Long-term investors are going to have winners and losers in their portfolio. But if they take the time to analyze their mistakes, they can learn how to better avoid costly missteps in the future.
In this week's episode of Industry Focus: Healthcare, Motley Fool analyst Kristine Harjes and contributor Todd Campbell go over some of their best- and worst-performing investments in the past few years, and what lessons they learned from each of them. Find out some of the most important things that long-term investors should know about balancing their portfolios, some useful advice for thinking about risk and diversification, when it's time to reevaluate your thesis, and more.
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A full transcript follows the video.
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This video was recorded on May 3, 2017.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. As it'sWednesday, we'll be driving to healthcare. Today's date is May 3,2017. I'm Kristine Harjes,and I'm joined viaphone by longtime fool.comcontributor Todd Campbell. Todd, how are you?Todd Campbell: Hi, Kristine!I was wondering whether or not we should film the show on our couches today,seeing as how we're going to be doinga little self-reflection.Harjes: Aha. I was like, "Where is he going with this?" But yeah. Todd has beeninvesting for a long time, andI'm only a couple years in, butwe thought we would do some reflection today onsome of our biggest winners and losers andmistakes we've made and lessons we've learned. So yeah, itmight be time to break out those reclining couches.Campbell: Absolutely, andsettle in and get comfortable andget ready to point and laugh at our mistakes, andhopefully learn from some of the trials and tribulationsthat we've experienced.Harjes: Yeah,that's the goal. Todd, sinceyour wisdom comes from so much more experience than I have,I'm going to hand the mic to you to start with.Campbell: I thought this would be important show to do for everyone,including myself.I've been investing since the early '90s,since I was in my 20s,and I can honestly sayI think I've tried every investment approach over the years, andI have the scars and what's left of my gray hair to prove it.I think one of the things that's intriguing about having thatbody of experience to look back on isto be able to look back and say,what has works and what hasn't worked? Over time, nutshelling it,I'm going to illustrate my point later on, but I'vediscovered that you really do need to worryless about the quarter-to-quartermachinations of the financialperformance or whatever happens to be driving the stock for the day or the week or the month,and you have to truly go out and say, what's thepotential for this company to disrupt andsignificantly change the industry in which it participates in? Andby doing that, you're makinginvesting so much easier. You're saying, "I knowI'm going to make a lot of mistakes,and I also know that bymanaging a diversified portfolio of stocks, themajority of my returns are going to come from theminority of my stocks, not the majority." So what I'm most concerned about is saying,what is the catalyst,the reason behind getting involved in the stock,and does that catalyst still ring true today for the long haul? Andlike I mentioned, I have a couple stocks I picked out, one winner and one loser thatI thought might be fun to go through and talk about a little bit more.Harjes: Right. You madea lot of really awesome points there, soI want to elaborate on a couple of thembefore we move on to some specific examples. The first one is what you were sayingabout the quarter-to-quarter anxiety.I think that's something that starts to dissolvethe longer you've been doing this.I know for me, when I first started buying stocks,I was really concerned about what they did a week afterwhen I first purchased them. The longer your time window is,the more you realize that they go upand they go down, and it's reallyabout how much they go up eventually. On Industry Focus, we did a series of episodes a couple months ago where our Financials host, Gaby Lapera, picked out a basket of stocks, one from each sector, that were going to be her first stock purchases. And it was so funny. For the next week or so, she's watching her portfolio, and she's like, "Kristine, what I bought is down 1% today! Why did you guys pitch this to me?" And she was joking,of course, because she knows our Foolishphilosophy of long-term. But still, it's really hard at first not to get wrapped up in these day-to-day or quarter-to-quarter fluctuations.
The other point thatI wanted to emphasize becauseit was such a good one is that the majority of your returns will come from the small minority of the winners. If you think about the math behind it, it makes a lot of sense. Your stocks can only go down 100%. Of course, that's the worst-case scenario. You don't really want that to happen. But the ones that go up a lot, that you were really right about, they can go up way more than 100%, and hopefully, over enough time, they will double, triple, 10x. That's when you really start to get, overall, a winning portfolio.
