Many investors are specialists. Indeed, specialism in something is usually the way to excel at whatever is your choosing. But can it lead to challenges (e.g. tunnel vision), and is there a way to overcome the specialist’s curse?
I’ve spent all of my working life within the healthcare space. First as a doctor in Accident and Emergency, then life sciences analyst, consultant, advisor, executive in biotechs and medtech. Most recently I’ve been working with entrepreneurial medtechs, and as a medtech investor and blogger. Including vocational education, I’ve spent over two decades in healthcare. Hopefully its a space in which I can make a difference.
Over the last 10 years, working with many emerging medtech and biotech companies, I’ve also had the privilege to meet and work with some very smart investors – a combination of VCs, corporate investors and angel investors. Many of them have also had a sector focus throughout their career (angels less so). Healthcare, and Medtech as a sub-sector, lend themselves to that.
But some of the most creative, thoughtful and insightful investors I’ve ever come across are generalists and sector agnostic. They have competency in assessing investment opportunities based on risk-reward profile, and outsource what specialist insights they might need. Is there something we can learn from this generalist group that can help those of us who are sector specialist investors? Yes.
As a specialist investor, you spend most or all of your time working in one industry. Healthcare has so many sub-industries within it, and so many factors that affect investment outcomes that it easily becomes an all-consuming activity. There are so many factors to consider – from clinical to reimbursement, from development to regulatory, technical, scientific, not to mention factors that affect all industries, for example: competition, marketplace, trends and valuation.
Developing a meaningful understanding of such a complex space means that many healthcare investors are typically populated by very bright folks. Teams are made up of senior level investors and investment managers with junior level analysts. All have various PhDs, MDs, MBAs and other combinations of graduate level science, medical and business degrees. (I too have an MD, though learning day by day how not to let that hold me back). Such qualifications are necessary to understand available investment opportunities, and to provide the all-important “value-add”, especially in private company situations.
Yet therein lies the biggest risk. Spending all your time thinking about just one industry means all your framework or perspective is skewed to your one industry. This is in complete contrast to the “latticework of mental models” described by Charlie Munger (and discussed in “Investing, The Last Liberal Art” by Robert Hagstrom).
Specialists spend so much time buried deep in the detail of their own space, that they may miss broader changes or trends developing within other industries. Often, such trends can have global impact. Obvious examples include the growth of software, computing and much more recently social media. Healthcare is typically an industry which adapts slowly to new enabling technologies – surprising given so much that is involved on a day-to-day basis involves high science and technology.
Also, as a specialist, this means you fish in a small pond, rather than the whole ocean. While you may get very good at knowing your own pond, by being unaware of what’s in the ocean, you may miss opportunities with better risk-return profiles. Indeed, such investors often have an externally determined mandate which prevents them from investing beyond their specialism. And what do you do when your own pond gets toxic waste dumped in it?
Looking at VCs, a recent analysis by Bruce Booth, LifeSciVC, compared healthcare specialist versus diversified funds, investing in health and technology. He suggests that such firms do better than healthcare only VCs. Several possibilities exist as to why this may be so. Though, perhaps one of the strongest reasons is having internal “checks and balances” by virtue of investment partners who consider both health AND tech deals. This means investment dollars get allocated to where the best perceived risk-return lies. (Even though funds may have a set allocation of tech versus health, as one outperforms you can guarantee this split will be revised in subsequent funds). And partners who specialise in technology can easily challenge investment propositions in healthcare and vice versa, in terms of broad asset allocation.
Mutual funds, hedge funds or other collective funds are interesting from an entirely different perspective. Here, the focus tends to be much more generalist regarding industry, but usually specialist by investment style. Just look at the bewildering array of fund strategies – to name a few: macro, arbitrage, currencies, commodities, growth, value, sector or industry specialist, event-driven and crisis investing, REITs. They’re often good at spotting strategies allied within their strategy, but may miss some of the subtleties that come from knowing an industry closely.
So, is there something that specialist investors can learn from our generalist brethren? This feels particularly relevant to me since I would be classified as a specialist investor – maybe even a specialist style coupled with a specialist sector. Specifically, I search for value, with a history of growth and within the healthcare and medtech space.
Here are the lessons that I take away, and how I apply them to my everyday investing:
1. Look Beyond Your Own Backyard
I’m a sector specialist who has spent all his working life in one industry. So, investing in healthcare is almost the obvious or natural choice for me. But I try to be cautious not to be blind-sided by my industry skewed view. So, I look beyond my own backyard – I read about general business, entrepreneurship and beyond healthcare. The whole area of entrepreneurship and investing is fascinating to me anyway, so it doesn’t feel like work.
Searching for ideas or insights from entrepreneurs, operators and investors in other industries stops me from drinking too much healthcare “Kool-Aid”. Recently, I’ve found Twitter really useful for this by gaining 2 minute snippets into the minds of leaders in other fields (including general business, social commentators, entrepreneurs, investors). It’s a great scanning tool then you can dive into items that arouse real curiosity.
