As investors in cancer stocks, the biggest high that we live for is when everything finally comes to fruition. This can take a few different forms. Maybe your company’s drug got approved (finally!). Maybe they go bought out. Maybe it got an extremely lucrative partnership that will erase its cash concerns for at least the next several years.
You go through a whirlwind of emotions. First and foremost, you feel your investment thesis is finally vindicated, as many have found after long haul trading positions. That vindication can sometimes feel more important than the money. You made a good prediction!
Second, in some cases, you find that your stock has suddenly changed in value by a lot, perhaps more than your were expecting it to. Should you sell? Should you buy more? These questions may well come to define how successful your investment ends up being.
Third, you may feel that enough is not enough. If it’s a buyout or a partnership, you start to wonder why the company couldn’t get more money. This is more uncertainty that can end up stressing you out more than you did when you were waiting for the big, binary event!
So what should you do? Here are some thoughts that you can take from my experience, as I’ve called several drug approvals, binary events, and have even been lucky enough to be a shareholder before a few buyouts. Here are a few lessons I’ve learned.
1. Don’t panic
In cancer investment, as well as biotech in general, we can find ourselves sitting in anticipation, waiting for years for a bet to pay off. Then the news finally comes from on high. The binary event that no potential shareholder can ignore finally happens.
And the stock price goes down?
Believe it or not, in many cases the market has already out-thought many of the shareholders. This is often ascribed to “buying the rumor, selling the news.” Truth be told, there is a huge dose of this in biotech stocks. Many companies post-approval follow a pattern like Progenics, which, at the time of writing, recently got its first drug approved through the FDA. Here was the response:
Progenics fell almost 10% on the news of approval for its first drug, Azedra. As usual, the message boards were full of all kinds of “wtf”-type messages, as shareholders struggled to grasp why the stock hadn’t doubled instead.
The reason makes itself more clear as we peer back in time over the past year.
Progenics stock has been on an overall major upswing throughout 2018, to the extent that it became one of my breakout players in the No BS Plan’s (contains an affiliate link) first run. The important lesson here is to start anticipating that things won’t go as you expect them to. If you were a Progenics shareholder and saw the dip after the approval news, you might expect that there was something seriously amiss. However, just a few days later, the price had begun to recover, offering you the chance for a quick gain.
Another important lesson we can draw from this episode is that not all drug approvals are created equal. In general, I’ve found that the impact of the announcement can be different depending on how “expected” the approval was.
For example, in the case of Progenics, there was significant uncertainty. We saw a delay in the action date from the FDA by several months, throwing the approval into question. There were also issues with the data collection methods that led some analysts to question the possibility of FDA approval, in spite of the special protocol assessment granted to Azedra.
Needless to say, the approval was not a 100% certainty. I would have pinned it at about 70%-80% likely, and I would not have been shocked if the application was kicked back to Progenics. Uncertainty like this tends to create a situation where the stock can plummet if things go wrong, but where there is still upside if the drug is approved.
So this helps to build the case for Progenics and its relative resiliency after approval. It wasn’t fully expected. Contrast that with a company like Tesaro, who got their first major approval in 2017. Here is their chart in the few days before and after their approval:
One reason among many for the beginning of this decline was that the approval of Tesaro’s drug, niraparib, was completely and unequivocally expected at this time. I would have put their chances about as high as I could imagine, barring any sort of disaster relating to manufacturing or some such. With no surprise to propel momentum forward, the only thing left for Tesaro was to have the perception of a “commercial stage” company. This means that Tesaro is judged almost solely on its ability to shepherd its drug to ever-increasing sales and profitability, which the company has not shown enough signs of doing just yet.
What this means for you, the shareholder, is that you always need to strive for calm in your investments. You should not panic sell if the stock price falls in the immediate aftermath, as the stock could recover and begin to rise again. But you should also not panic and freeze, since you still stand to risk a lot, even in the case of a successful drug approval and what seemed like a sure thing.
2. Take gains where you can get them
Again, part of the danger of “freezing” is that the fear of missing out on huge gains is massive when something really good happens to your company. That partnership or approval sends the stock flying, maybe 5-fold or more. Why would it fall?
Consider this, though: in all my years of trading, some of my biggest regrets have been holding through a huge rally without taking any gains off the table. For me, the biggest sting came right around the time President Obama took office. Ocata Therapeutics (then Advanced Cell Technology), had been trading in the doldrums, with the threat of bankruptcy looming high. But when the president took office, everyone was quite sure that he would sign an executive order allowing federal funding for stem cell research. And he did. The speculative frenzy was insane, in hindsight. The stock went from $0.03 to highs of $0.25 really quickly. Now, if I had been listening to reason, I would not have been invested in penny stocks in the first place.
But I didn’t listen to any reason. I just saw my account going up, and up, and up. At one point, my account, with some $5000 principal, had reached over $25,000, and I held tight.
And tighter…and tighter. It didn’t take that long for all the gains from the speculation to dissipate, as investors realized that removing federal funding on stem cell research wasn’t going to transform the regenerative medicine industry overnight. I didn’t make a dime.
And I didn’t even learn my lesson! Cut to almost 3 years later, and the company is again in the death throes, circling a bankruptcy drain. They had filed an IND to get their first stem cell trial started, and it had been about a year, and now there were serious questions about the FDA even allowing a trial to start.
