fuma,
Today isn’t a working day for me, though yesterday was as I shopped the sales and put on 31 new positions, two of which were biotechs, which you seem to have an interest in.
As I reported in an earlier post, I ended the day down by (-.57%) on one of them and up by +2.10% on the other. But that was yesterday, and this is today. Today at market open, I saw that the former position, INO, wasn’t doing well, and I dumped it immediately for an increased, though tolerable, realized loss of (-1.7%.). When I checked on the other, it had moved from an opening 6.6% gain to a present 10% something gain, which was a screaming warning sign. Obviously, there was panic buying happening, and, as likely, soon there would be buyer’s remorse kicking in, especially given that we had a flat to down market prevailing today due to the usual nonsense over waiting to hear what the Fed would say.
The smart play, the traderly play, even the investorly play, for me was to trust my tape reading and to grab the windfall profit and to go flat on the position. By time I could write the order and get a fill on RARE, it had begun to roll over for sure. But I got out at a price that give me a one-day, 15.6% profit, which is plenty good enough for the girls I go dancing with.
Aside: What’s the Sharpe Ratio on a one-day trade that yields 15.6% and another 3% or so when that profit is held in T-bills for the rest of the year? Ans. I don’t know, and I don’t care. But I do know that money earned a vacation from being put at risk, and that’s what’s happening with it.
OK, now that I’m outta INO and RARE, why did I put them on? For the exactly the reasons I laid out earlier in another post. Both were trading at a discount to fair value. Both had decent growth prospects. But both had become oversold due to news to which “the market” over-reacted, as it usually does to news, good or bad, which is why value investing, as Ben Graham laid it out in his classic, The Intelligent Investor, works so well. And it’s not as if I don’t do this trade repeatedly with the biotechs and can grab decent profits from short-holding periods.
Yeah, I’d like to be holding longer, and I’m not adverse to doing so, just as I’m not adverse to quick turnovers when that is the proper response to fundamental or technical conditions. But the whole biotech industry is mostly a scam that argues against it offering a would-be investor permanent value, as the covid thingie made abundantly clear. Big pharma doesn’t exist to help people be healthy. It exists to find or to create conditions that will give itself a perpetual income stream, e.g., promoting weight-loss drugs rather than sensible life choices. So I don’t mind turning over my biotech positions as fast as it makes sense to do so. It’s the other stuff I own, like my metals positions, where my holding-periods have become years, and some bond positions, like Weyerhaeuser’s debt, were bought decades ago.
Yes, sometimes, Buy-and-Hold makes sense. In fact, sometimes it’s the only thing that makes sense, as anyone who has done serious back-testing of trading system knows. But those back-tests fail to address how long the recovery periods often are, nor do they address the impact of inflation on purchasing-power when the investor who held finally does even back to even on a nominal basis. Why has B&H proved so successful over the past 20 years? Because the financial markets have been propped up by the Fed’s easy monetary policies, not genuine economic activity that would support the high prems now prevailing. Can the Fed keep the party going? My bet it that it can’t, and that is part of the reason the prices of precious metals are rallying. Thus, the smart macro-economic bet to make, IMHO, is to rent the biotchs and to own the metals. But to each, his own.
PS. Yeah, RARE recovered, and it is now trading higher than where I got out. But I’d do that same trade, the same way, every time. I don’t wait around hoping. If I truly had a deep knowledge of the company and the industry, then calling the market’s bluff and ignoring their head fakes would make sense. But my knowledge of the biotech industry is superficial. In fact, it’s worse than superficial. For all I really know about how the industry works and how it makes its money, I might as well be living in Plato’s Cave. What I’m seeing in financial statements and analysts’ reports are just shadows cast on the far wall of the cave by a flickering campfire.