With that introduction, Todd,I know you have some specific examples that you wanted to share. How about it?Campbell:Yeah,there was a winner and there was a loser.I wanted to take some timeover the course of the weekend and the past couple days andgo back and look at my notes and evaluate why I boughtthese two stocks andcheck in with them, and see what has changed, if anything,catalyst-wise. Why did I buy them, andhas anything changed that would make me not want to own them today? On the winning side of the column,I want to talk aboutAlign Technology(NASDAQ: ALGN). Align Technology is a stock that I got invested in in 2014. Like many parents out there,I was drawn to this company becausemy teenage boy needed to get braces. As I was sitting in there andwatching people pile in and pile out ofthe orthodontist's office,I started thinking to myself, what has really changedin the way of bracesover the last 20 or 30 years, other than adding charms to your metal brackets that reflect your sports interests? What has really changed in this way?Harjes: Wait,do they really have that now?I'm sorry to cut you off. Do they actually have that now?Campbell: Yeah. My son,unfortunately, was not a candidate for Invisalign,which is Align Technology's product, because he had a more severe need of straightening thanInvisalign can address. So he actually picked the Patriots' colors,because I know, God forbid, we'reup here in New England, and that happens to be his team. Please forgive us,rest of the United States.Harjes: You knowhalf our listeners just stopped listening.Campbell: Yeah, I know,shutting off left and right. But yeah, they actually do have that. If you think about thepotential to disrupt that market, and tothink about the millions and millions of adults and teenage kids who need braces or want braces, and fortunately can afford those braces. Ifyou can come in with a product that savessome money, cuts the cost, andyou can create a better, more desirable experience for the patient, that's a win-win in my book. That's the big reason thatI went out and boughtInvisalign, which is now up 170% for me. You talk about the minority of stocks outperforming the majority of underperformers, this was obviously a big winner, up 170% sinceMay of 2014. I'd like to say thatI knew I was going to get that kind of areturn in a few short years,but that's not the case. My decision to buy them was simply,how much of the market have they penetrated now with Invisalign, anddo I think consumers are going to want a clearaligner systemrather than metal brackets? And what is the opportunity to expand that beyond the United States as a global platform?Harjes: When you'relooking at this company going forward --you're still a shareholder, right?Campbell: I am, and afterdoing my homework this past weekend, there'snothing that has changed as far as the reasons behindwhy I bought it and would want to own it. If youlook at the most recent quarter, sales were up30% year over year. If youlook back at the Q1 2014, thequarter before I bought my shares,revenue growth was only up, "only," 18%. So, you have, as they're making moreheadway into treating more complicated cases, andas they're making more headway in rolling out this product,Invisalign, globally, inimportant markets like Asia, for example, wherebillions of people live and are getting wealthier and can afford products like this,I think there's a tremendous amount of opportunity.I think investors always benefit fromgoing through and reading the earnings transcripts of companies.I recommend they do that for Align Technology,because they will learn someinteresting things about the growth opportunities inplaces like South America, i.e. Brazil, and Asia, andwhat they're doing to try tobetter penetrate the teenage market.I thinkthere's a lot of opportunity, still, from here. If youlook at their annualized shipments for cases, it's running at about 800,000 cases. Theyestimate the total market opportunity would be 10 million cases. So you're really only talking about8% penetratedacross the entire market.Harjes: That'sincredible, yeah. Before we turn over to a potential loser you might want to talk about,what would you say is the biggestlesson you've learned from Align?Campbell: Don't getworried about the quarter-to-quartermachinations. There have been competitors like3Mthat are rolling out their own products. There have been patent disputes. There are a lot of reasons that, day to day,I could have looked at this and said, "Oh, boy,maybe the run is over andI should book this gain." Instead,I looked at it and said, "No,they're still the leader in this space, and they're 100% tied to this disruptive product." So as long as that remains to be the case, and revenuecontinues to grow the way it is, I think this is a stock that I can seeholding on to for years and years.Harjes: Very nice.
OK, Todd,turning over to an investment decision thatmaybe you can't brag about quite as much, buthopefully can still learn from?
