Oct 09, 2009 @ 08:49 am
We're entering earnings season once again and most investors are on edge.
Will companies be able to top estimates again? Earnings estimates are low, but they're not as low as they were last quarter when 70% of the S&P 500 beat estimates.
Will the $3.5 trillion parked in money market funds continue to make its way back into the market? Once cash and bank deposits are added in, there's $9.55 trillion ready to be spent once consumer confidence returns or that could go chasing after stocks.
Will the Fed put an end to the party and start raising interest rates sooner than later? Australia's central bank started raising rates yesterday.
These are all questions for the short-term though and, if they've been on your mind, you know how easy they are to get caught up in. But I want to step aside from the daily upheavals and look at where some of the savviest investors with a time horizon of three to five years see the biggest rewards.
Buy and "Can't Sell" Investing
Imagine you were forced to buy and hold a stock for five years. You cannot sell out early, take partial profits, or anything like that. You must hold on for five years.
What sector would you invest in? Biotech, healthcare, gold, energy, etc?
Kind of a tough choice, huh?
Well, there are some investors who are faced with this question every day.
They're venture capitalists. They invest in private businesses - start-ups, mostly - and they're in them for the long haul. In most cases there's no early or easy out. Either takeover or IPO is the only way to really cash out. That's why venture capitalists are true long-term holders.
And for the first time in history, they're betting on a completely new sector which has an exceptionally high upside.
Last quarter, venture capitalists (as a whole) drifted away from the traditional mainstays of biotech and software and moved into clean energy technologies. Deloitte & Touche reports 27% of all venture capital investments flowed into clean tech. Meanwhile, biotech, software, and medical devices moved to the back of the line with 24%, 18%, and 17% respectively.
The clean tech investments were spread across all sorts of sub sectors. Solar led the way with the most investment dollars and was followed by energy efficient building materials, advanced batteries, hybrid cars, etc.
The investments were spread around the world too. Two-thirds of all clean tech venture capital investments were in North America. Europe and Israel took 29%. And 4% went to Asia and India.
The Next Big Thing
Although this news didn't make too many headlines, it does signify a very important trend.
You see, in exchange for being "tied up" in a high-risk investment for years, venture capitalists need to see the potential for massive rewards. After all, many of the companies will fail (I've seen estimates as high as 60% of all venture capital investments fail completely). And many of those venture capital investments that do "succeed," they may never turn out to be anything more than a dozen guys installing solar panels in Arizona.
That's why venture capitalists have to go after the big prizes and it's always good to keep an eye on where they're putting their high-risk/exceptionally high reward investment capital.
It looks like they see what we see...
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