by Daniel Shvartsman
Several things have surprised us about the Marketplace since we launched it. We didn't expect the chat room to be the killer feature in the initial days. We didn't expect authors to build out teams and grow staff the way they have. And while we expected authors to be creative in developing their products, the ways they have applied that creativity has continued to surprise us. In hindsight this seems obvious, but it wasn't on our minds as we put this out there in 2015.
The nature of Marketplace services as communities is another facet that we didn't expect. Investment newsletter businesses are often one-way traffic - the author shares his/her ideas, and readers incorporate them accordingly. But good Marketplace services feature a back and forth between author and readers in the chat room and elsewhere, and an exchange among members that propels a service forward on its own energy. Which has been, I think, one of the most valuable aspects of the Marketplace.
We're going to spotlight some of our services more regularly over the coming months, and I mention community because the first service we're featuring is Jonathan Faison's ROTY. The biotech-focused service - ROTY stands for Runners of the Year, as Jonathan mentions below - is founded on community. As I point out in one of the questions, 25 different reviews for the service cite the value of the community specifically on the service (actually, this number is now 27 as two new reviews mention it as well!).
I asked Jonathan a few questions about the fast-growing service - in our top 6 by number of members and top 20 by revenue - and the nature of community, especially why that is valuable to biotech investing. Questions are bold, and Jonathan's answers follow.
What is ROTY?
Jonathan Faison: ROTY stands for Runners of the Year, a system which involves accumulating positions in biotech companies with emphasis on high %upside within a year's time frame. It's a proven approach built over the past 10 years where we find situations with elements of derisking and downside cushion, with as many factors in our favor as possible.
Our goal is to enter stocks before a potential "moment or phase of maximum value creation", when they are setting up both on a technical and fundamental basis. We put a heavy emphasis on risk management strategies, position sizing and personal due diligence.
ROTY also refers to our 550+ member community, a generous group of individuals that have come together and daily share knowledge and timely setups in our very active Live Chat. Among our ranks we count many profitable traders, experienced investors, biotech industry veterans, money managers and physicians who truly believe in "paying it forward" and "teaching others to fish". We also have our share of newbies, for whom it's my goal to make them feel at home and free to ask questions as they start out and we hopefully point them in the right direction.
What led you to start the service? What was your aim for yourself and for your eventual subscribers?
Jonathan Faison: I started writing regularly on Seeking Alpha a few years ago, namely just to share my investing & trade ideas as well as get constructive feedback via comments so I could continue improving. The first edition of ROTY was published in mid-2017 and continued for almost a year as a series of public articles.
As I slowly built up a following, quite a few readers asked for a dedicated service, complete with real time portfolio and Live Chat. After hesitating initially, in March of 2018 I finally decided to take the plunge with the hope of offering the type of resource I wish I'd had when I started investing. A service that would help members learn from my big winners and losers alike, conveying the guidelines and principles that I learned the hard way so hopefully they wouldn't have to.
I don't know if I had an initial goal as much, instead just focusing on working hard and knowing good things happen if you put in the effort. The biggest surprise for me was the community that came together, becoming the most important part of ROTY. People in chat encouraged me during rough periods (like Q4 2018 when I failed to manage risk appropriately) and brought other under-followed biotech names to my attention that I otherwise could have overlooked. There's a camaraderie that's quite rare here, where we celebrate each other's wins and help each other learn from our losers. I honestly wake up each day looking forward to work and catching up on previous conversations.
How much does it cost to join?
Jonathan Faison: $50/month for a monthly subscription, though signing up for an annual subscription works out to $33.33/month ($400/year).
On top of that, a 10% discount on year one is currently available.
What led you to biotech in the first place?
Jonathan Faison: I think it's the most exciting area of the market by far, to observe and be invested in science that is changing peoples' lives. Biotech is quite unique in that many of the smaller companies we research are driven by catalysts that are independent of the overall market, giving us the potential to generate excess return in the near term via clinical data readouts, regulatory catalysts, sales growth for commercial launch stories, etc. Even for investors who mainly own traditional vehicles (index funds, ETFs, blue chip stocks, etc), it can make sense to diversify into a few of these companies where the risk reward profile is especially compelling.
The educational aspect of the biotech sector is always fascinating, as we learn about novel approaches and technology platforms with the potential to cure certain cancers, rare diseases or other conditions where patients are in need of solutions. There's also the personal aspect, as we celebrate each medical advance and what it means to patients and their families (in some cases evenmembers of our own community).
Do you focus on biotech entirely in your investing, or do you have other investments in other parts of the market?
Jonathan Faison: ROTY methodology can be easily applied to several other sectors. However, we focus mainly on biotech with a smattering of medical device plays as well. I'm always up for a good technology idea, especially if it's participating in a key theme and a first mover. However, I haven't found one where I felt I had an edge or advantage since Shotspotter's (SSTI) IPO a couple years back. I also haven't felt the need to scan for them, as long as we have enough biotech ideas on radar that fit our criteria (elements of derisking & downside cushion, several factors in our favor, multiple ways to win, etc).
