Nuclear Breakthrough! And Other Bad Investment Theses

Something truly unusual happened Wednesday: Headlines had good news! As you may have heard, scientists at a UK research facility made a major breakthrough in nuclear fusion power. They successfully generated 59 megajoules (MJ), more than double the previous record of 22 MJ, set in 1997. Now, that is only enough energy to power an electric kettle for 11 hours, and generating it consumed much more electricity than that. So this technology is nowhere near ready for primetime. Researchers estimate it could take 10 to 20 years to become commercially viable—if it ever comes to fruition. Yet even the mere prospect of a clean, reliable, powerful energy source was enough to make the world salivate. Some coverage even hyped the big returns potentially awaiting the investors seeding some of the startups pursuing this technology, including Jeff Bezos and Bill Gates. Seems to me like a perfect time for a friendly reminder: Chasing the technology of the far-flung future isn’t a viable strategy for normal people investing for retirement.

It is always exciting when a tiny spark has the potential to morph into interesting, world-changing technology. It is especially romantic to think about today’s small thing becoming the next decade’s big thing and enjoying that ride—reaping financial rewards—along the way. Problem is, there isn’t ever a clear path for scientific breakthroughs to become commercially huge. Some, like the internal combustion engine, computers and the Internet do. But others flame out. In the mid-to-late 2000s, the prospect of “clean coal” was all the rage. Coal, the thesis went, would be a cheap, plentiful and clean power source for decades—all power providers had to do was convert lignite coal to synthetic natural gas, then capture the emissions and store the carbon underground. Yet it never panned out. When natural gas stole coal’s “cheap power” crown, the financial incentives to push the gasification of coal forward largely faded. Meanwhile, the carbon capture and storage aspect didn’t develop as proponents hoped. The flagship project—a multibillion dollar plant in Kemper County, Mississippi—was never completed. What there was of it was finally demolished last year.

Nuclear fusion could be amazing. Transformative. Harnessing the same energy that powers our sun! But I am old enough to remember when people said the same thing about cold fusion in 1989, when two scientists claimed to have observed it. No one was ever able to replicate the experiment, and the efforts soon fizzled out. Now, today’s fusion breakthroughs seem more legitimate, and the European group isn’t the only source of progress. A Canadian outfit has already taken promising baby steps. But are those baby steps for sure headed toward large-scale electricity generation that makes wind, solar, natural gas and other forms of nuclear redundant in 10, 20 or 30 years? There is no way to know—and that, for investors, is the problem. Fusion could be the winner. But so could hydrogen. Or space-based solar power. Or something even science fiction writers haven’t dreamed up. It is all just too pie in the sky for now. I get the allure and romance of the big, game-changing idea. But those are often about emotions—a terrible rationale for investing.

Even if you are right about which technology will ascend over time, that still doesn’t guarantee you make a mountain of money investing in it. Picking the tech isn’t the only requirement—you must also identify the winners within that space. The Wall Street Journal’s Jason Zweig highlighted this problem last week when discussing cryptocurrencies: Even if proponents are right that blockchain and digital coins will eventually dominate payment technology, there is no guarantee that bitcoin, ethereum, dogecoin (ha) or any of the other top cryptocurrencies today will be the winning token. It could be another of the thousands presently in existence, or one that hasn’t been digitally minted yet. Early leaders often don’t finish the race well. As Zweig wrote: “We don’t Excite or Infoseek or WebCrawler; we google. Those search engines were born before Google, but only the latecomer became so universal it turned into a verb. And we do our googling not on a device made by MITS or Imsai or Cromemco or Commodore, but on an iPhone or an Android, a Mac or a Windows machine.”^[i]

If early leaders always won, we would all have had Betamax players in the 1980s and Laserdiscs in the 1990s before moving on to HD DVDs. You would be reading this article on your PalmPilot, which you would also use to connect with old pals on Friendster and watch your Research In Motion^[ii] and Nokia stock go through the roof. That PalmPilot’s user interface would be Visi On mobile. Tesla beating out later-arriving electric vehicle competitors is the exception, not the rule—and even that competition looks to be gaining steam as more and more companies enter the market.

Yes, whichever technology—and company (or companies)—ends up solving the Earth’s long-term clean energy needs, it will probably make a boodle for early investors. Perhaps Messrs. Bezos and Gates will add to their personal fortunes. Or perhaps they picked wrong and will take losses while someone else enjoys the ride. They have the bandwidth to take this level of risk because they have already made their bazillions. They are (presumably) not trying to fund retirements and ensure they have enough to cover late-life medical expenses. Their financial situation is not your financial situation. Their goals are not your goals. And their ability to take a big loss on a far-fetched technology is divorced from your personal considerations.

But this doesn’t mean retail investors lose out on technological advancements—far from it. Successful startups eventually go public and have a long history of continuing to generate returns for investors after that. Plus, already-public companies regularly adopt new technologies over time, using them to get more efficient and develop new business lines—all of which add to earnings. Simply owning stocks has always been a marvelous way for us normal folks to keep up with the technological times.