2. How’s the Valuation?
Being aware of other industries and their developments means I get a feel for valuation generally. Why would I buy a healthcare opportunity with an EBITDA multiple of 20x and 10% projected annual growth, when I might find a non-healthcare opportunity with an EBITDA multiple of 10x and 20% projected growth (rare, but it does happen)? Often, I may buy such a generalist opportunity if it qualifies on my other investing criteria, see Medtech Value Investor’s Magic Number. At the very least, I may hold back until a better healthcare opportunity comes along.
3. What’s Your Opportunity Cost?
I run two watchlists. You can read about my use of watchlists and how they have become a crucial part of my investment strategy in Improving Investor Returns: 3 Benefits of Watchlists. One of my watchlists is healthcare specific. It covers medical devices, diagnostics, drugs, healthcare IT, healthcare supplies, health benefit managers and insurance (hmm, maybe even as a healthcare specialist, I AM diversified?). The other is generalist, sector agnostic. In both I look for investment criteria including history of earnings growth, high return on equity, low debt and low valuation. However, by spending at least some time every month thinking about available opportunities in other industries, I can assess the opportunity cost. It’s also really helpful to keep a gauge on industry-specific valuations. For example, at the moment many big pharma are historically very cheap. Every industry has its issues; pharma’s big ones at the moment are patent cliffs and payor pressures. But comparing industries helps put things in perspective and highlight areas that could be oversold on undue pessimism.
4. Bubble Trouble
Being aware of other sectors, valuations and trends means you’re more likely to spot bubbles in your own (or indeed other) industries. In the last few years, I’ve heard a lot of talk in healthcare (biotech) VC about RNAi based therapies. While the promise is still there, when speaking to entrepreneurs at the ground level with relevant scientific and commercial backgrounds, I’ve learnt that they still have a way to go to become widely realised and validated therapies. Now, I’m no expert in the RNAi space, not at all. But I do know that such groundbreaking science usually requires deep pockets, many step-wise breakthroughs and long patience. And often the earliest or most enthusiastic investors aren’t always the best rewarded (not in this world, anyway). It’s usually the ones who can take a promising technology and actually translate (or invest in it) through to commercial reality. The same applies to medtech. What matters is can you get your company to have product and sales?
5. Warren Buffett – Out of Touch?
Undoubtedly, many generalist investors also managed to avoid the dotcom bubble of the noughties for exactly the same reason. They saw the niche bubble forming and got out or stayed away – the most famous example of all being Warren Buffett. He refused to invest in the dotcom mania because he just couldn’t get his head around how such opportunities translated into business. At the time many investors and commentators wrote him off, saying he’d lost his touch or worst still, was out of touch. But investing is a long game, and soon after Buffett was vindicated as the dotcom boom turned into the dot-bomb bust.
Incidentally, that was part of my early investor education. Just to prove how smart I really am, I was heavily invested in dotcoms and leveraged to greater than my actual net worth. (Hey, I was smart – I was living in the Isle of Man at the time, so just think of my zero capital gains tax rate on all those losses). With almost perfect timing, I managed to select out the bubble as it peaked and rode that baby down. But bubbles have a way of doing that – pulling in the naive and the suckers. Though, by all accounts, I had some pretty expert, and technology specialist company to ride the rollercoaster down with me. Boo Hoo, mustn’t grumble.
6. Beg, Borrow or Steal
Studying other industries can provide great insights and ideas that can be borrowed or cross-fertilized into your own industry. This is just as useful for entrepreneurs and investors in private companies (though less so for stock investors, unless you are an activist investor). Are there better ways of developing, manufacturing, and marketing product, of delivering services where you can leverage efficiencies found in other industries? A good evolving example in medtech is the frugal innovation in healthcare, leading to significant cost savings in product development and manufacturing costs.
7. Go Neopolitan – Look at other Investing Flavours
Planned time spent reading and researching other sectors and other companies, for me anyway, just seems to make the world a more interesting place. There are not many times I can relate exciting medtech advances like the benefits of a new trans-catheter aortic heart valve to my four-year old son. But going to the cinema and trying out different, funky ice-cream flavours? Or guzzling on strawberry, blackberry and raspberry fresh fruit smoothies? And the related entrepreneurial stories behind Ben and Jerry’s Ice Cream and Innocent Drinks? That’s something we both get.
In a nutshell then, if you’re a specialist, look beyond your own space. Specialism has its own merits, and of course, you need to focus on a niche to get good at your game. But temper this. See what’s going on around you and look at your opportunity cost. And if we should ever meet, mine’s a double chocolate chip ice-cream…
What do you think?
This post is by Raman Minhas. He is a medtech enthusiast, CEO of ATPBio, and works with entrepreneurial companies, providing support with partnering, financing and exit planning. He is also an investor in medtech stocks, using a value based approach.
Raman’s next conference attendance will be at a Medtech focused event – EuroMedtech in Grenoble, France. He will be moderating a panel: Keys to emerging company commercialization. Feel free to reach out if you’re going to be there.
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