I’m sure you know by now… I LOVE investment systems.
The benefits of a well-defined, data-driven, and rules-based investment strategy are many:
• It removes the emotional component of your decision-making process (and at the same time, capitalizes on the inefficiencies created by other investors’ emotional decisions).
• Its effectiveness can be tested and validated on historical data.
• It allows for a depth and breadth of data processing that would otherwise be impossible, if a human analyst were to do it on a “manual” or “discretionary” basis.
Systems Are Valuable
And now, I’m happy to say, I’m not the only member of the Dent Research team that sees the value of a systematic approach to investing.
I met Ben Benoy two months ago at our 2nd Annual Irrational Economic Summit. I immediately sensed the overlap in our views of the global financial system…
During one of my talks, I shared with attendees my view of complexity and simplicity, as they relate to the world of investing. The take-home message was this:
Financial markets are complex. Yet, counter to the intuition of many, the most successful investment strategies are very simple.
The complex nature – or at least, the perception of complexity – comes from the plethora of interconnections between markets and market-driving variables… and the unimaginably large number of data points which are nearly impossible to tease apart.
Yet, the simple nature of the best investment strategies comes from their ability to hone in on one specific (and exploitable) phenomenon – one which is ubiquitously present across markets, market participants and throughout time.
What can loosely be called “hype” is one such phenomenon.
Investors are emotional beings. And with that comes all the trappings of wishful thinking and great expectations. Basically, we’re hard-wired to buy into the hype… the hope for pots of gold waiting to be discovered just around the cornrner.
Reality, of course, tends to unfold a bit differently than our rosiest expectations. Often, it’s the seemingly “sure bet” that goes bust… and the “long shot” that quietly comes to fruition.
And while many market trends are rather steady and predictable (i.e. Coca-Cola’s revenue growth), others are volatile and wildly unpredictable.
The biotechnology sector is the poster child for unpredictability (and massive volatility). Yet, it’s also well known that just one nice payout on a well-played biotech investment can multiply your wealth many times over.
Suckers Are All Around Us
Naturally, the lure of 10-bagger returnrns is what brings many novice investors to the biotech space. And it’s the wildly unpredictable nature of biotech stocks that leaves most of those investors burnrned.
I knew one such hype-buying sucker.
Years ago, while I was trading foreign currencies for a prop firm, I sat nearby a stock trader that focused exclusively on drug-maker and biotech stocks. His system, if you could even call it that was a desktop calendar chock full of sticky notes keeping track of various drug trial phases and FDA decision dates.
He did his best to find, read and process every bit of information that could possibly be found on whatever biotech stock he was targeting at the time. As he got deeper into stories of the company’s “massive potential” you could literally see the excitement oozing from his pores.
And after enough water cooler chats, you learnrned he was always just about to hit the “big one!”
But to my knowledge… he never did.
It seemed instead that, for as much information as he collected about his target investments, there was always a bit of information that he missed. Someone always knew a bit more than he did.
And, consequently, he routinely got suckered into overly hyped plays that never quite materialized as he expected.
Don’t get me wrong… he did catch a few winners. But the losses he suffered on the sucker bets seemed to swamp what he brought home on the winners.
Long story short… my buddy didn’t have the sophisticated analytical tools he needed to survive in the information-rich biotech sector.
His sticky-note system was the epitome of bringing a knife to a gun fight.
Today, if he’s still trading, I bet my friend would upgrade his system to something like Ben Benoy’s.
Collective intelligence is the name of the game in biotech investing. While it’s impossible for one analyst, or investor, to know all the opportunities and pitfalls inherent in betting big on the next potential biotech blockbuster, social media puts the collective wisdom (or, if you’re a contrarian, the “unwisdom”) of the masses at your fingertips.
Or course, the work is data-intensive and requires a robust computer program to handle the task of teasing apart thousands of social media-derived opinions. So it’s not a project for the typical home-grown investor who, I suspect, will continue to plod through online communication forums in a bumbling and unscientific fashion.
But that just creates more opportunity for YOU.
So, here’s what I say… instead of buying into the hype of the typical biotech “promise of riches” story… take the time to learnrn more about Ben’s system and how it might just give you the edge you’re looking for.