Research Watch

PORTFOLIO POINT: This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.

Investors are frightened, markets are whirling, and no one knows whether to buy, sell or hide. But what if this is cowardice, rather than pragmatism? Spectacular returns are possible, but only for those who think big and of the future. And in a world where even your personal attention can be bought and sold, companies are also looking to harness your curiosity for cash, while the rogue traders who invest only for today are a constant threat. In chartland, a grim graph shows exactly how bad it was – and still is. Civil war erupts within Berkshire Hathaway, Gina Rinehart is just a paltry $10 billion off making the US richest top 10, and the protests on Wall Street are being funded by '¦ you, probably. On video, we dissect a trader’s brain to find the rogue.

To invest in today is futile, the future, sublime '¦ “The future envisioned from the perspective of the 1960s was hard to get to, but not impossible '¦ For an industry that supposedly defines the future, space isn’t doing so well '¦ finding ways to get launch costs down is not only lucrative in its own right, but would vastly increase the size and potential of the space industry, a latter-day version of the railroads opening up the West '¦ if investors with cash are ready to fund that innovation '¦ There are presently three major and related obstacles facing biotechnology '¦ lack of data, capital intensity, and a medieval approach to therapeutic discovery '¦ Biotechnology companies that can overcome these stumbling blocks will create enormous value for their investors and society '¦ Moving up an order of difficulty, robotics represents another area of underachievement '¦ At the highest end, the industry remains over-focused on producing vanity robots with hyper-specific capability – clunky simulacra that play the violin or smile pointlessly – rather than solving more general problems, like locomotion '¦ While we have the computational power to support many versions of AI (artificial intelligence), the field remains relatively poorly funded, a surprising result given that the development of powerful AIs '¦ would probably be one of the most important and lucrative technological advances in history '¦ Internet companies that will outperform are the companies that take the internet seriously – as a technology for transferring information on a scale and at a level of convenience that can’t be replicated elsewhere – and that have a plan for translating those advantages into cash '¦ Our list is by no means exhaustive '¦ the most promising companies '¦ tend to share a few characteristics: They are not popular '¦ They are difficult to assess '¦ They have technology risk, but not insurmountable technology risk. If they succeed, their technology will be extraordinarily valuable '¦” (Founders Fund)

Selling your soul for extra legroom '¦ “It is fashionable nowadays to talk about personal attention as a commodity or even a currency '¦ It can be bought and sold, to some extent, but it cannot be traded to third parties, and it is not entirely fungible. While companies (and some people) seek attention because they expect to earn money through it '¦ the value of attention can be monetised, and a contract requiring someone to pay attention '¦ can be bought and sold. At a less exalted level, we buy and sell attention all the time '¦ You pay extra in a department store for the attention of a sales clerk, and you pay extra to fly first class not just for the legroom and the drinks '¦ The internet is changing the economics of attention by fostering peer-to-peer interactions '¦ Accordingly, companies need to learn how to give customers the attention that they crave, rather than demanding customers’ attention and then charging them extra for the attention that their brand commands '¦” (Project Syndicate, September 20)

How it feels to burn down the house '¦ “You expect to be caught in the first 24 hours '¦ You live in fear. In that very initial period, the heart is racing. You should have closed the position at the earliest opportunity, and taken no more than a slap on the wrist. But when the call, or the knock on the door, doesn't come, you start to grow in confidence. You start to believe that you'll have the time to correct it '¦ Eventually you start to think in terms of weeks, then it becomes months, and the losses become large multiples of the original '¦ Jérôme Kerviel, and the traders in some other, less high-profile cases, have maintained the banks knew what they were doing, that they encouraged it. I don't believe that for a second '¦ The traders have always been almost untouchable. Every bank will encourage financial innovation. When one market gets saturated you must move on to a new one, which will require new and more complex products. That creates new risks, and new difficulties in assessing those risks. The infrastructure to control it is always playing catch-up '¦ They need to put the house in order now '¦” (Nick Leeson, Independent, September 21)

Ye should have abandoned all hope long ago '¦ “About four years ago exactly, we learned that we were in trouble '¦ The daily gyrations of the usually-placid Federal Funds market starting in late 2007 told us all that banks were really worried that other banks had jumped the shark and turned themselves insolvent.

