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  • Did Ben Graham Understand The Difference Between Active And Passive Investing? [View article]
    I consider many of the diversified "rules-based" funds and ETFs to be a form of indexing. Most people think of the S&P 500, but research has demonstrated that market-cap weighted indices provide sub-optimal performance as they overweight the more expensive stocks (and hot sectors) and underweight stocks and sectors that are out-of-favor and have asymmetric risk/reward to the upside. The late 1990s and 2000 market top would be an extreme example of this phenomenon. 2000 and 2001 were fantastic years, and the 2000s were not a lost decade at all, provided that you had a broad portfolio of reasonably valued stocks rather than the tech/pharma/financials... large-cap "growth"-oriented S&P 500.

    Value-weighted, sector-diversified funds such as the long-short funds run by Gotham Capital make a lot of sense, IMHO. Greenblatt magic formula long-only portfolios (value + quality), which could also be considered a form of indexing, have also been shown to consistently trounce the averages (and by definition, most active managers) over time. Research from AQR (Cliff Asness) supports this and also suggests that all Warren Buffett has really done historically was build reasonably diversified portfolios based on value with a tilt toward quality. He pick stocks, but it's not completely idiosyncratic--it's mostly value and quality factors--avoiding the garbage, and avoiding whatever is over-loved.

    So, I think indexing makes perfect sense, but not market-cap weighted indexing with no sector concentration caps and no value/quality tilt. The "quality" is particularly important in this era given all of the low ROIC, capital-destroying garbage floating around the markets these days, although much of that is in the Russell 2000.
    Apr 6, 2015. 01:40 AM | 2 Likes Like |Link to Comment
  • Celldex: An Immuno-Oncology Play With Monster Potential [View article]
    There's nothing wrong with that, but what will your total return be when the other 10 small-cap biotechs you bought 12 months ago crash and burn down 40-60% from where you bought them, and don't come back for many years (or never come back at all).

    If you're a brilliant enough biotech stock-picker that PCYC is the only one you bought, then more power to you.
    Apr 1, 2015. 02:17 PM | 2 Likes Like |Link to Comment
  • Celldex: An Immuno-Oncology Play With Monster Potential [View article]
    Your concerns sort of illustrate the point about whether any of us really has an "edge" when it comes to picking winners in this space--we are all the "fools at the poker table" compared to the players you mention especially in such a specialized, binary-event market such as early-stage biotech.
    Apr 1, 2015. 09:06 AM | Likes Like |Link to Comment
  • Celldex: An Immuno-Oncology Play With Monster Potential [View article]
    Fair enough on the 2008 reverse merger and pre-2008 share price history--I was not aware of that. And, I actually have no opinion one way or another on the merits of CLDX itself.

    The broader point though is that early-stage biotech is a percentages game with the percentages working against you when valuations are high given the huge number of flame-outs of once-promising companies.

    How do you know what's priced into the stock at the present time? It has a multi-billion dollar market cap and no significant revenue, so clearly, at least some portion of the pipeline and "potential" are already priced in.

    Historically, buying a basket of companies with multi-billion dollar market caps that are losing money and/or have no revenues consistently leads to one thing--big losses! Even if a couple of them work out in the end.
    Apr 1, 2015. 12:15 AM | 1 Like Like |Link to Comment
  • Celldex: An Immuno-Oncology Play With Monster Potential [View article]
    Much of this discussion, like discussion about other hot small-mid cap biotech stocks, is focused on the stock itself rather than the space. The problem I see here is that we are all "the suckers at the poker table"--we are disadvantaged vis-Ă -vis big pharma/biotech acquirers and specialty shops like Baker Bros. when it comes to picking the small number of future winners (out of a huge pool of likely failures) in this space. People talk about XYZ being the next AMGN or DNA while ignoring the vast number of also-ran losers--this is classic survivorship bias.

    That's why valuation matters so much--you want to buy a basket of these when they're out-of-favor rather than after they've had a huge parabolic run and are white-hot. Otherwise, you're likely to get poor returns unless you're lucky enough to pick the few winners.

