The Inescapable Truth About Technology

The Coming Economic Collapse: How You can Thrive When Oil Costs $200 a Barrel
by Stephen Leeb, PhD., Glen Strathy

(Page 3 of 4)

As individual investors, there is little we can do to prevent mass hysteria from occurring, let alone the imbalances in society that can provoke a major economic crisis such as the tech bubble or the growing oil squeeze. We can, however, learn to avoid such ill-founded hysteria ourselves. Moreover, as the energy crisis unfolds, we must acquire the ability to protect ourselves financially, and grow wealthier, despite the resulting turmoil.

The most important question raised by the technology crash is why so many intelligent people - professionals and nonprofessionals alike - did not see the bubble for what it was. What fooled them into pursuing such a mad course of action that inflicted so much damage to their own future?

Because, of course, it was a kind of madness. It was a madness based on the false belief that technological progress would continue to rise exponentially, solve all of the world's problems, and make every investor a multimillionaire within a few short years.

In reality, technology could do none of those things. In my 1999 book, Defying the Market, I pointed out that, contrary to popular belief, the rate of technological progress has begun to decline. For example, in the early part of the twentieth century, science made major breakthroughs at a rate of five or more per decade. However, since the 1960s, the rate of breakthroughs has decreased. There were only three in the 1970s (quantum cosmology, chaos theory and fractals, and antiviral drugs), one in the 1980s (DNA replication), and none since.

Improvements in computer technology have also slowed, with the latest generation of computer chips only slightly faster than their predecessors, and the most popular software packages little changed from five years ago. There have been no big medical discoveries since antiviral drugs in 1978. And in recent years, high tech has not helped us increase the world's supply of food or freshwater, or solved our pressing need for new energy sources.

The slowdown in technology follows the general pattern of human progress. Every time civilization undertakes a new profitable endeavor, the biggest gains are made in the beginning. There is no mystery to this. We naturally pursue the biggest and easiest gains first, just as, when we pick apples from a tree, we start with the best apples that are easiest to reach. Eventually, when these run out, we turn to the smaller, harder-to-reach fruit. Consequently, every endeavor - from agriculture to technology to oil production - eventually must suffer diminishing returns.

One reason for the slower pace in electronics and computer development is that we are reaching certain physical limits, such as bus speeds, and the wavelength of light used to etch silicon chips. As a result, it is increasingly difficult and expensive to make even minor gains.

It was obvious in the late 1990s that the technology industry was maturing and that the best technology stocks were not the ones developing new technology. They were companies like Dell that were making money through sound management and excellent marketing strategies to achieve a dominant position.

Yet for some reason, people's expectations for technology seemed to balloon just as the industry began to peak. Only in 2000 did investors realize the high-tech industry was not living up to their exaggerated expectations. The massive demand, sales, and profits that had been projected failed to materialize.

Of course, I was not the only person who predicted the technology bubble would end in disappointment. Others expressed similar concerns. Warren Buffett, arguably the world's most successful investor, stayed away from high-tech companies altogether.

And of course, the truth about the technology industry was available to anyone who took the time to study the matter deeply. But those of us who contradicted the herd were decried by the so-called experts at the time as over the hill, our voices drowned out by the enthusiastic ravings of the other side.

Copyright © 2006 by Stephen Leeb

About the Author

Stephen Leeb is the president of Leeb Capital Management and editor of the prestigious newsletter The Complete Investor. Renowned for finishing among the leaders in the Wall Street Journal's and Forbes's annual stock-picking contests, Leeb is the author of four previous books. His wife and longtime collaborator, Donna Leeb, has a diversified background in business writing and holds a master's degree in journalism from Columbia University.