Physical Ai is the next wave. Five investments we own or are buying this summer.

 

The Next Industrial Revolution - Physical Ai!

A Five-Position Portfolio Designed for Long-Term Growth

Executive Summary

Artificial Intelligence is entering a new phase.

The first wave of AI focused on software—large language models, chatbots, and cloud computing. The second wave centered on building the infrastructure that powers AI, benefiting companies such as NVIDIA, Broadcom, Micron, and TSMC.

Today, a third wave is emerging: Physical AI.

Physical AI refers to intelligent machines that perceive, think, and act in the real world. It includes industrial robots, autonomous drones, self-operating vehicles, robotic warehouses, underwater autonomous systems, and AI-powered factories.

Jensen Huang, CEO of NVIDIA, has repeatedly identified Physical AI as one of the next major growth markets in technology. As labour shortages, geopolitical tensions, industrial reshoring, and automation accelerate worldwide, demand for intelligent machines is expected to expand dramatically over the coming decade.

For Canadian retail investors, the challenge is deciding how to invest in this trend without becoming overly concentrated in a handful of expensive technology stocks.

This report presents a diversified five-position portfolio designed specifically for a Canadian investor seeking long-term capital appreciation while maintaining exposure to multiple segments of the Physical AI ecosystem.

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Why Physical AI Matters

Unlike traditional software AI, Physical AI requires an entire ecosystem working together.

Every autonomous machine requires:

• Artificial intelligence processors
• Advanced robotics
• Secure communications
• Industrial networking
• Sensors
• Navigation systems
• Software
• Mission-critical infrastructure

Rather than betting on one robot manufacturer or one AI company, investors can build exposure across the technologies that enable the entire industry.

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The Portfolio

Investment	Suggested Weight	Role
Qualcomm (NASDAQ/TSX: QCOM)	30%	AI processing and Edge AI
Kraken Robotics (TSX: PNG)	25%	Autonomous marine systems
Global X Robotics & Artificial Intelligence Index ETF (TSX: RBOT)	20%	Diversified global robotics
Volatus Aerospace (TSX: FLT)	15%	Autonomous aerial systems
Nokia (NYSE: NOK)	10%	Industrial communications and networking

This portfolio provides exposure to five complementary components of the Physical AI revolution.

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Qualcomm – The Brain (30%)

Every intelligent machine requires computing power.

Qualcomm has evolved far beyond smartphone processors and is becoming one of the world's leaders in Edge AI—artificial intelligence that operates directly inside machines rather than relying on cloud-based data centres.

Its technologies increasingly power:

• Autonomous vehicles
• Industrial robots
• Smart factories
• AI-enabled PCs
• IoT devices
• Commercial drones
• Advanced automation systems

Edge AI reduces latency, improves security, lowers energy consumption, and enables machines to make decisions in real time.

Why Canadian investors should like it

Qualcomm combines strong cash flow, consistent profitability, a solid dividend, and exposure to multiple AI growth markets. It provides a stable foundation while still participating in one of the fastest-growing technology trends.

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Kraken Robotics – The Oceans (25%)

Canada has quietly produced one of the world's most innovative marine technology companies.

Kraken Robotics develops advanced:

• Autonomous underwater vehicles
• Synthetic aperture sonar
• Underwater imaging
• Naval intelligence systems
• Offshore inspection technologies

Its recent acquisition of Sonardyne significantly expanded its global footprint, technology portfolio, and customer relationships.

As NATO nations modernize their naval capabilities and offshore energy infrastructure expands, demand for autonomous underwater systems is expected to increase.

Why Canadian investors should like it

Kraken represents a uniquely Canadian opportunity to participate in a global defence and marine robotics market with long-term structural tailwinds.

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RBOT ETF – The Body (20%)

The RBOT ETF provides diversified exposure to many of the world's leading automation companies.

The ETF includes businesses involved in:

• Industrial robotics
• Warehouse automation
• Factory automation
• Medical robotics
• Motion control
• Machine vision

For Canadian investors, RBOT offers two important advantages:

• It trades on the TSX in Canadian dollars.
• It provides broad diversification across the robotics industry.

Instead of trying to predict which robot manufacturer will ultimately dominate, investors gain exposure to the entire sector.

