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03/02/2011

Three Paths to a Prosperous Future


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Three Paths to Profitable InvestingThe first decade of the twenty-first century has not been kind to investors. On average, stocks lost about 1% per year over the ten-year period or more than 10% for the entire decade. During the decade we saw the collapse of three bubbles: the dot-com boom came to an end in 2000, the meteoric rise in housing prices in the middle years of the decade reversed sharply in 2007, and then in 2008 the massive over-leveraging of the banking system came home to roost, very nearly destroying the economy.

The decade saw the emergence of vibrant economies and stock markets in the developing world, particularly in China but also in places such as Russia, Brazil, and India, among others. Investors hungry for the returns they had experienced during the roaring ’90s sought to capitalize on the economic opportunity created by these emerging markets. Recognizing that growth requires access to commodities, precious metals, energy, and capital, investors sought to ride those new opportunities for investment gains. At the same time, Wall Street recognized this demand and rushed to create investment vehicles that would give investors the access they desired. Mostly these came in the form of exchange traded vehicles, primarily exchange traded funds (ETFs). ETFs, in addition to allowing investors to buy virtually any subset of stocks (by size, style, sector, or geographical division), for the first time ever also allowed for individuals to own foreign currencies, oil and gas, precious metals, and commodities. Previously only institutional investors could access these markets.

While all of this was going on, the United States was engaged in a war in Iraq that has since morphed into two wars, and in early 2010 we had 130,000 troops in Afghanistan. The expense of these wars, coupled with the decline in tax revenues as a result of the recession, has caused our national debt to swell past $10 trillion. The combination of a weakening U.S. economy and strengthening emerging markets caused the U.S. trade deficit to balloon to historic highs. This resulted in a weakening dollar. The political havoc in the Middle East, coupled with increased demand for energy worldwide, drove up the price of oil and gas. We have seen this scenario in the markets before, notably in 1973 after the Arab Oil Embargo drove up the price of oil and eventually the price of gold. But, in 1973, most investors could not access those asset classes. In the past five years, investors have poured tens of billions of dollars into macroeconomic bets on oil, precious metals, interest rates and sub-prime mortgages, currencies, and commodities. At the same time, investors have made huge bets against the dollar, which have become something of a self-fulfilling prophecy. A weaker dollar has some virtue in terms of making U.S. goods more attractive to foreign buyers, but never in history has it been a foundation for a strong economy. So a cycle that was once virtuous has become vicious: We invest more in foreign markets, less in our own, and invest in oil and gold, which essentially are bets that we can make money at the expense of our own economy. It is simply irrational. These investments create no sustainable industry, no jobs, and no permanent wealth. The investor who is buying oil in the belief that it will rise to a level where nobody can afford to buy it is delusional. Expensive oil retards economic growth. The investor buying gold believing that gold will go to $3,000 an ounce (from its $1,100 price in early 2010) will earn profits in gravely weakened dollars whose purchasing power will be seriously diminished. And because all this investment frenzy plays out very publicly on the Internet, on television, and in the newspapers, we eventually draw in too many investors and another bubble will develop and burst. Individual investors who chased the previous bubbles of this decade for the most part lost money when all was said and done.

We need to get back to basics and fund sustainable businesses that will create jobs, drive productivity, and increase our standard of living. It is this type of investment that is and always has been the only source of permanent wealth.

The bad news is that this type of investing does not appeal to those who have become enamored of “casino capitalism.” They will continue to make bets against the American economy so long as it is working.

The good news is that there is a technology-based revolution occurring that rivals, and probably will surpass, the 1982 to 2000 bull market led by the information age and telecommunications companies. In medicine and biotechnology, green technologies and alternative energy, and the rebuilding of the U.S. infrastructure lay the greatest investment opportunities in history. Over the next 25 years, medicine will be revolutionized as we completely change the way we diagnose and treat disease. During that same period, we will break free of our dependence on imported fossil fuels by developing alternatives such as solar, wind, and nuclear. We will utilize new technologies first to reduce carbon emissions and eventually to eliminate them. And we will rebuild our roads and bridges, commercial structures, and transportation and shipping systems and retrofit all our real estate to be energy efficient.