Finally, the flood gates opened, and the IND was approved. Advanced Cell’s stock rose from around $0.05 per share to upwards of $0.27 per share. Again, I had finally realized some winnings. And again, I froze, with nothing to show for this as the stock continued to dwindle lower and lower. lt took around 5 years of waiting for the company to finally be bought out and for me to be put out of my misery with relatively little to show for it.
Don’t be like Zach circa 2009-2011. Get some of your gains, if not all of them, off the table when something very good happens to your speculative cancer stock.
3. Leave a stake behind (if applicable)
My story needs to be a lesson for you, not a pity session for me. Tip #2 is to take something off the table when everything seems to be going your way. If I was acting smart, I could have sold 20% of my penny stock holdings and paid for the entire initial investment, less capital gains. At that point, I wouldn’t have risked losing a single dime except for the opportunity cost. Advanced Cell Technology gave me many opportunities to do that in the past, and I failed to take advantage.
But I’ve found that the best way of mitigating fear with my long-term speculative investments, aside from not putting too much money into them in the first place, is to leave something behind to manage the “What if?” scenario. If I take out my principal so I can move on to other stocks, then if my caution is wrong, and the stock continues going higher, then I still get to take advantage of that momentum.
This is one of the major building blocks in the No BS Plan, and I’ve found that exercising this kind of discipline really does help me keep focused on the goal of making money.
Of course, if your “big event” is a buyout of the company, then I recommend just taking your money out and moving on. If you participate in discussions online, you may be trapped into thinking that someone else is going to come along and offer a better buyout deal, meaning you should just leave your investment in place until the final buyout goes through several months later.
I consider this folly. While it is possible that another stakeholder COULD come in with a bigger buyout offer, the company that made the initial offer did their due diligence and risk assessment. This is likely the best you’re going to get, and I recommend immediately taking your money out and moving on to better things in the event of a buyout.
4. Diversify your gains into a wider pool of investments
Now that you have your principal back, or perhaps the entire enchilada, and you now have a nice little nest egg to work with. What should you do with it? First, pay your estimated capital gains taxes. It can be done online pretty painlessly, and you don’t want to mess with reconciling that later. If you didn’t know, you can go to EFTPS.gov to enroll.
After that, I would recommend spreading your money a little bit, and take a risk-mitigation approach to it. Rather than funneling all of your money into one other speculative cancer stock (more on that a bit later), consider moving it into more stable ventures. Perhaps half into a big pharma stock with growth potential or dividends that pay out.
This is a step you should take as a way of training your own mind to be less speculation oriented. Investing against cancer allows you take advantage of a wide scope of risk options. They include the following:
- Speculative, small-cap stock: This is where you probably just came from. They carry high risk, and potentially high reward
- Mid-cap growth stock: This is perhaps a company that has gotten a drug approval in the past few years, and is now looking to grow their sales and deepen their pipeline
- Big-cap blue chip stock: This is a massive pharma company with a broad and deep pipeline. They typically offer stability, with growth that is realized over the course of years
I would consider diversifying your risk exposure here. Instead of funneling your gains into these three types of stocks equally, you should consider adjusting your investment based on risk. So rather than a 33%-33%-33% split, consider floating 10% in a new speculative cancer stock, 40% in mid-cap growers, and 50% in the big caps. This way, you can take advantage of the different potentials offered by these classes.
5. Consider stopping the journey to pick single winners
When we find that we have picked a winner and realize massive gains, it’s very easy for that to get to our heads. We acknowledge that we took a gamble, yes, but it was an educated gamble. And it was our smarts that made the pick a winner. Therefore, we are smart! We are right! It feels good. And it means that we can do it again!
But it’s critical for us as investors to realize just how dumb and misinformed we are. Consider a speculative stock “win” a lucky break, and do not try to repeat your success. Maybe your research was fantastic, with you making a great call. But maybe you just flatout got lucky. For me, the Advanced Cell/Ocata journey was a mix of both. Stem cell-based regenerative medicine did have and continues to have great potential, but it was too early at the time I invested.
When Ocata got bought out, I made some money, enough for a home down payment. Then I continued to follow them. As I write this, we have heard no further progress in some four years. This indicates that the naysayers back then may have had a few things right, and certainly it was going to take a long time for Ocata to get to a point where they could sniff the finish line for approval. If they had not been bought out by Astellas, then my investment would have hung in the air for years. So it was a lucky break, in addition to being a good call, in the end.
Now, I hold a small stake in Advaxis, as many of you know, and this has further cemented the lessons I’ve learned from the Ocata days. Picking individual winners is a losing proposition in the long term, because you will not be right all the time. No matter how smart you are, and no matter how good your due diligence is, something can blindside you and crush your investment.
So if you funnel your entire pool of investment money into a single speculative stock, you risk repeating the cycle of boom and bust again and again, and if you come out green on the other side (factoring in the opportunity cost), I will be shocked.
The most critical lesson we need to draw from winning is to remove our own egos from the equation, and to not let the fact that we were “proven right” to drive us toward making mistakes. Consider every ounce of good fortune as a piece of good luck, and act accordingly. Remember that your luck can turn, and take a win to build your discipline further. If you keep basing your “long-term” investing on picking winners, then you take a huge risk of major losses in the long term.
So, readers, no one can tell you exactly what you should do in the event of a big win. Every newsworthy event has the chance to surprise you in terms of how the market reacts. Maybe great news causes the stock to crater, or maybe no news at all causes a speculative frenzy for whatever reason. I’m not saying that if you follow my advice, you will be successful every time, but if you exercise discipline in the face of irrational exuberance, you set yourself up to be right more often than you are wrong. And that is a winning formula for making gains in the long term.
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