Dear David

My name was mentioned in the email of the day yesterday on biotechnology so I thought it would be timely to add some thoughts.

On the question does one buy and hold biotechnology shares or funds, some interesting data was published earlier this year by Steve Sjuggerud, who is a very experienced and successful investor living in Florida. He back-tests market data extensively. His back-testing showed that from 1983 until his publication in early 2015 you would have made 21.5% a year on average following buy and hold in a biotechnology index. I think that beats Warren Buffett. But is a very tough ride as there are large booms and busts. So he then went on to say that a simple trend-following strategy can help avoid the large busts and can improve returns significantly. He suggested using monthly data and buying biotech stocks when they close above their 6-month moving average, and selling when they close below their 6-month moving average. His back-testing indicated this strategy would have delivered a compound annual gain of 30.8% since 1983. One has to stomach many whipsaws, as with any trend-following strategy.

Personally, I add another nuance. This is a rule I follow in my own investing, and it featured in my Markets Now presentation in London on 15 June 2015. The slides are available on Fuller Treacy Money website. Look at slide 6 for the rules, and slide 7 for the data on which they are based. This concerns the market overall, not biotechnology specifically. If the yield curve remains positive (as it is today) there is a strong probability that the overall bull market remains intact. Nevertheless, this has worked only about 70% of the time historically over the past 100 years. The other 30% of times when markets fell substantially have generally been during the market ‘weak season’ May-October which David mentions regularly. As a safeguard I go 50% cash during this time. I went 55% cash during May-June this year and sold about 90% of my biotechnology holdings.

In addition to the market weak season, another factor that made me lighten my biotechnology positions is that they had become significantly over-extended relative to the 200 day moving average. Mean reversion is highly likely when price gets 30-40% above the 200 day moving average. David and Eoin refer to this very often.

My own investing in quoted biotechnology is guided by the three factors described here. I gave a lot more detail on biotechnology in another presentation titled ‘The Third Industrial Revolution’, at Markets Now on 23 February 2015. Again, the slides are available on the website.

I hope this is helpful.

Best wishes David, and I hope to see you sometime in December or January, after my travels are finished at end November (I will be helping at the orphanage I support in South Tibet).

David

David Fuller's view

My thanks to David Brown for this wonderfully educative email which he posted on the FTM site today.  I reproduce it here to ensure that subscribers see it. 

The advantage of an interactive website is that we can learn from each other, not least as the level of knowledge and experience within the Collective of Subscribers is enormous.  Thank you for sharing your thoughts.