Campbell: I think this is very important, Kristine. Youhave to be willing to look at your losers. You have to be willing to say,why is this stock down? Is there a reason,did something change dramatically that makes meno longer think the reason I bought it holds true anymore? And it's tough. It's probably the toughest thing to do sometimes.Harjes: Oh,I would much rather just forget about them.Campbell: Yeah,bury your head in the sand and say, "OK,I'm going to move on." My loser isMylan (NASDAQ: MYL). Mylan,you may know, over the course of last year,has been the subject of a lot of negative press,first for their EpiPen product, which got called out foregregious --I think that's fair for me to say personally,what I feel wereegregiousprice hikes for the productthat we're a big driver of revenue growth for this one product, EpiPen. Then, some concerns over the course of the past year over somecollusion among some of these generic-drug makers onpricing of certain products, which,obviously, has not been proven, but there's still some rumors and things going down that have weighed down the share price.I stepped in and bought Mylan in two blocks -- one block of it inJuly of 2015, andI added to it last fall. ButI'm still down, even after lowering my average cost, 23% on that investment. It's really due to thenegative publicity that we've seenover the course of the last year.Harjes: Were you eventhinking about EpiPenwhen you first bought into this company? It'sprimarily a generic-drug maker.Campbell: No.EpiPen was not the reason I bought this stock. And that's one of the reasons I added to this position last fall. This is why youtake the long-term approach. You say,what was my reason for buying it? My reason for buying it, Kristine, was biosimilars, whichyou and I have talked about ad nauseam at various pointsover the course of the last year and a half.Harjes: They'rekind of a big deal in healthcare.Campbell: Right. Kristine,want to give a quick and dirty on what a biosimilar is?Harjes: Sure. Biosimilars are basicallygeneric versions of really complex biologic drugs. If you want more than that,shoot me an email. We've talked about them, as Toddso appropriately put it, ad nauseam on this show. Butwe also have a really good article on fool.com thatexplains everything you need to know about them. If you want that,you can email me, firstname.lastname@example.org. But if you're just looking for the basics, justthink of it as a complicated generic drug.Campbell: Yeah. And the marketopportunity, theoretically, is huge, because you have $100 billion in branded-drug sales inbiologics that are losing patent protection over the course of the next five years or so. So you have a gold rush going onamong different drug makers including Mylan to develop these alternative options, to these top-selling biologics. Perhaps there is no company that has made as big a push R&D-wise intodeveloping biosimilars as Mylan. They have 16 different biosimilars in their R&D pipeline, and they have a couple that are closing in on potentialcommercialization here in North America. When I went out and bought shares of this, it wasn't with the view thatEpiPen is a significant one of their sellers andcontributesa lot of their profitability. It was,how will the market look for biologic drugs in 10 years, 20 years, 30 years? And are we on the cusp ofsomething like we saw on the 1990s, whensmall-molecule generic drugs firststarted to gain a toe hold, and now they account for 90% of allprescriptions written?Harjes: Right. So theopportunity is still clearly there for biosimilars. It sounds to me like you're holding on to Mylan. Are you bullish on it going forward?Campbell: I am. If I'm still long it -- and I added to it a year ago,after determining thatif the EpiPen issuedidn't really affect my thinking for getting into it, yeah,nothing has changed tomake me think they're going to fail in biosimilars, or they won't be a major player. This is a global company. You have 600 millionpeople living in the world right now over age 65. By 2030, you're going to have a billionpeople over 65. There's a lot of demand coming down the line forpharmaceuticals. And Mylan, both throughgenerics and hopefully through biosimilars, is one ofthe largest by volume producers ofmedicine that gets prescribed.Harjes: Yeah.I think when you look at this company,it's a really good learning opportunity to see that when share prices dipfor reasons outside of what your original thesis was, if that thesisremains intact,that could be a really good time to buysome more of them,if you're still confident in your thesis. This wassomething I had to learn pretty quickly withone of the first stocks I ever bought, whichI've also talked about ad nauseamon the show, which isPortola Pharmaceuticals(NASDAQ: PTLA). That stock went up a lot, it went down a lot, it'spretty much recovered by now. Butthrough the process,I did buy a little bit more when shareprices started to dip for the first time. Andthe last time that I bought more shares of it was right before itreceived arejection from the FDA. Notsurprisingly, after the rejection, shareprices dropped even more, andI got kind of nervous. I was still relatively new at this,I really liked the bullcase for this company, andI still believed in the bull case,because even after that rejection, the drug wasn't done. It was, for simplicity's sake,mostly just a manufacturing issue, which seemedcompletely surmountable. I was happylooking at this now that I did decide to buy more as the share price was sinking,but I wish that I had bought even more when it actually did hitwhat ended up being the bottom. Of course, it's impossible to try to call a bottom when you'reright in