Monthly Archives: August 2017

What John Brooks Business Adventures Tells Us About Biotech Investing

Business Adventures is Bill Gates and Warren Buffet’s favorite book on business. This book was written in 1969 by John Brooks, a prominent New York Times columnist covering business and finance topics. The book vividly told 12 business stories in the 1950-60s. Despite they are half a century old, human nature still remains the same. The educational and entertaining value in these stories shines as bright after 50 years.

Here I will show you how some of these stories reflects on Biotech and Biotech investing.

1. The Fluctuation

First story was about a panic stock market crash, reverse and recover in 1968. Chaos, emotion, fear, margin call, slow and throttled information distribution due to outdated or limited technology, all these factors contributed to this extreme case of high volume panic selling and reversal.

Verdict: don’t trade in emotion. Stay calm and look for opportunity in market turmoil. Such as during Brexit and Trump presidency market panic.

2. Fate of Edsel.

This is about a total corporate failure in every aspects when Ford tried to introduce a new make. But for years, entire Ford teams of all task thought they were making great things, just like the naked emperor. They romanticized everything with professional confidence or ignorance.

Verdict: What is hyped during development often becomes commercial failure. Think Dendreon (DNDN)’s DC therapy for prostate cancer and Mannkind (MNKD)’s inhalable insulin.

3. Fed Income Tax

History; no tax -> little tax -> War: high tax -> tax cut, exemptions -> lower tax -> more exemptions. But still much higher than pre-war era. People use business expenses and capital gain to dodge income tax.

Verdict: Focus on company and business; let politicians debate about tax.

4. A Reasonable Amount of Time: Insider trading

Texas Gulf Sulphur stroke on the richest mine ever; its employees of various level tried to buy stocks before public announcement. This marks the beginning of tougher insider trading regulation.

Verdict: although the law and SEC are much tougher than before, insiders still have much advantage. Keep an eye on insider transactions. If insiders and major holders sell heavily on a clinical stage biotech company, it is probably overpriced. Don’t be the victim.

5. Xerox, Xerox, Xerox

A story about how Xerox overcome decade of failure and engineering hardship, finally invented the copy machine. With the abundant profit, Xerox funders and executives set high bar for corporate value and citizenship.

Verdict: Xerox, as this story detailed, has high value of ethics, earned its success through enduring idealism, tenacity, the courage to take risk and enthusiasm. Human good and human value should always be tied with business, before and after the success.

6. Making the customer whole.

A brokerage went bankrupt because a major client was a complete fraud. Unfortunately, the rest of smaller clients of the firm were going to innocently lose all their money too, since the creditors of the firm had higher priority claim over the remaining assets over those innocent clients. For public interest, to make the customer whole, NYSE led a rescue efforts with the creditors and other NYSE member brokerages. Those smaller clients were protected. This marks the beginning of SIPC.

Verdict: not all financial guys are evil. Btw, some small minds argued that NYSE organized the rescue “out of gilt”.

7. GE 20.5 Fix-price scheme Scandal

GE mid-level management were punished for price-fixing schemes, while the executives were totally fine. They said they were not aware, thus not responsible. But mid-level management argue it was all hinted by their winks. Well, who do you believe?

Verdict: Poker face and ambiguous communication can create problems, especially in big corporations. Try to evaluate a company leadership to see whether they are integrate.

8. Piggly Wiggly

A self-promoter and manipulator Sanders tried to “corner” shorts of his company stock by buying out all the float share with borrowed money. While he kind of succeeded the corner, he didn’t earn much as expected due to a dovish SEC. He lost a lot when he had to unload the shares to repay the debt. What eventually mattered was the company’s fundamentals, which was apparently failing.

Verdict: stay away from self-promoters. Period.

9. David Lilienthal

Admired strict government regulator turned into successful business man. Unsatisfied for simply making lots of money, he transcended to do infrastructure development projects for poor countries. Making money and help poor people at the same time.

Verdict: You want to invest a highly ethical executive like David Lilienthal. A great man with great goal and high ethics. Making lots of money is just a by-product for these people.

10. Shareholder’s meeting

It described professional retail stockholders’ interaction with company executives at annual shareholder’s meetings. It seems in the beginning these retail investors were mean people and demanded unfair things from executives. Later, the author use other examples to show that it is the attitudes of the executives that determines the behaviour of shareholders. The same bad guy can behave nicely when interacting with a skilled cooperative and forgiving executive.

Verdict: the personality of company executives matters!

11. One free bite

One employee decided to quit and join a competitor. What trade secret is allowed to be taken with him? This marks the beginning of job-hopping era.

Verdict: Ethics, karma, reputation with the help of law enforcement does restrict people’s and companies’ behavior. Despite that talent and idea goes with the employee’s brain, what belongs to previous employer should stay there.

12. Foreign currency crisis

A story about major central banks hold a firm British pound value and later the dollar-gold system against shorter who knew it is economically impossible not to devalue Pound and Dollar. This marks the fall of Bretton-Woods System.

Verdict: market cannot be resisted. Both pound and dollar eventually devalued. I thought the central banks were just wasting taxpayer’s money. But the author and senior officers involved in the crisis argue that government rescue action bought more time for British economy to recover and get ready for the devalue. It is not all in vain.

Overall conclusion: ethics is the key!

Business is not just about profit, it is profit in the right way. Great companies are always led by people who have high ethics.