Investing is a lifelong learning process, with successes and failures. No one is perfect -- despite our best efforts, we're going to make mistakes. Part of the learning process is to recognize the mistakes we've made and try not to repeat them. I've certainly made a few blunders, and I'm going to share them with you to hopefully steer you in the right direction.
Invest in what you know
I had the misfortune of starting out as an investor near the height of the market boom in 1999 and 2000. Stocks were shooting to the sky because valuations didn't matter, easy money abounded, and I was incredibly naive. That's a bad combination. I wanted to get in on all the fun and not miss out on making a quick buck, so two of my early investments were in Cisco Systems
I got creamed on these stocks when the market crashed. And rightfully so, as this was my own fault. One reason these were bad investments at the time was valuation. An even bigger mistake, in my mind, is that I really had no idea what these companies did. I knew that Advanced Micro Devices makes computer central processing units (CPUs), but I had no way of assessing the risks that either of these companies faced. Or the risks to the overall industries they're in.
It's a big mistake to not know anything about a company or its industry before investing. That is simply flying blind. There could be problems you are not aware of but should be with a little bit of research. You can never eliminate the risk in investing, but you can manage risk by understanding where you're putting your money.
The mistakes I made with Cisco and Advanced Micro Devices are easy for me to shrug off as the byproduct of inexperience. Just like falling off a bike the first time you go out for a spin without Dad holding the seat. Once it's over, it's time to brush yourself off and get back to work.
On the other hand, I made a more serious mistake in 2002 with a small drug company called Sepracor
An important component of Sepracor's business model was to make drugs from other companies' drugs. What it did was patent the biologically active metabolites and isomers from drugs that were already approved and commercially successful. A good example here is Clarinex, which is simply a metabolite of Schering-Plough's
By 2002, Sepracor had a handful of these drug programs in a late stage of clinical development, where they could potentially be on the market in a short period of time. The late-stage drugs in the pipeline back then included Soltara, Estorra, Xopenex MDI, and (R,R)-formoterol. With four drugs approaching filing for approval, the time frame to substantial revenue growth wasn't a decade away as it was with some of the genomics companies that had been so popular during the biotech boom. I liked that as well.
The story with this investment has to be put in the context of what was happening in summer 2002. In contrast to 1999 and 2000, when everyone wanted to buy biotech stocks, during 2002 no one wanted to touch biotech with a 100-foot pole. This was the era of the blowup at ImClone Systems
With all of this creating a horrendous investment climate, biotech stocks were cratering. The Nasdaq Biotech Index started 2002 at 890, and by the end of the third quarter that year, it sat at 465. That was a very painful 48% slide in just nine months.
During summer 2002, in the midst of this broad sector decline, I started to get excited about bargain hunting. Small biotechs were getting market caps down near the amount of cash on their balance sheet, and I was licking my lips. Sepracor was on my watch list, and I bought the stock around $8, thinking I got a pretty good deal. After all, it started the year at $55.75, so $8 was a bargain.
But caught in the sector tailspin, Sepracor's stock kept falling and falling and falling after I bought my shares. Every day down, down, down, and down some more. This was a brutal market, and it was an excruciating experience. A stock that I thought was a bargain near $8 had been chopped down to $5 in a matter of months.
Along with the general malaise in biotech during this time, Sepracor was taking a beating on concerns surrounding its massive amount of debt and its ability to repay the convertible bonds it had issued. All that talk about a looming financial crisis started to make me second-guess my initial decision to buy the stock.
It finally got to the point where I couldn't take the heat, so I got out of the kitchen and sold. I don't recall the exact price, but it was about $4 and change, making my sale very near the absolute bottom. I think that qualifies as my Bill Buckner moment.
Since then, I've watched Sepracor's stock climb to the $50 range. The reasons I bought the stock in the first place largely held up over the past two years. While the Soltara program was cancelled, Estorra and Xopenex MDI have been filed with the FDA and are awaiting approval.
Essentially, my initial investment thesis was correct, but because of short-term market fluctuations, I freaked out and sold way too soon. I was right in my analysis of the company, but my decision making was very wrong.
There are two key lessons I hope everyone can take away from this article. The first is an easy one: Invest in what you know. While risk in investing can never be completely eliminated, it's important to manage risk by being educated about the companies you own.
The second lesson: Trust your decision making. There's nothing wrong with continually monitoring the progress of the companies you own. But as long as the reason why you bought the stock in the first place is still valid, then any dips in price represent a buying opportunity and not a basis for making a panic sell.
Personally, I will never again sell a stock because of how the market is moving in the short term. I no longer play that game. I think the only good reasons to sell are if the business has deteriorated and the rationale for buying is no longer valid or if the investment objectives have been met.
To learn more about the biotech industry, check out Charly's articles:
- Surviving Biotech's Downturns
- What's a Drug Worth?
- Biotech's Full Monte
- Unraveling Biotech Potential
- Don't Be a Biotech Gambler
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