Buyer beware! Wall Street Discovers Quantum Computing

Wall Street and most investors will never be up to the task.

It’s a maxim that sells sexy on Wall Street. This year we’ve seen a lot of coverage about bitcoin, aerospace, blockchain, GM, meme stocks – even the prospect of human drone transport. New shiny objects usually attract a certain type of investors and that’s not necessarily a bad thing. The sell side of Wall Street is eager to capitalize on emerging investment ideas by throwing a lot of analytic and sales power behind the new exciting industries. Early adopter customers are quickly following, and news of new investment opportunities is spreading like a contagion.

This is great when the industries or inventions are straight forward and don’t require advanced degrees to understand. But if the basic concepts of a product are beyond even analysts’ comprehension, how can a retail customer expect to understand the concept? These problems have been present throughout time – think of the first classical computers, mobile phones, the Internet and other exciting industries over time. However, the onset of recent industries puts an additional burden on the investor to do more heavy lifting to understand things. At least that’s the expectation. Investors are starting to make shortcuts in understanding things like cryptocurrencies, blockchain, and genetic engineering. Many invest even though they know very little about ‘how the sausage is made’.

No new industry is more prominent and incomprehensible than quantum computing. These computers will be super fast and solve all kinds of problems that were previously considered unsolvable. I do believe that this is a real technology with a proven scientific basis and I am delighted that the technology is very feasible. However, from an investment perspective, it is a disaster waiting to happen.

Unless you have a solid bachelor’s and master’s degree in physics, you’ll never really understand the basics. I say this with great confidence, as I myself have studied physics and quantum mechanics for many years up to the graduate level. Even a “recovering physics major” like me will tell you it’s a real bear.

Quantum mechanics is not intuitive at all. It’s much less intuitive than relativity, by the way. The math is daunting. The hardest part is accepting fundamental “axioms” the theory proposes – without rationality or physical intuition. As you move up the quantum mechanical ladder, the math becomes more intractable and the logic more mysterious. Many books have been written for the non-specialist layman on quantum mechanics, but please don’t bother. My favorite physics professor once taught us to never read layman’s books on physics. The reason? Such works simplify, distort and lead to terrible misconceptions that foster a deadly sense of self-confidence about a subject. (I remember he even quoted the book Relativity for the Millions as an excellent example of a poor attempt to educate the masses on a difficult subject. The book was written when the theory of relativity had come out into the open and sparked a frenzy of curiosity. Einstein was a public figure at the time and the press loved him.)

Predictably, we will see many well-intentioned attempts to teach us about quantum computing and how it will revolutionize society. Science writers enthusiastically describe “quibits” and “quantum supremacy” in deceptively readable letters. They skip about 30 years of development in quantum mechanics and jump to the current development of computers and ways to invest. I think it’s dangerous.

I also don’t have much confidence that Wall Street analysts will do a better job of explaining things. “What about the physics and math majors that have defected to Wall Street?” you may ask. They’re mostly quant-coding computers hoping to understand how we fickle investors tick so they can monetize our supposedly predictable behavior. Even they don’t have the impossible skills to teach science without math.

I truly believe that the people working on the quantum hardware of the future know what they are doing. Quantum engineers are highly talented and are quietly competing to create the first workable versions of these super-fast machines. These engineers work at large companies such as Google and Amazon. In researching these industrial teams, I feel like I belong to a secret society. For example, when I first saw Google’s Quantum Computing logo (pictured above), I wondered how many people got the connection.

The logo may seem as trivial as a doodle, but it’s kind of a hidden joke. It borrows the difficult “Bra-Ket” notation developed by Paul Dirac to perform advanced quantum mechanics calculations. I wonder how many analysts or retail investors understood that joke? You could even argue that if you missed the joke, you’re not ready to invest yet!

If I’ve scared you into thinking that understanding quantum computers is a daunting task – it is. But don’t be discouraged altogether. Is there another way to continue learning about quantum computing and potentially investing in the field? Let me offer these parting guidelines.

Option one: Leave it to the experts. I don’t mean Wall Street analysts, but instead think of the companies that are known in other fields and have made serious commitments to build quantum computing divisions. google (GOOG), Amazon (AMZN) and honeywell (HON) are hard at work in the race to create practical quantum computers. If you currently own these stocks for other reasons, keep in mind that you are already secondary invested in the field. But such exposure is very diluted. I don’t expect the revenue from this division to be significant for years to come.

Option two: Play the field. If you want to own almost all the public stock that has something to do with the development of quantum computers (hardware, software, etc.), it’s best to buy the small Defiance Quantum ETF (QTUM). The fund seeks to index a portfolio of companies primarily involved in quantum computing and machine learning development. It owns about 70 shares.

Option Three: Buy single stocks that focus on quantum computing. This is the most aggressive option and requires the most work on your part. If you have a physics background, you have an advantage here. There are two approaches to design the computers. Look for companies developing room temperature quantum computers. The other approach requires a near-absolute zero (-460 degrees F) environment which I don’t think will be scaled up to mass production. The highly speculative SPAC dMY Technology Group (DMYI) merges with IonQ to become the first publicly traded pure-play quantum computing company. IonQ makes room temperature machine prototypes that I believe are the most promising. But remember, this is the riskiest way to get in touch with science.

The choice you make is yours. Or maybe you just want to succeed. Quantum computing is the most exciting industry today, but as the famous physicist Richard Feynman said of understanding difficult problems:The first principle is that you should not fool yourself and you are the easiest person to fool.

Disclosure: I own AMZN and DMYI.

Opinions expressed are subject to change and past performance is not equivalent to future performance.

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