The Five Dumbest Things on Wall Street in the Last Year or So

3. Nanotech It to the Limit One More Time

In March and in May, we warned investors not to get sucked in by the hype of nanotechnology.

Not that anybody listened to us.

Yes, the nanotech bandwagon has proved unstoppable, gaining momentum despite its occasional alarming resemblance to the dot-com bubble that's quickly receding from our collective memory.

Nanotech's greatest day -- or its worst, depending on your outlook -- was most definitely Dec. 3. That's the day that President Bush signed into law the 21st Century Nanotechnology Research and Development Act, which budgets $3.7 billion of funding over the next four years for nanotech, roughly defined as manufacturing on a molecular scale.

That same day, a San Diego-based company called Nanogen (NGEN Quote) issued a press release announcing it had been awarded a "key nanotechnology patent," bringing its U.S. portfolio to 56 patents. (The patent, according to the U.S. Patent Office, had actually been awarded Nov. 25, but perhaps someone at Nanogen thought Dec. 3 was a propitious day for getting the word out.)

Nanogen's stock jumped 51% on massive volume, raising the company's market capitalization from $92 million to $140 million in a single day. Nanogen, for you valuation-obsessed folks, reported $5 million of revenue for the first three quarters of 2003, and a net loss of $24 million. Not that it matters.

You've got to watch out for the hype in nanotech investing, warns Josh Wolfe, managing partner of the nanotech-focused venture capital firm Lux Capital and editor of the Forbes/Wolfe Nanotech Report -- a newsletter, by the way, whose promotional materials the research lab cited for nano-hypology back in March. Wolfe wasn't too impressed by Nanogen's release; that week, he happened to be more impressed by a DuPont (DD Quote) patent announced a day earlier. As far as nanotech investing is concerned, says Wolfe, "People are going to get burned."

That being said, Wolfe thinks it's good for America that the government will be pouring money into nanotech research. "Other countries are doing it as well," he says. "If we [the U.S.] do not create new knowledge, new innovations, we become a net importer rather than an exporter," he says. Plus, he says, the government is doing what private industry can't or won't, because there's no evidence private industry would get any return from funding basic scientific research in nanotech.

But we're not the only skeptics. "Government or politics can never appropriately make selections among different research programs," says Wayne Crews, director of technology policy for the Cato Institute. Rather than place bets by funding research for specific new technology, he says, the government should lessen the tax and regulatory burden on private industry to make conditions more conducive to basic research.

So why are people, especially in D.C., so obsessed with nanotech? "Partly it's a response to the technology downturn," says Crews. "There's a lot of interest in wondering what the next big thing is, what the next big technology is. And nanotech has been waiting in the wings."