Listen to Buffett: Invest in Biotech

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OK, Warren Buffett would never say to invest in biotech stocks. After all, he is notoriously wary of industries he doesn't understand. Besides his investments in Johnson & Johnson and Sanofi-Aventis, he has never made any serious forays into drug stocks.

Regardless of his aversion to biotechnology and some other Rule Breaking industries, Buffet did reportedly say something that should resonate with all biotech investors: "We prefer a lumpy 15% return to a smooth 12% return." As any biotech investor knows, share price swings of three, four, or even five percentage points per day are not unusual for many development-stage biotechs such as Exelixis (Nasdaq: EXEL) or Panacos Pharmaceuticals (Nasdaq: PANC) -- two picks of our Motley Fool Rule Breakers growth investing service. 

Biotech's big gains
Even with this type of share price volatility, the AMEX Biotechnology Index is up nearly 500% since the beginning of 1996, compared to a mere 142% rise in the S&P 500. And some of the largest biotech stocks have posted eye-popping returns:

Company	Return Since 1996
Amgen (Nasdaq: AMGN)	271%
Celgene (Nasdaq: CELG)	5,778%
MedImmune (Nasdaq: MEDI)	1,701%
Biogen Idec (Nasdaq: BIIB)	1,355%
Genzyme (Nasdaq: GENZ)	321%

But in order to get those gains you would've had to take a long-term view and been willing to stomach some drops along the way.

It's not all sunshine and cherries
As the case of Amgen has shown recently, even the largest biotech stocks will experience large swings in share prices. In just the past 52 weeks Amgen shares have yo-yoed between $52 and $77 as a result of rapid changes in the near-term outlook for the company's compounds.

What more myopic investors always seem to forget is that there will always be negative clinical trial results released or other setbacks with large diversified biotechs such as Amgen. But as long as they continue to advance novel molecules through their pipelines and introduce new drug candidates (which take an average of six years to reach the market), these biotechs will outperform in the long run.

The Foolish bottom line
As Warren Buffett also said, "Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised." In biotech, there can be a lot of unusual circumstances -- and the science involved can be difficult for many investors to understand. It is this learning curve that makes multi-bagger opportunities available to biotech investors -- and why the sector will outperform the S&P 500 in the long run.

If you'd like to learn more about investing in biotech, we've assembled a team of top-notch analysts at Motley Fool Rule Breakers. You can see what we're recommending today with a free 30-day trial.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. Johnson & Johnson is a Motley Fool Income Investor recommendation. Biogen Idec is a Stock Advisor pick. The Fool has a disclosure policy.