You mention 'community' a lot in your marketing materials and writing, and it comes up in a lot of your reviews (I counted 25 different reviews that bring it up, including one in Spanish). Why is this important to you and to ROTY?
Jonathan Faison: Many experienced investors, or even those who've been involved in this sector for just a few years, often go it alone, using their free time to scan articles and other resources as they strive to find new setups to profit on.
However, what we've found true in ROTY is that regardless of your experience, it's more rewarding to pursue your investing and trading goals as part of a community where people have the same objectives as you do (profit, learn, grow, improve). We have more eyes on the market, which means more setups are brought to your attention at the right time. We have experts of various backgrounds, so you benefit from the points of view of people who are in the right place to be able to judge the probability of success of a particular technology or drug candidate. Every day market intel and lessons learned are shared.
No matter what stage you are at when it comes to this pursuit of profits, you are likely to benefit from advantages a community can bring to you (accelerating your learning curve, receiving critical feedback on your top holdings, formation of good habits, etc).
In my case, I've gotten to know a number of ROTY members on a personallevel and it's been very rewarding as well.
What are the key features on ROTY?
Jonathan Faison: Aristotle once said "We are what we repeatedly do. Therefore, excellence is not an act, but a habit". In my personal life and in ROTY, my goal is to form good habits which lead to the desired outcome.
In the case of trading & investing, that means consistent profits and minimizing losses as much as possible.
I prefer to keep things as simple as possible. As Bruce Lee said, "Adapt what is useful, reject what is useless, and add what is specifically your own." Therefore my goal for ROTY members is for them to take whatever parts of my system they find useful and incorporate it into their own approach.
1) We have a 15 stock model account, for which I provide updates (new ROTY editions) 2 or 3 times per month. Importantly, trades occur at day's closing price that an article is published for maximum transparency. So far, since inception we've stayed ahead of the XBI and IBB ETFs, and we're ahead of both in 2019 as well. We have a number of potential Q3 and Q4 runners on radar currently. However, there will be times where I have less ideas, as I focus on quality over quantity.
2) JF's Scorecard - Other ideas outside of the model account that meet my criteria for derisking and downside protection. Updates on these are exclusive to ROTY as well and they could be added to the model account as they set up.
3) Cheat Sheet - Regular reviews of technicals, thesis and catalysts for each of our holdings (a great time saver).
4) Catalyst Tracker- I do my best to track material events coming up for each of our holdings.
5) Idea Lab- Allows ROTY members to submit their high conviction ideas to be scrutinized by the Community. I am increasingly using a strict filter here, to ensure this resource truly adds value. Some great runners have been discovered this year.
6) Exclusive articles- When I find a stock that meets my criteria, I publish it only within ROTY. This can be on average two articles per month, sometimes more or sometimes les if nothing is popping up in my scans.
7) Live Chat - Hard to understate the importance of this resource. I also post a Weekly Chat Highlights article to help members with less available time catch up on important conversations and interesting due diligence shared in Chat.
8) Resource Section - meant to help members accelerate their learning curve (my guide to due diligence, principles of ROTY, Lessons learned from our Winners/Losers, etc).
9) Archive access - Articles on stocks that don't meet my criteria are published publicly. However, later on (after they are behind paywall) they can prove useful as the stories for these stocks improve or the chart sets up. Thus, members are encouraged to use these as a first step in their own due diligence for stocks of interest.
What has surprised you most about running the service?
Jonathan Faison: The steep learning curve- one thing is having a successful system that works for you, but another is to try to translate it into a useful format for other people. I continue to do my best to communicate my way of thinking, my rationale for each position and what I am learning along the way. It's still a work in process.
Could you talk a little bit more about Q4? What went wrong, how did you adjust, what did you learn for the future, and how specifically did the community help you and each other amidst an unpleasant time in the market generally?
Jonathan Faison: One of my biggest struggles is with overconfidence and forgetting past instances where the market humbled me. I see it in Chat with other traders and it's true for myself as well - when we experience a hot streak, that's when we are most likely to take bigger risks, trust overly in our own judgement and lose that sense of skepticism that is so important in the biotech sector. That's one benefit of sharing your trades and positions in Chat, having other experienced traders who call you out when you are overly exposed or there are red flags you failed to identify.In Q4, we went from a period characterized by multiple wins and ROTY's model account hitting new highs, to rapidly losing ground as a steep correction took place in the market and biotech sector. For some stocks we were holding into data presentations at upcoming conferences, poor technicals were forecasting a "sell the news" reaction but I was too stubborn to cut my losers quickly.
