Investors may be tempted to invest in the hopes of a potential vaccine and big gains, but don’t be seduced by the hype and steer clear of this industry.
Oct. 24, 2020
The global pharmaceutical industry is worth roughly $1.25 trillion and without a doubt there are opportunities in this space. However, as legendary investor Peter Lynch stated: “invest in what you know”. The pharmaceuticals industry is perhaps one of the most complex industries out there and the majority of retail investors will struggle to understand it. Despite this, in recent months the sector has caught the attention of many investors who are ill equipped to invest in these companies.
Issues for retail investors
Some of the issues that investors may find hard to grasp are strict regulatory guidelines that must be met, such as clinical trials which must be passed, along with protection by patent. The FDA recently released guidelines in relation to the development of a COVID-19 vaccine, which is another aspect that investors would need to be aware of. Prospective investors would need to have a detailed knowledge of the vaccine and much more in order to be confident to hold the stock.
Perhaps you work in the pharmaceutical industry or have some other expertise in this space which may give you a greater understanding and enable you to invest in this sector. Likewise this could be applied to other sectors. This is a niche industry that some professional investors will track solely and prosper, but they would be the minority. For the vast majority of people, they are better off avoiding the pharmaceutical industry entirely.
Recent volatility
A number of pharma stocks have recently had massive fluctuations following news of potential vaccines, based on the stage of their clinical trial. Moderna (NASDAQ: MRNA) has seen its stock surge this year as its vaccine goes through clinical trials and is at the final stages. However, if this fails in its final stage, it could cause the stock to drop significantly. Pharma giant Johnson & Johnson (NYSE: JNJ) has paused all trials for its COVID-19, causing its stock to fall. Events surrounding regulatory approval can be make-or-break for smaller companies in particular.
According to a study conducted by MIT, only 33% of vaccines for infectious diseases make it to regulatory approval. Picking a winner out of the roughly 650 companies that are currently attempting to produce a vaccine is extremely difficult. Even if you do choose a winner that has a vaccine approved, it is not a foregone conclusion that this will be the best. A vaccine approval will also have different effects on companies due to the size and may cause some stocks to rocket while others could barely move at all.
An understandable alternative
Instead of attempting to invest in an industry that is complex, investors could put their money in something like tech, which is both more familiar and understandable. At MyWallSt, one of our 6 Golden Rules is to “Buy What You Believe In”. For example, if you happen to be an avid iPhone user why not buy Apple stock? Or perhaps you binge watch Netflix, you could own a piece of this streaming giant. As retail investors, we have an advantage over the professionals due to our ability to spot the next big thing early before Wall Street takes notice.
For the majority of investors investing in pharmaceuticals the odds are stacked against them. As Warren Buffet has stated many times, stay within your “circle of competence”. There is no need to invest in companies that you do not understand or are high risk. Buy great companies, and watch them grow along with your investment.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.