Investing in biotech stocks - My experience so far

BrockStoker

Thanks for answering so very glad to hear it’s only a small part of your assets.
What I think is probably not what you want to hear... May I ask a couple of questions?

Of course. I'm always happy to discuss and answer questions, otherwise I would not be here.

1. Assuming that 1/25 stock perform well and you have the ability to recognise a winning stock 22/25 of the time, what do you estimate the probability of you picking a performing stock is?

Well, if I did OK with 22/25, that suggests I'm getting it right 88% of the time I guess?

2. For each stock you’ve picked you have a compelling story as to why it will perform but have you considered some of the ways in which they could fail?

Absolutely. Amyris might fail to successfully up-scale it's fermentation for example, but it says that it's able to overcome these potential hurdles, and they appear to be way ahead of their competitors having worked with many molecules. That experience gives me faith that they are ahead of the game.

Orchard is probably my riskiest stock, and a set of bad data could easily make it plunge 60+% or more. That is a risk I'm willing to take as the potential up side could be a few hundred percent if they produce good data.

Each of my 4 smaller holdings has potential risks, and I have no doubt my largest holding (ARWR) has some risks, but, I believe the most likely risks (bad data, dilution) are as small as they could possibly be. Of course a disaster out of the blue (a fire destroying their HQ for example) is always possible, but then that is the case with virtually any company, and so I think it can be ignored.

Probably the largest risk with healthcare/biotech in general is sector specific political risk related to drug pricing, and this has held back the sector in the past, but for the most part I'm not worried about it for a number of reasons:

- Firstly it's costly to develop new therapies/drugs, and traditionally very risky (high chance of failure for every attempt - though this is starting to change, and TBH I'm not entirely sure what it might mean - I will investigate more), which means, in order to attract investors, there has to be the chance of significant profit, otherwise it's not worth the risk, and there would be no investment in new therapies/drugs. We need these new therapies/drugs, so prices will remain high, unless someone figures out another pricing model that will work. Ultimately it's up to governments to foot the bill, and it's in their interest. For example, to care for someone with a debilitating condition (alzheimers, diabetes, HBV, covid 19 - take your pick) is very expensive and takes up many resources (especially if people live for years/decades with a condition), which is why may healthcare systems (not just our own) are overstretched. Although some of these new treatments may be initially expensive, if they are effective, it actually works out cheaper in the long run, and can take the strain off struggling healthcare systems. This is especially true with aging populations.

- Secondly, the pressure is usually worse in the run up to US elections, as candidates make their "promises" to the people to try and bring down drug prices. That's over now, and Biden is unlikely to be able to do anything to change the status quo for the reasons mentioned above. It will no doubt raise it's ugly head again in a few years, but again, I don't see it as a serious risk, although it can affect share prices temporarily. Trump did his best to lower prices - in 2018 he was constantly tweeting about "high drug prices" and "how he was going to bring them down", and it certainly affected my biotech funds at the time, but investors soon saw through the bluster, and realized that he can't really do much about it, so share prices quickly recovered.

Of course the largest risk in biotech is that your drug simply does not work (or is not safe), but this risk is much minimized with a disruptive tech like RNAi, so again, I'm happy to accept what little risk there is, since the rewards are potentially enormous.
As ARWR's CEO said, "biotech investing is all about risk management", and from what I've seen, there is no company that manages risk better than ARWR.

BrockStoker

Cus said:

BrockStoker said:

No. Those are just my individual stock portfolios. Individual stocks make up just a small part of my overall assets. Most of it is in funds, and I also have a large part in cash/property at this stage in time. 

Why do you not use the extra assets to invest more in Arrowhead? You have said often that if you had more money to invest in it you would.

Also, you have done well, but considering that even the basic worldwide healthcare trust has gone up over 50% since the autumn of 2019 means that this has been an exceptional time for this industry anyway.

Right now we're looking to buy/move house (and also make repairs/renovate), so I have to be careful what I invest as I may find I need the cash. Hoping we can get that out of the way soon, so I can invest anything there is spare. I'll also have to wait till the start of the next tax year as I've already nearly used up our combined ISA allowance. I fear that by that time ARWR will have already gone up significantly, so the opportunity won't be as good, but we will see.

Yes, the sector did start to pick up at the end of 2019 (after 4 years of going sideways), and I managed to get some of my investments in at the start of Nov, just as things started to go up. Likewise, when my second lot of £20K came through, it was just at the right time in March to pick up bargains.

So yes, that is one factor I neglected to point out in my recent posts here, and it has certainly helped me out. The possibility to pick duds was still always there though, I think it's fair to say.

BrockStoker

Quite a timely article I just found.

