My trading strategy.
"Experience is like the son of difficult mistakes".
September 21st, 2010 by BiotechInvest
As I said my main strategy is: 1) to find the small/middle cap biotech companies before they move to large cap; 2) perform scientific analysis of company technology to predict a probability of successful clinical trial results.
The good illustration of this method is hunting. When hunter wants to shoot a flying duck he must shoot at the point that is far ahead of flying target. Actually he is shooting in empty place that is sometimes 20-30 foots ahead. He is doing this because he is calculating the flying duck velocity and the velocity of short and predicting the point where they will meet. He is doing this without any equipment and computers, by eye. Actually he shoot in the future and his success depends on his previous experience.
So, I am a short-term trader. I perform complete fundamental/scientific analysis of of biotech company (small or middle cap usually) before any binary event (clinical trial results, FDA panel voting or FDA PDUFA date) and buy the company stock if the prognosis is positive. If negative I short it or buy puts. After event I usually sell this stock and switch to another one.
Sure that numerous investors are using similar strategy. But always after recent crash of biotech company I read posters like this:
“I will never buy a bio stock again.
Biotech stocks are lottery tickets, not investments, and should be treated accordingly.”
“I just lost 100k from the past 2 days
Entirely my fault, I should have never load up at 7. Now hoping to recoup the loss with my still long share i have left. Hopefully, the FDA will see the truth and approve this. Never again”
I always answer: "you are wrong, biotech is most profitable sector. I have average 50-150% gain per year and trade only biotech. I use combination of tech/fund/science analysis and it give perfect results."
Actually it was another reason to create this website. I will publish my portfolio and all portfolio corrections/changes at Home page. Also I will publish my comments about each company I picked (or not picked). Chekhov said: "Brevity is the sister of talent." So, my comments will be very short.
December 16, 2010 by BiotechInvest
Short-term stock trading has numerous advantages in comparison with long-term strategy. But also this strategy has one very substantial minus: you have much higher taxes for the short-term capital gains. 25% vs. 15% for long. As I said I'm using only the short-term strategy because I'm investing only in biotech sector, mostly in micro- and mid-cap companies. It's very labile sector, and investor must continually correct portfolio. There is no chance to holding the biotech stock one-year to decrease taxes to 15%.
I have decided for myself that I will switch to long-term strategy when this unstable time will gone. The investment in mid and big biotech companies is producing stable gain when the global economics is stable and growing. Now we have a "wolf" market and the short-term investment strategy is very good for this time.
So big short-term gain means big taxes. To decrease taxes usually I'm taking all unrealized losses in December. The “wash rule” says that you can’t sell a stock and buy it back within 30 days. "If you take losses in any stock in December, be sure NOT to re-purchase the same stock (or an option on that stock) for a period of 31 days. If you do, your losses will be deferred to a later tax year. You won't permanently lose the loss, it will just move forward and you will have a greater tax consequence in the current year."
Thus, I will correct my portfolio tomorrow and sell next companies: CLDX, CYTK, CERS. Also I will cover JAZZ. I'll re-purchase these companies after January 15, 2011. Also I will again short JAZZ. This stock is highly manipulated by MMs and funds so I'll do it after Q4/annual earning release (28-Feb-11 Earnings announcement).
After correction the 2010 gain will be approximately 70-80%, less than in 2009 ( ̴ 125%). However, 2010 gross gain is higher than 2009. I did 4 big mistakes in 2010 investment: VVUS, ALXA, AMLN and JAZZ (short). But as I said any mistakes and losses could be corrected in biotech sector if you use the reliable investment strategy.
It seems like that the binary events sank, and a some calm set in at the biotech area. So, I have started to search portfolio candidates on the assumption of the absence of binary events such as panel vote or PDUFA. However, some companies with 2011 PDUFA are already in my "buy" list: SPPI, DCTH, SGEN, MAPP, VVUS, ALXA.
JAZZ, OSIR and MDVN are in 2011 short list.
