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What you don’t know can make you poor

The biotech sector is taking the world by storm.

It was Donald Rumsfeld, the former US Secretary of Defence, who once rambled on about the “known knowns”, the “known unknowns” and lastly, the “unknown unknowns”. Or something like that.

He was trying desperately, as far as I recall, to defend the US’s military invasion of Iraq on the pretext of searching for weapons of mass destruction, which ultimately did not exist.

Hence, the logic, that they didn’t know what they didn’t know when they went into Iraq and therefore their actions were justified.

I sometimes find something similar when it comes to investing. People always tend to approach investments and investment discussions on the basis of what they know, often closing their minds and viewpoints which do not form part of their “known knowns”.

Older and more conservative investors, for instance, only want to deal with money market investments and fixed deposits, because that’s what they know and it is very difficult to try and convince them that they should consider some equity investments, or heaven forbid, offshore investments, in order to grow their capital against inflation and rand weakness.

Property or nothing

I find the same with investors who have a penchant for residential property investment. You cannot get a word in edgeways when it comes to debating the investment merit (or not) of property. It’s property or nothing and no amount of counter argument will convince them otherwise.

Even fairly sophisticated investors and commentators also fall into this trap rejecting, sometimes out of hand without any further investigation, any investment that might fall outside of these ’known’ parameters.

Recently an article in the Business Times discussed the merits of investing in biotechnology, an investment strategy I have been writing on and recommending for about five years now. Both the author of the article as well as a commentator used to get a quote from, obviously had no clue what was going on, and concluded that an investment in biotechnology is ‘high risk’ and must be avoided a great cost.

Even my old friend, No1coolestdude, who previously called me a FIGJAM on Moneyweb, latched onto this article, requesting some kind of a comment from me.

Due to the fact that I invested a decent chunk of my own retirement (what’s that?) capital into a biotech fund some four years ago, I follow and track the performance of this sector with more than a passing interest. Although I therefore ‘know’ a little about biotech I also realise (know) that there is a lot more that I do not know, therefore it is ‘unknown’ to me in certain parts.

Best investment in the world

The performance of the biotech sector over the past five years has been nothing short of phenomenal. The US dollar return of the sector in 2014 was 32% and over the three of the last five years as it been the top-performing sector in the US.

For a South African investor, who received the added benefit of a weakening rand, the returns over the past three years has been nothing short of stupendous: a return of 303% versus the JSE at a measly 69%. It has also beaten all the other ‘hot’ sectors in the world, including healthcare, technology, demographic and even the best-performing country India over the same period of time. See table for a comparison.

Magnus - bPastedGraphic-1 (1)

However, I can understand that local investors and commentators have mostly missed the boat on this one. We don’t have a biotech sector in SA, it is not discussed on TV and radio or at investment seminars, so therefore it remains off the radar-screen. Understandable but not excusable.

A recent report published on the Guardian’s website suggest that at the rate of growth and with the pipeline of exciting discoveries already in hand, the biotech sector could become the “biggest industry in the world”, according to one the scientists Dr Aubrey de Grey, quoted in the article.

You see, dear reader, there are a number of very smart and very rich people pumping billions of dollars into biotechnological research in order to find cures for cancer, Alzheimer’s, dementia and even death. They include Dr Craig Venter, head of the human genome project as well as Larry Ellison, founder and chairman of Oracle.

A cure for death?

It is already fairly certain that a child born today in the western world can, with good nutrition and genetic manipulation, expect to live to 130, 140 years. There is also a small but growing number of scientists who are of the opinion that death is a medical condition and that in future a cure for death could possibly be found! The ramification of such a development would be unthinkable.

But even if that is an unthinkable concept, what about the financial implications if life can be extended by another ten to 20 years. And not just extending life for the sake of extending it, but a longer lifespan with greater health, mobility and human functionality than ever consider possible.

How much would the wealthy so- called 1%-ers of the world be prepared to pay for cures for ailments and sickness and to be able to live another good ten or 20 years in good health? There is virtually no limit to what these millionaires and billionaires would be prepared to pay for some biological invention that can make you live longer, look better and feel more youthful than any other generation. This what is happening in the biotech-space at the moment. It’s a known known.

Where will it all end? That’s an unknown unknown at the moment, but it remains an investment opportunity to be considered. That I do know, even if it comes with a bit of volatility.

*Magnus Heystek is the investment strategist at Brenthurst Wealth. He can be reached at magnus @brenthurstwealth.co.za for ideas and suggestions.

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Investing in bio-tech now may be similar to investing in IT / Telecoms in the late 90’s. To spot the Microsoft or the Apple of this era is the trick. Allan Gray quarterly had a good article on how you would have been better of by investing in BAT “an obvious sunset industry” rather than Digital Equipment corp “the obvious growth industry” of the 70s and 80s.

End of comments.

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