The #1 rule to investing in biotech stocks
- Jul 16, 2020
YOU HAVE TO PLAN TO LOSE MONEY 1/3 OF THE TIME.
That’s the first rule to investing in biotech stocks.
But that’s not the worst part. The worst part is that you’ll lose half of your money when those stocks do go down.
That’s what I say to folks who ask me about biotech investing. I tell them to go into it with their eyes open.
I bring this up today because in the past week, I’ve gotten emails from a half dozen Biotech Insider members. They want to know how they should think about creating a biotech portfolio.
Because I’ve been asked this so many times over the years, I’m afraid to admit I have a standard response. That’s the bad news.
The good news is that I decided to share it with you. So today I’m going to quickly describe how we look at biotech investing here at Biotech Insider.
Here we go:
Every business on earth is in one of four phases of its life cycle: start-up, growth, maturity and decline. Understanding what phase you’re investing in can make a huge difference in how you construct your portfolio.
- Start-up Phase:The start-up phase is the idea and money raising phase. This is where you get the highest returns, by far. But it is also where most companies fail.
- Growth Phase:The growth phase is where you start selling more and more products and generating ever-greater levels of revenue. Growth rates of 15% + are typical here. Google’s performance during the past decade comes to mind.
- Maturity Phase:The maturity phase is where your rate of growth slows down to the 5% range and you focus on maximizing your profits. With good management (i.e. smart investments in R&D / acquisitions), you can stay in this phase for decades. The amazing job Amgen or Microsoft has done over the past thirty years to stay current comes to mind.
- Decline Phase:This is where the market has moved past your product line and your business begins to decline. The struggle cable companies are currently facing with cord-cutting comes to mind.
Like Venture Capital Investing
The stocks we recommend at Biotech Insider are in either the start-up phase or the growth phase of their life cycle.
By nature that means these investments are high-risk, high-return investments. It also means they’re going to be very volatile. Sometimes comically volatile.
That’s why most professional investors look at small cap biotech investing like venture capital investing. And just like venture capital investing, fortunes can be made even when you know in advance that you will lose money on a good portion of the investments you make.
In fact, let me just say right now that here at Biotech Insider we expect 30% of the investments we make to lose money.
That’s right: 3 out of 10 stocks we recommend to you will likely be sold at a loss at average loss of 50%.
That’s just par for the course. Anyone who tells you anything different either doesn’t know what they are talking about or is trying to sell you something you don’t want.
But what happens to the 7 remaining stocks?
4 will likely generate breakeven performance, meaning they’ll be marginally higher or lower from where you bought them.
That leaves us with 3 stocks out of the original 10. These will likely be the winners.
2 of the winners will likely be strong performers, with returns in excess of 50%.
But it’s the last winner that will be the real game changer: potential returns of 1,000% are what we’re after.
Now let’s say you set aside $10,000 of your money to invest in small cap biotech stocks with us. With ten stocks (our target portfolio) you’d put $1,000 into each one.
What we’ve seen is that over time is that a portfolio like that could earn returns in excess of 30% per year.
That’s how Biotech Insider members were able to earn returns of 38% last year.
And after thirty years doing this for a living, I can tell you without question that earning 38% on your money is no small feat.
“The Buck Stops Here”
Chairman & CEO
Behind the Markets