How to Invest in the Volatile Biotech Sector

Biotech stocks can be quite volatile. On Monday – one day after the conclusion of a major medical conference – some biotech stocks were absolutely hammered.

Threshold Pharmaceuticals (Nasdaq: THLD) crashed, falling 84%. Bluebird Bio (Nasdaq: BLUE) fell 38% from its previous close. Both drops occurred after the companies reported weak clinical trial data at the conference.

Of course, these events can make a stock pop as well…

[ad#Google Adsense 336×280-IA]In 2014, I was in the room when Alnylam Pharmaceuticals (Nasdaq: ALNY) announced a new collaboration with Genzyme.

This made Alnylam’s stock pop 40% that day.

And yesterday, after reporting positive clinical trial results for its colorectal cancer drug, XBiotech (Nasdaq: XBIT) soared more than 70%.

These kinds of moves happen all the time in the biotech sector.

It’s one of the reasons why I find healthcare so attractive.

I don’t know any other sector where these kinds of large one-day moves take place with such regularity.

But one of the other reasons I follow the sector so closely is the work that these companies do is important.

Not to take anything away from Amazon.com (Nasdaq: AMZN), but if Amazon went away tomorrow, another company would step in to take its place. It might not do it quite as well, but there would still be other places to buy books, electronics, cloud services and streaming video.

Most biotech companies, however, are trying to create novel drugs – often for horrible diseases. What they do matters.

When you read tons of data and conference abstracts, it’s easy to approach these medical discoveries from a clinical standpoint. But, every so often, I’m reminded of just how important the work is.

Yesterday morning, I was on the phone with a contact in Boston. He was telling me about a tiny company he’s invested in that has a treatment for cystic fibrosis (CF).

A friend of mine lost his wife to CF. A former colleague is currently battling the disease. So, for personal reasons, I’d like to see an end to CF.

Another friend is struggling with late-stage lung cancer. I’m constantly on the prowl for information on a clinical trial that I can pass on to him… to perhaps buy him some more time.

Yes, I like to help investors make money from healthcare stocks. But it’s not just about the money. I want these companies to succeed because of the enormous good they have the potential to produce.

But you must not get emotionally involved with the stocks… which is easier said than done. (That’s one of the four painful lessons I learned when I was starting out as a trader, which I detailed here.)

If you bought a stock because you believe the company has the next great cancer drug, it’s easy to ignore a slide in the stock or some bad news. After all, they’re going to cure cancer!

That’s why it’s imperative that when trading these stocks you use a stop loss. And if that stop is triggered, you get out no questions asked. You can always get back in at a lower price if the stock continues to slip, but you don’t want to let a winner become a loser – or turn a small loss into a big one.

Most of us have seen a stock go from a small loss to a complete loss. If you’ve never ridden a stock down to zero, consider yourself fortunate (or quite smart).

Biotech stocks have the ability to generate huge gains or huge losses in one trading session. That’s why you must must MUST use stops. That way, any losses you take are as small as possible.

Good investing,

Marc

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Source: Investment U