discussed in this segment of Wealth, Health & Kids™ are in their very early stages of expansion. However, they have already displayed their ability to have a strong positive impact on our social and working lives. At the same time, they have demonstrated that they are capable of disrupting certain industries and upending established businesses. By paying strict adherence to our KJH investment philosophy and conducting deep fundamental research, financial analysis and physical due diligence in making all investment decisions, we strive to help our clients navigate this rapidly transforming investment landscape.
KJ Harrison’s vision is to be the most relevant private client firm in Canada for high net worth families, centered on outstanding investing and strategic advice, where clients are treated like partners. Throughout various market cycles we have, and will continue to encounter powerful disruptive technologies. However, we are consistently able to adapt. As a firm, our core values, long-term vision and promise to deliver exceptional client service have proven the ability to withstand any technological disruptions.