2013 Letter to PSIC Partners

Dear PSIC partners,

PSIC is now 1 year old. Thank you a lot for your inputs: your insightful research and opinions in projects, your coming to meeting on time, your suggestions for the club directions, your constructive critics and encouraging appreciations to fellow partners!

What we have achieved

  • After initial call and discussion in early 2013, we held our first online meeting on Feb 23rd.
  • We had 8 individual talks to prime everyone on various subjects in the biopharm and investment realms.
  • With a solid research framework setup by Dandan, we started second stage to work on predicting FDA decisions for investment.
  • We have worked on two projects:
    • Abraxane from Celgene: we were right!
    • Northera from Chelsea. Finger crossed.

All documents are archived in our shared PSIC Google Drive folder.

A vision we share

Why are we doing this in our precious spare time? I found at least three benefits:

  • Keep up with cutting edge industry trends.
  • Learn from fellow partners.
  • Opportunities for investment.

What we look forward to

In the next year, we will develop our club in the following aspects:

  • Rotating roles for everyone
  • Towards investment
  • Continue to work on the most interesting drugs.

Value averaging

As I mentioned in the meeting, I will introduce you an investment strategy: value averaging. I learned about this strategy about two years ago. Recently, I did some back testing with Python Programming. The results seem to prove the superiority of this strategy. So I am excited to share it with you.

This link well compares Dollar Cost Averaging vs. Value Averaging.

I backtested these two strategies with S&P 500 index from 1950-2013 (dividends are not considered, inflation ignored, will not affect interpretation anyway). I tested 20-year investment period, starting every 3 years. So there’re 15 such 20-year scenarios (started from 1951, 1954, … 1993).

Dollar cost averaging

Simple to use. You buy $1, 000 worth of SP500 every quarter. Invest $80, 000 over 20 years, your results: mean: $191, 000, stdev: $85, 600

Value averaging back testing

More sophisticated. I won’t go into the details here. What I discovered is, the quarterly growth rate you set strongly affects the way your portfolio grow. And setting a lower/ even negative rate actually gives you better relative return over Dollar Cost Averaging.

For example, if we set quarterly rate at -1.95% (note: minus), our target number should be 1000, 1000(1-0.0195)+1000, …. With this rate, we expect to invest nothing (~$64) at the end of 20 years, and get an average return of $41, 800 ( stdev: $19, 800).

These two figures tell better:

All 15 scenarios: total money invested over time:

Total money invested over time
Total money invested over time

All 15 scenarios: total profit earned over time:

Total profit over time
Total profit over time

The take home message is: if you want to start investing in stock markets, a safe way (and rewarding) is to start an automatic dollar cost averaging account in your Roth IRA. Make sure it’s the money you can set aside for a REALLY long time. Buy total market ETF (ticker: VTI, SPY) every quarter, and stick to the plan no matter how good or bad market is. If you are more curious, you can do some Google research on value averaging, see if you like the idea.

Wish you a happy new year!