This common Baker Brothers biotech investing mistake will kill your portfolio

Around two decades ago, I introduced the world to the amazing record of the Baker Brothers in biotech. Up until then, no one had written about them. Literally. The only thing I could find online when researching that column was news of their wedding announcements.

But I’ve always closely studied which managers and insiders have great records (and in what areas of the economy). So I noticed early on (about two decades ago) how good the Baker Brothers are in biotech. I wrote the first public column explaining their approach, at MSN Money.

Since then, I have followed what they do, and I have a solid record in biotech. I’d guess about 10% of that comes from insights on what the Baker Brothers are doing.

The key lesson for you is that success in biotech is never just a matter of “doing what the Baker brothers do!” This is a fatal mistake. I am telling you now, do not make this mistake. You need a much more refined way of analyzing their activities, which is why I have developed an approach that works better because it averts this common Baker Brothers error (and many others).

Here is an example of the train wreck that can happen if you follow the overly simplistic view, “just follow the Baker Brothers!” that you regularly see on Twitter and in market news articles.

Biotech investing fatal flaw to avoid

On May 26, 2020, Yahoo Finance published an article suggesting three stocks on the basis of buying by the Baker Brothers. The stocks were BioDelivery Sciences (BDSI), IVERIC Bio (ISEE) and Minerva Neurosciences (NERV).

Just two months later, those stocks were down 28.8%! Compared to gains of 6.4% and 7.2% for the SPDR S&P Biotech (XBI) exchange traded fund and the S&P 500.

That’s a performance differential of 35 percentage points against the most relevant biotech benchmark, the small- and mid-cap XBI ETF. Not good.

The writers made the basic error of simply “following the Baker Brothers,” an error I identified years ago and have avoided ever since.

The bottom line: Never simply “follow the Baker Brothers.” Unfortunately, biotech investing is never that simple.

My biotech model has three components I apply all the time: 1) a look at the science for certain qualities that consistently lead to superior performance 2) a look at who is endorsing the company’s science from the outside (don’t just trust the company) and 3) a look at what insiders and biotech investors are doing in the name.

The Baker Brothers fall into the last category. I use a more nuanced analysis of their behavior that screens out the Yahoo Finance fatal flaw, and several other mistakes people commonly make. I never reveal the details of my biotech model because I do not want people to imitate it. But you can benefit from it by subscribing to my stock letter, which contains several new biotech ideas and updates every month. It is a biotech rich stock letter.

Follow me on Twitter here.

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