BIO: Raghav Kapoor is the CEO and Co-Founder of Smartkarma, an Asia-focused Investment Research Network that serves global institutional investors, corporates, and private wealth.
STORY: Raghav invested 2% of his portfolio in a biotech company in the US simply because it was run by people he believed had a good reputation. He ended up losing 98% of his investment.
LEARNING: Invest within your area of competence or expertise. Capital preservation and compounding are essential. Great people get it wrong too.
“I try to get in early on an investment that I know is so simple that I can explain it in one sentence, and almost everyone would agree to it.”
Raghav Kapoor
Guest profile
Raghav Kapoor is the CEO and Co-Founder of Smartkarma, an Asia-focused Investment Research Network that serves global institutional investors, corporates, and private wealth.
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Worst investment ever
In 2021, Raghav had an excellent portfolio performance behind him. He got overzealous and invested in a US biotech company. There were a lot of things that looked really great about this company. For starters, the company had been operational for about 15 years. They were developing a new platform for cancer research and drugs, and the specific type of cancers they were trying to cure were called orphan cancers. These are cancers that affect a tiny percentage of the global population. But they’re almost always fatal. Because they affect such a small percentage of the population, the Big Pharma companies don’t have a big incentive to try and come up with medication.
This company firmly believed it could cure some orphan cancers using hormone treatment. They had been doing this research for many years and had quite a bit of success. At some point, the company joined a more prominent group well-known in the US. The group had an impeccable track record and had taken a controlling stake in this business.
In addition to the research that they were doing, the company was also sitting on a beautiful piece of real estate in downtown New York—that alone was worth almost 40-50 % of their market cap. Because most of the company’s value and revenue at that time came from that commercial real estate, it was misclassified in all the industries as a real estate company even though it was a biotech company. And so it used to trade at a discount to book value, whereas biotech stocks back then were trading at very rich valuations.
The company hired a guy heading the oncology practice at Novartis, one of the largest Big Pharma firms. He joined as the CEO of this small company and went on to build a solid bench of illustrious managers and board members. The company’s first drug went into phase three trials. According to initial valuation, even the smallest of these drugs would generate about $5 billion per year of revenue stream. When you look at how these things are valued, you can get at least a two times revenue multiple because these are very high-margin businesses. So it looked likely that the company would get bought out even before the trial results came out.
After analyzing all these factors, Raghav predicted that the payoff of this investment would be about a 5,000% return on the upside. He decided to put 1% of his portfolio into this investment. Raghav figured that if this led to that 5,000% return, he would get many times his entire portfolio back. And if it dropped 60%, that would shave off about 60 basis points from his book in a year when he was up 40% to 50% overall.
The company did a small placement of $30 to $40 million. Raghav thought that was tactically very smart because such clinical trials are expensive. This placement brought in four or five pure healthcare investors, adding to the company’s credibility. The company also reclassified from real estate to healthcare, which would now unlock more value. The stock fell below the placement price, which had come at a discount. Raghav decided to double down on his position. So it went from being 1% to a 2% position.
Raghav waited and waited for something good to happen and push the stock up. Then one day, investors woke up to the news that the phase three trials had failed by a vast margin (from $50 to $1). Raghav lost 98% of his investment.
Lessons learned
- When investing, don’t step very far out of your area of expertise or competence.
- It’s tough to get an excellent risk-adjusted return when you take bets outside your area of competence.
- Sizing and trading decisions have a tremendous impact on eventual returns or losses.
- Just because great people are involved in a business doesn’t necessarily make the business successful.
- Capital preservation and compounding are essential.
Andrew’s takeaways
- Be more cautious as you grow older and avoid high-risk investments.
- Great people get it wrong too. Don’t blindly follow them, as you don’t know their objectives
- Be on high alert when your portfolio is doing great.
Actionable advice
Before investing, ask yourself if you know enough about this industry or space to have some edge. Do you have a really good feeling about this? When new information comes, you will learn how to process it quite intuitively.
Raghav’s recommendations
Raghav recommends Smartkarma as the go-to resource for anyone focusing on Asian companies and looking for sound independent research.
No.1 goal for the next 12 months
Raghav’s number one goal for the next 12 months is to spend a lot more time grooming leaders within his company and meeting external stakeholders more. Raghav also wants to prioritize his health a lot more this year.
Parting words
“I’ve never stopped investing because I think it’s the biggest superpower that nobody teaches you in school. It’s also something you can do until the moment you die. So never stop investing.”
Raghav Kapoor
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