“If you catch just one biotech bull market in your lifetime, you may never have to work again…”
I’ve written that many times in our research. Why? Because biotech booms are like nothing else in American investing…
The potential gains – without leverage – are extraordinary. As one example, biotech stocks gained over 600% in their three-year bull run ending in 2000.
That wasn’t a one-off occurrence… Biotech stocks have delivered triple-digit returns (or near-triple-digit returns) in many calendar years (based on the Datastream U.S. Biotech Index). Take a look:
It has been 15 years since we’ve seen a triple-digit year in biotech stocks. We’re due for a great run in biotech. And right now, I believe we’re in the middle of it…
[ad#Google Adsense 336×280-IA]Is there a way for you to make money here, even if you’re not an M.D. or some other type of medical expert?
I think there is… and it’s much simpler than you think.
Let me explain…
Paul Tudor Jones is a billionaire…
He became a billionaire through investing.
In the latest book by Tony Robbins, he says:
“You don’t need to go to business school; you’ve only got to remember two things. The first is, you always want to be with whatever the predominant trend is.”
That’s how Paul Tudor Jones made his fortune – by sticking with the trend. History shows that Paul Tudor Jones’ philosophy is right on the money when it comes to biotech stocks (you just want to change “business school” in his quote to “medical school”).
In short, you want to stick with the predominant trend when it is going up. And most importantly, you want to get OUT when it is going down.
Why? Paul Tudor Jones explains it:
“The whole trick in investing is, how do you keep from losing everything? If you use the 200-day moving-average rule, then you get out. You play defense, and you get out.”
There’s nothing particularly magical about the 200-day moving average… It is simply a commonly used measure of long-term trends in asset prices. Through testing, we have found that more volatile sectors – like biotech stocks – give better investing results when you look at shorter-term moving averages that are less than 200 days.
For example, using a six-month moving-average trading strategy in biotech stocks delivers amazing results…
From 1983 until today, you would have made 21.5% a year following a “buy and hold” strategy in biotech stocks. (That’s pretty incredible by itself!)
Following a simple trend strategy would have performed much better…
Using monthly data, if you’d simply bought biotech stocks when they closed above their six-month moving average at the end of a month, and if you’d sold when they closed a month below their six-month moving average, then you would have dramatically outperformed buy and hold.
Specifically, biotech stocks delivered a 30.8% compound annual gain when they were in an uptrend (above their six-month moving average), and they returned 6.2% – well below buy and hold – when they were below their six-month moving average.
It’s easier to see than explain. So here’s a chart of the six-month moving-average strategy… When the line is green, you’re “in” the trade. When it’s red, you’re “out”:
The results are pretty compelling. And Paul Tudor Jones is right – the most important thing a moving-average strategy does is it keeps you from sinking with the ship.
In our True Wealth Systems letter, we are “long” biotech stocks. We are already up more than 20% on our latest biotech recommendation – in less than two months.
If you’d followed our two previous recommended biotech trades in True Wealth Systems, you’d have turned $10,000 into roughly $44,000 (going back to 2012). That does NOT include our newest trade… If we closed it out today, you’d add an additional 20% to our biotech winnings.
These are massive gains… and we fully admit to having no expertise in medicine. We simply want to stick with the trend. The biotech sector goes through massive bull runs. We simply want to be on board for those runs.
One caveat… If you are buying in today, you need to be aware that you are not buying in early… We are already a couple years into this biotech bull market.
Importantly, we are nowhere near “bubble” valuations just yet… The last bubble in biotech stocks ended in 2000 – with biotech stocks at over 20 times sales. Today, we’re around 8 times sales. That’s a rich valuation, but not a bubble valuation. Take a look:
To me, this limits our upside… If biotech stocks soared an additional 100% from here, chances are you’re reaching the point where the risk is too high relative to the reward.
Another sign that we’re not at the top in biotech yet is that we’re not at a peak in biotech sentiment… You don’t hear about biotech breakthroughs regularly on the mainstream news, and medical researchers aren’t on the cover of popular magazines… yet. You usually see stuff like that at the peak.
In short, yes, we are a few years into this biotech bull market. But yes, we are staying invested… staying with the trend.
We are not M.D.s. But we are still managing to make a lot of money here…
If you follow our advice here… and follow the advice of legendary hedge-fund manager Paul Tudor Jones, then you too could do well in biotech – no M.D. required…
Good investing,
Steve
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Source: Daily Wealth