"Investing in biotech companies may not entail higher risk than investing in other sectors, according to a new report from Bentley University's Center for Integration of Science and Industry."

https://phys.org/news/2021-01-investment-emerging-biotech-companies-non-biotech.html

thegentleway

BrockStoker said:

1. Assuming that 1/25 stock perform well and you have the ability to recognise a winning stock 22/25 of the time, what do you estimate the probability of you picking a performing stock is?

Well, if I did OK with 22/25, that suggests I'm getting it right 88% of the time I guess?

That is the most common answer but it is incorrect as it ignores the base rate (1/25). There are only two conditions in which you will pick a stock:

1. You correctly identify a performing stock. Probability is 22/25 x 1/25 = 3.52%

2. You incorrectly identify a non performing stock. Probability is 3/25 x 24/25 = 11.52%

You will therefore pick a stock 15.04% of the time (3.52% + 11.52%). The probability that you picked a performing stock is therefore 23.40% (3.52% / 15.04%).

Even with your magical ability to recognise performing stocks 22 out of 25 times you are going to pick a performing stock less that one quarter of the time.

csgohan4

thegentleway said:

BrockStoker said:

1. Assuming that 1/25 stock perform well and you have the ability to recognise a winning stock 22/25 of the time, what do you estimate the probability of you picking a performing stock is?

Well, if I did OK with 22/25, that suggests I'm getting it right 88% of the time I guess?

That is the most common answer but it is incorrect as it ignores the base rate (1/25). There are only two conditions in which you will pick a stock:

1. You correctly identify a performing stock. Probability is 22/25 x 1/25 = 3.52%

2. You incorrectly identify a non performing stock. Probability is 3/25 x 24/25 = 11.52%

You will therefore pick a stock 15.04% of the time (3.52% + 11.52%). The probability that you picked a performing stock is therefore 23.40% (3.52% / 15.04%).

Even with your magical ability to recognise performing stocks 22 out of 25 times you are going to pick a performing stock less that one quarter of the time.

but his portfolio is undeniably doing well and it wasn't like he chose a stock at random for the odds to kick in. 
His risk appetite will likely be high and understandably has to be in the biotech sector. 

Username999

csgohan4 said:

thegentleway said:

BrockStoker said:

1. Assuming that 1/25 stock perform well and you have the ability to recognise a winning stock 22/25 of the time, what do you estimate the probability of you picking a performing stock is?

Well, if I did OK with 22/25, that suggests I'm getting it right 88% of the time I guess?

That is the most common answer but it is incorrect as it ignores the base rate (1/25). There are only two conditions in which you will pick a stock:

1. You correctly identify a performing stock. Probability is 22/25 x 1/25 = 3.52%

2. You incorrectly identify a non performing stock. Probability is 3/25 x 24/25 = 11.52%

You will therefore pick a stock 15.04% of the time (3.52% + 11.52%). The probability that you picked a performing stock is therefore 23.40% (3.52% / 15.04%).

Even with your magical ability to recognise performing stocks 22 out of 25 times you are going to pick a performing stock less that one quarter of the time.

but his portfolio is undeniably doing well and it wasn't like he chose a stock at random for the odds to kick in. 
His risk appetite will likely be high and understandably has to be in the biotech sector. 

He hasn't shown his "portfolio".
He's shown a fantasy Yahoo Portfolio anyone can setup.
You have to wonder why. 

thegentleway

csgohan4 said:

thegentleway said:

BrockStoker said:

1. Assuming that 1/25 stock perform well and you have the ability to recognise a winning stock 22/25 of the time, what do you estimate the probability of you picking a performing stock is?

Well, if I did OK with 22/25, that suggests I'm getting it right 88% of the time I guess?

That is the most common answer but it is incorrect as it ignores the base rate (1/25). There are only two conditions in which you will pick a stock:

1. You correctly identify a performing stock. Probability is 22/25 x 1/25 = 3.52%

2. You incorrectly identify a non performing stock. Probability is 3/25 x 24/25 = 11.52%

You will therefore pick a stock 15.04% of the time (3.52% + 11.52%). The probability that you picked a performing stock is therefore 23.40% (3.52% / 15.04%).

Even with your magical ability to recognise performing stocks 22 out of 25 times you are going to pick a performing stock less that one quarter of the time.

but his portfolio is undeniably doing well and it wasn't like he chose a stock at random for the odds to kick in. 
His risk appetite will likely be high and understandably has to be in the biotech sector. 

You’ve misunderstood: there is no picking at random in the above calculations. Picking randomly would yield 4% probability of picking a performing stock.

BrockStoker

csgohan4 said:

thegentleway said:

BrockStoker said:

1. Assuming that 1/25 stock perform well and you have the ability to recognise a winning stock 22/25 of the time, what do you estimate the probability of you picking a performing stock is?

