“A Track Record Better than his Hero, Warren Buffett.”

— Canada’s Globe and Mail

1. Covestor Spotlight Article 2011

2. Year End Letter 2008

3. Sunday Express Article 2008

4. The Aveo Articles 2013

​5. Outperforming Warren Buffett 2017

6. Top Investors: Buying BAC 2010

7. Test Your Risk Intelligence 2012

8. The Billionaire’s Question 2015

9. The Comfort Zone 2013

10. Dual Buffett Strategy 2007

11. The Dust in Sunlight 2012

In September 2011 Covestor (now Interactive Advisors) published a Manager Spotlight article featuring Chris Rees of Rees Capital Management (formerly Tenstocks.com). Here's the text:

“What is the single most important lesson you’ve learned about being a successful investor, and how do you try to apply that today?”

It’s extremely difficult and probably unwise to narrow the process of investing down to a single best rule or element. I personally use a blended and balanced application of many different elements. But if I try hard I can perhaps chop these down to four main rules:

1. Maintain an investment portfolio that is not priced at more than one times net tangible assets.

2. Never invest in companies with high debt.

3. Limit portfolio holdings to your ten best investments.

4. Invest at times of market or company stress.

Careful and disciplined application of #1 and #2 can go a long way to looking after #3 and #4.

I try to keep my investment portfolio priced at around one times net tangible assets. In an overvalued market, new investment candidates become harder to find and already owned investments tend to reach sell targets and get sold. I aim to pile up cash in overvalued markets, then re-invest in undervalued markets.

Many investors invest based solely on assumptions and forecasts about future earnings. If someone pays a price to earnings ratio of 20 for a stock, they need to be a very good fortune teller to get it right with any degree of consistency. My approach is different – I only pay for current tangible assets and thereby aim to get future earnings for free.  As Warren Buffett has said, “a girl in a convertible is worth five in the phone book.” (Berkshire Hathaway 2010 annual letter – http://www.berkshirehathaway.com/letters/2010ltr.pdf)

So where did this focus on tangible assets come from? Imagine the market as an elevator in a skyscraper. Tangible book value is the ground floor. Each floor you go up, the more risk you take and the lower your survivability becomes in the event of an accident. If the cable snaps and you’re on the ground floor, you open the door and go get a coffee. If you’re on a higher floor, they are scraping you off the walls.

Investing with a focus on tangible assets is all about managing risk. An investment portfolio can go up, down or sideways. If you concentrate on not going down, the alternatives take care of themselves.

"How do you apply that lesson in your current investing? What do you find are the challenges to applying it?"

I know there are many different approaches to investing. I can’t say I have the best strategy. But for me, when I started investing, I had nothing. I couldn’t afford to lose. So my priority and focus from day one was not on making money, but rather on not losing it. And this is one of the most important lessons I’ve learned about intelligent investing. The way to make money is first and foremost to strive to not lose it.

Psychology and emotion are probably the biggest challenges to sticking to an investment and portfolio discipline. You need to be mentally and financially prepared to invest when others are afraid to, and to have the discipline to leave the market’s wild parties early and sober. This is not easy to do, but I believe it’s the first law of investment survivability.

Also, I believe a portfolio needs to be put together like a jigsaw puzzle. Too many people think of an investment portfolio as merely a bunch of stocks thrown into a basket. A strong portfolio doesn’t work like that. In a strong portfolio, investments work and fit together. Entry points, allocation, sector, country and currency considerations all play a part. The concept of stock picking, in my opinion, is overstated. The importance of portfolio management and strategic planning  is understated.

A global perspective is also important in building a strong portfolio. It makes no sense to limit potential investments to one country, or one currency, or one sector. Instead, I seek the most compelling investment prospects I can, wherever I can find them, and then blend, diversify, fit and balance them together into a concentrated global portfolio that meets my overall strategic goals.

In 'The Warren Buffetts Next Door' by Matthew Schifrin, the author excerpted parts of a letter we wrote in January 2009 about how we did in 2008, the worst stock market year of our lifetime. We publish it here uncut (a slightly different version of this letter was published at Marketocracy to address their audience).

January 3, 2009

We have just finished the worst year in our history.

The Tenstocks.com portfolio ended the year down 44%. It is remarkable that we were still positive (up 5%) coming into October. To lose half a portfolio in three months really takes some doing but we managed it.

Volatility in Q4 was jaw dropping. Portfolio positions plunged and lurched 10-20% in a day- sometimes in minutes. In Q4 the S&P 500 moved more than 5% up or down (mostly down) on 18 trading days. There has been less than 20 such days in the last 50 years.

As markets plunged, some 30 trillion dollars of wealth were wiped from global markets. The US alone has given up some 7 trillion dollars of wealth since the 2007 highs. Some of this wealth was ours.

