Mark Cuban shocked the audience at TechCrunch Disrupt in September when he stated that too many investors in Silicon Valley suffer from FOMO or Fear of Missing Out when it comes to their approaches to investing in tech companies.
Cuban said: “Everyone throws money at everything because they want to find their unicorn, however a 90% fail rate doesn’t work for me.”
Avoiding the Bear Traps
With the biotech sector as a whole out gaining the S&P 500 three times over since 2012, many investors are beginning to fall into this same mentality when looking for opportunities in this red-hot sector. Everyone wants a piece of the winning team; however, few understand the large bear traps that loom in this volatile sector.
The risk versus reward ratio in the biotech sector is enormous. That said, what is the best way to avoid the many bear traps in order to downsize your risk?
Today on Wall Street, everyone looks at the diversification of each company’s drug pipelines and then verifies their financials. If a company has a long line of drugs in production and also in various stages of development, many will take this as a good sign, counting on reduced risk if any of them go under.
In many cases, this is true, however the solid companies don’t leave enough gain on the table to pay off for the amount of risk the average retail investor is leveraging.
Another technique used by many biotech traders is mapping out all the expected drug trial release dates of the companies they’re tracking and take advantage of price movement in anticipation of these events. This is the equivalent of making a bet on a company a month before earnings are released because you have a hunch on the direction it will take.
This technique works… sometimes. But it’s still highly speculative for the most part.
Then again, what if you were able to apply some serious rigor to the “hunches” based approach by tapping into the overall sentiment of the community following each company?
Often times, there are thousands of people performing research and writing about companies via blogs, tweets, and other forms of social media that go largely unread if you aren’t directly subscribed to them.
Here’s another advantage we’ve found and it’s become a cornerstone — it’s a swing trading strategy. It leverages this data over the course of a few months, not hours and days. Ground swells in human-based momentum truly beat out the day-trading machines when driving the price of a stock.
By capturing these momentum swings through social media, we’re able to forecast movements that typically occur in 60 to 90 days. One added benefit from capturing these longer swing trades is that you don’t have to get caught up in the daily volatility of the market, allowing for more peaceful and methodical decisions that give you peace of mind.
Today, most of us are familiar with the word trending and its relationship to social media. One in particular has created a “financial” adaptation for messages — Twitter.
It’s called a cashtag.
Introduced back in 2012, it’s gained in popularity so instead of using the pound symbol (#), when tweeting about a stock’s activity, a dollar sign is used along with the company’s stock ticker symbol (e.g. $AAL is American Airlines’ cashtag).
It’s these small indicators that are easily picked up and processed by my social media collective intelligence (SMCI) system. And over the past year, (SMCI) has come through solidly on several occasions.
Mark Cuban was right when he stated that many of us suffer from a fear of missing out, but now we have the tools to better assess if our fears are true by leveraging social media for our benefit.
If you’re interested in learning more about how to harness this powerful technique, check out my Biotech Intel Trader service here .
Stay tuned as I continue to monitor social media opportunities across the markets!