January 11, 2011 by BiotechInvest
It's good to have an investment strategy i.e. a plan of action designed to achieve a gain when you play in biotech sector. So, each investor has own strategy and never change it (especially if it works). However, a stock market is changing so fast that any even very good strategy may become unprofitable.
Recently published paper inspired me to think about my strategy modification.
Investing Dying as Computer Trading, ETFs & Dark Pools Proliferate
"Computer trading, dark pools and exchange-traded funds are dominating market action on a daily basis, statistics show, killing the buy and hold philosophy still attempted by many professional and retail investors alike. Everything moves up or down together at a speed faster than which a normal person can react, traders said.
High frequency trading accounts for 70 percent of market volume on a daily basis, according to several traders' estimates. The average holding period for U.S. stocks is now just 2.8 months, according to the Crosscurrents newsletter. In the 1980s, it was two years."
I should agree with this, the trading machines with powerful and flexible algorithms are masters of a stock market today. They are sniffing any growing stock, start buying it immediately, get some gain and sell it without any delay. The investors like me continue to keep this stock (because it's good company with strong science, tech/fund analysis is good and etcetera) and finally lose. Each time when I see that good stock is falling without any reason I'm asking myself: "who is selling?" I see now that this question is slightly incorrect, correctly will be "what is selling?" Just some trade programs, algorithms...
"For example, Renaissance Technologies makes extremely high returns as well, but everybody understands that there is an algorithmic trading strategy that is simply the best ever invented. This guy Jim Simon brought together a team of outstanding mathematicians."
"The capital raising stock market of the past hundred years has morphed in just the last 10 years into a casino," said Sal Arnuk of Themis Trading and a market infrastructure expert who advised the SEC after last year's so-called Flash Crash. "Who is doing the fundamental work analyzing stocks? In the end, we've greatly increased systemic risk."
"Another factor jumped into the fray in December: dark pools. Off-exchange trading accounted for more than a third of the trading volume in December, says Raymond James. While these trades are eventually reported to the public markets, they further damage price discovery, an essential element for a fair securities market, investors said.
"This was a record high market share for off-exchange trading and we believe the SEC will ultimately be forced to react to support the price discovery process by limiting off-exchange trading for all traces except for large block trades," wrote Raymond James analyst Patrick O'Shaughnessy in a note to clients yesterday."
"This destroys capital markets," said Jon Najarian, co-founder of TradeMonster and a 'Fast Money' trader. "Hidden trading venues, where some participants get to peek at the orders as they are entered so long as they agree to 'interact' with a minimum percentage, is not an exchange,it's a license to steal."
Well, it seems like that SEC hunting for insider trades scared funds. Before they just used "insider network" (created by them) and had very good gain. Now they switched to fast-speed trading and making money without any risk.
So, this new "high-speed market" demands the new ideas. I have decided not change my basic strategy but I will change my tactics (detailed maneuvers to achieve objectives set by strategy).
Since, the "average holding period for U.S. stocks is now just 2.8 months" I will keep any stock less than this period i.e. from 1 to 15 days. So, portfolio will be extremely dynamic and flexible. I don't like a day trading but it seems like it's impossible to avoid it at this reality when many stocks jump 20-30% in one day and fall 30-40% in next day. It doesn't matter for taxes if you keep stock 3 days or 30 days (short-term any way). But it seems like that many "gains" disappeared after 30 days (and never come back).
February 20, 2011 by BiotechInvest
I see that an idea of dynamic and flexible portfolio was correct. However, it needs some correction. The stem idea of my strategy is to discover the "hidden biotech gems" at their early stage i.e. when they belong to small cap and their pps is around $1-2. At this stage these companies can't grow fast, so if you buy them you need to keep them long (even if they bring some temporary losses).
Thus, each biotech portfolio should be separated at least into 2 parts: long-term and short-term (speculative) parts. Ideally, the major version of biotech portfolio must be formed on the "inversed pyramid" principle (see BiotechInvest logotype). But in this case portfolio value must be at least $5-10M. Since I don't have it (yet) my portfolio is more simplistic: biggest part is used for short-term speculative (and of course high-risk) investments and smaller part will be used for long-term investment in potential biotech gems.
