Investment Philosophy

The Medical Technology Stock Letter believes in the long-term advantages of growth stock investing. Most successful investors have made their money in growth stocks. Stocks in the biotechnology area have a number of unique advantages. The combination of technological advances, demographic increases in demand, and immunity from the economic cycle make this sector extremely attractive over the next decade.

The one perceived disadvantage of growth stocks is their greater volatility. While volatility is often equated with risk, it is also a source of considerable opportunity. Even those companies with the financial resources and product diversity to reduce the long-term risk can still have short-term price fluctuations. These dips provide outstanding opportunities for those investors to establish positions or add to positions when the stocks are down. While investors are always most aware of these short-term risks when the stocks have dropped in price, the better growth stocks often have the lowest risk at the time they are considered to be the riskiest. For example, after the 1987 crash, many biotech stocks were selling for at least 50% below their 1987 highs and were perceived as high-risk investments. They were trading at levels which were close to hard asset value, and clearly less than their acquisition value. At these prices, the long-term risk was greatly reduced. Thus, we started the aggressive portfolio with a leveraged position.

Inefficient markets result when all buyers do not have the same information. This is in part due to the unique problems inherent in properly valuing development-stage companies. Most of them are losing money, and the value is in products that are not yet approved for sale. The visibility is increased and the risk is reduced as these products progress through the regulatory cycle. Opportunities are created because the investment community often ignores this progress as it happens. Investors get excited when a prominent medical publication publishes results, or the product passes a major regulatory hurdle. However, the real value changes as clinical trials prove that the drug actually works. Investing in these stocks is further complicated by the speed with which events get discounted. In recent years, news of technological progress has often been ignored, while in the early eighties, stock prices would move dramatically on any good news. This variability in the investment reaction means that investing in these companies at times requires a great deal of patience.

Over the years, we have become increasingly impressed by the importance of management in the long-term success of biotechnology companies. The rapidly changing technology and the many years it takes to get a product approved make managerial decisions that much more important. Many of our less successful investments have been among those companies with only adequate management. These intangibles are difficult to discuss in MTSL, but they are an important part of the investment decision. We want to emphasize that our evaluation of management is often different than the prevailing opinion within the investment community, and our experience leads us to believe that this has been an integral part of our success over the years.

We are frequently asked, "How do I build a portfolio?" Building a portfolio of our recommended stocks should be done with awareness of your tolerance for risk. A few of the larger companies such as Elan and Chiron have only modest long-term risk. The smaller companies require more diversification (at least 4 or 5 stocks) to reduce long-term risk. All of the stocks have more than normal volatility and thus short-term price risk.

One of the essential keys to growth investing is a long-term outlook. The cumulative value of MTSL over time will provide the understanding necessary for an intelligent reaction to events. Through your patience, perseverance and an investment strategy which fits your investment needs and desires, your growth investing in biotechnology should be very profitable for many years to come.