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Volatus Aerospace – The Sky (15%)

Canada is becoming an increasingly important player in autonomous aviation.

Volatus Aerospace develops and operates advanced drone technologies serving both commercial and government markets.

Its opportunities include:

• Defence and military surveillance
• Border security
• Infrastructure inspection
• Utility monitoring
• Emergency response
• Cargo delivery
• Arctic operations

The company's expanding manufacturing capabilities and relationships with government agencies position it to benefit from increasing investment in autonomous aerial systems.

Why Canadian investors should like it

Volatus offers exposure to one of the highest-growth segments of Physical AI while remaining a Canadian-listed company with significant long-term upside potential.

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Nokia – The Nervous System (10%)

Autonomous machines cannot function without reliable communications.

Nokia has transformed itself into an industrial networking company focused on:

• Private 5G networks
• Enterprise wireless
• Edge networking
• Industrial automation
• Quantum-safe cybersecurity
• Future 6G technologies

Factories, ports, airports, mines, and utilities increasingly require secure, ultra-low-latency communications to support fleets of autonomous machines.

Why Canadian investors should like it

Nokia provides exposure to a critical enabling technology that is often overlooked by investors focused solely on robotics or semiconductors.

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Why These Five Work Together

Many technology portfolios suffer from significant overlap.

This portfolio intentionally avoids that problem.

Each investment occupies a unique position within the Physical AI ecosystem.

Function	Investment
Intelligence	Qualcomm
Robotics	RBOT
Marine Autonomy	Kraken Robotics
Aerial Autonomy	Volatus Aerospace
Communications	Nokia

Rather than owning five companies competing against each other, investors own five companies enabling one another.

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Why This Portfolio Is Well Suited to Canadian Retail Investors

Canadian investors often face unique challenges:

• Limited access to many emerging technology companies.
• Currency conversion costs when investing in U.S. markets.
• The need to balance growth with diversification.
• Tax efficiency within registered accounts such as TFSAs and RRSPs.

This portfolio addresses those issues by combining:

• Two Canadian-listed growth companies.
• One Canadian-listed ETF.
• Two established global technology leaders.

It provides exposure to both Canadian innovation and international market leadership while remaining simple enough for most self-directed investors to manage.

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Potential Growth Catalysts (2026–2030)

Several long-term trends could support this portfolio over the next five years:

• Widespread adoption of AI-powered industrial robots.
• Expansion of autonomous drones in commercial and defence applications.
• Increased NATO defence spending.
• Growth in autonomous underwater surveillance.
• Accelerating adoption of private 5G networks.
• Expansion of Edge AI into manufacturing, healthcare, logistics, and transportation.
• Labour shortages driving automation investment.
• Industrial reshoring across North America and Europe.

These trends are complementary rather than independent, creating multiple avenues for growth.

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Principal Risks

No investment strategy is without risk.

Investors should consider:

• Market volatility affecting technology stocks.
• Slower-than-expected adoption of robotics.
• Execution risk for smaller companies such as Kraken Robotics and Volatus Aerospace.
• Government procurement delays in defence markets.
• Currency fluctuations for Canadian investors holding U.S.-listed securities.

Diversification across five complementary businesses helps reduce dependence on any one company or technology.

Ed Note: We now own two of these stocks and will be adding the ETF and others over the summer!

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Final Thoughts

Many investors view Artificial Intelligence solely through the lens of software.

History suggests that the companies enabling technological revolutions often become just as valuable as those creating the applications.

Physical AI represents the convergence of robotics, autonomous systems, advanced communications, and intelligent computing.

This portfolio is designed to capture that convergence.

For Canadian retail investors seeking long-term growth, it offers exposure to five distinct yet complementary businesses that participate in one of the most significant technological transformations of the coming decade.

No one can predict which individual robot, drone, or autonomous platform will ultimately dominate the market. However, by investing across the foundational technologies that make Physical AI possible, investors can participate in the industry's growth while reducing the risk associated with betting on a single winner.

As always, investors should ensure that any portfolio aligns with their own financial objectives, risk tolerance, and investment time horizon. For those with a multi-year outlook, Physical AI may prove to be one of the defining investment opportunities of the 2020s.