The S&P 500 closed the year down 38%. It was the worst down year since 1931. The MSCI World Index finished down 42%. Brazil, Russia, India and China all fell over 50%.

In 2007, we did not add meaningful value to the market despite a good first half. This year, despite a good first half, we have also failed to add value. If we do not add a significant amount of value (alpha) over the market in 2009, we should be fired. Managed accounts would be better served in an index fund. Some of you may not be inclined to wait for a third year.

While getting our head handed to us in 2008, we were not alone. We had some very good company. Mr. Warren Buffett’s Berkshire Hathaway (a holding) fell around 45% from its 2007 high. Mr. Martin Whitman’s Third Avenue Value Fund was down 45% for the year. Mr. Bill Miller, of Legg Mason Value Trust, and famous for outperforming the S&P 500 for 15 years straight, finished the year down 55%. There were so many violent twists and turns in 2008 that very few people got it right and of those who did a lot of them still lost a lot of money.

Mr. Buffett has said “predicting rain doesn’t count; building arks does.” We clearly didn’t build an ark and we can be faulted for that. But we did have anchors to windward (including a large Berkshire Hathaway position). But when the Cat 7 hurricane of October/November came, nothing held.

Mr. Ken Heebner, who manages CGM Focus Fund, was one of those who saw the gathering storm coming in real estate and mortgage related financing. He built an ark and made good money for his clients in 2007 with big, brave and fearless short positions (a bet they will go down) in homebuilders and mortgage companies. As the storm raged in 2008, he moved into energy and finance and got his head handed to him. CGMFX finished the year down 48%.

One of the most stunning revelations in 2008 concerned Mr. Nouriel Roubini, Professor of Economics at the Stern School of Business at New York University. He has been dubbed Dr. Doom by the media and is widely credited for seeing the entire storm coming in all its ravaging glory. Surely, Dr. Doom, seeing it all coming and getting it all right built an ark? Well no. A recent article in Newsweek states “despite his prescience, he's suffered just like the rest of us: he's remained fully invested in stock index funds through the market downturn, causing his portfolio to plummet.” If he’s in index funds he took a 40% haircut as well. And he got it right.

We’ve looked carefully at what we did wrong in 2008. Closely matching the market in the worst year of our lifetimes is no comfort. We are supposed to be better. We are supposed to keep the portfolio safe. We are supposed to produce alpha. We didn’t do it.

We have posted to the Tenstocks.com website updated annual average returns as of 12/31/08. They are:

  5 years   17%

10 years   25%

17 years   21%

This long term track record was built using strict value investing disciplines. While not perfect on a year to year basis, they have served us well over time. These valuation metrics center on liquidation values, net tangible assets, low price to earnings, and low debt among others. Long term safety is supposed to come from a careful and balanced blend of these metrics (as well as sector and currency diversification) across the portfolio.

One of the things we noted while looking at our updated 17 year performance of 21% per year was that over the same timeframe, the S&P 500 returned 7% per year and MSCI World returned 2% a year. The numbers are quite remarkable. Over a 17 year stretch, we produced 14 points over the US market, and 19 points over the global market. Apart from that, two other things are worth mentioning. First, competition for stocks (meaning downward price pressure) can be expected to come into the market anytime something else, with an equal or lower risk profile, offers more than 7%. Second, that a diversified investment on the global economy, bought and held for 17 years would have produced less than a money market fund?

There is something else here too.

S&P 500 (500 stocks) = 7%

MSCI World (1600 stocks) = 2%

Tenstocks.com (10 stocks) = 21%

Over a 17 year time span (which includes 2008- the worst market year in 77 years) the market is saying you pay dearly for the perceived comfort of diversification. Careful disciplined portfolio concentration outperforms. The price for concentration is extreme price volatility over the shorter terms.

When we look at what we did wrong in 2008, we conclude the answer is ‘not much’. Some may not be happy to hear this. We did produce value coming into October. We were up 5% versus S&P down 19% and MSCI World down 25%. By any reasonable standard, we had done our job coming into Q4.

One of the things we got right in the first half was exiting all our energy positions in early summer. In June we wrote “oil is around $140 a barrel. The energy market is starting to feel like a very crowded trade. For us, it evokes the image of an overloaded Filipino ferry. It might get where it wants to go but we don’t want to be on it if it doesn’t. As a result, we have sold our energy investments.”

Over the next months, oil fell from $140 to around $35 a barrel- a drop of 75%. As smart (or lucky) as we were to get out at the top in energy, we were quickly stupid (or unlucky) enough to start buying the positions back way too early and still took a pasting.

Another thing we did right in the first half was not to buy back into Elan when its share price collapsed from $37 to $10. We reviewed Elan (an old friend) and came up with a valuation in the $14-16 range. We were very tempted to take a first bite at $10 but didn’t. It recently traded as low as $5. At sub $7 it’s a reasonable buy here but we will probably pass.