Additionally, I compounded my losses by making more subpar trades instead of taking my own advice for traders going through a rough patch (take a timeout to analyze your decision making process). When we lack compelling ideas in ROTY, we tend to hold more cash and wait patiently. However, in this case I think my impatience was the chief cause of those losses.Also, as membership hit new highs it started to be apparent the outsized effect a purchase or sell in the model account was having on certain stocks, especially those of microcap companies or with lower trading volume. When we exited certain positions, that "rush for the exits" certainly was visible.I view the value add as two fold in ROTY- the wisdom and due diligence shared in Chat by members AND the outperformance of the model account versus our benchmarks (IBB and XBI). The larger the gap between outperformance of the model account and our benchmarks, the better I feel about the value I am adding for members. During this stretch we had periods where we were underperforming our benchmarks and that made me question whether I was adding enough value to justify continuation of the service.I took the time necessary to review my process and identify where I went wrong. Several of our more experienced members in Chat gave me helpful suggestions and more importantly encouragement to keep going, to keep sharing lessons I was learning. I am very grateful for their expertise and words of wisdom when they were most needed, and I'm sure other members feel the same way.
More than anything else, I reviewed the rules and guidelines for ROTY, identifying which ones I was failing to follow. From there, we made several changes.First, I increased the minimum market capitalization for selection of stocks in our model account to $100 million. I also made sure that in general we stick to those with adequate trading volume. To an extent, this has addressed the effects our trades in the model account can have on daily price action.Second, I increased the amount of derisking and downside cushion I require from each holding in the model account (via prior data sets, cash position, partnerships, multiple irons in the fire, etc). In a risky sector I wished to help members avoid getting burnt as much as possible, although we will still have our share of losers. Third, instead of publishing updated ROTY editions every week, I decided to do it every 2 weeks or so. This enables me to take a step back, take more time to consider each of my decisions and do things in a patient manner. Ultimately, I want to make sure there is a solid rationale for each decision I make.Fourth, I added Cheat Sheet, a time-saving feature for members which serves as a quick checkup on stocks we own (thesis, chart/technicals, next catalyst, plan, derisking/downside cushion). This helps us avoid "getting married" to a stock just because we love the story, reminding us to continually revisit in an unbiased manner. Fifth, as requested by members, I added an Actionable Buys section, to highlight the ideas that are best setting up on a technical and fundamental basis. We also increased the potential number of holdings in our model account from 10 to 15.
Lastly, lately I'm working toward a thicker filter for submissions to Idea Lab (high conviction picks from ROTY members) to ensure that these stay high quality and weeding out ideas that are too speculative. I also added a Portfolio Xchange channel in Chat, to encourage members to share the rationale for trades in their own accounts.
What would you tell someone new to your community to expect if they were to join today? What happens once they sign up?
Jonathan Faison: The journey to consistently profiting in the market to reach your goals is a marathon, not a sprint. Don't get discouraged by early losses, but instead view them as tuition and seek to learn from them. Don't enter ROTY with the mindset of needing to hurry up and buy each position in the model account. Instead, take the time to read all of our material slowly and learn. Read my rationale for each idea, do further research, discuss in Chat and decide if you agree or not. Make each decision your best, whether taking partial profits, cutting a loser quickly or taking some risk off the table. Learn from veterans who've been there and are doing their best to impart that wisdom to you.
If you focus on learning and forming good habits, the rest will takecare of itself.
Who is ROTY geared towards? Is it more for experienced biotech investors, or novices, or somewhere in between?
Jonathan Faison: For all.
Veterans benefit from being challenged by other experts, including playing devil's advocate for their favorite ideas and bringing new setups to their attention. No matter how many years one has in the market, we all seek to continuously improve.
Newbies especially benefit, as we take years off their learning curve and try to put them on the right path early on.
Whether swing trader or long term investor, you'll find others with similar mindsets and styles to discuss with.
While I focus on just a few tickers, those where I feel I have the most advantage or "an edge", chances are you'll find others who own the same names you do and are able to share useful information or opinions.
If someone were coming new to biotech investing in general, what would your advice be for starting out?
Jonathan Faison: Do so slowly and intentionally, writing down your thesis for each idea and rationale for each trade. Share it with others to get feedback. Each time you win or lose, write down why that happened and what you learned.
Give me the quick pitch for why I should consider ROTY given all the resources available to me on the web, whether on Seeking Alpha or further beyond.
Jonathan Faison: There are some incredible writers on SA and elsewhere on the internet, running services that add a lot of value as well. Some cover many more names than I do. Others use completely different approaches, such as diversifying more or offering several different strategies.
My goal is simply to put in the effort and good things will happen. To continue improving ROTY framework using feedback from members, to do my best in finding new setups, doing the research and sharing it in a way that is actionable & easy to understand for members. Performance of our model account is the scorecard that tells me whether I'm on the right path, as well as reviews from members. As long as people are profiting, learning and enjoying their time with us, I can't ask for more.
Trial us out for a few months. The test of ROTY is same as for any service or trading tool. If it adds value for you, helps you profit more and lose less, if you find yourself learning more (and enjoying it), then it's likely a keeper for you. If it's not adding value, then it's not worth it for you.
Our churn rate is quite low (just 4% or so), so most people who try us out switch to annual membership and stick around. That makes me confident and pleased that we are adding value.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Neither Jonathan nor I have any positions in any stocks mentioned. Jonathan hosts ROTY on the Seeking Alpha Marketplace, and Seeking Alpha is a partner with him and 170+ other authors on that platform.