One of the most surprising discoveries about investing is that it gets simpler over time. Apple’s (AAPL) Steve Jobs captured the essence when he said, “Simple can be harder than complex: you have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”
When I first started investing in biotech about ten years ago, just mastering the jargon and the mechanics of the clinical and regulatory process took months. Then came the thick volume of technologies and indications, and ways to differentiate the good, the mediocre and the bad.
Next, technicals like pricing patterns, volume changes and implied volatilities began to seep into the decision making process. As if that’s not complicated enough, fundamentals like insider activities, financial and peer group analysis add another layer of complexity. The deeper I delved into the subject, the more inadequate I felt about my knowledge. But it got simpler, gradually, and the results became better when I began to shed the non-essential.
So here are the 3 essential attributes I now look for in promising holdings for my Covestor Biotech and Medtech model, and they boil down to 3 questions:
- Does the company have at least one late stage Phase III drug?
- Does it have an established partner to help market this drug?
- Does it have enough cash to sustain itself until FDA approval?
If the answers are all yes, then my interest deepens and further investigation is justified. If at least one answer is no, I will generally move on. Have I missed some great opportunities? Certainly. But my investment process becomes efficient and I believe I have tilted the odds to my favor. At any given time within the 400 biotech stocks universe, no more than 10% of them meet all three criteria.
How I arrive at these 3 attributes I will save for another time. But needless to say each of them addresses fundamentals that point to research excellence, ingenious entrepreneurship, and financial prudence. Come to think of it, Buffet and Munger also distill their investment criteria into 4 simple filters:
- A business we understand
- Favorable long-term economics
- Able and trustworthy management
- A sensible price tag
And because I’m such a quote addict, I’ll end with one from Einstein. “Everything should be made as simple as possible, but not simpler.”
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
