Pt. 2 of How Not To Make Money
No pharmaceuticals. I was going to recommend avoiding Pfizer, but I decided it would be wiser to recommend avoiding healthcare in general. Now, what I advise is what I avoid, this does not apply to you if you are a genius or a Martin Shkreli. I look for predictable, compounding companies with sizable moats and excellent leadership, and pharma companies are pretty much the opposite of all of that.
Only one out of the 15 largest public pharmaceutical companies exceeded the S&P 500 over the past five years; excluding that one (Eli Lilly), they returned an average of 20%. For reference, the S&P returned an impressive 92% in that same period. Eli Lilly had a negative return from January of 2000 till January of 2014. Investing in pharmaceutical companies is like investing in the stock market on steroids. You have to have more knowledge about new medicine coming out than 95% of other investors, you have to understand the drug-making process down to a T, you have to time the market nearly perfect every time, and you have to be extremely lucky. Even those who are the best in the world can and have lost everything by betting against or on pharma. For example, Martin “Pharma Boy” Shkreli is a genius. I know I may get some flack for complimenting him, but he is a genius. Pharma Boy bankrupted multiple hedge funds of his after returning insane gains by betting against pharma companies.
Take Novo Nordisk for example, that is a company whose stock is up by 352% over the past five years, after a completely unpredictable discovery that their diabetes drug had the side effect of weight loss. Few people on the planet could have called Novo Nordisk’s jump in price, and really, this goes back to my original point, you want predictable. If you are not going for predictability in the market you are gambling.
The biggest factor in drug-making is the FDA. Everything revolves around getting approval for drugs in America. One of the reasons is that most other countries, perhaps wisely but I will not dive into politics, set limits on drug prices very strictly, particularly Europe. In America, however, you can set prices however high you want, so if the FDA approves your Alzheimer's drug, you are golden. However, there are so many stages during the approval process that getting to the finish is never a certainty, and as a retail investor picking where/if the drug will fail in the process is nearly impossible.
Finally, morality plays a factor. If I was investing other people’s money, I would have a fiduciary responsibility to invest in what I thought would make them the most money, but I do not feel great putting my money into pharma companies. Similar to insurance companies, I find that pharma companies, while positioning themselves as one of the saviors of our society, a beacon of advancement, are truly reprehensible. Pharma companies abuse the system they create and in my opinion, are a hallmark of corruption deep within our society. I recently re-read Fahrenheit 451 by Ray Bradbury, one of my favorite authors, and it is impossible to miss the similarities between our world and theirs, the rapid proliferation of intensely artificial chemicals packaged as cures for the problems they create. Every time I turn on the TV, I am confronted with blaring and contrived commercials forcing medicine upon the masses for exorbitant costs. Pharmaceutical companies are as evil as we allow them to be, and I want no part in them.
If you are dead set on investing in pharma then instead pick the Jets to win the Super Bowl, at least then you will have better odds.
