The Valley of Disbelief

May 21, 2013 |

steve-jobsAre you missing out on great investment returns – is the Dow really headed for 20,000? Is the advanced biofuels rally for real?

Why are investors sitting on the sidelines in the Valley of Disbelief?

This year in the United States, despite awesome returns in the stock market and miserable bond yields, the Investment Company Institute estimates that $85.4 billion in new investment has poured into bonds — by contrast, only $73.2 billion into stocks.

Seth Masters, CIO of Bernstein Global Wealth Management told the New York Times last week that “people were so traumatized by the financial crisis that they were seriously underestimating the stock market” – and projected that the Dow would reach 20,000 by the end of the decade.

Let’s look at investor trauma.

A contrarian investor who, by contrast, put money into an S&P tracking fund on the day after the Thanksgiving holiday, would have realized an 18.4 percent return in less than six months.

What would have happened to same investor putting money that same day into the highly-maligned category of advanced biofuels equities (Amyris, Ceres, Codexis, Gevo, KiOR, Renewable Energy Group and Solazyme), and weighted the investment according to their market cap?

A 31.6 percent return.

advanced-bio-performance

So why all the negativism – both inside biofuels — and without? Twitter, as seen through the lens of a keyword like “biofuels” — offers a heavy stream of sarcasm about crony capitalism, broken technologies, government interventionalism, third world oppression, infrastructure incompatibility, and lousy investment performance.

Advanced biofuels — and equities as a class — appear to have entered into a geography which you might call the Valley of Disbelief.

Irrational inexuberance

If the Valley of Death describes the dangerous period when emerging companies face difficulties in raising expansion capital to build their innovative products at scale — the Valley of Disbelief represents the period when companies have figured out a means across the Valley of Death but the market remains irrationally skeptical. You could call it a period of irrational inexuberance.

True, public markets have always been less patient sources of capital than early-stage or strategic investors — and advanced biofuels companies came out early.

(But then, so have biotech companies. Gilead paid an 89% premium over Pharmasset’s stock value to acquire the company, for $11B, more than two years before its signature all-oral Hepatitis C treatment (Sofosbuvir) was even expected to win FDA approval. Gilead shares have rocketed up 43% this year as Sofosbuvir gets nearer to market.)

Which is to say there’s long been an arbitrage between perception (in the public markets) and reality. The explosion of information in the digital age was supposed to level the playing field for the small investor, but seems to have exacerbated the gap. Let’s look.

It’s a period that Apple (APPL) famously went through — to mention the highest-flying stock of the 2000s, when it tumbled 71 percent between the spring of 2000 and the fall of 2001, even while it was launching its seminal Mac OS operating system and the seminal iPod. In fact, its shares continued to tumble for some time after the iPod appeared – investors had a hard time grasping that the world had changed. A $10,000 investment made the day after the iPod launch is worth more that $480,000 today.

And anyone who ever listened to a Steve Jobs keynote back in those days can assure you that Jobs was not shy in describing Apple technologies as the revolutionary unlockers of value that, in fact, they proved to be. He described the iPod as a “breakthrough digital device” — and as a first step in Apple’s “digital hub” family of devices, which ultimately included the, er, iPhone and the iPad.

A year after Job’s launch keynote and the iPod launch? You could pick up APPL for 19% less than the day before the announcement. Remember, this was a company that had already rolled out the strategy, was rolling out the products, was getting rave reviews, and had assembled the cash to execute its strategy (as it did) without a single dilutive equity issue or even a debt offer. Plus has the Steve Jobs “reality distortion field” working for it.

There are powerful magnets dragging on reasonable expectations — down there in the Valley of Disbelief.

Advanced biofuels in the Valley of Disbelief

It affects many great companies. You might notice that a company like KiOR, in our advanced biofuels set, has seen its shares fall dramatically since last autumn. Last week we saw this meme floating around Twitter, “Yesterday Molchanov reiterated his Outperform on KiOR despite losing 61% since his initial Outperform rating”

KiOR’s unforgivable market sin? Producing drop-in renewable fuels successfully in its new first commercial facility for the first time in Q4, as promised. Shipping drop-in renewable fuels to customers starting in Q1, as promised.

For meeting all its pre-IPO commitments and timelines, Solazyme was rewarded with a post-IPO 50%+ fall in its stock price — before beginning a meteoric rise last November. Renewable Energy Group, which was operating at scale for years before its IPO, experienced a 40% drop-off, post-IPO, before crossing back into positive territory just this month, 15 months after its IPO.

The problem of information overload

Why causes companies to fall into the Valley of Disbelief? At a time in history when digital distribution of information has made investing so much more transparent. You can find more chatter about stocks today than ever before – whole television channels, message boards, newsletters. Why does the information revolution not result in the death of disbelief?

In the 2003 book Anchoring America, I observed that rate of information distribution was rising, but that the circles were narrowing — in short, intensity was on the rise, but broad awareness was falling. The number of private messages received by the average individual had grown at two times GDP since the 1920s — from one per day to 48 per day (as of 2002). Information has only increased in intensity — as anyone knows who counts their emails, tweets, facebook postings, phone calls and texts.

The result is not a shared information base of common public knowledge — but a shattered glass a highly-fragmented culture — divided into little tribes of people, daily reinforcing their beliefs through shared messaging, selective news distribution, and inductive reasoning. Technologies that challenged tribal values, or were irrelevant to them, are misunderstood or ignored. The jungle drums are broken.

In Anchoring America, it was noted that there were an increasing number of children who would name and describe every single character in the world of Harry Potter, but only 20% of US sixth graders could correctly identify the United States on a world map.

We are left with no effective means of efficiently communicating the impact of new technologies. Consequently, technologies can begin to transform society long before the culture can embrace the significance.

There was a time when the cost of innovation was so high that transformative technologies were owned by corporations for year, even decades, before they were rolled out to individuals. So there was a long stretch of time for ideas to diffuse through the culture.

For example, consider the 30 years it took for computers to migrate from the corporate sphere to the consumer. By contrast, the iPhone was pushed into corporations because of consumer pressure — executives rebelled against their own IT departments.

The Problem of Dogma

For the intrepid investor, there is evidence of a significant lag time between the moment that a company has transparently assembled the means to go big, and the moment when that fact is valued in the market.

For everyone, a challenge. Given that 80% of new start-ups fail within five years, it is pretty easy to look smart by picking holes in the strategies and technologies of new ventures. You’ll look mighty smart practicing your “no,” but no one ever found happiness or riches without practicing their “yes” from time to time. Your “yes” will set you free.

You might ask and answer for yourself three questions.

1. Do I have “the right stuff “to study and understand these technologies — and decide which places on the Monopoly board I will place my bets, practice my “yes” and place them?

2. Can my belief withstand the terrors of the Valley of Death — or the Valley of Disbelief — or both, or neither?

3. If I can answer those two questions in the affirmative, what am I doing about it?

As Jobs himself said in remarks at the 2005 Stanford commencement exercises, “Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

I’ll leave you today with a YouTube link to Steve Jobs’ October 2001 keynote.

Think Different.

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