Barron’s: What the Doctor Ordered

A doctor-turned-stockpicker says he’s bearish on stents.


YOU DON’T HAVE TO BE A MEDICAL DOCTOR to pick healthcare and biotech stocks, but it doesn’t hurt.

Joon Yun has been managing money for only nine years, but his 12 years as a radiologist — mostly at Stanford University Medical Center — have served him well in his second career as a partner of Palo Alto Investors in Palo Alto, Calif., an 18-year-old hedge fund with about $1.5 billion under management, focused mostly on small-cap growth. “Radiology is sort of similar to investing,” he says. “You’re making decisions based on limited information and looking for patterns.”

The graduate of Harvard and of Duke Medical School hadn’t been looking to leave his day job. But when a colleague had to bail on an interview with Palo Alto, which was seeking a doctor to oversee healthcare investing, Yun filled in on a whim. The rest is history.

Since joining PAI, Yun has never had a down year. The three-year return of Palo Alto’s $250 million micro-cap fund, heavily weighted toward healthcare and biotech, is nearly 23%. Over five years, the return is close to 30%.

The firm’s philosophy is to find unloved, under-covered companies with hidden value through intensive research. And Yun finds being located in a biotech hotbed a distinct advantage. “I’m a big fan of local companies,” he says. Yun has help from Dr. Patrick Lee, a partner, and has enlisted seven other physicians as part-time researchers. His team’s independent thinking and medical expertise appear to have paid off: Four out of Yun’s top 12 holdings — Biosite, Cytyc, Kyphon and FoxHollow Technologies — have been bought out.

Yun sees himself as a bit of a pioneer among M.D.s who traded in their stethoscopes for stock charts. When he started, he was one of the few stockpickers attending academic medical-research meetings. Now, he’s no longer alone, which is why he rarely attends such conferences anymore, choosing to look elsewhere for an edge. His greatest advantage might just be that he doesn’t think like a medical doctor. He says that physicians are trained to adhere to protocol and discouraged from thinking out of the box. “Independent thinking is winnowed out by conformity, [so] we don’t see a lot of it in the healthcare investment business,” Yun observes.

For example, he thinks heart disease, which he calls “Darwinian dysfunction,” is misunderstood. It’s not about a bad heart, but the result of things that hurt the heart, such as high blood pressure, which damages blood-vessel walls and ultimately affects the heart. Yun is bearish on stents. He says the trauma they induce to arteries outweighs the benefits they produce by fighting clogs. He’s bullish on a less invasive plaque-removing catheter made by FoxHollow Technologies, recently merged with medical-device outfit ev3 (ticker: EVVV).

Yun even views healthcare through a different prism. The native Korean doesn’t see it as a cost, but rather something that extends life and so creates value.

While short interest in biotech and healthcare stocks is currently high, Yun is bullish on the sector. “There certainly seems to be a lot of value in healthcare right now,” he says. Wise investors might heed doctor’s orders.

Originally published in Barron’s on November 19, 2007.