 

Markets, like nature, are lawful in the aggregate — chaotic in the details. Build a system that survive chaos (diversification, rebalancing).

 

Econophysics

Physics = Investing

The intersection of physics and investing is a fascinating area of study that combines the principles of physics with the dynamics of financial markets. This interdisciplinary approach, often referred to as "econophysics," uses statistical and mathematical models to analyze and forecast market trends, similar to how physicists use models to understand natural phenomena.

let’s bridge physics directly into investing in everyday language.

---

1. Entropy = Diversification

In physics, entropy is a measure of disorder — systems naturally spread energy out to reach balance.
In investing, entropy is like spreading your bets.

• Putting all your money in one stock = low entropy → fragile.

• Spreading across assets, sectors, and regions = higher entropy → stable.

👉 Lesson: A diversified portfolio is like a stable thermodynamic system — it can absorb shocks and stay in balance.

---

2. Energy Minimization = Efficient Portfolios

Nature tends toward minimum energy states — a ball rolls downhill until it rests in a low-energy valley.
In finance, the equivalent is minimum risk for a given return.

This is exactly what Harry Markowitz’s Modern Portfolio Theory does — it finds the “efficient frontier,” where your portfolio earns the most possible return for the least risk.
It’s the financial version of nature finding its balance point.

👉 Lesson: Optimize for efficiency, not excitement. The best portfolios are calm, not flashy.

---

3. Phase Transitions = Market Crashes

In physics, a phase transition is when small changes suddenly trigger a big transformation — like water turning to ice or steam.
Markets behave the same way:

• Low stress → steady prices.

• Gradual buildup of pressure (debt, leverage, emotion) → sudden crash or boom.

This is why crises seem to come “out of nowhere.”
But to a physicist, it’s just the market shifting phase once thresholds are reached.

👉 Lesson: Watch systemic pressure, not headlines. Stability often hides fragility.

---

4. Random Matrix Theory = Finding True Signals

When physicists analyze noisy data — like atomic energy levels — they use random matrix theory to separate meaningful patterns from random noise.

Investors use the same math to study:

• Which assets really move together (true correlations).

• Which apparent relationships are random flukes.

This helps clean up big data and avoid overfitting — a key tool in quantitative finance.

👉 Lesson: Not every correlation is meaningful. Physics-based tools help reveal what’s real.

---

5. Adaptive Systems = Evolving Markets

Nature constantly evolves. Species that adapt survive.
Markets are the same: strategies that work for a while stop working when too many people use them.

This is the idea behind adaptive investing — portfolios that update automatically as conditions change (like AI-driven funds, risk-parity models, or momentum-based strategies).

👉 Lesson: Static systems fail. Dynamic systems evolve — and survive.

---

6. Information = Energy of Markets

In physics, information and energy are deeply connected (as shown by entropy and thermodynamics).
In markets, information flow is the energy that moves prices.

When information is freely shared, markets are efficient.
When it’s uneven or delayed, markets “heat up” with volatility.

👉 Lesson: Understanding how information travels (e.g., through AI, social sentiment, or macro signals) is like tracking heat in a system — it tells you where energy (money) will flow next.

---

7. Chaos vs. Order = Long-Term Investing

A single atom, like a single stock, can behave unpredictably.
But an ensemble (the entire market) has structure over time.

The best investors — Buffett, Dalio, Marks — think like physicists:

• Ignore the chaos of individual motion.

• Focus on the statistical laws of the whole system (value, cycles, reversion to mean).

👉 Lesson: Zoom out. The laws of large numbers always win.

---

🧭 Putting It All Together

Physics Concept	Market Equivalent	Key Investing Principle
Entropy	Diversification	Stability through spreading risk
Energy Minimization	Efficient Frontier	Max return per unit of risk
Phase Transition	Market Crash	Monitor systemic pressure
Random Matrices	Correlation Filtering	Identify true patterns
Adaptive Systems	Evolving Strategies	Stay flexible and responsive
Information Flow	Market Energy	Follow how data drives money
Chaos to Order	Long-Term Trends	Patterns emerge from noise

---

How “physics meets finance” The idea in plain English while keeping the meaning.

