Two Phase II readouts in the biotech space this week, with outcomes that illustrated exactly why position sizing in pre-revenue biotech is the most important decision you make before you make any other decision. One name added 34 percent in a day. One name lost 62 percent. Both outcomes were consistent with the binary nature of Phase II data, and both should have been anticipated.
The lesson from this week is not that biotech is dangerous -- it is that binary events require binary-appropriate position sizing. If you hold a pre-revenue Phase II company at 15 percent of portfolio and the data is negative, you lose 9 percent of your total portfolio value. That is uncomfortable but survivable. If you hold the same company at 40 percent of portfolio, you lose 24 percent of your total portfolio value. That changes the character of the loss entirely. The sizing decision is the risk management decision. Everything else follows from it.