The healthcare sector is my favorite sector to invest in, both long and short term.
Long term, demographics practically ensure that the sector will remain healthy (pun intended) for years to come. Ten-thousand baby boomers turn 65 every day. A few decades from now, when the baby boomer population has dwindled, the next large population group (millennials) will be middle-aged.
Short term, few sectors have the ability to produce such strong gains as healthcare, particularly small cap biotechs. But with these types of companies, it’s easy to break one of investing’s cardinal rules: Don’t fall in love with a stock.
My brother works in the movie industry. Sometimes he’s under a lot of pressure. When he feels stressed, he reminds himself, “You’re either curing cancer or you’re not curing cancer.” In other words, people won’t die if his project isn’t successful.
When you invest in small cap biotech stocks, you’re often investing in companies that are trying to cure cancer or diabetes, or a rare but fatal disease. The work that these companies do is important.
If you buy shares of a stock like Target (NYSE: TGT), of course you want the company to prosper. And if Target’s sales are strong, it will employ more people and help grow the economy. All good things. But let’s face it, you probably don’t get that excited about the same-store sales report each month.
But when you invest in a small biotech, it’s different. It’s easy to become emotionally attached.
For example, consider a company like TG Therapeutics (Nasdaq: TGTX), which is developing therapies for treating leukemia. You want the company to succeed, not only for your own monetary gain but because of the impact it could have on tens of thousands of lives.
If things go wrong with some of these companies, like when their drug is rejected by the FDA or their clinical trial data is weak, investors often make excuses and justify why they should stay in the stock, even if they have a large loss and the medical studies say the drug clearly doesn’t work.