While most people make their New Year’s resolutions on January 1, now’s a good time to make your investment resolutions for the new year. To that end, MDLinx spoke with Travis Johnson, president of StockGumshoe.com—a website that sleuths out real-deal information on highly touted stocks—to get some insight for physicians looking to review their investments in 2020.
Healthcare sector picking up
The healthcare sector—which includes everything from health insurance companies and medical device makers to big pharmaceutical stocks and little biotech stocks—has usually been a safe, defensive investment to turn to when the market is doing badly, Johnson said. But the healthcare market hasn’t done too well in 2019, what with news of Democratic candidates’ plans for Medicare for All, as well as potential drug price controls and other factors.
Fortunately, the healthcare sector has started to perk up in the last month or two, according to Johnson.
Proceed with caution
But before you take your kids’ college fund and put it into a brand new biotech company whose stock is “sure” to pay off a hundred-fold, here’s a word of warning: Doctors don’t make the best investors. (Yeah, we said it, but we’re not the only ones who say it.) Why do doctors tend to make poor investment decisions? Because their expertise and authority in the medical field often encourage them to overestimate their abilities in other fields—like the stock market.
“Highly educated people often believe that they should be able to outsmart the market. And they have a hard time with the humility that the market forces upon you,” Johnson said with a rueful laugh. “It’s control of your emotions that makes you a better investor, not a high IQ.”
That brings us to our next point.
The hot new thing
Doctors are usually interested in the hot new ideas, like the latest biotech stock for a startup company whose single new drug is in clinical trials.
“Biotech is an area where you might get huge 1,000% returns, but it’s also an area where you get a lot of 95% losses,” Johnson said. “So whenever I think about a biotech stock—and they get teased by investment newsletters all the time because of that potential of 1,000% gains—I always try to remind myself that the person I’m buying the stock from probably knows a lot more about it than I do, and probably understands the science better than I do, and yet they’re willing to sell it to me at that [low] price.”
Another reason he tends to avoid them: Startup companies have no financial track record. “They’re all pre-revenue companies because they don’t yet have an FDA-approved product,” he said.
‘REIT’ this way
“I tend to focus on areas where there are actually financial results you can look at,” Johnson said. As an example, he points to Medical Properties Trust (ticker: MPW), a real estate investment trust (REIT) that owns hospital properties. It’s an investment that’s been growing in 2019, but it’s also fairly stable with regular dividends, he said. Low interest rates are likely benefitting its performance, too.
Compared with tiny pharma startups, big pharmaceutical companies (and some large biotech companies) have fairly stable cash flows, dividends, and earnings. But even though these companies are large, with dozens of drugs in their product line, their financial performance can still be tough to predict.
If you like pharma investments, though, a more stable option might be an exchange-traded fund (ETF) of big pharma stocks, Johnson suggested, like the iShares US Pharmaceuticals ETF (IHE). An ETF is like a mutual fund because it contains a diversified portfolio of dozens of assets, but it’s also like a stock because it can be traded easily.
“So, instead of buying one share of Pfizer, you might buy one share of an ETF that holds little pieces of Pfizer, and Merck, and Amgen, and AbbVie, and 30 other big pharmaceutical companies,” Johnson said. “Compared with buying stock in a single company, you do reduce your potential gains because the whole sector is not going to go up by 500% if one of the companies makes a huge discovery and gets a new blockbuster drug. But at the same time, the whole sector is not going to fall by 50% if a patient dies in a clinical trial.”
Because medical devices often face less risk and scrutiny than new pharmaceuticals, consider investments in medical device funds, like iShares US Medical Devices ETF (IHI), Johnson suggested. Or, for an even broader take, there’s the Vanguard Health Care ETF (IHE), which basically covers all healthcare companies.
All the investments described above are generally stable with less risk than most stocks. But less risk can also mean less gain. The well-known mantra on Wall Street is: “Don’t invest more than you can afford to lose.” However, if you want to invest some money you can afford to lose, then read on.
“I don’t generally make recommendations, but if I’m investing my money—the ‘play money’—I would want to do something more interesting [than investing in ETFs],” Johnson said. (“But for my retirement money, I wouldn’t dabble in individual stocks or try to make big bets on the next biotech breakthrough,” he added.)
A couple of individual medical device companies he likes these days:
Intuitive Surgical (ISRG): “Even though it’s expensive, we’re probably underestimating how many surgeries are going to be done with robotic assistance in the next 10 years,” he said.
Elekta (EKTAY): “This is a Swedish company that makes combined MRI and radiation therapy machines. They have a new model out that seems like it’s going to sell pretty well next year,” he said.
The grass is always greener
“Many people, including doctors, are obsessed with marijuana stocks. But that market has collapsed this year. So, the stocks are certainly cheaper, but there is a constant flow of people trying to find the next big winners,” Johnson said.
The next million-dollar question in this sector: Will cannabidiol (CBD) companies be able to market their products as dietary supplements? If the FDA decides to allow this, the potential is huge.
“But if they’re not allowed to, then the market will become a lot smaller, because people like their CBD gummy bears more than they like the idea of putting a CBD lotion on their arm,” he explained.
Bottom line for 2020
So, what’s the best investment strategy for 2020?
“The basic advice is to try to tune out all the franticness that you’re probably seeing—that I’m certainly seeing,” Johnson said. “Whether you’re worried about Medicare for All, or impeachment, or the next election, or if you’re worried that we haven’t had a recession in a very long time and the market has never gone up for this long without collapsing—just remember that those things were all true last year too and it didn’t make any difference.”
The real challenge for investing next year is not to think of it as investing for 1 year, or 1 month, or even 1 day, for that matter. “Stay the course with your investments and try to think rationally about what’s going to happen over the next 10 years, not over the next 6 weeks,” he said.
(Then again, if you like all the hype and the franticness, Johnson said to visit StockGumshoe.com, where he navigates readers through it.)
Disclaimer: Johnson is not a financial advisor, and Stock Gumshoe does not give individual financial advice. Please consult a trusted advisor before making any investment decisions. Johnson and his family own shares of IHI, ISRG, MPW, and EKTAY as of this writing.