Today's column examines another way to invest in the biotechnology revolution.
The Rule Breaker strategy is just one that we use at the Fool to share our investing education. Whether Rule Breaker, Rule Maker, Drip, Foolish 8 Small Cap, or Mechanical Investing, you can explore many strategies from the Fool.com home page and the Investing Strategies page. Each approach sports at least one discussion board where you can join fellow Fools to furiously debate the strategy's merits -- or demerits!
Finding an investing strategy -- or mixing and matching strategies -- doesn't take place overnight. Philip Fisher, author of Common Stocks and Uncommon Profits, observes:
"No investment philosophy, unless it is just a carbon copy of someone else's approach, develops in its complete form in any one day or year. In my own case, it grew over a considerable period of time, partly as a result of... logical reasoning, and partly from observing the successes and failures of others, but much of it through the more painful method of learning from my own mistakes." [Emphasis added.]
Investor seat belt
Of course, it helps to have a few ground rules to avoid mistakes that may cause permanent damage. Motley Fool co-founders David (Mr. Rule Breaker) and Tom Gardner (Mr. Rule Maker), provide three:
1) Don't invest any money in individual stocks that you will need in three to five years.
2) Don't invest any money that you cannot afford to lose.
3) Absolutely do not buy stocks on margin.
A fourth piece of advice from the Brothers Gardner's newly revised and updated Foolum opus, You Have More Than You Think, is that there is never any need to own more than 15 stocks, and 10-12 diversified stocks are best. It's too hard to keep track of so many businesses, and you dilute the returns from your successes. (This is the toughest advice for me to follow. Like the person who just has to kiss all the boys or girls, I find myself invested in 15 to 20 stocks. But my goal is to reduce, and I'm going to get there!)
OK. With three guides acting as your investor seat belt, we're free to drive. One final word: If you're going to try a risky strategy like Rule Breaking, Tom and Dave also recommend in Rule Breakers, Rule Makers limiting yourself to 20% in Rule Breakers (with 80% in Rule Makers and/or index funds).
A biotech basket strategy
If you are fascinated by biotechnology, you may have checked out the Fool's InDepth: Biotechnology page, participated in our exciting Biotechnology Investing online seminar last fall, or purchased the Motley Fool Research Guide to Biotech Investing or the Motley Fool Research Industry Focus 2001 (which includes analysis of biomaterials and genomics tool makers). Or even (sacrï¿½ bleu!) chuckled over David Gardner's Why To Invest in Biotechnology or our Biotech Investing Do's and Don'ts.
You may have followed Jeff Fischer's Rule Breaker column on Ways to Invest in Biotech and eyed the Rule Breaker Port's investments in Amgen (Nasdaq: AMGN), Celera Genomics (NYSE: CRA), and Human Genome Sciences (Nasdaq: HGSI). These purchases -- announced publicly beforehand and made with David Gardner's own money (now that's sharing!) -- conform generally to the Rule Breaker investing criteria, but we hope that you will pick your own strategies and not mimic the RB Port or any Motley Fool investing strategy.
If you found more than one good company that piqued your interest, why invest in only one? If you buy a basket of excellent companies, you reduce your risk and don't have to try to pick the possible winner in that industry -- one of the riskiest aspects of Rule Breaker investing. Let's look at some biotech baskets.
When the RB Port bought Celera, top dog and first-mover in bioinformatics (a term for an industry that broadly covers gene sequencing, proteomics, gene expression -- functional genomics -- and pharmacogenomics), the buy report mentioned Incyte Genomics (Nasdaq: INCY) and Gene Logic (Nasdaq: GLGC) as competitors. Since then, other companies, such as Rosetta Inpharmatics (Nasdaq: RSTA), have gone public. If this revolutionary but risky area is for you, these and other companies are worth a look for your bioinformatics investing basket.
Biotechnology drug makers
What about Rule Breaker Port holding Amgen, a pioneer in recombinant DNA drugs, specifically in human therapeutic proteins governing red and white blood cell production (now there's a product with customer demand!)? Your research could lead you also to another recombinant DNA pioneer that's as successful by many measures: Genentech (NYSE: DNA). You could add in other competitors Biogen (Nasdaq: BGEN) or Chiron (Nasdaq: CHIR), too.
The RB Port tapped Human Genome Sciences as top dog and first-mover in regenerative medicine. With its patent applications for genes that code for therapeutic proteins, HGS may have staked out the most real estate in this risky, new field. But it has two other competitors that also sport strong positions in the protein drug patenting and developing queue: Genentech (why does that name keep cropping up? Jeff Fischer has some answers) and privately held ZymoGenetics (whose CEO we interviewed last month). If these companies meet your investment criteria, you could spread your risk with Genentech and, after it goes public, ZymoGenetics.
And, if you categorize HGS a different way -- as a genomics-based, fully integrated drug company -- you might put it in the same category as Millennium Pharmaceuticals (Nasdaq: MLNM), Hyseq (Nasdaq: HYSQ), or any number of other genomics-based drug discovery companies that are expanding to the entire drug-making process. You might buy a bunch, rather than have to pick one.
You could go the big basket route and pick a no-load, low-expense-ratio mutual fund specializing in biotechnology. As with all mutual funds, you should research the fund's management and be comfortable that its selections make the kind of basket you want.
A basket strategy does dilute the overall returns if one egg in the basket turns into Super Chicken. But it can help you sleep at night, knowing that if you've done your homework well, the chances are good that something in the basket will hatch!
Tom Jacobs (holds Celera and Human Genome Sciences shares) -- TMF Tom9 when in his green and yellow (biotech) basket.