---

1. Nature’s Kind of Order = Market’s Kind of Order

In nature, individual events look random — like gas molecules bouncing around — but when you look at millions of them together, patterns appear (temperature, pressure, energy flow).
The same thing happens in markets.

• A single stock move seems chaotic.

• But across thousands of trades and investors, clear patterns show up — like volatility cycles, market trends, and long-term averages.

Markets don’t follow neat equations like planets around the sun.
They follow statistical order — laws that describe groups of outcomes, not single ones.

---

2. What “Random Matrix” and “Ensembles” Really Mean for Investors

When physicists study complex systems (atoms, nuclei, even the human brain), they use -

“random matrix theory.” It sounds fancy, but it’s basically a way to look at how thousands of variables connect — and separate what’s real structure from random noise.

In investing, the same idea helps:

• Imagine a heat map of how 500 stocks move together.

• Some correlations are real (like banks rising together).

• Others are pure noise (just random coincidences).
  By applying this kind of math, investors can filter out randomness and see true relationships — helping them build smarter, more stable portfolios.

In other words: physics helps investors tell noise from signal.

---

3. The Big Takeaway for Investing

Let’s translate physics into money:

Physics Concept	Market Meaning	Investor Lesson
Individual particle motion is random	Individual stock moves are random	Don’t try to predict every tick
Order shows up in large ensembles	Patterns emerge in entire markets	Study the system, not single events
Systems reach equilibrium through energy flow	Markets reach “fair prices” through trading flow	Markets self-organize — don’t fight the tide
Entropy (disorder) always increases	Markets tend toward unpredictability	Build robust, not perfect, strategies
Thermodynamic stability comes from diversity	Portfolios need diversification	Spread risk across assets to stay “stable”

---

4. What It Means in Practice

a. You can’t predict, but you can prepare

Just like weather forecasters use probabilities (“60% chance of rain”), investors should think in probabilities, not certainties.
Good investing is about risk control, not crystal-ball prediction.

b. Diversification = Statistical Stability

A portfolio of uncorrelated assets behaves like a stable physical system — shocks to one part don’t destroy the whole.
That’s why diversification isn’t just advice — it’s a law of complex systems.

c. Volatility = Temperature

When the market is “hot” (volatile), it’s like gas molecules bouncing faster.
Too much heat can cause “phase changes” — bubbles or crashes.
Smart investors measure volatility just like physicists measure temperature 

To understand when the system is near a tipping point.

---

5. The Core Philosophy

Modern physics teaches us this:

You can’t control or fully predict the behavior of individuals — but:

you can understand the rules of the crowd.

So instead of trying to outguess the next move, investors do better by:

• Understanding statistical laws of markets (risk, correlation, cycles).

• Building systems that survive chaos (diversification, rebalancing).

• Focusing on long-term ensemble behavior, not short-term noise.

---

In one sentence:

Markets, like nature, are lawful in the aggregate — chaotic in the details.
Success comes from respecting the laws of the ensemble, not fighting the randomness of the parts.

---

 Comparing physics directly into investing in everyday language.

---

1. Entropy = Diversification

In physics, entropy is a measure of disorder — systems naturally spread energy out to reach balance.
In investing, entropy is like spreading your bets.

• Putting all your money in one stock = low entropy → fragile.

• Spreading across assets, sectors, and regions = higher entropy → stable.

👉 Lesson: A diversified portfolio is like a stable thermodynamic system 

It can absorb shocks and stay in balance.

---

2. Energy Minimization = Efficient Portfolios

Nature tends toward minimum energy states — a ball rolls downhill until it rests in a low-energy valley.
In finance, the equivalent is minimum risk for a given return.

This is exactly what Harry Markowitz’s Modern Portfolio Theory does — it finds the “efficient frontier,” where your portfolio earns the most possible return for the least risk.
It’s the financial version of nature finding its balance point.

👉 Lesson: Optimize for efficiency, not excitement. The best portfolios are calm, not flashy.

---

3. Phase Transitions = Market Crashes

In physics, a phase transition is when small changes suddenly trigger a big transformation — like water turning to ice or steam.
Markets behave the same way:

• Low stress → steady prices.