Question is what is "hidden biotech gem"?
In simple words it's a small cap biotech with pps average $1-2 that has a huge upside potential to grow. This potential is based on the constellation of bright science ideas that lay the foundation of this company. These ideas may have any origination: academy science, small start-up biotech and etcetera. AMLN is a good example of such hidden biotech gem that had one bright idea originated from academy lab.
We have numerous biotech companies in mid and big cap with chart that started from single digits several years ago. And many biotech investors can say now: "If I knew it I already will be millionaire".
Well, it's true. But only partly.
Recent examples of such raised biotech stars are DNDN and HGSI. Everybody remember DNDN pps average $2 or even less (March, 2009). It was so simple to buy 10,000 shares and then sell them at $56 i.e. half-million gain. Did somebody had a nerve to do it?
I bought 4k DNDN in March 27, 2009 at average $4.30 and sold it in April 1 for $22 i.e. almost $70k gain for 4 days of investment.
And I put under risk almost 15% of all my money i.e. if DNDN showed increased survival <20% pps could be <$1 and my losses -$12-13k.
But if I used all my money this time my gain could be $340k.
Or (if negative results) my losses could be -70% and I'm in big trouble.
And with HGSI I bought only 5k for $3.48 and sold them out 4 days later for average $10 (too early)
Thus, I choose to have the diversified portfolio and investment style. However, sometimes it's possible to put under the risk even 15-20% of assets if the probability of win is higher than 70-75% (recent OREX short sell).
So, hidden biotech gems are already here among hundreds other small cap biotechs. And it's not easy to figure out them before they become visible to all investors and funds. I'm going to collect these potential gems and keep them long (>1 years) in my portfolio. I'll use the deepIndigocolor (#8A2BE2) to mark this stocks. Extremely high-risk and short-term stocks will be marked by Rich Carmine color (#D70040). Brown is for medium-risk short-term stocks. Cyan is for high-risk nano-cap.
March 02, 2011 by BiotechInvest
Yesterday losses were terrible and I'm sure that almost each investor is thinking now about to sell everything and just wait and watch. Nobody can't predict "Black Swan events" that may crash market.
"The theory was developed by Nassim Nicholas Taleb to explain:
1. The disproportionate role of high-impact, hard to predict, and rare events that are beyond the realm of normal expectationsin history, science, finance and technology
2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)
3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs
Unlike the earlier philosophical "black swan problem", the "Black Swan Theory" (capitalized) refers only to unexpected events of large magnitude and consequence and their dominant role in history. Such events, considered extreme outliers, collectively play vastly larger roles than regular occurrences."
Based on the author's criteria:
1. The event is a surprise (to the observer).
2. The event has a major impact.
3. After its first recording, the event is rationalized by hindsight, as if it could have been expected (e.g., the relevant data were available but not accounted for)."
So what is the situation we have now?
Numerous upheavals in Arabian countries (even such quite and peaceful as Oman), oil price rise and etcetera.
I have an "aggressive portfolio type" i.e. stock only. And the most of these stocks are microcap biotech i.e. this portfolio will be most vulnerable if "Black Swan" event really happens. The probability of this event is high enough (>30%).
In the light of this probability I have decided to sell my entire portfolio today. It's too risky to invest now (especially in biotech). I already used the term "investomadness" for some market situation.
Just want to propose another neologism: "investophobia" i.e. an irrational, intense and persistent fear of investments (particularly in biotech sector).
So, you may think that I have an investophobia attack. I hope that it was baseless. But recent news are really bad.
Qaddafi Attacks East Libya to Wrest Control of Oil Facilities From Rebels
Many investors follow the rule "Sell in May and go away". This year I'll do it slightly earlier i.e. in March. If the Middle East situation stabilize I will be back for some spring binary events.
