My Buy and Hold Strategy. Balancing Risk and Reward

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My Investment Strategy

After summarizing my position and briefly writing about my strategy in an older blog post, I realized that I wasn’t staying true to my own strategy.
That’s why I want to go into more detail about my approach here.

Core Strategy: Buy & Hold

My strategy is clearly Buy and Hold.
That means I want to buy a stock that I would theoretically be willing to hold forever, no matter how much it might drop in the short term.

Current Situation with DNLI and OMER

At the moment I hold DNLI and OMER.
Both are stocks that do not yet generate revenue and whose fate depends on the decisions of the FDA or EMA.

  • In case of a CRL, these stocks could lose almost 100% of their value.
  • The main reason I bought them was to benefit from the price run-up until the PDUFA date.
  • My plan was to sell shortly before the decision.

But here’s the issue:
I would not want to hold these stocks forever, since I’m not convinced by their business models.
And that’s the wrong approach.

Sure, if I’m right and the stocks climb until the PDUFA decision, it’s a good trade.
But what if they go down instead?

  • With a stock like PGEN, I would average down my entry price, because I truly believe in their drug.
  • With OMER and DNLI, I would definitely not do that.

That’s exactly why I am now selling both at a loss because I simply don’t want them in my portfolio long term.

My Criteria for Buy & Hold

I aim to buy stocks that are already established:

  • generating positive cash flow
  • showing growing revenue
  • having a strong cash position
  • ideally even conducting annual buybacks

And all of this while still being relatively fairly valued.
This often happens when they’ve been heavily sold off in the short term, or after a weak quarterly guidance.

Special Focus: Biotech

Within biotech, I like to look at companies with an upcoming PDUFA date.

  • If I believe the upside potential of an approval outweighs the downside risk, and I’m convinced by the drug, then I buy the stock.

Particularly interesting:

  • Companies that already have an approved drug (e.g., PGEN).
  • At that point, it’s only a matter of whether they can successfully market the drug.

Even if they fail to market it properly, the downside risk is limited if the drug is attractive to Big Pharma:
→ The company can always be acquired, allowing Big Pharma to:

  • save years of R&D costs
  • avoid the risk of a CRL altogether

Example: PGEN

PGEN is a perfect case study:

  • On the day of approval, the stock surged, fueled by retail investors buying into the hype.
  • The very next day, it dropped sharply because retail investors took quick profits, while institutions typically need more time to make decisions.

For me, that’s the perfect time to buy:

  • No more risk of a total loss from a CRL
  • Protection through IP, which can be sold to Big Pharma if necessary
  • At the same time, huge upside potential if the company manages to market the drug successfully

Conclusion

If you take time out of the equation, you can almost set up the calculation like this:

  • -50% downside risk
  • +1000% upside potential

Sounds like a plan, doesn’t it?