3 asymmetric investing “bets” in action
As we discussed yesterday, the math behind “asymmetric” investing is compelling…
Perhaps the sector that’s most illustrative of its effectiveness is biotechnology.
Let’s consider a hypothetical portfolio comprised of three well-known Big Pharma stocks: Pfizer (NYSE: PFE), Merck (NYSE: MRK), and Abbott Laboratories (NYSE: ABT).
Scrutinizing their fundamentals (balance sheets, expected operating results, historical earnings “surprises”), we can perhaps determine that each of these stocks entail a 25% chance of losing half of your investment and a 25% chance of doubling it. Your investment range would be a 50% loss to 100% return.
Let’s look at the real-world returns of these three “Steady Eddie” drug firms, over the past five and 10 years respectively: Pfizer (+74% and +36%); Merck (+63% and +43%); and Abbott Laboratories (+57% and +70%).
Perfectly respectable, but…well, pardon us while we stifle a yawn. That’s what you’d expect from these “blue chip” mega-caps: less risk, but also less reward.
For context, consider that over the past five and 10 years, the S&P 500 has gained 67% and 66%. You could have done approximately just as well, by putting your money into an index fund.
Now let’s assume you’re a more adventurous soul who embraces the asymmetrical method, by putting your money into a fledgling, small-cap biotech. This entrepreneurial company is considered “risky,” but it boasts a promising, proprietary technology that’s targeted toward a demonstrated and growing medical need.
By vetting this company’s stability and growth potential (cash on hand, projected revenue, potential market share, etc.) and applying an asymmetric approach, you can never lose more than 1X your investment, but your return could be 10X, 100X, 300X…the sky’s the limit.
Don’t take our word for it. Let’s look at three biotech success stories that started out as ostensibly risky small caps but went on to make early investors a fortune:
Medivation (NASDAQ: MDVN)
This maker of treatments for breast, prostate, and other cancers was founded in 2004 with a $1 million venture capital bridge loan. The company went through various ups and downs, but continued to attract financing until it finally struck it big with the prostate cancer drug Xtandi. Other blockbuster products followed.
Over the past five and 10 years, MDVN has gained 1,088% and 4,979%, respectively. (Those numbers aren’t typos.)
Illumina (NASDAQ: ILMN)
Illiumina is a pioneer in one of the hottest areas of medical research today: gene splicing or “sequencing.” Founded in 1998, the company provides sequencing solutions for research centers, government laboratories, and hospitals, as well as pharmaceutical companies. These customers, in turn, use Illumina’s solutions to create groundbreaking treatments for a wide variety of diseases and illnesses.
Illumina was at first riding high, until the great financial crisis of 2008 slashed the company’s value in half. However, the company stuck to its guns and has since bounced back.
Over the past five and 10 years, ILMN has gained 103% and 658%.
Gilead Sciences (NASDAQ: GILD)
Founded in 1987, this company is now familiar to biotech investors but it didn’t start that way. Carving out a niche in the treatment of unmet medical needs, the company endured a roller-coaster ride of funding and false starts until it struck it big with its blockbuster drug Sovaldi, a breakthrough in the fight against the chronic liver disease hepatitis C.
When the drug finally received FDA approval in 2013, early investors enjoyed a big windfall. Since that year, GILD shareholders have seen a 2:1 split, several dividend payouts, and a total gain to date of roughly 125%.
Over the past five and 10 years, GILD has gained 343% and 469%.
These outsized biotech gains bring to mind another Buffett quote: “Volatility is not the same thing as risk, and investors who think it is will cost themselves money.”
Where to Look?
The key to mouthwatering gains like these is to find hidden gems that the market has overlooked and substantially underpriced. When you’ve unearthed these investment opportunities, they’re “game changers” for your portfolio’s performance.
That’s why asymmetrical investing should be an intrinsic part of your long-term wealth building strategy. Spotting asymmetric opportunities and placing larger bets in scenarios where there is positive asymmetric risk can produce market-beating gains that help you blow past the broader indices and traditional performance benchmarks.
Problem is, these asymmetric opportunities tend to be obscured from retail investors and known only to hedge fund managers, insiders, and the savviest venture capitalists. Otherwise, the investment herd would simply pile in.
Editor’s Note: The clock is ticking on a little-known asymmetric opportunity our analysts at Breakthrough Tech Profits are following. Due to the urgency of its particular situation (which you can hear more about here) the time to invest in this innovative drug-making pioneer is now. Watch the full presentation here.