March 15, 2011 by BiotechInvest
The current market is in fluctuating equilibrium now. However I think that the Middle East situation already start to normalize. Japan catastrophe was terrible but Japanese people are strong and they will start to re-build the economics immediately. I hope that biotech sector will start to grow even faster. However I will wait some time and see what is really going on. Not sure that we have a bottom now so short positions may be the most safest way to invest now. I will search for some heavily overvalued biotech stocks to short them for short-term. VRUS, MDVN and JAZZ are still in short list. These stocks are strongly manipulated so sometimes they grow even against common sense. For example someone wants JAZZ pps to be $30. Well, let them do it and then short it at $30. This price is absurd and finally market will force JAZZ holders to sell at $29, $28 and etcetera. Same about VRUS.
MDVN has the earning release today after-market. May be I'll short it at high today.
March 18, 2011 by BiotechInvest
I see that it was too early for optimism. The Middle East crisis will not be stopped by air strikes of Libya. In contrast these air strikes will only aggravate this situation. I must again switch to "short only" mode. The oil price will start grow like crazy after first air strike against Libya and market will lose interest in biotech sector for long time. News said that raids may be spearheaded by an Arab nation such as Qatar or the UAE: "We're probably looking at involvement from Qatar, UAE and perhaps Saudi Arabia and Egypt."
So, after this Libya will have a right to strike back on oil terminals of UAE, Saudi Arabia, Egypt and Qatar. "If you corner a rat, it will go for your throat". Gadhafi knows what happened with Saddam Hussein and he will use all power to bring a maximum pain to attackers.
April 29, 2011 by BiotechInvest
Well, it seems like that this Middle East problem was not so important for market. This problem was resolved so easy with modern technology: just "bomb it and forget it" especially if you have the drones.
So, 'let us return to our sheep' i.e. to biotech investment.
After 2 years observation of this area I can said that biotech sector is heavily manipulated by funds and mercenary analysts like Adam F and Cramer. They can crash any company only because this company don't pay them (or just because some funds hired them to crash this company).
So, the reality is simple: the biotech sector is under strong manipulation of funds and institutions. What we (individual investors) can do?
Tactic is simple here: "catch the wave" i.e. figure out next company that funds will pump, follow it (buy) before critical event, sell this company with gain and then short it. Right now MDVN is on the "pumping wave", JAZZ, ITMN and VRUS are almost exhausted. Who is next? May be CLDX. This small biotech has % of Shares Held by Institutional & Mutual Fund Owners: 32%. When they will have 60-70% they will dictate stock price easy. Buy it now and you will "catch the wave".
July 30, 2011 by BiotechInvest
Sorry for long silence, I just took a vacation and had a trip to some cool place where are no cell phone connection, internet and even electricity - Isle Royale Island. This National Park is located in the northwest corner of Lake Superior. It's really cool place if you want a real wilderness without roads, cell phones and electricity.
Well, I hoped that when I will be back the situation with possible USA default will be resolved. But we again have a possible "Black Swan" event next week: technical default and market crash. I hope I will have a time in Monday to cut possible losses.
August 21, 2011 by BiotechInvest
It seems like that we have the worst case scenario for market: possible double-dip recession in USA i.e. "a recession followed by a short-lived recovery, followed by another recession." All biotech is red and this crazy sell off continues to deeper level. What can we do at this situation? Just two ways: 1) sell everything and keep cash before recovery; 2) go to "dark side of investment" i.e. short stocks. I prefer last one and shorted the most overpriced biotech companies that was manipulated by funds and "big money": VRUS, JAZZ, MDVN, ITMN, HLF.
Because even "big money" can't fight the global market downturn. They will sell off these junk biotechs to have any gain from it. Look at VRUS. Some mercenary asked recently: "Could Vertex Sell $1 Billion Of Its Hepatitis C Drug This Year?" But why he never asked: Could VRUS Sell at least $100 Million Of Its Hepatitis C Drug in 2015? VRUS pps now is $115 and cap is still >$4B but this company has nothing. Funds have >90% of VRUS stock and continue to keep this artificially high pps. But when the fund's clients call them and ask to sell everything VRUS pps will become real one i.e. $15-20. And may be in 2015 it will go up again.
