What exactly is green tech?
Why will green technology explode in coming years?
Why will the green-tech bull market last such a long time?
Why will so many investors lose fortunes in this sector?
How do you separate the winners from the losers?
What exactly is green tech?
Green tech (also known as environmental technology, enviro-tech and clean tech) is a broad category of technologies that produce useful products or solve problems without at the same time producing pollution. Some examples:
Solar power, which converts sunlight into energy.
Fuel cells, which produce electricity with only water as a byproduct.
Wind power, which harnesses the wind to produce electricity.
Construction techniques and materials that produce buildings that use far less energy than today’s structures.
Pollution control technologies that vaporize, break down, or filter out various kinds of waste without the pollution now produced by landfills or incineration.
The smart grid, which manages the flow of electricity to homes and businesses more efficiently, saving energy.
Plug-in hybrid engines, which use electric motors rather than internal combustion engines to power most in-town driving.
Why will green technology explode in coming years?
Green tech is the beneficiary of two intersecting trends which guarantee virtually unlimited demand:
1) The side-effects of six billion people burning carbon-based fuels, generating massive amounts of garbage and obtaining food in traditional ways are overwhelming the earth's ability to adjust. Global temperatures are rising, land and water are being polluted, soil is eroding, fish populations are collapsing. Another century of this and human society will at best be far poorer and less stable, and at worst will be plunged into chaos. Solutions are required, now.
2) Those solutions are arriving. The combination of rising oil prices and scientific progress on many different fronts is producing a tidal wave of technolgies and business processes that cumulatively have the potential to eliminate pollution as we know it and put the human race on a path to sustainable abundance.
Why will the green-tech bull market last such a long time?
Despite the promise of environmental technology for cleaning up pollution and generating sustainable growth, humanity begins with a huge installed base of old technology. Today's cars and trucks will run for another decade or more. Coal and natural gas power plants will keep spewing out carbon dioxide and particulates for another half century. And as the developing world adopts Western lifestyiles complete with cars, airconditioners and big houses, the demand for energy, meat and fish will continue to rise, along with our output of pollutants and usage of scarce resources.
That's bad news for the planet, but great news for the suppliers of the technologies that will eventually put things right. This story, in short, has legs; it will play out over decades, not years, which means that investment expertise gained now will pay dividends for most of the rest of our natural lives.
Why will so many investors lose fortunes in this sector?
Put simply, the hottest markets are the most dangerous. Because everyone wants a piece of the action, entrepreneurs find that that they can obtain venture funding for virtually any green business plan. And established companies find that investment banks are willing to take them public no matter how far off profitability may be. Investors, meanwhile, are willing to buy pretty much anything with an environmentally friendly name.
The tech stock mania of the 1990s illustrates the risks posed by hot markets: Virtually anything with .com in its name was able to attract investors, and it was only after the capital spigot was turned off that the good businesses were distinguishable from the bad. As it turned out, there were far more eToys (which went bankrupt) than eBays. So despite the fact that the Internet has indeed changed the world and spawned some superb companies like Amazon and Cisco, the vast majority of investors—individual and professional—who bought tech stocks in the late 1990s ended up losing money.
Green tech is playing out the same way. Any company with “fuel cell” or “wind” or “solar” in its name attracts a tidal wave of hot money. But history teaches that only a handful of these companies are Amazons, while the rest are eToys, destined to disappear without a trace.
How do you separate the winners from the losers?
That’s the question this site is designed to explore. In general terms there are a several strategies:
1) Hand your money to an expert who spends all day long trying to separate the wheat from the chaff. If you choose well, this will pay off. But it’s absolutely not a panacea. The best fund managers will be deluged with cash, and they’ll be forced to buy less and less attractive stocks simply to put that cash to work. In the end their funds will come to track the market and, like most of the major tech funds in 2000, get creamed when the sector inevitably corrects.
2) Avoid the speculative part of the market (no matter how great these emerging technologies sound) and focus on real companies with cash flow and customers.
3) Develop an edge in one particular part of the sector and use this depth of knowledge to pick winners. This is not easy, because clean tech is a complicated subject. But it offers a fair possibility of success.
4) Focus on the “pick and shovel” makers which sell basic equipment to the green tech companies. The best of these firms will win no matter which solar or fuel cell company ends up on top.
5) Don’t be greedy. Take profits (or lock them in using options, stop-loss orders or short selling) to avoid the dreaded “round trip.”
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