Let’s start with a little exercise… this is the pivotal sentiment of the latest pitch from Chris Wood in his ad for Casey’s Extraordinary Technology newsletter:
“The Stock Story I’m About To Share With You Is The BIGGEST Of My Entire Career”
How often, do you imagine, is something similar said in an ad for a newsletter?
Ding ding ding! You there in the back, you are correct, sir! The answer is “every single time.” Very good!
OK, fine, I should temper that and say “almost every time” — but you get the point. Newsletter ad copywriters are storytellers — their goal is to catch your attention, and to convince you that the ideas they’re peddling, usually a stock or a trading “system”, are compelling and rare and require urgent action.
Anything less than that, and they risk losing your attention — and once lost, it’s rarely regained… if you’re going to sign up for a newsletter that advertises like this, the publishers know that it will likely be in the flush of excitement over some heretofore mysterious investment idea that they’re peddling. That’s when your credit card slides most easily out of your wallet, when you’re licking your lips in anticipation of the feast of profits headed your way.
So these ads require some mystery, some notion that the person selling the service has secret insight to sell, and the promise of extraordinary gains (even if, as is usually the case, the lawyers force them to also include the “of course, all investments have risk” verbiage). My goal here at Stock Gumshoe, of course, is to get rid of the mystery… to get rid of or explain the urgency… and to let you consider an investment in a newsletter subscription the same way you’d consider buying a new toaster oven or washing machine. Maybe you’ll check Consumer Reports, maybe you’ll search online for reviews, maybe you’ll ask your friends, maybe you’ll just stalk around the showroom obsessing over the look and feel or other details… but you probably won’t buy it in a rush without considering what other options there are, whether the price is reasonable for your budget, or whether the features of that washing machine meet your needs.
That particularly matters not just because a newsletter subscription can be a substantial cost (Extraordinary Technology is $1,000 a year, for example), but because buying an advisory service based on a red-hot idea that has you excited means you’re also setting yourself up for a very biased relationship with that investment idea. If you’ve just paid $1,000 to learn about a stock, then if you’re like most people your brain is going to do anything it can to talk you into investing a lot of money in that stock so you can justify that newsletter purchase. You’ll look for anything you can that confirms the wisdom of the newsletter writer, and it will be even more extreme if it’s a stock you’ve never heard of before (that’s from anchoring bias — the first analysis you read about something is likely to set the basis for your understanding, and most of the time we suffer from confirmation bias that makes us seek out information that supports that anchored information).
So we try to get rid of the urgency, provide some counter to the hype, and let you take a hopefully more balanced look at whatever the stock or investment might be that’s being used as bait by the newsletter ad copywriter. Once you know what the stock is and have a little basic info maybe you will want to subscribe to that newsletter, that’s your choice. But I hope you’ll be better situated to understand the investment idea and consider it rationally if you know a little bit before you subscribe.
How’s that for a long-winded lead-in? Perhaps this is a good opportunity to remind you of our unique selling proposition here at Stock Gumshoe: If you pay us, we give you less! Our premium members, who we call the Irregulars, do get articles that are just for them, and access to my Real Money Portfolio, but the service that many of them find most valuable is our time-saving “Quick Take” box at the top that summarizes the basic info in the article.
Back on track: So what’s actually being teased? Chris Wood is touting “Reagan’s Law” and saying that only 60 small companies have taken advantage of it since it was passed in 1983… and, of course, that he has found the 61st.
That “Reagan’s Law” term is a reference to the Orphan Drug Act, which was indeed passed in 1983 and which has helped to create some tremendous returns for some pharmaceutical companies, both large and small. Designation as an Orphan Drug means a drug is designed to treat a disease with a limited number of patients, which means there isn’t a profit incentive to develop drugs for that cohort, and in return for the investment the drug developer makes in addressing this relatively small market they receive some tax incentives, some relaxing of typical standards for clinical trials (i.e., perhaps they can run trials with fewer patients), and, probably most importantly, a period of marketing exclusivity regardless of what the patent life might be (including some monopolistic protection from subsequent new drugs, which would have to be proven superior to get approved).
And yes, it may be true that only 60 small companies have gotten Orphan Drug status (I haven’t checked”, but it’s not restricted to small companies — lots of big Pharma operations also develop “orphans” (in 2015, almost half the new drugs approved were for rare diseases… in 2014, 18 of 41 new drugs approved had orphan indications).
The Orphan Drug Act has been beloved by pharmaceutical and biotech companies, as you might imagine, though it’s not without controversy — partly because some of those orphans have gone on to be huge blockbusters with much broader markets (Cialis, Crestor, Abilify, etc.). That’s not unusual or unique to the pharmaceutical industry, of course — set up a complex regulatory regime to incentivize good outcomes, and companies will figure out how to benefit from the letter of the law — but it has led to perhaps more headline risk in pharmaceuticals than you’d see in other industries with other legal frameworks, since drug pricing is often a matter of great political attention.