Technology as Affliction

Analyst Pip Coburn of UBS is quoted extensively in a WSJ piece today on this wood anniversary of the bursting of the technology bubble. I agree with the following comment of his, which should make Pip worried that we’re both dead wrong:

So where do investors turn now when they feel bullish and want to bet on fast-growing stocks? Technology stocks.

“It’s not so much a fascination any more. It is an affliction or an addiction,” says Pip Coburn, Global Technology Strategist at UBS. He sees it all ending badly once again.

…Mr. Coburn … sees the Nasdaq falling as low as 1500 or 1600 during the next year or two — a decline of 23% to 28% from here. Taking that into account, it could be 20 years before the Nasdaq returns to its old record, he says.

He no longer considers most technology companies vehicles for major innovation. He sees them as mature companies focused on cutting costs. “Some of the best innovations that come up will be in areas that have nothing to do with technology — areas like life sciences or energy,” he says.


  1. Nigel deGruyther says:

    Based on your 4 March posting, you and Pip are not saying the same thing. He believes that innovations are going to come from life sciences, whereas you believe that biotechnology investing relies upon the willing suspension of disbelief.
    Pip appears to believe that understanding of biological systems will lead to new economic opportunities. You seem to think biotech investing is the next bubble.
    Perhaps Pip will find some solace after all…

  2. Fair enough, but saying that biotech investing requires the “willing suspension of disbelief” is not the same thing as saying it will underperform as an investment. I was just pointing out that biotech investing is even riskier than it looks given the confusion about “mechanisms of action”.

  3. Does Pippi Coburn have long red ponytails, superhuman strength and boundless mirth?

  4. Nigel deGruyther says:

    I fail to see how biotech investing is
    `…even riskier than it looks given the confusion about “mechanisms of action”.’
    Just because you don’t understand molecular biology does not make biotech any more risky. Many investors can’t explain the intricacies of the operation of microprocessors, let alone the quantum limits on information density and processing rates. This does not make Intel or AMD any more risky as investments. By the same standard, investing in an insurance company must be incredibly risky, since you can’t know which policies will have to be paid out.
    However, as I am sure you are aware, investment risk can be mitigated through diversification. Just as the insurance company can mitigate risk by writing many similar policies, an individual investor can hold several biotech companies, developing multiple products.

  5. I cordially disagree. There is a world of difference between saying that molecular biologists don’t understand the mechanism of action for a particular drug or procedure, as was the case in the example that I cited, and you saying that “many investors can’t explain the intricacies of the operation of microprocessors”. If you were arguing that many electrical engineers don’t understand why CPUs work then we’d be on the same page.
    Portfolio management is a solution, but it is a solution to a different problem than the one about which I was writing.

  6. Nigel deGruyther says:

    Claiming that all biotech investing is risky because the mechanism of action of drugs is unknown is fatuous at best. The mechanism of action for many drugs in development is known. Clinical trials are required because living systems are very complex and the sum of the actions of the molecule under investigation can’t be known without testing in the biological system in which it is intended to be used. Much like the engineering solutions to the physical limits of computing; engineers theorize solutions then build prototypes to test the solutions.
    Companies with drugs for which they can’t articulate a mechanism of action tend to be relatively inexpensive compared to their peer group. (There are always exceptions, and the reasons for that can be varied.) Conversely, companies with drugs with well established mechanisms of action tend to be more expensive.
    In sum, for many drugs in development molecular biologists, pharmacologists, and many others can explain why the drugs do the things that they do. If you are arguing that the valuation of a particular company is too high given that no clear mechanism of action can be articulated, that is one thing. Claiming that all biotechnology companies are over valued because no mechanism of action can be described for any drug is quite another.

  7. Nigel — While you may be exaggerating to make a point, you’re really stretching things. As is clear from the majority of my writing on the subject of biotech investing, I don’t believe that “all biotechnology companies are over valued because no mechanism of action can be described for any drug”. I described _one_ example for _one_ treatment in playfully making the point that companies and analysts sometimes elide mechanism of action issues.
    My core view about biotech investing is actually fairly sanguine, albeit informed by the real and important (non-regulatory) differences between investing in biotech and investing in, say, IT — issues like causality. Rather than closing ranks and hiding this fact behind jargon & opacity, I wish more biotech sorts would simply concede the issue, which was the real point of my March 4th note.
    Does any of this mean people should not invest in biotech? Of course not — I have done so, both in private and public companies, and I continue to do so. And it certainly doesn’t mean all biotech companies are somehow overvalued merely because causality is generally complex in biological systems.