Thursday, November 19, 2009

The price of cheating death

I was at dinner with some friends and the conversation turned to the topic of undiscovered investment opportunities. One of my nominations for undiscovered investment theme was life extension technology. In October 2009, the respected medical journal Lancet published a study indicating that given the trend of progress in life extension strategies, people born in the year 2000 in today’s major industrialized countries will likely live to 100.

What does that mean for investors? Who are the winners and losers under such a scenario?

Biotech a winner?
The natural winner in life extension is the biotechnology industry. But not so fast! The real winners may not be available for investment.

Here is a case in point. Back in 1979-80, I correctly identified the microcomputer (they were called microcomputers back then as IBM didn’t introduce the PC until August 1981), would be the growth industry of the future. I told anyone who listened that the microcomputer would be as common as the office photocopier in five years. I was wrong, it was more common than the photocopier as there were multiple PCs in most offices.

Who were the major publicly listed players in the microcomputer then? They were Commodore, Tandy (Radio Shack) and Atari, which was a division of Warner Communications. Apple hadn’t gone public yet and hadn’t gotten into the business at the time. Microsoft was just a small private concern.

This story shows that it is possible to identify a long-term trend, but the winners may not be available to the ordinary investor for quite some time.

If we can’t invest in the more obvious primary winners of a trend like life extension, we can identify the winners and losers from second order effects of longevity.

Loser: Pension funds
There has been an implicit social contract in Social Security and other defined benefit pension plans. Contribute to it and we pay you when you retire, but you promise to die on time.

What if people stopped dying in accordance to the actuarial projections? Today, the leading edge of the post-World War II Baby Boom cohort are now beginning to face retirement. There have also been a tremendous amount of work being done on life extension strategies, which will likely to bear fruit in the next ten years or so. If these strategies begin to take effect for the Boomers as they enter retirement, then the extension of even a few years of expected lifespan would increase pension fund liabilities.

Already there have been a number of terrifying articles on the path of the U.S. budget and Social Security by Laurence Kotlikoff. Here is an example of Kotlikoff’s projections (and this was written in 2006 before the advent of the trillion dollar deficits):

To close our fiscal gap, we face a menu of pain: raise income taxes 70%, hike payroll taxes 109%, cut Social Security and Medicare a combined 41%, eliminate 79% of federal discretionary spending, or some combination.

In a later study, however, Kotlikoff revised his projections by stating that China can save the day but the results wouldn't still be pretty.

At the extreme, pension benefits may have to get modified. David Merkel at Aleph Blog wrote that retirement is a modern invention. If things get bad enough, we may have to un-invent the concept.

Winner: Life insurance companies
The reverse side of the pension plan liability coin is the life insurance business. If you are paying premiums based on an expected life expectancy of, say 78 years, and you die at 85, then you will have overpaid for insurance protection. The life insurance company wins, at least from a financial viewpoint. Multiple that by several million people and you get an idea of the gains the industry faces.

Winner: Equities and real estate
In America, the effects of the Baby Boom generation are well known. They grew up, dabbled in alternative lifestyles, went into the work force, bought houses and now they are now approaching retirement. Standard retirement planning prescriptions has been to heavily invest in equities when young and lower the equity allocation with age. The question is, with the huge number of Boomers, who are they going to sell their stocks and houses to? The next age cohorts, popularly dubbed Generation X and Y, don’t have the same sheer numbers as the Boomers.

If the Boomers live longer, then the selling pressure on their equity and residential real estate holdings will lessen.

Possible losers: Gen X and Y
If these life extension technologies arrive in time to affect the Baby Boomers and combined with pension pressures, will the Boomers be tempted, or forced to stay at the wheel and work longer than expected? If so, what happens to the cohorts behind them? Will the Gen X cohort and Gen Y behind them be frustrated by lack of advancement because the Boomers refuse to relinquish their mantle of leadership?

What about Europe? There is a smaller Baby Boom generation in Europe, but that cohort is about ten years behind the post-World War II baby boom effect well-known in North America, Australia and New Zealand. This European age cohort will have more time to take advantage of these technologies. What will happen to social and demographic pressures were that to happen?

Other winners and losers
The purpose of this post is to encourage debate and comments are welcome. Can you think of any other winners and losers?

I have tried to avoid the simple analysis of “leisure industries would be the winners” as people live longer and tried to think more about the longer term implications. I would welcome any comments on this long-dated theme, especially from actuaries.

This is a “big picture” investment thesis with a time horizon that is longer than the horizon of most investment managers, much like the controversial Peak Oil thesis (which gained greater attention last week from the controversy over IEA’s projections). As such, I expect that the theme wouldn’t get a lot of investment traction. Nevertheless, it’s important to keep your eye on the horizon as you invest.


Andy Dong said...


Good to step back and think about a bigger picture.
As to winner and losers, I think it depends on countries.

In Australia, superannuation will be a winner as majority of retirement income is in form of defined contribution rather than defined benefit.

Another winner is services related to retirees. e.g. Retirement villages will be in demand; reverse mortgage will be in demand for retirees to unlock their equities in their expensive house.

I guess for U.S, it is a complete different picture. People are more worried about the negative equity in their home.

Another winner is health care and therapeutic medicine e.g. fish oil etc that improves lives of the elderly.

Unknown said...

I think your premise is shall we say premature. While people are more likely to achieve their potential maximum lifespan - around 80 or so depending on genes - science has not yet managed to increase that maximum itself. There has been much progress in "squaring out" the survival curve and increasing the quality of that survival but to date the only intervention proven to extend maximum or potential lifespan is calorie restriction. It may well one day be possible to have "immortality in a pill" - it may surprise you that lobsters and certain species of fish don't age at all so it's not inherent in a organism - but there's no way of knowing how long we'll have to wait (and age) before that day arrives. It wouldn't surprise me though if already there are people alive now who will have theoretically infinite lifespans. One can speculate on the effect that would have on inter-generational conflict and on scarce resources.

Taoshum said...

Well... with older folks still living "somewhere" and younger folkts still living "somewhere else"; all of these "somewheres" will need to exist and they don't today so who's gonna build them? and where?

Unknown said...

Nice article looking at the big picture and the life span. I believe a retiree with investments must actively have them managed or manage them in order to enhance returns and support his lifespan.

That is why using timing signals to know when to get in and when to get out of the market is important and can enhance returns.

Example: There wass a big move down on Thursday in the stock market.

But there was a way for an investor to make money even from this move lower, if only he had a DJIA index timing signal tell him TWO DAYS AGO that the market is in correction mode.


Josh said...

Interesting and thought provoking article. But the answer is staring you in the face.
1. Avoid Government as much as you possibly can, or places where government can stick its nose in. Difficult if you are an American, but a must ! At least keep a very low profile flying under governments' radar. You have to be ready to cheat government out of what is rightfully yours in the first place. If you succeed, that in itself will give you longevity !
2. Avoid involving your retirement in any corporate entity. Take responsibility yourself for managing your wealth. Pension funds and real estate make you a sitting target for avaricious governments.
3. Put a significant percentage of your net wealth in gold/silver and keep it secretly in your possession.
To do all this may mean having to move out of America !