the thick of it. We're not trying to time the market, butI think it's animportant lesson to learn thatyou have this thesisand you confidently support it, so act on it. If why you lovethis company remains intact and someexternal forces driving shares down, thengo ahead andscoop up some discounted stock.Campbell: And Kristine,Portola probably wasn't the only stock in your portfolio.Harjes: No. Gosh,that would be terrifying,I would not sleep at night.Campbell: Yeah. You havea lot more flexibility as an investor to add to stocks that you still believe inif you're running a diversified portfolio, and these stocksdon't account for the majority of the moves. Staydiversified: 20 stocks, 30 stocks, 50 stocks,whatever is right for you. Maintain diversification. That will give you the opportunity to do as Kristine did.Harjes: Absolutely. Todd,as we wrap up,any other lessonsfrom the stories or other ones thatyou just have to share before we close off?Campbell: Both of these companies are similar, Mylan and Align, in that theyboth have something disruptive going on. Butthere is a key difference between the two, andI underestimated that difference. They keydifference is that 100%of the success or failure of Align is tied to its disruptive product. That's not the case with Mylan. Biosimilars is only anadjacent market for them,because they're already such a huge player. As a result,they were more at risk to something going wrongin another part of their business that would derail thereotherwise potential growth in biosimilars. So I think that's something to keep in mind, too. Youdon't want to necessarily not buy acompany that has a diversified revenue stream,but you have to recognize that, along the way, things can happen to those other parts or pieces of the business that mayimpact your share price.Harjes: Right. Itseems like there's different types of risk that you're getting at. There's the risk of,you are basically an all-your-eggs-in-one-basketkind of company, oryou are a company that has 500 eggs and any one of them could crack.Campbell: And,theoretically, the one who'smost exposed is going to be the one who's the riskiest. But it's also,if you've done your homework and you truly believe in that,online retail, e-commerce, whatever ithappens to be,if you truly believe in the long term tailwinds supporting that disruption, then it's the one that couldgenerate you the greatest return.Harjes: Yep, absolutely. As we finally conclude, remember that it's Puzzle Week on Industry Focus. As you heard from the other hosts so far this week, we love games at Fool HQ. Fun is one of our core values, as is competitive, sopuzzles and challenges area big part of how we team build and sparkcollaboration hereat the Fool. Welove them so much that we had our chiefcollaboration officer,his name isTodd Etter, make us a challenge for our listeners. So we wanted to let you in on the office fun that we have,give you a littletaste of Todd's challenges, which are so wildly brilliant, and also really fun. Each day this week, thehosts are wrapping up theshowwith a clue, andthe answer to that clue is a company name,and the company names from Monday to Friday will all fit into a final puzzle that will berevealed on the Friday Tech show. So if you want to solvethe whole thing, you need to listen to every episode this week.Campbell: I have to wait?Harjes: [laughs] I know. Yes.Campbell: Kristine, I thought you were going to tell us today.Harjes: Oh, no. Hey, we're investing for the long haul, so we're also puzzling over the long run, too.Campbell: All right, I'm getting my pencil and paper ready.Harjes: Before I give you guys the clue, I'll just say what you get for jumping through all of our clue hoops, which is that the first 10 listeners to shoot us an email after Friday's show with the five company names and alsothe final answer will get Fool swag.So, the healthcare clue. Pencils out: What two-wordFortune 500 healthcare companyhas a first word that could also be a type of number, a religious person, a flying creature, or a World Series champion?Campbell: [laughs]Harjes: Todd, do not say the answer if you know what it is.Campbell: All right, no, you have to repeat that.Harjes: I will repeat it. Whattwo-wordFortune 500 healthcare companyhas a first word that could also be a type of number, a religious person, a flying creature, or a World Series champion?Starting Friday, if you solve every clue, write in to email@example.com with the email subject line "Puzzle" and your answers. Also, make sure to tell us your T-shirt size. If you're stumped and want the reveal, on May 12th, we'll post them to the Motley Fool PodcastsFacebookgroup and the Industry FocusTwitteraccount. To enter this contest, there'sno purchase necessary, and the contest is open to all legal residents of the United States and Canada -- excepting residents of the province of Quebec -- over the age of 18. Employees,affiliates, and contractors and their families ofThe Motley Fool LLCor any of their affiliates are not eligible. Void whereprohibited by law. For a complete list of contest rules, visit puzzle.fool.com. There you have it.
As usual, people on the program may have interests in the stocks they talk about, and The Motley Fool may have recommendations for or against, so don't buy or sell stocksbased solely on what you hear. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!
Kristine Harjes owns shares of Portola Pharmaceuticals. Todd Campbell owns shares of Align Technology, Facebook, Mylan, Portola Pharmaceuticals, and Twitter. The Motley Fool owns shares of and recommends Align Technology, Facebook, and Twitter. The Motley Fool recommends Mylan. The Motley Fool has a disclosure policy.