Research Before You Buy – Published Nov. 3rd, 2008 (The Davian Letter)

A popular stock arena for people who are looking at getting into the “cutting edge” technologies of the future, are Biotech Start-ups. The very thing that makes these seductive stocks so tempting is the same thing that causes otherwise intelligent investors to lose a pretty penny. How do you know which biotech company has merit and which one […]

A popular stock arena for people who are looking at getting into the “cutting edge” technologies of the future, are Biotech Start-ups. The very thing that makes these seductive stocks so tempting is the same thing that causes otherwise intelligent investors to lose a pretty penny. How do you know which biotech company has merit and which one does not?

The key to finding any good stock is doing your research. You have to be picky; perhaps even borderline OCD (Obsessive Compulsive Disorder). What is the business model? What are their short-term versus long-term goals? Is there a true market for what they are trying to do? Or, are they reminiscent of Will Smith’s character in the “Pursuit of Happyness”; a little bit better than an x-ray but a price-hike that does not follow the same curve? And the power question, how do you or I tell the difference?

There have been several consultancy companies that have analyzed the Biotech Start-up Model of business. One of the biggest areas that slowed or kept these stocks from taking off the way that everyone expected was a lack of correct leadership. Often times these companies will place brilliant scientific minds, the kind of genius that can create something that no one else has ever done before, into leadership positions that might be handled better by someone who knows the business side of things rather than the science behind how it works. You don’t expect your doctor to run a Fortune 500 company, but that is what we expect from these scientists who create this medical alchemy. Look for good leadership. Too often we have white-knuckled individuals trying to push a square object into a triangle hole. A good leader is a trademark of a good company, a good country, and a good home.

Look at their goals. If they have a goal of putting an x-ray machine in every household by the year 2020, then I would start asking myself a few questions. Do I personally think that I need my own x-ray machine so that I can produce cancer causing radiation in my own home over and over again everyday to see if something has changed in my lungs? Ok, maybe my grandpa died of lung cancer when he was 52 and I would like to know how my lungs compare. But then again, he smoked for years and I haven’t smoked once in my life. I workout and I don’t get short of breath: I will take my chances.

Who else is interested in this company? If it is truly a good idea, you probably won’t be the first to hear about it. There is a company called 23andme.com. I wish that they were publicly traded but right now they are still private. They have a website that you can order your own genetic code. Find out what your strengths and weaknesses are and gear your life around them (the movie GATTACA with Jude Law and Uma Thurman comes to mind). The website is clean, Web 2.0, and easy to use. The leadership is coming up with creative ways to get people involved (getting models to get their DNA tested during Fashion Week) and one of the co-founders, Anne Wojcick, has close ties to Sergey Brin (of Google); they are married. Google is involved, Genentech is involved and New Enterprise has its fingers in the primordial dough.

There is no replacement for good research. If you want to find a winner, you have to research the daylights out of a company, and it helps if you have some basic understanding of the field that you are researching. Allen Iverson, the basketball player, had a move called, “The Iverson” (naturally), that when executed, it didn’t seem to matter if the opponent anticipated the move or not, the move was so polished that it was still effective. He could have told the defender he was about to do it, and the defender would still have no chance of stopping it. You have to polish your stock game the same way. Know it. Do it. Be confident. Do your homework.

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