The wealth that will be created in the next 25 years will dwarf that of the Internet era. Thirty years ago, one could have made the statement that most of the companies that would be industry leaders in the ensuing 30 years either did not yet exist or were too small to be known by the public. Microsoft, Cisco, Google, Dell, and Amazon all fit that description. In 1980, nobody had heard of any of them. In 2010, the same statement can be made. The companies that will drive us to prosperity in the next 30 years are busy at work right now, but most of us have never heard of them. The best news is that investors can own these companies today. Using the ETF structure, we do not have to figure out which will succeed and which will fail. We can own all the solar companies in one ETF and all the wind companies in another.

The purpose of this book is to describe the path to prosperity, to demonstrate that we must get out of the casino and back to fundamentals. We must create millions of jobs, drive the productivity of workers, deploy new technologies, and ultimately increase the standard of living for all. ETFs have been created that give investors total access to pharmaceutical, biotechnology, alternative energy, green technology, and infrastructure companies. We describe in detail each of the ETFs in these areas and some of their component companies. Many of these companies are small- to mid-cap in size but have the potential to become large and dominant players in their fields in the years to come. Investors should see this as an opportunity akin to investing in Internet companies in the early 1980s.

Three major forces are shaping an environment that will foster this prosperity:

  • The first is a demographic wave of new investors—the Baby Boom Echo generation born between 1974 and 1989—who are now starting to invest heavily in the stock market and whose money has great potential to move the markets just as Baby Boomer money in the early ’80s ignited the longest bull market of all time.
  • The second force comes in the form of the new and innovative technologies being developed in all these areas—biotechnology, saving the environment, and rebuilding infrastructure—that will solve pressing needs for society.
  • The third major factor is the development of ETFs, which allow investors to buy into the biotechnology, environment, and infrastructure fields in a diversified, low-cost manner. ETFs increase an investor’s ability to gain exposure to innovative new companies while mitigating the risk of that investment.

THE WAY FORWARD

If we are to be a prosperous nation, we must invest in activities that create real economic utility and promote social welfare. The right investments cannot be discovered sitting at a computer terminal in a windowless room. In fact, they are easily revealed if we simply look out the window. We are dependent on fossil fuels, much of which we get from hostile states. We use that fuel inefficiently and waste a great deal of it. Our healthcare system is collapsing just as the Baby Boom generation (78 million people) is reaching its senior years. Healthcare has gone from 8% of gross domestic product (GDP) in 1980 to 17% of GDP ($2.5 trillion) in 2010 and is expected to rise to 25% of GDP by 2020. Finally our infrastructure is in dire need of repair. From the electrical grid to water mains to the rails, roads, and bridges, we need to make a massive investment in the foundations on which our economy runs.

Fortunately, there is a comprehensive set of ETFs that allow us to invest in these three critical areas of our economy. In each case, the required investment is hundreds of billions of dollars. In each industry—alternative energy and clean technology, healthcare, and infrastructure—we can create thousands of new companies and tens of millions of jobs. The technology in each case is ripe and ready for commercialization. In the 1980s, when we saw an economic boom based in the telecom and computer industries, Wall Street made its money by providing capital to these industries. Today, Wall Street has forsaken its capital formation role for a seat in the casino. But we can and must take matters into our own hands. You can travel these three paths to wealth without Wall Street’s involvement. You can buy ETFs as easily as buying any publicly traded stock and build a portfolio that works for you.

Our goal here is to explain the various ETFs that invest in these critical areas. There is no question that the country cannot prosper if we do not create sustainable industries, and these three sectors represent our most pressing needs. No doubt there will be other sectors that flourish in the coming years, but none can thrive if we do not solve the fundamental issues. On the other hand, the businesses that tackle and overcome these problems will create substantial and permanent wealth. With a few clicks of a mouse, you can own these companies right now.

Investing in healthcare, the environment, and infrastructure through ETFs allows you to buy into the next major wave of investment and to help create a better society at the same time. For the investors willing to take control of their investments, the combination of demographic changes, new investment tools, and major societal needs make this a great time to seize investment opportunities. Assigning blame for financial misdeeds helps us feel better but locks us into arguing about the past, which will not rebuild the economy or make you money. Which do you want to do? If you want to make money in a sustainable economy, start reading. If not, return this book. It isn’t for you.

–Jeffrey Feldman and Andrew Hyman. Excerpted from Three Paths to Profitable Investing: Using ETFs in Healthcare, Infrastructure, and the Environment to Grow Your Assets (Insights for the Agile Investor Series; FT Press).


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