Can you beat the market in your own area of expertise?

Caliburn1

Up to now I've invested almost exclusively in vanguard index funds through De Giro and apart from putting a heavier weight on Europe over the US at the moment for instance, I have only dabbled with small amounts in individual shares. But I recently read Warren Buffett writing about how he only invests within his circle of expertise. It got me thinking as to whether it is indeed possible to beat the market when investing in a niche business area that you have significant expertise in?

I'm thinking of investing in a number of companies in a particular market niche that I believe is going to grow very significantly in the coming years to decades. I'd really appreciate it if people could play devils advocate and offer some advice to make sure my thinking makes sense on this.

I won't discuss the particular area here if that's okay. Not because I don't want to share it but rather because I think it might sidetrack any discussion towards it's specific merits whereas I'd like to get some feedback on the overall rationale of investing in this way. I think it's called thematic investing actually?

Now I have a reasonable knowledge of accounting and finance but not enough to engage in any serious technical analysis of these companies. I've looked at their financial statements for sure but I'm primarily relying on analysis available online for this from people who know that end of things better then me.

The companies are all pharma companies developing or already marketing medications for a particular condition. I trained as a doctor (although I no longer work in clinical medicine) However because of this background I would have in depth expertise in this condition and the various medications available etc.

I guess the bottom line is that I think the incidence and rate of diagnoses for this condition is going to significantly increase into the future and that this has not been priced in sufficiently as the market is not fully aware of this. In fact, the expansion of this market with the rise in this condition is as good as certain. What's less certain of course is which drugs will be successful and which companies will emerge successful.

One particular company for instance has a very promising drug in it's pipeline. But critically, this drug was already licensed a few decades ago but for a different indication and was effective and well tolerated. I've read the entire past academic literature on this drug and found only positives. I've researched this company extensively and all of the analysts see significant upside despite them saying they have only used conservative projections for this particular drug. It seems to me that most people in finance don't have the expertise to be able to evaluate the likely success of pipeline drugs - is this accurate?

I think Warren Buffett also wrote that he doesn't invest in pharma for this reason. He said that the only way to know if a particular company is a good buy is to get a Phd in the area!

I'd love to hear in particular from anyone who has worked professionally in this area. I'm curious to what extent the big finance firms hire doctors and scientists to advice them in this area. Or perhaps I am being naïve and the market is much more knowledgeable then I think in these matters?

res ipsa

I've been getting 20% a year for the last 6 years or so. I also have a background in healthcare, but I've been outperforming recently on NASDAQ stocks, the FAANGs with the exception of AAPL which was a mistake not to buy in hindsight & Chinese stocks listed in US, BZUN , BABA, BIDU. Tencent.
With higher returns more effort is required.
Capital risk management is also essential.
If you're interested have a look on Share-doctor.com

Pharma companies are volatile share price wise.... especially bio pharma.

Look at biomarin, regeneron, shire, Alexion.... wild fluctuations in price but nothing major changing in turnover, debt or profit.

Logic doesn't apply to stock markets IMO but pharma is another level of lunacy.

I had a face to face with a VP of one of the above, chap was fully confident of a favourable FDA decision the following week... FDA told them to get f#&cked essentially.

You mention investing in a number of companies in thus niche.... their drugs will presumably compete against each other...that's not diversification or risk spreading IMO.