    Recent take-out winner PCYC is a great example of this. It's being acquired for around 255. If you had bought it around the height of the last biotech bubble in 2000, you would now have made, depending on timing, 3x-5x of your purchase price over a 15-yr period. Not bad. However, only a small number of these development-stage companies make it or are acquired--most end up being big wipe-outs for their investors. If you bought a basket of these types of companies in 2000, it's unlikely that a 300-500% return on a couple of them would make up for the dozens that went down 80-100% (not to mention your cost-of-capital / time value of money over 15 yrs). Note that even CLDX, while still in the game and hot lately, is still down 80% from 2000--and I'm sure it looked very promising in 2000.

    Alternatively, if you had bought PCYC during a period when biotech was out-of-favor (rather than when it was hot), you would have gains of as much as 200-300x over an even smaller number of years. This is likely more than adequate to offset the numerous losers and wipe-outs, and you would have a truly outstanding return.

    Price/valuation matters (it protects you from the numerous unknowable risks), and we're currently more like 2000 (if not higher) with development-stage biotech valuations.
    Mar 31, 2015. 07:32 PM | 1 Like Like |Link to Comment
  • Celldex: An Immuno-Oncology Play With Monster Potential [View article]
    OK, but it seems as though you're making the past 18 months of strong price action out to be a CLDX-specific story. Nearly all of the spec biotechs have surged around the same time. CLDX may or may not have great prospects, but that action tells me something else is at play.

    Also, on 2007-08 events, note that CLDX consistently declined for nearly 20 years prior to that point. What were the excuses during that 20 years?

    Maybe CLDX will be the next AMGN or DNA, but it's hard to believe that the many dozens of mid-cap biotechs following a similar price trajectory over the past 18 months will all blossom accordingly.
    Mar 31, 2015. 08:19 AM | 2 Likes Like |Link to Comment
  • Celldex: An Immuno-Oncology Play With Monster Potential [View article]
    Honest question: CLDX has been public for 25 years, and has been consistently destroying shareholder capital the entire time (the stock is in a steady 25-yr downtrend), with the stock price every 6-8 years punctuated by a short-lived burst of speculative enthusiasm that quickly burns itself out.

    What makes "this time different" with regard to CLDX considering how the other bursts of enthusiasm in the share price have ended?

    On a related note, if this is all about a sudden revolution in the prospects for the biotech industry over the past 18 months, why is it that speculative, small-cap cash-burning companies in a wide variety of industries suddenly all burst to life around the same time beginning in 2013? Is this just a wild coincidence, or is it evidence of a market mania / speculative bubble in the capital markets rather than some independent miraculous turn in the prospects for small-cap biotech companies? Did the science suddenly make a quantum leap 18 months ago? Were their prospects really that much poorer three years ago than they are now?
    Mar 30, 2015. 11:40 PM | 1 Like Like |Link to Comment
  • A Buyback Or Biotech Bubble? [View article]
    The problem is that most of the biotechs in the XBI don't have any meaningful revenue / profits so pricing power isn't really the dynamic at play. What's in play are loose financial conditions (they enable cap-markets-driven roll-up acquisitions at outrageous prices by the likes of Valeant, Endo, Abb-vie, etc. as well as secondary offerings by the biotechs themselves) and a speculative, risk-embracing market mood that awards sky-high valuations based on "hope" and perceived growth potential and/or takeover possibility.

    If we get a deflationary collapse, the cap markets will collapse and so will anything that is "hot", speculative and trading at high valuations (including most biotechs).

    Even for the larger, profitable biotechs, I would be careful in assuming that they have firm pricing power--note the recent concerns with Gilead's Hep C drugs--pricing power by large buyers and competition from other biotechs.
    Mar 28, 2015. 06:45 PM | 3 Likes Like |Link to Comment
  • A Buyback Or Biotech Bubble? [View article]
    "Over the next decade, maybe, but not over the next three years"

    This indicates that you're speculating rather than investing. That's fine, but don't try to pass this off as "investment" advice.
    Mar 28, 2015. 06:38 PM | 1 Like Like |Link to Comment
  • A Buyback Or Biotech Bubble? [View article]

    XBI is all small and mid-cap biotechs which are most assuredly in a speculative bubble. Take a look at the long-term (25-year) chart of recent mo-mo fave CLDX. Consistent downward trend (i.e. capital destruction) punctuated by a speculative mania every 6-8 years that enables the company to do secondary share offerings at high prices to stay alive. Yes, there will be a couple of gems in the haystack that manage to do well long-term (just like internet stocks in 1999), but on average, investors in the space will do poorly from current valuations. Why do you think they've all been rushing to do secondary offerings recently?

