Affymetrix
By capuchinomics | August 21, 2008
Affymetrix
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Welcome back to Capuchinomics
By capuchinomics | August 3, 2008
Capuchinomics is a investment research letter covering companies that create and commercialize innovative products and services.
Marketing and innovation are the two chief functions of business. You get paid for creating a customer, which is marketing. And you get paid for creating a new dimension of performance, which is innovation. Everything else is a cost center. - Peter Drucker
We agree. Innovation is the basis of our modern life and we are as dependent on it today as we are on necessities like electricity, telecommunications and modern transportation. Innovation alone has rarely guaranteed of success. Entrepreneurs will testify and we can confirm that numerous innovative products never make it, despite their superiority to available alternatives. Entrepreneurs and innovators are an optimistic bunch and have no foresight as to what will be commercially successful. We too admit to both faults, of being optimistic and posessing no guarantee that the companies will hit the commercial jackpot. Nonetheless, it’s clear to us that innovation will continue to lead humanity forward and investing in it is likely to be rewarding if pursued with diligence and discipline.
People who don’t take risks generally make about two big mistakes a year. People who do take risks generally make about two big mistakes a year. - Peter Drucker
Innovation and its commercialization is a very risky proposition. The attrition rate among those seeking to introduce new products and services is extraordinary, perhaps as high as 75%. It truly is a compliment to the enduring fortitude of the hopeful, optimistic inventors and entrepreneurs that the human race has achieved its current level of extraordinary success. The rewards of success hold the key, as they are significant, so significant that they can offset many failures.
In our opinion, the combination of the the high attrition rate and the inability to predict success requires approaching investing in innovative companies, with a strategy that requires all the characteristics of the innovator and entrepreneur with one significant exception. Investors can diversify their risk, ensuring that no single investment will destroy their capital. Further, diversification gives the innovation based investor more chances to succeed, with the knowledge that it only takes one Amgen or one Microsoft to overcome numerous failed investments.
With this in mind, Capuchinomics has come up with these following primary factors that we believe are critical to understand and utilize when investing in innovation.
1. Invest small amounts (eg: maximum of 1% of the innovation portfolio) in any single company.
2. Invest for the very long-term (eg: a minimum of 7 - 10 years).
3. Measure success or failure on overall portfolio performance, understanding and acccepting many investments may result in total losses.
4. Investors must commit to holding on to all winning and losing positions, and reject the temptation to cherry pick short-term winners or losers.
5. Accept that a successful innovation based portfolios will over time become concentrated. A majority of the returns will be generated by a few very successful investments.
6. Volatility is not risk. Permanent impairment of capital due to product failure, poor business planning, insufficient funding, poor leadership among other reasons is the critical risk one faces when investing in innovation based companies.
The Capuchinomics research letter is itself based on an innovation in investment theory — behavioral finance. Capuchinomics was introduced in 2003, utilizing behavioral finance to demonstrate that markets are not efficient, not ideal and are highly susceptible to human impulses. This is in direct contravention to Modern Portfolio Theory (MPT) that suggests that the financial world can be understood through mathematical formulae like the physical sciences. Our approach to this new version of Capuchinomics, focusing on innovation is built on our continued study and application of behavioral finance in investing.
The track record of our recommendations from the original newsletter is available upon request. The original Capuchinomics research letter provided broad coverage of world markets and asset classes and included market advisories and recommendations of individual stocks, both long and short.
The purview of the new Capuchinomics research letter is narrower. Behavioral finance is still the overarching philosophy, but we will now focus solely on innovation based companies. One of the tenets of behavioral finance is to focus on simple characteristics, such as the size of the company. A company that grows from a market capitalization of $1 billion to $10 billion, provides a return of 1000%. However, a company that grows from $10 billion to $20 billion, provides a mere 100% return. By mathematical definition, one’s likelihood of significant returns are greater when investing in companies with small market capitalizations.
Another tenet of behavioral finance is to focus on what is known. For example, in healthcare cancer therapies are lucrative because there are many patients. A biotechnology company pursuing a cancer therapy, if succesful will generate higher returns than one pursuing a disease with fewer patients.
Capuchinomics will be provide a compendium issue 4 times per year. Our reporting on companies is based on what we believe to be important factors affecting their development rather than stock price volatility or short-term financial results. Portfolio turnover of recommended investments will be zero excepting companies that are acquired or go bankrupt. Capuchinomics takes the view that uncertainty works for and against investors and once an investment is made, the risks and opportunities associated with it company must be allowed to unfold over time without interference. Over time the portfolio will self select such that the succesful investments dominate the returns.
The About us section has additional background on Capuchinomics development and history.
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