Thread by @Biotech2k1

#Risk_Reduction Part 1

Understanding ways to mitigate risk.

1/ The first thing I tell new investors in biotech is to first figure out what you are willing to lose. With a
sector where 90% of the science fails, you have to have a high pain tolerance or a very good strategy.

2/ We will go with strategy because no one wants to endure a lot of pain. When it comes to science, we go
through a lot of failures before we find great success. Hopefully, most of that is done in the early discovery phase before it comes into the clinical stage.

3/ Even so, many drugs still fail to ever reach
commercial sales. We will look at strategies to limit the damage any single company can do while
maximizing the returns each company can give us. For me, that level is 5%.

4/ I will risk up to 5% of my money on a speculative company. If I take that kind of loss, I know I can make up for it.

5/ Diversification is the best strategy for protecting yourself from single company risk. If you are diversified enough, it can also protect you from overall market risk as assets like bonds do well in bad
markets.

6/ Spreading out your money is the best lesson any successful investor learns. Nothing is worse
then going all in on a company and it fails miserably. You will always hear about that one guy who got
rich going all in on a company, and it was a huge winner.

7/ What you never hear about is the 100 other
people who go bankrupt from going all in on a company that fails. People who had all their money in
companies like Enron and Worldcom know this lesson all too well.

8/ The first thing I do with new investors is figure out how much they can afford to lose in a single
company. That becomes the limit they are allowed to put into any one company. I usually will go
between 10 and 20 companies depending on how much I want to risk in each.

9/ If you have 10 companies, that would limit each one to 10%. At 20 companies, that would limit each to 5%. How much money you concentrate in each company depends on how risky it is and how much risk tolerance you have.

10/ I tend to put more into the companies I have big gains in while limiting the newer companies that
lack any real gains. Spreading out your money into more companies is the best way to protect it if one
of those companies turns out to be the next Theranos

11/ By setting a max limit on each company, it will protect you in case something goes wrong. I always tell myself, “If I am right about this company, it will come back”.

12/ It's more than natural for an investor to dig in and insist they are right about a company. They will continue to throw good money after bad into a company as the stock goes lower. All they end up doing is amplifying the losses on the losers.

13/ Do not ever get into the habit of selling the winners to fund the losers. You end up with a
portfolio full of tragedy. Setting a maximum limit on any position should be done even before you buy
it.

14/ Once you have done all your research, you know how risky it is and how it fits into your overall
strategy. Set those limits right away and stick to them.

15/ Don't buy all your position at one time. In this day and age, you can trade for free at most brokers.
There is no reason to be a hero and go all in with your max position right away. I usually make one buy
early with a small position to get me in on the story.

16/ Then I wait for a correction in the stock
to build up my position. If you love the company now, you will really love it at a much cheaper price.
Too many people go all in for their position right away. That is a very risky strategy as we often let
emotion control our buying.

17/ One rule I use that I seldom see in many investors' portfolios is a cash level limit. I call this my 20% for
20% rule. I keep at least 20% cash for when the market has at least a 20% crash. That ensures I have
money when the best opportunities come along.

18/ Treat cash as if it's one of your investments. It is a
hedge against deflation and market volatility. There is nothing worse then having a correction come
along and not have any cash to put to work.

19/ You can set your limits different from mine based on your risk levels and strategy. Make sure you keep some cash available for when the right opportunity comes along.

20/ I would recommend treating it as one of your positions so at least 5% or 10% depending on how much you diversify.