• Gradual buildup of pressure (debt, leverage, emotion) → sudden crash or boom.

This is why crises seem to come “out of nowhere.”
But to a physicist, it’s just the market shifting phase once thresholds are reached.

👉 Lesson: Watch systemic pressure, not headlines. Stability often hides fragility.

---

4. Random Matrix Theory = Finding True Signals

When physicists analyze noisy data — like atomic energy levels — they use random matrix theory to separate meaningful patterns from random noise.

Investors use the same math to study:

• Which assets really move together (true correlations).

• Which apparent relationships are random flukes.

This helps clean up big data and avoid overfitting — a key tool in quantitative finance.

👉 Lesson: Not every correlation is meaningful. Physics-based tools help reveal what’s real.

---

5. Adaptive Systems = Evolving Markets

Nature constantly evolves. Species that adapt survive.
Markets are the same:

Strategies that work for a while stop working when too many people use them.

This is the idea behind adaptive investing — portfolios that update automatically as conditions change (like AI-driven funds, risk-parity models, or momentum-based strategies).

👉 Lesson: Static systems fail. Dynamic systems evolve — and survive.

---

6. Information = Energy of Markets

In physics, information and energy are deeply connected (as shown by entropy and thermodynamics).
In markets, information flow is the energy that moves prices.

When information is freely shared, markets are efficient.
When it’s uneven or delayed, markets “heat up” with volatility.

👉 Lesson: Understanding how information travels (e.g., through AI, social sentiment, or macro signals) is like tracking heat in a system — it tells you where energy (money) will flow next.

---

7. Chaos vs. Order = Long-Term Investing

A single atom, like a single stock, can behave unpredictably.
But an ensemble (the entire market) has structure over time.

The best investors — Buffett, Dalio, Marks — think like physicists:

• Ignore the chaos of individual motion.

• Focus on the statistical laws of the whole system (value, cycles, reversion to mean).

👉 Lesson: Zoom out. The laws of large numbers always win.

---

🧭 Putting It All Together

Physics Concept	Market Equivalent	Key Investing Principle
Entropy	Diversification	Stability through spreading risk
Energy Minimization	Efficient Frontier	Max return per unit of risk
Phase Transition	Market Crash	Monitor systemic pressure
Random Matrices	Correlation Filtering	Identify true patterns
Adaptive Systems	Evolving Strategies	Stay flexible and responsive
Information Flow	Market Energy	Follow how data drives money
Chaos to Order	Long-Term Trends	Patterns emerge from noise

---

🌌 Final Thought

Modern physics teaches us that lawfulness emerges from randomness.
Likewise, successful investing isn’t about predicting the unpredictable — it’s about understanding the deeper structure of how risk, information, and behavior organize into patterns over time.

Or, as a physicist-investor might put it:

“You can’t predict the next tick — but you can model the system that makes the ticks.”

 

Why we like and own shares of, Royalty Pharma plc (NASDAQ: RPRX)

                                     

Investment Analysis Report: Royalty Pharma plc (NASDAQ: RPRX)

Date: September 25, 2024

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Executive Summary

Royalty Pharma plc (RPRX) stands out in the pharmaceutical sector with its unique business model of acquiring pharmaceutical royalties. This approach provides diversified exposure to a broad range of therapies and mitigates risks associated with drug development. Given the company's strong financial performance up to October 2023, solid portfolio of royalty interests, and the continuous growth in the pharmaceutical industry, RPRX presents a compelling investment opportunity for investors seeking exposure to the healthcare sector.

Company Overview

Royalty Pharma plc is a leading buyer of biopharmaceutical royalties and a funder of innovation across the healthcare industry. The company collaborates with innovators from academic institutions, research hospitals, and biotechnology and pharmaceutical companies. By acquiring existing royalties and funding late-stage clinical trials and new product launches, Royalty Pharma provides capital that supports innovation in the biopharmaceutical industry.

Unique Business Model

• Diversification of Revenue Streams: Royalty Pharma's income is derived from a diversified portfolio of royalties on over 45 marketed therapies and four development-stage product candidates. This diversification reduces reliance on any single product or partner.