Well, if I did OK with 22/25, that suggests I'm getting it right 88% of the time I guess?

That is the most common answer but it is incorrect as it ignores the base rate (1/25). There are only two conditions in which you will pick a stock:

1. You correctly identify a performing stock. Probability is 22/25 x 1/25 = 3.52%

2. You incorrectly identify a non performing stock. Probability is 3/25 x 24/25 = 11.52%

You will therefore pick a stock 15.04% of the time (3.52% + 11.52%). The probability that you picked a performing stock is therefore 23.40% (3.52% / 15.04%).

Even with your magical ability to recognise performing stocks 22 out of 25 times you are going to pick a performing stock less that one quarter of the time.

but his portfolio is undeniably doing well and it wasn't like he chose a stock at random for the odds to kick in. 
His risk appetite will likely be high and understandably has to be in the biotech sector. 

Yes, I'm not exactly sure what thegentleway is trying to say (or prove?) there - is it that "you can't pick 22/25 stocks that are winners"?

Well, theory is fine, but my experience is "real world", and isn't necessarily going to align with theory. Of course, I could get a very different result if I tried to repeat my "experiment", but it doesn't change what I got on the first run.

thegentleway

BrockStoker said:

csgohan4 said:

thegentleway said:

BrockStoker said:

1. Assuming that 1/25 stock perform well and you have the ability to recognise a winning stock 22/25 of the time, what do you estimate the probability of you picking a performing stock is?

Well, if I did OK with 22/25, that suggests I'm getting it right 88% of the time I guess?

That is the most common answer but it is incorrect as it ignores the base rate (1/25). There are only two conditions in which you will pick a stock:

1. You correctly identify a performing stock. Probability is 22/25 x 1/25 = 3.52%

2. You incorrectly identify a non performing stock. Probability is 3/25 x 24/25 = 11.52%

You will therefore pick a stock 15.04% of the time (3.52% + 11.52%). The probability that you picked a performing stock is therefore 23.40% (3.52% / 15.04%).

Even with your magical ability to recognise performing stocks 22 out of 25 times you are going to pick a performing stock less that one quarter of the time.

but his portfolio is undeniably doing well and it wasn't like he chose a stock at random for the odds to kick in. 
His risk appetite will likely be high and understandably has to be in the biotech sector. 

Yes, I'm not exactly sure what thegentleway is trying to say (or prove?) there - is it that "you can't pick 22/25 stocks that are winners"?

Well, theory is fine, but my experience is "real world", and isn't necessarily going to align with theory. Of course, I could get a very different result if I tried to repeat my "experiment", but it doesn't change what I got on the first run.

You asked me what I thought... which is that you are ignoring the base rate. I have not argued with your unrealistic ability to recognise a performing stock 22/25. I’ve explained that this yields a 23.4% probability of picking a winner in real life. It’s basic stats but I appreciate it’s unintuitive hence why I showed the workings and tried to explain it. Ironically it’s very important for medicine; it’s one or the reasons we have control groups. 

Perhaps it would help if you considered a made up scenario where there is only 1 performing stock. Surely you can see that the odds of you picking that one stock is incredibly small even with a 22/25 ability? That’s the effect of the underlying base rate.

BrockStoker

Username999 said:

csgohan4 said:

thegentleway said:

BrockStoker said:

1. Assuming that 1/25 stock perform well and you have the ability to recognise a winning stock 22/25 of the time, what do you estimate the probability of you picking a performing stock is?

Well, if I did OK with 22/25, that suggests I'm getting it right 88% of the time I guess?

That is the most common answer but it is incorrect as it ignores the base rate (1/25). There are only two conditions in which you will pick a stock:

1. You correctly identify a performing stock. Probability is 22/25 x 1/25 = 3.52%

2. You incorrectly identify a non performing stock. Probability is 3/25 x 24/25 = 11.52%

You will therefore pick a stock 15.04% of the time (3.52% + 11.52%). The probability that you picked a performing stock is therefore 23.40% (3.52% / 15.04%).

Even with your magical ability to recognise performing stocks 22 out of 25 times you are going to pick a performing stock less that one quarter of the time.

but his portfolio is undeniably doing well and it wasn't like he chose a stock at random for the odds to kick in. 
His risk appetite will likely be high and understandably has to be in the biotech sector. 

He hasn't shown his "portfolio".
He's shown a fantasy Yahoo Portfolio anyone can setup.
You have to wonder why. 

Why? Because It's easier not to have to log in all the time, not to mention less of a security risk.

I have nothing to prove, and I don't have to show actual screenshots of my portfolio, but here you go anyway: