Invest Like a Rockefeller
Editor's note: Our resident biotech expert Dave Lashmet is something of a legend around the Stansberry Research offices. As Porter has written...
Anybody can give you a stock in biotech that's going to double or triple. But it's very hard to find someone who can find as many opportunities that go on to make a thousand percent as Dave does.
Dave's route to Stansberry Research was unusual. He's a scientist and a former professor who has been tracking cancer treatments for nearly 20 years – on the lookout for new, safer cancer medicines that can also make early investors a fortune.
His track record speaks for itself. Porter has given Dave an "A" or better in every annual Report Card since he began writing Stansberry Venture Technology. And more than one-quarter of the stocks Dave has recommended have gone on to double (or more)...
In today's Masters Series essay – originally published in the August 2016 issue of Stansberry Venture Technology – Dave walks through the first two clues he looks for in a potential triple-digit winner...
Invest Like a Rockefeller
By Dave Lashmet, editor, Stansberry Venture Technology
His recommendation letter to Princeton was short and pointed...
Mr. Nash is 19 years old and is graduating from Carnegie Tech in June. He is a mathematical genius.
John Forbes Nash Jr. had already earned a Bachelor of Science and a master's in mathematics from Carnegie. He had published research papers to prove his mettle. And after Princeton stole Nash away from Harvard by offering him a full scholarship, Nash received his doctorate in math within two years.
Nash's dissertation included the now-famous "Nash equilibrium"... a powerful mathematical tool for analyzing competitive situations.
It says that in a non-zero sum, non-cooperative contest with multiple players, the person with the most information gains a strategic advantage.
Nash won the 1994 Nobel Prize for economics based on his equilibrium theory, along with two other pioneers of the game-theory field...
Today, the Nash equilibrium theory is a staple tool in business, politics, and economics. And it's a major factor in our Stansberry Venture Technology investing thesis...
Complex games with multiple competitors always include information – some known to all players, some hidden. The more information you can learn, the better your strategy.
Think of it like the game of poker...
The odds of drawing a certain card or beating a certain hand are known information.
The betting patterns of the players are obscure information that may be partially known or guessed.
And then the cards are either fully known (your hand and any community cards) or fully unknown (other players' cards).
The challenge in poker is to maximize your return based on how you can decipher the obscure information of betting patterns... which ultimately reveals the fully unknown: the value of the cards in someone else's hand.
Most card players understand this goal. But stock market investors often get it backward...
Many fundamental investors consider known information – like historical patterns of a business' debt, sales, or profits – and pretend that it is unknown, obscure, and valuable. Between Bloomberg terminals, company filings with the U.S. Securities and Exchange Commission, and Yahoo Finance, almost every investor has ready access to this information. There's no secret to commonplace knowledge.
Technical investors follow the betting patterns... but they rarely look at the cards. Stock X has been rising for 50 days or 200 days so it has to keep rising, or stop rising, or... whatever it has to do next.
In Stansberry Venture Technology, we follow a third course... Nash's prescribed course. We look for information that is available but that isn't prepackaged for investors.
We find this obscure information in medical journals and in Nobel lectures... scientific conferences and research labs... and meetings with world-class experts and one-on-one discussions with company executives.
Then we pull everything together. We "solve" the formula to make our investment decisions. Behind every Stansberry Venture Technology recommendation is a lot of John Nash...
The Hundred-Year History of Monopolies
If John Nash defines our investment method, John Rockefeller defines our perfect business.
His Standard Oil corporation was one of the largest monopolies in the United States. It dominated a massive sector – oil production, transportation, and refining – by virtue of its size and its elimination of competition.
We like to invest in existing monopolies... or in companies with the potential to monopolize a medical treatment or market niche.
Standard Oil was broken up by the Sherman Antitrust Act. And many investors think that monopolies are illegal today. But there are exceptions...
For example, I grew up with an "inside view" of a regulated monopoly. My father worked for "Ma Bell" – American Telephone and Telegraph ("AT&T"). It was a telecommunications monopoly that was legal for a time, despite violating everything the Sherman Antitrust Act was about...
Everyone had to join. Everyone had to pay. And nobody could negotiate prices.
The AT&T corporate brochure called it "Universal Service," while critics labeled it a "copper cage." It was inextricable.
By the 1980s, AT&T was one of the largest, richest companies in the world. It had more than a million employees – or about one in every 80 American workers. For roughly a hundred years, patent law served as the foundation for AT&T's monopoly... from Alexander Graham Bell's original patents on telephone lines, then a line-switching system, to many patented incremental improvements to the network.
The U.S. government eventually broke up the company with the Sherman Antitrust Act, but the monopoly was already eroding due to microwave technology.
When phone companies MCI Communications and Sprint argued that they could use microwave relay stations to convey information wirelessly over vast distances cheaper than the "long lines" division of AT&T, the two companies filed an antitrust lawsuit against AT&T for blocking their networks.
Once microwaves were able to bypass long lines, the rest of Bell's legal edifice fell apart. The regulated monopoly became redundant. And my father got one of the best pensions in history... It's still paying off.
