When it comes to investing in cancer stocks, we need to face the fact that we’re all doing a bit of gambling. These are usually companies with no fundamentals to speak of. They have few tangible assets. They have no revenues. And they have no promise of ever achieving some measure of solvency or profit. Many of the companies struggle to break a profit even after getting a product approved.
More importantly, the markets for cancer stocks are swimming with sharks, and it’s way too easy for us to fall into the trap of getting married to a stock. This puts you at risk of taking your finances down with a ship.
If you want to make money, the first most important thing is to not LOSE money. That’s Warren Buffett’s first rule. Recall that his second rule is remember rule #1. To stop losing money, we need to be able to identify promising investments. And we also need to be able to recognize when we’ve made a mistake and pull the trigger. Here’s what I do to make sure I don’t lose money in cancer stocks.
“Do” #1: Do your due diligence
Gaining a basic knowledge of the company’s science is critical for making an educated investment in cancer stocks. If you can’t understand their approach, then it is next to impossible to tell whether the company has any chance at all. A complete failure to understand the science behind cancer medicine will lead you to invest in pipedream penny stocks, where you become sold on the idea that the company in question has a magic cure for cancer.
If you can gain a foundation in the field you’re looking to invest in, you’ll be able to appreciate where the unmet needs are, and where the company you’re interested in can help. Filling unmet needs in cancer will give the company the best chance for a rapid approval and profitability.
It’s also important to assess the financial status of the company as part of your due diligence. Basic literacy in SEC financials will carry you far. You can learn very quickly how to pick out the “no go” companies who should not get your money right now, no matter what their science looks like. If you want to learn more about pulling out important information from these sheets, click here!
“Do not” #1: Do not fall in love with the message…or your understanding of it
There is a trap that comes with understanding a company’s science: the Dunning-Kruger effect. It is formally defined as…
a cognitive bias in which people of low ability have illusory superiority and mistakenly assess their cognitive ability as greater than it is.
Essentially, as you start to gain a little bit of knowledge on a topic, you tend to think you know more than you should. In the realm of science, unless you’re going to become a professional, you won’t be able to gain enough understanding to fully grasp the nuances of clinical medicine and the drug development process…to say nothing about the complexities of the other sub-disciplines that contribute to making a new drug.
The trap for you is that you can easily come to a certain basic understanding of a company’s drug, but if you grow too invested in that science, you risk becoming too emotional about the investment. Beautiful ideas fail all the time in science, and we need to train ourselves to see when things are looking grim long before we’ve lost large amounts of money.
Unfortunately, as with many cognitive biases, the Dunning-Kruger effect is something we can recognize logically, but it cannot be simply ignored. It requires constant diligence to continually ask “What is the science doing, and is it meeting my expectations?” Perhaps your expectations need to be re-evaluated, or perhaps you need to reconsider your investment altogether.
Either way, we have a strong tendency to fall in love with interesting ideas. And once we fall in love with an idea, we become invested in being “right” about it. This creates too much risk when it comes to our actual investments, and we need to develop mindfulness as a way of combating becoming too attached to a company’s ideas.
“Do” #2: Do participate in discussions with other shareholders and experts
One of the best ways to stay updated, is to participate in conversations with other shareholders. These conversations can also help you avoid the Dunning-Kruger effect, as you can always find someone to put you in check. Chats with experts and shareholders can help you place events in context. They can also remind you of where the company has come from.
I’ve had a lot of discussions on message boards where a lot of small news items were put into a bigger picture. This helps the less-certain shareholders navigate the fear they feel of losing all their money because drug development is taking “too long.”
In essence, discussions on message boards can provide you with a big, heaping dose of patience. They can also be a great source of other ideas for investment. People who participate in these conversations are rarely invested in only one stock, so it makes sense to consider other traders when narrowing stock picks.
In addition, you can gain rapport with people and identify those you trust. This lets you get quick answers to questions about science, finance, law, or whatever else people are expert in. This can save you hours of researching complex topics by yourself.
“Do not” #2: Do not take pumpers (or bashers!) seriously
The dark side to participating in message boards is the presence of people who do not have your best interests at heart. One coin in particular has two faces: pumpers and bashers. “Pumpers” act as cheerleaders for the stock, hyping up every small, insignificant piece of news while downplaying anything bad. Every new press release is evidence that the company is about to get the big partnership. Or they’re about to be bought out for 20 times the current share price.
The pumper will at all times be maintaining a sky-high view of the company you’re invested in. This messaging is misleading and dangerous. If you listen to pumpers, you’ll come to believe that the company has no risk, or very minimal risk. And the cheerleading grows more fervent as the stock price declines.
A few years in, and you find that your investment has declined over 50%, and you’re stuck with catastrophic losses or waiting anxiously.
