Monday, January 6, 2014

Not so great 2013? A look at the IBB biotechnology index

I thought I beat the market rather nicely in 2013, with a 79% return (see My Great 2013 stock investments). But it turns out that the Nasdaq Biotechnology Index (IBB) closed at 2013 at 227.06 and closed out 2012 at 137.22, for a return of 65.5%. I would say my non-biotech stocks dragged down my portfolio a bit, but my three worst-performing stocks were all biotechs.

While I did beat the IBB, I did not do so by much. Not enough to claim that it was anything outside the normal probability distribution. Many of my biotechs are in the IBB, and some of them account for a lot of market capitalization within the IBB.

So maybe I should save myself some trouble and just buy the IBB. The argument against that can be summed up in my best performing biotech stock in 2013: Inovio, up 530%. INO is not in the IBB.

There are 128 companies in the IBB, and like most indexes they are updated in a way that tends to mask failures. On the other hand one of my worst performers was Dendreon (DNDN) and it is still on the list.

But I will think about adding the IBB as a part of my portfolio. That way if some tiny company gets an unexpectedly good trial result or FDA approval, I'll catch part of it. Along with the companies that have powerful backers on Wall Street, until their innovative therapies fail and investors loose their billions.

Probably I will just keep digging through the data, looking for potential that the sharks have missed. I don't mind the time; science is a hobby of mine. Some times that potential is in fairly large cap companies, not just in the little guys with no approved therapy yet. I first bought Gilead (GILD) in 2007, then  Celgene (CELG), Onyx (ONXX) and Biogen (BIIB) in 2008. It took a while for those investments to work out, but my strategy was a long-term one. As far as I am concerned, it beat day trading.

Goldman Sachs pontificated today that biotechnology stocks are generally overvalued. I take a conservative approach to investing, but I look for long term value in product pipelines. I don't know where GILD, BIIB, and CELG will be in a year, but in 5 years they are highly likely to be much more valuable than today [barring the zombie apocalypse, in which case all bets are off].

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