I understand the business advantages of a monopoly on a personal level... They paid for my college, graduate school, and first car. For a business owner, a monopoly is a perfect business because it lets you set prices.
The key for investors is that the monopoly needs to be legal...
The ability to create a legal monopoly is the No. 1 criterion we look for in a Stansberry Venture Technology recommendation. We are typically looking for unassailable patents... Getting in front of the patents to the original physical or biological sciences that led to the discovery or the invention that's protected.
There are some limits to patent protection: China constantly violates patents, and the developing world can exploit a "for sovereign survival" loophole to build a copycat drug. Otherwise, patents rule.
Aside from willful violators, patents are only limited by future improvements, as well as the time limits of the patent. Still, a patent can become a long-term monopoly with slight improvements to the original patented drug or invention...
For example, take 100-year-old glass company Corning (GLW). Corning supports 2,500 scientific researchers inventing new types of glass. These guys can produce a mountain of patents.
A few years ago, many investors thought Corning's flat-glass business (called "Gorilla Glass," used in smartphones and tablet devices) was under threat from sapphire crystal. Glass made with sapphire was much more scratch-resistant... but it proved to be more brittle and hard to build.
So sapphire lost, and Corning won. And the next generation of smartphones is likely to include the next generation of Gorilla Glass. Each iteration is clearer and stronger.
We suspect that the next iteration of Gorilla Glass will be thin enough to sense a fingerprint through the glass without a button, allowing for an all-weather biometric ID. A smartphone could finally replace your car keys and your wallet. We saw the prototype in a back-room meeting at the Consumer Electronics Show back in January. But there is one big difference between Corning and our Stansberry Venture Technology recommendations...
As you can tell by the name – Gorilla Glass, and Gorilla Glass 2, 3, 4, and 5 are evolutionary improvements. For Stansberry Venture Technology companies, we look for revolutionary improvements...
The Ideal Number of Competitors Is Zero
Just because you have a patent does not mean you can grab a dominant share of a market... Or that you can maintain a dominant share if other competitors enter the market.
The key question is: what advantages does your product offer?
Price is an important factor. If you have a slightly better product, but I have a cheaper price, we might split the market. Prices help determine what company can win the most revenue in a market.
Even for drug companies that have strong patent positions, if a rival drug loses patent protection and becomes a generic competitor, its price can plummet – threatening market share.
That's why we seek products that offer far more than mere incremental improvements over their rivals. Ideally, there's no competition – nothing even comes close to a Stansberry Venture Technology company's offering, at any price.
For example, take a safe cure for cancer...
Big Pharma company Bristol-Myers Squibb (BMY) makes the blockbuster cancer drug Opdivo, which competes with Merck's (MRK) cancer drug Keytruda. But only Bristol-Myers owns the valid, early patents from the inventor.
Recently, Bristol-Myers sold off by about $20 billion in market cap because Opdivo failed one trial as a standalone product. The drug is still approved by the U.S. Food and Drug Administration ("FDA") for 10 other indications. Plus, we know Opdivo works better in combination with other drugs. So we expect Bristol-Myers' share price will come back once the market learns what doctors already know. The selloff only took hours. During that time, doctors wrote hundreds of prescriptions for Opdivo.
Meanwhile, Merck's share price shot up, as if Keytruda's position improved based on Opdivo's single failure. For investors, the patents should matter most... not a single clinical trial.
Already, Bristol-Myers has two related drugs that are FDA-approved and can be added to Opdivo. More important for Stansberry Venture Technology investors, Bristol-Myers is developing three outside drugs to see if they help cure cancer.
Notice, nothing is displacing Opdivo. No matter what other drugs Bristol-Myers is adding, it's keeping the same lead drug. Of course, Bristol-Myers' chances for a true monopoly position are dependent on it winning its patent case against Merck. Until then, this sector is divided. But we expect Merck will ultimately lose... (Editor's note: Since publishing this issue in August 2016, Dave's prediction proved accurate. Merck lost and was forced to pay Bristol-Myers $625 million upfront and a 6.5% royalty going forward.)
Bristol-Myers already sells the lion's share of cancer immunotherapy treatments. It's a $2 billion market, doubling annually. But the monopoly share of the market could come with this patent case... and give Bristol-Myers total pricing control.
Bristol-Myers is too large a company for our Stansberry Venture Technology investment strategy, but we follow it because many of the most promising cancer immunotherapies work better together.
That gives us two of our rules for a Stansberry Venture Technology stock: a revolutionary product and a verifiable monopoly. Our third rule seems simple by comparison, but it's the hardest one to measure. We'll tell you all about it tomorrow...
Editor's note: Just days ago, one of Dave's Stansberry Venture Technology biotech recommendations rose 51% in a single morning.
But frankly... we're not surprised. You could have doubled your money nine different times over the past few years by following Dave's advice. He's the best in the business.
That's why all eyes are watching another one of Dave's recommendations, which he predicts could triple (or more) beginning December 31. Learn more about this opportunity right here.