Risk, Diversification, Reward, & MarginLast night OrdinaryAverageGuy1 (A-O) posted: “Reader beware: JLGemini has bought ONC on margin. His/her margin call is coming due, and he/she probably can't cover it. He/she is now trying to pump ONC in the short term in an attempt to cover his position. It is very likely that should the price spike to his sell price, he will then short ONC and trash it repeatedly and ruthlessly. In the short- and long-terms, this leads to volatility in stocks such as ONC and usually lower value for long-term shareholders.”
Rubbish. A-O is part of a buy side manipulation of people acquiring larger positions of Oncolytics. These people do not require margin or are prohibited from buying on margin due to regulation or investment mandate. They form the dominant buying group and they share a common desire to buy stock at the lowest price possible. They will not pay $10 if they can buy the stock for $6.33. The reward is deceiving the retail investor into selling too soon for too little. Hold onto your shares if you are an existing shareholder. The price will go up if the volume from retail investors dries up.
The buy side manipulation does like competition. Competition pushes up the stock price. I have suggested that retail investors buy on margin while Oncolytics is on sale through the efforts of the buy side manipulation. Here is the argument for retail investors overweighting their normal position by buying on margin.
The first consideration is investment quality risk. Is Oncolytics a risky investment? It was years ago. It was a venture capital risk when it started. It is six months away from announcing partnership agreements. The analogy is the odds of tossing 10 heads in a row being 1 in 1024. After 9 heads are reached, the probability of tossing the next one heads is 1 in 2, or 50-50. Oncolytics has come a long way and the odds of failure are low. Twenty two trials and US NCI endorsements speak volumes for success, credibility, and quality.
The second risk consideration is diversification. How many eggs do you put in one basket? If they are quality eggs, you can put in fewer than high risk speculative eggs. As noted above, a speculative egg can transform into a quality egg. The beauty of investing in biotech development companies is that slow and time consuming process. Success does not come as a surprise. The holding should increase when the successful conclusion is in sight.
Reward is why we take risk. Assume ONC hits RBC CM’s target of $26.52 in 2016. $26.52 represents over a 400% increase. If ONC represents 1% of the value of your diversified portfolio, the 400% gain will translate to only a 4% contribution to your portfolio return. 4% is not going to do much for you. With a 5% holding, you will notice the 20%. At 10%, you will be justified in feeling good about a 40% contribution to your portfolio return.
You see the pattern. The risk question regarding investing in Oncolytics is not about the quality of the stock but how much are you willing to own. How big is the egg in your basket? If you use margin, you can increase a weighting and still maintain your other positions. The other alternative is to sell out your lower ranked investments and reinvest in Oncolytics. The impact of 25% weighting is material. At 25%, you are looking at a 100% contribution, or doubling your money. You do not get these opportunities very often. When you see them are you willing to take advantage of them? The buy side manipulators will advice caution and prudence, and sell fear.