How We Lost 90%

Time to fess up. One of our Rule Breakers picks, Panacos Pharmaceuticals, has suffered disaster, and we've been forced to sell at a huge loss.

It's not a fun story, but it started out well. On Aug. 22, 2005, start-up Panacos announced it had created a drug that, when delivered at its highest dosage, reduced the amount of HIV present in the bloodstreams of trial patients by 90%.

Results that promising can't be ignored. At least, that's what Charly Travers argued when he recommended the stock in the November 2006 issue:

Panacos, with its novel drug bevirimat and strong R&D background, could be the next Gilead (Nasdaq: GILD  ) . That's a bold statement, and it's not one I put out there lightly. I'm confident Panacos has the goods to back it up. Bevirimat is a first-in-class HIV maturation inhibitor. That means it's a completely new type of drug and could be the first to reach the market. Historically, that signals a strong competitive position.

Fast-forward to December 2007. Panacos reported awful results from its 350-milligram phase 2b trial -- worse than two earlier dosing studies -- and the stock plummeted, down 90% from Charly's original recommendation.

From 90% to (90%). Talk about irony.

But why am I telling you this? Might I, in doing so, risk turning you away from a service that I contribute to and believe in? Sure, but the investing lesson is worth the risk.

Back to the numbers
It's not the first time we've struck out:

  • Only 37% of our picks are in the green.
  • Only 35% are market-beaters.
  • Our average loser is down 36%.

We're not the only ones suffering. Growth guru Will Danoff, manager of the Fidelity Contrafund (FCNTX), is down more than 10% year to date. Here's why:

Company

2008 Return

Chipotle Mexican Grill (NYSE:CMG)

(33.2%)

Adobe Systems

(19.7%)

EMC (NYSE:EMC)

(21.1%)

Salesforce.com (NYSE:CRM)

(11.5%)

Sources: Fidelity Investments, Yahoo! Finance.

Nothing new there. Contrafund lost big on Patterson Companies in 2005. Sirius Satellite Radio (Nasdaq: SIRI  ) tuned out in 2006. PokerTek folded in 2007. And yet Danoff is up more than five percentage points a year over the last three on both the market and category peers.

Strike out, get rich
How can that be when Peter Lynch says that, to be a winning investor, you should strive to be right 60% of the time? Truth is, Lynch is only partially correct -- accuracy isn't all that important -- and that means Warren Buffett is wrong. Your aim isn't to "never lose money."

Instead, your aim should be to invest in stocks with sustainable advantages. These, Fool, are the multibaggers in the making. Buying just one can make all the difference to your portfolio.

That's why Danoff told Kiplinger's in a December 2005 interview that his strategy is to own "the very best companies." Today, that list includes mobile monarchs Nokia (NYSE: NOK  ) and America Movil (NYSE: AMX  ) . These winners have more than offset his losers.

Ours, too. Winners in the Rule Breakers portfolio are up an average of -- wait for it -- 92%. Dancing on the precipice of a double.

So, yeah, we lost 90%. We've been right with only four out of every 10 picks. But, like Danoff, our portfolio is crushing the market by more than eight percentage points as I write.

I won't promise you similar returns. But isn't this lesson encouraging? You needn't be right all the time. Heck, you needn't be right half the time. All you need is to join the hunt for the next great multibagger.

That's what we're doing at Rule Breakers. Click here to join the service free for 30 days and you'll see everything we're recommending right now. There's no obligation to subscribe.

Fool contributor Tim Beyers owned shares of Nokia at the time of publication. Chipotle is a Rule Breakers pick. Its B shares are a recommendation of Motley Fool Hidden Gems. The Motley Fool's disclosure policy is a multibagger in the making.


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