Persistence, Patience and Tenacity are critical to success in biotech investing. Usually, selling a biotech investment is a bad idea. However, from time to time, an investment has simply run its course. Look for these five signs that it’s time to sell a biotech stock…
1. The C-Suite has Become a Revolving Door
This is a big red flag that should set off alarm bells for you. If you think that you have gone through a lot of ups and downs with a particular biotech stock, just imagine the blood, sweat and tears that the leadership team has dedicated to their business’s success. And it IS their business. Typically leadership teams in the high flying world of biotech are paid mostly in stock. They are shareholders just like you, except with a much clearer view of the actual facts on the ground. If high ranking execs are leaving in droves, what do they know that you don’t?
It’s not always an automatic “sell” if leadership changes. Sometimes a “new regime” can energize a company that has stagnated or lost its way. But if you sense chaos in the c-suite or boardroom, it might be time to pull your money out and look elsewhere.
2. Clouded Transparency
Trust is the glue that holds a biotech company together. To some degree, investors and the public have to trust that data being presented about a certain product candidate is honest and unbiased. Even though most biotechs strive to comply with generally accepted scientific norms in the publication of data, occasionally bad players will just make it all up. One example is Theranos. This company boasted of having miraculously created a much better method of blood testing than any rival. They retained an all star Board of Directors, and the company’s founder and CEO presented herself to the media as the next Steve Jobs. But they never did quite manage to explain how they achieved such a scientific breakthrough. Rather than proudly publishing data for all the world to see, they claimed that their data was “proprietary” and that no one should be able to scrutinize their technology. Of course, it all turned out to be a fraud. It seemed too good to be true, and it was too good to be true. Astoundingly, no one asked any hard questions.
Ask the hard questions. Has your biotech company published data in well known scientific journals for all the world to verify? Does your management team joyfully accept a public grilling from journalists and analysts, or do they hide from the light? If they make mistakes, do they publicly acknowledge missteps, or do they “name and blame” everything and everybody except themselves? If you suspect that someone is lying to you, either directly or by omission, run.
3. Your One Trick Pony did its Trick, and it Sucked.
Larger biotechs tend to have a diversified pipeline, and enough different “irons in the fire” that they can recover from a major failed trial. Not so for small caps and microcaps. Often, when you buy a nascent biotech, you are simply taking a 50/50 shot that a certain trial will yield good data. You may well get paid for this risk….young biotech upstarts are famous for share prices that can skyrocket on good news. But the same is true when results disappoint.
If you have made that 50/50 bet, and a trial has failed, just move on. Take a deep breath, and wish yourself better luck next time. You may well be able to use the loss as a tax shield against income. But “holding and hoping” is not a winning investment strategy.
This may be the trickiest point, but understanding this concept is what separates champion investors from everybody else.
If you choose to take a ride on the biotech roller coaster, get ready for a lot of highs and lows. Get ready to hear a lot of trash talking on CNBC. 90% of the time, it’s all just noise. In the short to medium term, biotech share prices are notorious for wild gyrations that seem as if they were determined by astrology. But hopefully, you carefully researched and considered a company before you bought a piece of it; you made this investment for a reason. When the talking heads get negative on your company, just ask yourself this question: “has anything fundamentally changed?”
90% of the time, the answer to that question will be “no.” Most biotechs exist because they are trying to formulate solutions to grave health problems in growing markets. Those kinds of needs rarely change overnight; the stock market will likely fluctuate much more than, say, the need for a cure to pancreatic cancer.
However, there are a few times when a game changer explodes on the scene, greatly dimming the prospects of your own company. Let’s say BioPancreas Inc, is producing solid stage 2 data to treat pancreatic cancer, but three other companies just got approval for compounds that show a 90% success rate in phase three trials. Ouch!!! Perhaps time to cut your losses and move on.
Tuning out the market noise to focus on what really matters is one of the toughest tasks in investing. But if you get good at it, your brokerage account will look good, too.
5. You’re Losing your Cool.
Are you the kind of investor who used to check his brokerage account every day, but now, thanks to the glory of the smartphone, checks the account every hour? Do you feel elation when your biotech shares soar, only to feel crushed when they dive the next week? Do you find yourself actually being in a bad mood because you see too much red in your brokerage account?
If you can’t take the heat, get out of the kitchen! There is no investment that is worth it if a volatile biotech is making your life hell. I can show you thousands of studies that will demonstrate that a simple, plain S&P 500 buy and hold strategy does quite well over time. Do own some stock, but don’t own biotech if a little nausea freaks you out.
Small companies dedicating all they have to birthing scientific breakthroughs will always be an inherently risky business. Some investors manage that risk by only putting a small percentage of their assets into biotech. Other investors go “all in” on biotech, but just don’t seem to feel the pressure. If you don’t fit either of those two descriptions, there is nothing wrong with investing your hard earned cash in bigger, more established companies. Your mental health comes first; if the biotech game is making you crazy, get out.
Warren Buffett says that his favorite holding period for a stock is “forever.” I wholeheartedly agree. However, even Buffett sells from time to time. If you look for the five signals above, you’ll know when “forever” needs to come to an end…