by Mark B. Spiegel of Stanphyl Capital:
In January 2014 I had a large position (both as a percentage of AUM and the company) in a nanocap biotech company. Although it was sort of a liquid stock for just a $50 million or so market cap, I still owned probably 200% of its average daily trading volume. I’d accumulated it in the low $3s and it was now trading in the high $4s (around 50% over my basis) and I thought it was headed a lot higher as soon as its drug was approved. (It had a patented drug delivery mechanism which obviously worked and the underlying drug was already approved.)
I was working that week from my dad’s place in Arizona, and just as we sat down to eat (long after the market was closed) I saw a new Bloomberg story on my phone that said the patents for a competing delivery system that was equally as good as my company’s had just been invalidated. I was immediately sick to my stomach, thinking: “Holy shit– if an equally good delivery system is now generic, no one will pay a premium for the one from my company!” I figured my stock would open the next morning cut in half and then go down from there.
Unable to eat, and hoping maybe I was misinterpreting this, I stepped away from the table and called a very smart biotech analyst I knew (I’m a generalist) and asked him if he thought my interpretation was correct. He said something like “Oh yeah, you’re 100% correct.”
Great.. Just what I was NOT hoping to hear!
I said “Then I’m dead here, aren’t I?” He burst out laughing and said something like “Dude, we’re in a biotech bubble! The morons who own that stock will have no idea what this means– they probably won’t even notice it… You’ll have plenty of time to get out!”
Refusing to believe people could be that stupid (hence my current upside-down multi-year position shorting TSLA!), I thought my friend was just trying to make me feel better, and thus had quite a sleepless night. I awoke the next morning at 4 AM Arizona time (6 AM in New York) and figured my stock would already be cut in half, but… nothing. No pre-market volume whatsoever, and a perfectly normal bid-ask spread. And there was nothing unusual at 7 AM New York time, or 8 AM or 9 AM either, and then the stock calmly opened in the high $4s, just where it had closed the night before. Recognizing a gift from God when I saw one (and I’m an agnostic!) I immediately started dumping my stock and by early afternoon had managed to unload all of it while only knocking the price down around 10% (from the high $4s to the mid-$4s). I then stood up with the thrilling feeling (I suppose) one gets when escaping a near-death experience.
The next day (my selling pressure gone) the stock– thanks to its oblivious biotech-bubble “investors”– had bounced right back to the high $4s and I said “Fuck it… How can I not short this thing???” So I did, and a few days later– not wanting to tempt fate too much– covered it in the $3s for a decent profit and then watched over the next few years as it worked its way down to well below $1 before finally reverse-splitting and– like all biotechs in this bubble– rising vampire-like from the grave to suck the cash out of a fresh crop of virgin investors.