What’s the source of your investment strategy? Many look to great investors like Warren Buffett for guidance on how to invest. Some take what we at the Fool call a “motley approach” and try a little bit of everything. Others really don’t have an investment strategy at all. They just throw their money at whatever looks good at the time.
Here’s another angle: Learn from successful companies. In other words, see what made a given company do well in the market and find others that exhibit similar attributes. There are plenty of companies to choose from, but let’s see how this approach plays out with an example from the biotech world: Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). Here are three investment strategy lessons from Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX)’s success.
1. Understand the market opportunity.
Even the best-run company in the world won’t produce stellar returns if it operates in a sector with lackluster sales potential. Before buying a stock, make sure you understand the market opportunity. Look at the realistic potential for sales and the strength of competitors. If all looks good, the stock can advance to your next stage of analysis.
For example, a key market targeted by Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is cystic fibrosis. The disease impacts around 30,000 Americans and has no cure. While treatments exist to address some symptoms, no drug targeted the defective protein at the root of cystic fibrosis — until Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) introduced Kalydeco.
Some analysts project that Kalydeco should reach annual sales of more than $1 billion within the next three years. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX)’s other cystic fibrosis drugs in development could triple that amount.
Of course, developing a product for a market with great opportunity doesn’t guarantee success for your investment strategy. An estimated 1 million people die each year from complications related to hepatitis B. Dynavax Technologies Corporation (NASDAQ:DVAX) developed a hep-B vaccine, Heplisav, that showed tremendous promise. However, safety concerns derailed approval for the drug. While Heplisav might still reach the market, Dynavax Technologies Corporation (NASDAQ:DVAX)’s experience highlights the risks even in a market with solid potential.
2. Be patient.
Success doesn’t typically happen immediately. Investors usually must be patient and wait for good things to happen. Sometimes, that waiting means persevering through tough times.
Shareholders of Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) experienced this challenge in the fourth quarter of 2012. The stock plunged 34% starting in October after it reported clinical results for experimental cystic fibrosis drug VX-809 followed by disappointing quarterly sales numbers. However, any concerns were temporary. Patient investors can now claim gains of nearly 30% above the early October levels.