I had three reminders this week about how important it is to diversify – to spread your investment risks.
First Innate Immunotherapeutics, which was one David Blake’s Top Stocks picks back in September last year, fell 92.3% on Tuesday after a couple of days on the sidelines waiting for the results of latest trials on its multiple sclerosis drug. Turns out, the drug doesn’t work.
After David recommended it, Innate went from 60c to $1.75 and just as quickly back down to 60c again. David dropped it from his list in February, not because of concerns about the MS drug, or because of the ups and downs of the price, but because the company had got caught up in some controversy with President Trump, through a shareholder who was nominee for Secretary of Health and Human Services.
He replaced it with Opthea, which is developing a therapy for aged related macular degeneration, and that hasn’t done too well since then either, but at least it hasn’t fallen 90%.
Another one is Slater and Gordon, which was finally recapitalised this week, with the private equity firms that had bought its distressed debt ending up with 95% of the equity, and existing shareholders left with the 5%, which could end up being zero. CEO Andrew Grech and the entire board all have to go – fittingly.
And finally, I got an email this week from someone (who shall remain nameless) who has lost $1.25 million – his entire life savings – on Martin Aircraft Company, the jetpack developer.
Martin is a “reverse 10-bagger”, going from 50c to 5c in a year. Management is still full of fight, describing the company in a recent presentation as the “world leader in jetpack development and commercialisation”. The poor bugger who wrote to me said he thinks the company will close its doors in August.
I simply don’t know, but I do know that going “all in” on a stock like that, or SGH, or IIL, is very unwise.
Slater and Gordon is perhaps an outlier – a good, solid law business whose CEO bet the company on a shocking acquisition – but the others are binary stocks, that is they inherently either win big, or go to zero.
Biotechs are binary by their nature, since the drug either works or it doesn’t. Tech stocks are usually binary, but not always. Audio Pixels is an example of one that probably is binary – if the tiny speakers work, and are picked up by smartphone makers, it rains money; if not, nada.
Binary stocks are the red and black squares on the roulette table, and while having a small bet that way may be worthwhile, as Martin Aircraft, Innate and Slater and Gordon showed this week, it’s impossible to be sure… of anything.