• Reduced Operational Risks: Unlike traditional pharmaceutical companies, Royalty Pharma does not engage in drug development, manufacturing, or commercialization, thereby avoiding associated operational risks and costs.

• Strategic Partnerships: The company has established relationships with leading pharmaceutical and biotechnology companies, enhancing its ability to acquire high-quality royalty streams.

Financial Performance (Up to October 2023)

• Revenue Growth: Royalty Pharma demonstrated consistent revenue growth, driven by strong performance of key products in its royalty portfolio.

• Strong Cash Flow: The company's business model generates robust cash flows, supporting dividend payments and reinvestment in additional royalty acquisitions.

• Healthy Balance Sheet: With prudent financial management, Royalty Pharma maintained a solid balance sheet, providing flexibility for future investments and acquisitions.

Key Royalty Assets

• Blockbuster Drugs: The portfolio includes royalties on high-performing drugs such as Imbruvica, Tysabri, and Trulicity, which have shown strong sales and growth trajectories.

• Emerging Therapies: Investments in royalties of development-stage products position the company to benefit from potential future blockbusters.

Growth Prospects

• Pipeline Expansion: Ongoing investments in new royalties and partnerships are expected to enhance future revenue streams.

• Industry Innovation: The continuous advancement in biotechnology and pharmaceuticals presents opportunities for Royalty Pharma to acquire royalties on innovative therapies.

• Strategic Acquisitions: The company’s expertise and financial strength position it well to capitalize on acquisition opportunities in the royalty market.

Industry Outlook

• Growing Healthcare Demand: An aging global population and increased prevalence of chronic diseases drive demand for innovative therapies.

• Biopharmaceutical Innovation: Significant investments in R&D across the industry are leading to new drug discoveries, expanding the potential for royalty acquisitions.

• Favorable Regulatory Environment: Regulatory support for accelerated drug approvals can shorten time to market for new therapies, benefiting royalty holders.

• Royalty Pharma is dominant and very successful. Over the past 4 years,  the company has invested $13 billion acquiring royalties on 34 unique therapies, half of which are either currently or will be blockbusters.

  The royalties generate very high profit margins. Last year, for example, they produced a margin of 89%. On an earnings-per-share basis, the company posted net income of $1.88 billion last year. The stock is also yielding 2.8%.

  Going forward sales and profits should continue to grow as the development-stage drugs in its portfolio gain approval. Currently, the company holds a total of 49 royalties, 35 of which are for approved drugs and 14 for development-stage drugs.

Risk Factors

• Dependence on Product Success: Royalty revenues are tied to the performance of underlying products; any decline in sales due to competition or patent expirations can impact income.

• Regulatory Changes: Changes in healthcare policies, drug pricing regulations, or patent laws could affect royalty revenues.

• Market Competition: Increased competition in acquiring royalty interests may lead to higher acquisition costs and affect future returns.

Conclusion

Royalty Pharma plc offers a unique investment proposition with its diversified and growing portfolio of pharmaceutical royalties. The company's strong financial position, combined with industry growth drivers, supports the potential for continued revenue growth and shareholder value creation. Investors seeking exposure to the healthcare sector with a focus on stable income and growth may find RPRX an attractive addition to their portfolios.

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Disclaimer: This report is for informational purposes only and does not constitute financial advice. Investors should conduct their own research and consider their financial situation and investment objectives before making investment decisions.

Update - Feb 6th 2025

We added to our shares of RPRX today...

Royalty Pharma plc (Nasdaq: RPRX) today closed a transaction to monetize the remaining fixed payments on the MorphoSys Development Funding Bonds for $511 million in upfront cash. This payment, combined with payments previously received, results in total cash proceeds of $530 million on the $300 million investment that was made in September 2022. The company generated an attractive return by monetizing these future fixed payments at a low discount rate of 5.35% and will redeploy these proceeds into higher returning investment opportunities, including repurchasing its shares and acquiring attractive new royalties.

"While Royalty Pharma does not generally sell royalty investments, Novartis' acquisition of MorphoSys created a unique opportunity to convert a fixed stream of long-term payments with no potential for outperformance into a large cash inflow today at an attractive return for shareholders,"

RPRX reports in Feb 11 2025

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