    The non-takeover bait large-caps like GILD, Biogen and AMGN are not so frothy--the rest of the space is very frothy. In a way, this reflects the broader market where the S&P mega-caps are rich but not outrageously so, while the median stock valuation is much higher, and the Russell 2000 is at all-time high valuations.

    Also, Leo, "know thyself"--you're on record as having loved Nortel in 1999 and commodity stocks / rare earths in late 2011 and early 2012. That suggest you have an affinity / bias toward things that are coming off of multi-year bull markets and are primed for devastating losses. Think about it.
    Mar 28, 2015. 06:31 PM | 2 Likes Like |Link to Comment
  • XBI Is +24.22% YTD And +44.70% For 2014, But What Are The Risks? [View article]
    Small-cap biotech is in a speculative bubble the latest round of which has been driven by takeover speculation after the PCYC and Salix takeovers. Haven't you noticed all of the companies doing secondary share offerings over the past month to take advantage of these bubble prices? How about the CEO of momentum-fave PTCT dumping 100% of his holdings recently?

    If you want to take a look at how small-cap biotech trades over time, pull up the 30-yr chart of recent mo-mo fave CLDX. Basically, most of them destroy capital over time though every 8-10 yrs, the action is punctuated by a parabolic speculative bubble that subsequently collapses to lower lows. Yes, there may be a couple gems in the haystack, but on the whole, the space is a loser from these elevated valuations. I would avoid (or short, if you're brave) XBI.
    Mar 25, 2015. 04:14 PM | Likes Like |Link to Comment
  • The Bull Case For The Russell 2000 [View article]
    Here's a different take on small-caps valuation from several credible buy-side sources.
    Mar 20, 2015. 02:33 PM | Likes Like |Link to Comment
  • The Earnings Recession Of 2015: Stock Market In Danger? [View article]
    What is your view on Gotham / Joel Greenblatt's diversified long-short value strategies? Seems like the perfect prescription for an environment with overvalued equities and overvalued bonds. Eke out a modest return while preserving the optionality value of cash (market neutral = cash) to go long once the big bear market eventually hits.

    Off to a weak start this year though as crap tech / spec biotech shorts have soared. Perhaps a good entry point though.
    Mar 7, 2015. 02:53 AM | Likes Like |Link to Comment
  • The Earnings Recession Of 2015: Stock Market In Danger? [View article]

    I take it then that you have now "got religion" and believe in the cyclicality of profit margins per GMO / Grantham / Montier? (Note that I do acknowledge the possibility that the equilibrium level of margins might be higher than in decades past due to oligopolistic effects and the shedding of commodity businesses by the S&P 500--though cyclicality is still present).

    On the US dollar, taking a longer view, Hussman views it as overvalued vs. euro and yen, much as he pointed out (correctly) in 2001. What say you? I think the weak dollar trade (emerging markets, gold, oil, silver, euro) is where the long-term value is today (while US markets, unless you're doing a Greenblatt-style long-short strategy, is picking up pennies in front of a steam-roller), though it's probably too early, just like in 1999-2000. What say you? Rob Arnott agrees with me.
    Mar 7, 2015. 01:56 AM | Likes Like |Link to Comment
  • Retirement Strategy: Is It Time To Panic Based Upon The Most Widely Used Valuation Metric? [View article]
    Broadly speaking, valuations are lower for the mega-caps than for the average stock--that's why the market cap-weighted S&P 500 dramatically outperformed equal-weighted indices, the Russell 2000, etc. last year. Small-cap valuation multiples are at an all-time high much like junk bonds were until recently.

    However, even mega-cap multiples are still historically quite high particularly when adjusted for cyclically-elevated margins. Margins are most definitely cyclical, and we've likely just hit a cyclical peak. Stocks looked reasonably priced at the 2007 peak as well but also had cyclically toppy margins which disguised the high multiples.

    The big thing propelling these markets and sustaining high valuations is ultra-low interest rates and TINA--it's no coincidence that the huge multiple expansion happened in 2013 (continued through 2014) after long-term interest rates collapsed through 2012.
    Feb 15, 2015. 10:41 PM | 3 Likes Like |Link to Comment