Let’s take a few minutes to talk about biopharma stocks in general – or to be more precise, about some of the people who invest in biopharma stocks. There’s a lot of weird behavior in this area, and the pandemic has amplified it. I refer specifically to the “stock cult” mentality that will be familiar to anyone who writes about the market, about drug trials and approvals, anything that touches on the vital topic of whether Stock XYZ will take off like a rocket (or not).
We’ll stipulate up front that the very nature of biotech investing is that some stocks do take off in this way. Some of the charts you get in this business are wild indeed, total binary events that send previously obscure issues off into the skies and make the people who were holding them while they were unloved quite wealthy. I should mention that the opposite happens, too – there are plenty of biopharma stocks that have suddenly cratered on news of a regulatory rejection, suddenly toxicity in a Phase III trial, unexpected pullouts by larger partners, that sort of thing. But while there are always a few short-sellers looking for those events, the state of the market has always been hugely biased towards upside events – a constant raging thirst for upside.
With small biopharma companies, this gets mixed in with another psychological issue, a storyline. Human beings have a narrative bias. We often think in terms of stories, stories with beginnings and ends and plot lines and resolutions, with heroes and villains, with explanations that tie the threads together. But the natural world doesn’t have a narrative bias at all. I mean sure, there are causes and effects, but (1) they’re not always something that we are aware of, (2) they’re under no obligation to be relatable or even comprehensible to us, and (3) they’re similarly under no obligation to happen on the time scale of human attention or to be easily visible to our senses.
We also model events as if they were being done by other humans, and we ascribe intentions, emotions, and mental states to things. That can work, a little bit, with animals, because sometimes (not always!) those mental states overlap with things we can relate to: kitty wants food, doesn’t she? But it doesn’t work at all with things that don’t have any mental states at all. There is no god called Hurucan that assaults the Yucutan peninsula with high winds and rain, and lighting bolts are not sent by Jupiter. Earthquakes and comets are not signs of the displeasure of higher beings. That’s one of the problems with dealing with the coronavirus pandemic – the virus is beyond human concerns and it does what viruses do, which is make copies of themselves.
That’s all viruses do. They have no motivations and no storyline, and they don’t notice if we’re bored or frustrated or angry. While those copies are being made, the imperfections of that process mean that mutations will constantly occur. Most of those will do nothing, but if one of them turns out to help make more copies, it’ll stick around. Meanwhile, mutations that interfere with copy-making will vanish quickly. But don’t confuse with with any sort of intention; the virus didn’t “come up with a new strategy” or “respond” to anything, not in the way that we use those words. It’s very easy to speak that way, but it suggests abilities that a virus simply does not have. It makes copies. That error-prone mutation-throwing copy-making is, in fact, just another thing that in the past has turned out to be useful for making copies.
Back to stocks. The storyline, for many small investors, is a very simple one. It’s Us versus Them, a Manichean struggle of the forces of darkness against the forces of light. People get married to their ideas, in an emotional version of the Sunk Cost Fallacy, and when money is involved this process happens even more surely and strongly. So someone who becomes convinced that LittleTinyCorp, unappreciated by the world, has the answer to pancreatic cancer or to the coronavirus and then puts a good pile of their own money behind it . . .well, the last thing you should expect is for them to be continue being rational about that decision. Not everyone loses their mind, but plenty do.
In too many cases, every setback that LTC and their amazing therapy might encounter is ascribed not to the science just not working out, but to Evil Intentions. Paid “stock bashers” are at work – they want to shake the shares out of the weak hands, you see, so the “money managers” can pick them up cheaply to reap the huge, huge profits that are surely on the way. People have been bribed, suborned, paid off; it’s really the only reason that LittleTinyCorp hasn’t conquered yet. And remember, LTC are the good people who are fighting to bring a lifesaving therapy into the world. What does that make the ones who are fighting them, then? Who apparently want people to suffer and die so they can turn a buck? To arms, to arms, the forces of darkness are right there in front of you.
Well, as mentioned, you can see a lot of this going on during the pandemic. I’m not even going to mention the names of the drugs and the companies and the therapies – I’m sure that many readers will be able to fill them in. Just go back and look at the comments section here to find the accusation of bad faith and nefarious plans. Biopharma stocks have always had this problem because of the confluence of health, money, and the sheer fact that most ideas for new therapies simply do not work. But it’s worse than ever. Keep an eye out for this sort of thing, and adjust your worldviews accordingly.