On the flipside of the coin, you have the basher. These posters are forever pessimistic about the company in question. Maybe they got burned at one point and now refuse to see anything as good. Maybe they are short in the company and feel that they can manipulate the price down. I don’t know. But the company can do no right in the mind of the basher, and if you give them too much room in your head, they’ll make you miss out on potentially strong investments.
To combat both of these, you need to try and stay cool when dealing with people online. Remember that almost nobody has your best interest at heart. Learn what you can from people, but do not let anyone become a salesman of a stock for you.
“Do” #3: Do place a significant-enough bet to be able to make it worth your time
Your time is money, and if you’re going to be waiting for a significant period of time to realize some kind of gain, you need to make dang sure that your “skin in the game” is enough to make it worth the reward. If you dither with $100, then you’re going to feel inclined to wait until the stock price doubles to make $100. This could take months or years, which comes with an opportunity cost, to say nothing about the time you spent watching the stock chart!
Much better would be to try and make that same $100 gain investing $1000 at a time. This is a relatively modest 10% gain, and it’s something that can easily be gained within a week of trading. This means that you can put your money to work for you more quickly and efficiently.
So you need to identify a level of money you’re comfortable placing on the table, attempting to strike a balance between money that will let you make a profit for yourself while maintaining reasonable goals (see “Do #4”).
“Do not” #3: Do not use leverage, and do not overextend yourself
While you do need a certain level of skin in the game, you should not take that advice and assume a “go big or go home” mentality. Investing in developmental cancer stocks is a dangerous game, and you need to make sure you’re not putting in more money than you would be comfortable seeing disappear completely.
Pretend the company will go bankrupt tomorrow. Would you be devastated financially, unable to pay your bills?
This extends into an even more important point: be very avoidant of leverage. I would go so far as to say do not use any at all. This means do not take out any kind of loans to buy cancer stocks.
Do not take on a second mortgage for them, ever. Be very, very careful about buying on margin. These are the most common ways investors find themselves completely attached to one or two large bets, hoping and praying that this one works out so they can finally get out of the game relatively intact.
Meanwhile, they lose years of sleep, and they watch 100 other investment opportunities go by. And you’ll kick yourself for having leveraged too much. If you obey the general rule of not risking more than you’d be comfortable to lose, you will place yourself in the best position to make logical decisions with your investments in cancer research.
“Do” #4: Do set aggressive, but realistic, goals for your investing
No matter what you want to achieve in your investing, you should strive to “systematize” your goals. This means setting up from the outset what you want to see in terms of gains, and then creating a plan to follow through with that. This was the goal of the No BS Plan. I laid out a case for setting goals and then buying/selling within those parameters.
But you do not need to follow guidelines that I would hand you. You can develop your own approach. The key is developing the system. That way there will be fewer questions that you can’t answer.
Is now the time to buy? Use your system to determine if they have enough money and if they are undervalued.
Is now the time to sell? Have you met the gains you set out to make? If not, don’t sell. Has the price fallen below your threshold? If not, don’t sell.
Systems can create structure in a chaotic world. This helps you avoid fear and make sound investment decisions. If you’re interested in learning how I systematize my personal holdings, check out my short book The No BS Plan, which you can pick up for $3.
“Do not” #4: Do not expect a home run. Learn and exercise discipline!
If you put in place a system, you’ll also be well positioned to avoid a common trap for investors in biotech. They will refuse to take any money off the table until the stock has reached the moon.
Maybe they invested too little money to make a nice 20%-30% gain worth the effort.
Perhaps they listened to the cheerleading pumper who convinced them that this stock is going “to da moon!”
Rest assured, though, that the companies that pull a Dendreon are extraordinarily rare:
First of all, most stocks won’t make a 10-fold rise in price within a week. Most stocks will never gain that much. Even getting a drug approval is no guarantee that the stock price will go up. So if you refuse to take some of the gains that you might accrue, you lose time.
Worse, you find yourself counting on a shot that could have worse odds than a lottery ticket! You need to dispel the notion that you’re going to hit a home run by picking stocks. If you look to make the singles and doubles, that’s how you end up with the big score at the end of the game.
This is why it’s so important to have a systematic approach in mind when you’re investing. If you have clear goals, and if you adhere to the plan, then you position yourself to take the small wins and leave the small losses. A 16% gain in one quarter is not nearly as exciting as buying a stock, waiting two years, and then selling for double the price.
But the longer your investment takes to double, the less you stand to make overall.
There are many perils you need to avoid in the wild west of biotech investing. However, by adhering to some simple rules, you can prevent yourself from the worst. Take this advice, and you’ll be ahead of 90% of the investors out there who are doing nothing but losing their money.
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