So, investment in biotech is over. It's really sad. Gold never was a cure for any diseases. And you can't buy a cure for Alzheimer's disease even if you pay all of the world's gold.
September 10, 2011 by BiotechInvest
Investment in biotech for dummies
One subscriber asked a funny question: how to invest in biotech without any bored fund/tech/science and etcetera. Firstly I wanted to answer that it’s impossible but later after some thoughts I have changed my opinion. Why not?
Biotech is risky but extremely profitable area for investment. Especially for short-term one. We have a biotech calendar with numerous bifurcation events i.e. PDUFA, clinical trial release, quarterly reports… So, what are the simple rules to invest before these events and win? I’m also a dummy in biotech investment so I will base on my own experience.
Here my rules of 3 for each event. PDUFA
Firstly about PDUFA. How to invest in some Biotech Company if you know its PDUFA and almost nothing about this company (and don’t want to know)?
Usually we have 2 possible scenarios after PDUFA: 1) approval; 2) rejection (or so-called CRL). If #1 happens company pps will go up (at least for some short period of time); #2 is always bad even if it’s not bad CRL that is not asking about additional clinical trials. We will not discuss FDA response delay.
#1: never buy the company that has a principally new technology (drug, treatment or device) and has PDUFA first time. Even if this “new” showed perfect efficacy in clinical trials in 95% cases FDA will issue a CRL and will ask some questions (sometimes stupid, they just want to buy more time for evaluation of this “new”). Even it’s a good idea to short such company because pps drop will be very big (there a numerous examples, the recent one is PATH);
#2: if it’s second PDUFA after first CRL just buy it – the probability of approval is very high (too many positive examples, but there some exclusion too: MNKD, AMLN…)
#3: sell off after approval very likely happens, so it’s better to sell an approved company right after approval (some exclusion happens too: sometimes acquisition happens and pps jumps but it’s rare event)
That’s all about PDUFA event.
The clinical trial results release (I mean a phase III) is very high risky event. It’s rare when we know exact date of release so if you play “run up” strategy it could be a “sudden death” event. Here are some simple rules to avoid big losses:
#1: never buy a company if you are motivated only by positive phase II trial results: if company started phase III it means that phase II trial results were very “promising and safe”. But safe is not equivalent to “effective” (example MDVN Alzheimer drug).
#2: never listen to analyst’s opinion: they are mostly paid liars and they are working for funds that hold a big portion of this company.
#3: it’s less risk to buy a company that test a state-of-art approach (drug or technology) to fight a very tough disease like cancer, Alzheimer, MS i.e. absolutely new drugs that target a new-discovered “Achilles heel” of disease or new equipment to treat or diagnose diseases.
Examples: ALXA, MNKD, AMLN, HGSI, CLSN…
Last ones are quarterly reports.
#1: for most small biotechs without any products they are usually negative events i.e. the best strategy is to sell (temporary) a company before earning release and then buy it after at lower price.
#2: some companies that have already approved new drugs can’t show good drug sales during 2-3 quarters (sometimes more) after FDA approval. Physicians are conservative people and they will not prescribe a new drug to patients. Sometimes they even don’t know about this new drug before company sales representative call or visit them.
#3: big cap biotechs with good drug portfolio usually release very good quarterly reports. So, it’s low risk to buy them (short-term) right before (even 50% of portfolio) and then sell. But again you should choose these companies very carefully: for example I will buy NVO, but not PFE. NVO has >50% of global diabetes sales and this company is always trying to catch some new technologies and directions. For example they are developing an oral GLP-1 program and this oral diabetes drug could be a world diabetes blockbuster. They also started oral insulin program and if they have an oral basal insulin tablets together with oral GLP-1 the NVO pps $200 will not be a big surprise for me.
