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New Paradigm Investing
Considerations For Nano Investing

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By tomheadrick
July 7, 2003

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After reading the recently published book The Next Big Thing Is Really Small, Uldrich and Newberry, which is the first I've read on nanotechnology (and I hope to find some more book recommendations on the subject) I came away with some thoughts that I just can't let go of.

While I found the book to be helpful to me in many ways, for example, what nanotechnology is and what some of the implications could be and what types of questions, or how to think about and consider what the implications this field of science may have on industry(s) going forward, I just can't seem to let go of other implications that the nanotechnology industry may have on itself in some uses as a result of certain nanotechnology benefits.

In many and various illustrative examples the authors use to describe the possible benefits of nanoparticles, (such as a tennis ball that is nanoparticle enhanced to maintain its ability to hold its form and bouncing attributes longer), the authors ask you to consider what the implications of this could be for the established value chain of the tennis ball industry; i.e. fewer sales industry wide from longer lasting tennis balls, and they draw similar illustrations about the building materials industries: Flooring, roofing shingles, siding, windows and glass that could be self-repairing with mere heat applied to a crack, new composites materials for the Aerospace industry that could replace what is currently used that would last longer, be lighter and more flexible, liquid additives to be applied to the internal working parts of mechanical devices that could enhance and extend the life and use of these machines and their parts, and on and on.

In each of these examples that the authors take time to point out that we should consider how these nano-enhanced changes are going to affect the value of these industries, pointing out time and again that if all these products and materials are longer lasting and even come with life-time warranties for such things as floors, windows, roofing materials and siding that will pretty much never have to be replaced, how does that affect the sales rates of those industries that manufacture, and industries related to the replacements of those products? The automotive replacement parts industries with mirrors, windshields and tires that are longer lasting and service shops with mechanics, and the sporting goods industry with longer lasting products and on and on

What the authors do not point out to the reader or ask the reader to consider is what are the long-term implications for the nanoparticle industry, and the suppliers of these nanoparticles used in all these super hero products that do not need replacement?

Don't get me wrong, I think the various Nanotechnology applications and some companies and products are going to provide for a very fertile initial investment opportunity. What I'd like to discuss or consider deeper is what will make the better nanotech investments. Will it be Nano applications that are applied to consumable products like drugs, food, and fuels as opposed to products that are enhanced with attributes that confer longer lasting life, such as clothes, building materials and cars?

In some ways this reminds of the fiber optics industry that appeared about 10 years ago when people got wise to the idea of the Internet and the needs for bandwidth and the effects this had on investment opportunities for in companies like Corning, JDSU, Nortel and many others. While they were great investments, if you got in very early you made a killing if you exited the investments by about 1999. Soon afterwards, though, everyone realized that with fiber optics, connectivity and transmission became so cheap and abundant that Telecom companies couldn't make very much money selling transmission services and the entire industry imploded including the venders of the optical components. Could a similar long-term scenario play out for Nano companies supplying products whose customers are those manufacturing non-consumable goods that are enhanced with longevity which, long-term would mean fewer sales of those products, which in turn would mean fewer purchased raw materials, including those supplied by the Nano company?

I don't see the same outcome for a Nano company that is supplying raw materials to a company that manufactures a consumable like drugs, food or fuels?

Am I making any sense here or have I missed something? Again, I'm thinking long-term, and I suppose getting into Corning or JDSU in 1995 even, and getting out in 1999 you'd made a tidy sum and that wouldn't be all bad. However, look at the investors who got in those stocks in 1998 at the height of the frenzy not realizing (and there were very, very few who did realize) what the long-term implications of cheap and abundant bandwidth not only meant for the very end-users, which is why they continued to pour into those fiber stocks in 1998, but never saw what the implications were from the supply side of the equation, which is what they were investing in.

Tom


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