Four years ago nearly all mainstream economists would have said that, even though the situation appeared serious, by now the economy would be back to normal '¦ Very few of us thought that it would be long and nasty '¦” (Delong, September 21)

You can’t buy world domination '¦ “In thinking '¦ about American predominance in the world today, it would be nice to know when it will decline, and whether the United States can do anything to postpone the inevitable '¦ A few years ago, some regarded Japan as having overtaken the US. Europe also was supposedly vying for global economic dominance. Now any such claims would seem preposterous '¦ Similarly, it remains unclear that the Chinese development path will remain smooth. Fixed investment in China is close to 50% of GDP – which must be a world record. Credit to state firms and to households continues to grow rapidly. Isn’t this a version of exactly what derailed Japanese growth? On the key issue of being able to issue a 'reserve currency’ that investors and governments want to hold '¦ China has many of the prerequisites in place. But it still lacks some key elements, including fully fledged property rights. If you worry about getting your money out of a country when times turn tough, China is not an attractive place to hold your reserves '¦ If the US is eclipsed any time soon, this will more likely be due to its loss of social cohesion and its dysfunctional politics. China might well step in to fill that vacuum, but that is quite different from being able to elbow America aside.” (Project Syndicate, September 19)

A red market rises in the East '¦ “China's long-awaited international board will be a major platform for the listing of Chinese companies incorporated outside the country, or red chips, rather than non-Chinese owned foreign companies '¦ the board will be a strong platform for red chips, which are eager to list shares in mainland China '¦ Red chips aren't allowed to list on mainland China's stockmarkets, which are only open to locally incorporated companies, although their main businesses are on the mainland. Hong Kong-listed China Mobile Ltd is likely to be among the first batch of candidates for the board '¦” (MarketWatch, September 20)

Civil war breaks out in Berkshire Hathaway '¦ “It must be tough having your money everywhere. This afternoon, Warren Buffett's holdings waged a mini civil war against one another as the ratings firm Moody's downgraded Bank of America's long-term credit rating two notches from A2 to Baa1 sending its stock plunging 3%, and cutting Wells Fargo's credit rating by one notch dipping its stock 1% '¦ Interestingly, the knife-holder in this scenario just so happens to be one of Buffett's largest holdings '¦ Buffett owns 28,415,250 shares in Moody's '¦ [and] $US5 billion in the knife-taker, Bank of America '¦ As for Wells Fargo, it's Buffett's second-largest holding '¦ As such, it's probably not a fun day for the Oracle of Omaha. But a fine day for stock watching sadists like CNBC's John Carney. 'It's fun to watch Warren Buffett's Moody's downgrade Warren Buffett's Wells Fargo and Bank of America,’ '¦” (The Atlantic, September 21)

Gina Rinehart, eat your heart out '¦ “Forbes released its list of the 400 richest Americans '¦ and we've got the top 10 right here. A lot of familiar faces remain at the top of the list, leaving little hope for the rest of us '¦ #10 Alice Walton is worth $20.9 billion '¦ #9 Jim Walton is worth $21.1 billion '¦ #8 Sheldon Anderson is worth $21.5 billion '¦ He's a self-made billionaire gaining wealth from Las Vegas casinos '¦ #7 George Soros is worth $22 billion '¦ #6 Christie Walton is worth $24.5 billion '¦ #5 David Koch is worth $25 billion '¦ #4 Charles Koch is worth $25 billion '¦ #3 Larry Ellison is worth $33 billion '¦ #2 Warren Buffett is worth $39 billion '¦ Berkshire Hathaway shares declined nearly 20% in the past year, contributing to a $6 billion loss for Buffett. That makes him America's biggest loser – kind of. #1 Bill Gates is worth $59 billion.” (Business Insider, September 21)

Cashed up and cranky '¦ Take that!

(DealBreaker, September 19)

Going rogue: A trader’s brain on risk '¦ “Bloomberg's Betty Liu and Shannon Pettypiece talk about the psychological and physiological impact of investing on the brains of traders.”

(Bloomberg, September 16)