Those are all BiotechInvest rules of 3 for each event. When I was following them I mostly had a gain. When I forgot them usually I failed (last time it was PATH).
Since 2011 BiotechInvest is an active Solver at https://www.innocentive.com/
16 challenges are solved for approximately 2.5 years of participation - the majority of solutions got highest awards (entire award or >50%). Actually it's very good brain exercise to compete with thousands of Solver of entire world and finally win. The awards are not so big but I know that if I am still winning I can compete with strongest minds of entire world. Of course, the most of my wins are in biotechnology/medicine/biology areas but I'm also trying chemistry, physical science and other natural sciences (successfully). Definitely, this brain exercise is helping me in the biotech investment area. Solving
the challenges help me to analyze science of biotech companies i.e.
crack their technologies and answer one question: is it real science or
very good fake? When you know answer your investment in biotech area
will be always profitable.
So, my advice to all my followers: never stop to exercise your brain, solve difficult (or even impossible) problems within your professional area and outside. Your minds should work each day to be sharp and effective.
18) Seeking Safe Drug-like Small Organic Molecules for Human Use with Negligible Biological Effects
award notification is pending
TAGS: Chemistry Food/Agriculture, Life Sciences, Royal Society of Chemistry
17) Novel Treatment Approaches to Stop the Allergic March towards Asthma
TAGS: Chemistry, Life Sciences, Ideation
16) Crunchy Inclusions for Sugar-Free Chewing Gum
TAGS: Chemistry, Engineering/Design, Life Sciences, Physical Sciences
15) Next Generation of Rodent Control Chemical Agents
TAGS: Chemistry, Food/Agriculture, Life Sciences
14) Minimally Processed Foods
TAGS: Chemistry, Engineering/Design, Food/Agriculture, Physical Sciences
13) Cleveland Clinic: Cleveland Clinic: Methods to Reduce a Medical Device Driveline-Related Infection
TAGS: Cleveland Clinic, Engineering/Design, Life Sciences
12) Cleveland Clinic: Cleveland Clinic: Artificial Cell or Vesicle for Incorporation of Proteins / Molecules
TAGS: Cleveland Clinic, Engineering/Design, Life Sciences, Nature
11) Elizabeth Arden Challenge: Novel Fragrance Delivery System
TAGS: Business/Entrepreneurship, Chemistry, Engineering/Design.
10) Protecting Hair from Heat
TAGS: Chemistry, Engineering/Design, Physical Sciences
9)Cleveland Clinic: Early Detection of Inflammatory Bowel Disease
TAGS: Cleveland Clinic, Global Health, Life Sciences, Math/Statistics, Nature
8)Improved Surgical Glove Materials – Reducing Exposure to Blood Borne Viruses
TAGS: Engineering/Design, Global Health, Life Sciences, Physical Sciences
7) Pfizer, Neusentis Challenge: Demonstrating Molecular Engagement with an Ion Channel
TAGS: Chemistry, Life Sciences, Nature, Physical Sciences
6) Cleveland Clinic: Early Warning Indicator for Contamination or Fouling of a Central Venous Catheter
TAGS: Cleveland Clinic, Engineering/Design, Life Sciences, Nature, Physical Sciences
5) Oxygen Barrier for Natural Rubber
TAGS: Chemistry, Engineering/Design, Physical Sciences
4) Detecting Isocyanates in Suspended Particles
TAGS: Chemistry, Food/Agriculture, Global Health, Life Sciences, Nature, Physical Sciences
3)Topical Methods to Prevent Yeast Infections
TAGS: Chemistry, Food/Agriculture, Global Health, Life Sciences, Nature, Physical Sciences
2) Real-Time Differentiation of Retina from RPE & Choroid
TAGS: Computer Science/Information Technology, Engineering/Design, Global Health, Life Sciences, Nature, Physical Sciences
1) Advancing Research into Facial Fat Redistribution
TAGS: Chemistry, Global Health, Life Sciences, Nature