So, if we did all right coming into Q4, what the hell happened to blow us away so badly in October/November? Simply put, we believe all fundamental valuation metrics were ignored and abandoned by the market in a panicked rush for the exits. In desperate sudden need for liquidity as the credit markets froze up and redemption demand soared, hedge funds, banks, mutual funds and insurance companies, etc, sold off what they could as fast as they could. In many cases, firms, unable to sell the paper garbage they wanted to get rid of, were forced to sell what they didn’t want to get rid of. If there was a market for it out the door it went. Panic feeds on itself. In many cases, selling prices simply uncoupled from any standard measure of true value. When nobody is interested in what something is worth, investing based on value is not going to work and it didn’t in Q4 in spectacular fashion.

However, if disciplined concentrated value investing has worked (on average) over the last 17 years, do we stop doing it because it failed to work for two months? We don’t think so.

There is a huge amount of cash piled up on the sidelines. It amounts to about 75% of the total value of the US market. This cash is making less than 2%. Right now we are experiencing deflation. The next concerns will likely be inflation and dollar devaluation. Staying in cash will not protect you from either. The incoming Obama administration is readying a stimulus package that could well reach one trillion dollars.

Combine the money already on the sidelines with the new money rolling off the printing presses and you have a powerful force to re-inflate the economy and push stock prices higher.

At year end 2008, the Tenstocks.com portfolio was selling at a P/E of 4, at a 60% discount to tangible assets, at an 80% discount to estimated fair value, and pays a current dividend of 15%.

Quite simply, nobody can get where they want to go in this world making 2% on cash.

There is a new bubble forming in treasuries and another forming in gold (we prefer oil and gas which is taken out of the ground and burned). The cash will have to move somewhere. We believe, given the relative valuation spreads, it will move back into stocks.

So what’s the timeline?

We don’t know. But we think it will be about a year for the Obama recovery package to filter through to the economy. The market often moves about six months ahead of economic data so we may see some stability/improvement by mid year 2009. Meanwhile, some of that sidelined cash should start finding its way back to the market as fear and forced selling subsides.

But there are some negatives. Bad news will continue to roil the market at least through mid year. 2009 S&P 500 earnings could come in as low as $50. If we assign a bad recession bottom P/E of 10 to those earnings we could see the S&P 500 sell down to 500 although we think it unlikely. More possible as a worst case scenario is a brief retest of the recent 740-840 range. Another question mark on the market is there continues to be good value available on corporate debt. It is reasonably easy to find decent paper paying better than 7% which, as noted above, gives some competition to common equities.

Reaching for our crystal ball, we think several themes are likely to be prominent over the next year or two. Hard assets and commodities will likely do well from current depressed levels as inflation and currency devaluation hedges. They will also benefit from increased demand as the global economy begins to recover. We have started nibbling at some discounted real estate that offers hard asset protection and produces good current income.

When we seek shelter from global political risk, inflation, and possible continued dollar depreciation, as well as seeking hard asset investments with good future supply/demand characteristics, we like Penn West Energy (PWE). It closed 2008 at $11. Annual oil demand has fallen only once in the last fifty years (1983). The International Energy Agency forecast global production will drop roughly 7% a year going forward while demand will increase. It is noted that Mr. Bill Gates and Mr. Warren Buffett flew to Alberta recently to take a first hand look at the oil sands. While there may be short term weakness in the price of oil due to slower demand, we think 2009 and beyond will see higher oil prices.

[PWE was sold in October 2010 for $22.20. The average sale price of the entire PWE position was $20.30]

Now a few closing notes.

We have had a jarring and painful 2008. I have received many emails, especially in Q4, expressing understandable concern. Overall you have been truly wonderful. I thank you for your support and continued trust.

Also, I am a strong believer in keeping my mouth shut and letting the results do the talking. Over the long term, the results have generally spoken favorably. I spend a lot of time reading opinions, articles and reports. I listen to talking heads on Bloomberg. 90% of everything I read, see and hear is total garbage and an utter waste of time. Not too long ago I told someone that “increasingly investors will need to produce more return on their capital and with conventional mutual funds wallowing in mediocrity it becomes a smart proposition to at least consider alternative methods and vehicles where the emphasis is less on the talk and more on the walk.” In 2007 and now in 2008, there hasn’t been much ‘walk’. But I still don’t like talking. When we have a reasonable year, I don’t usually do a year end letter. For 2008, it’s all I’ve got.

I wish you all a happy, healthy, peaceful and more prosperous 2009.

Chris Rees

Tenstocks.com

After note: The Tenstocks.com portfolio recovered in 2009 and finished the year up 134%. The S&P 500 gained 26%.

On December 1st, 2010, Forbes published this article featuring Chris Rees of Rees Capital Management. We reprint the text of the article here.

Some of the best buying opportunities for savvy, level-headed investors occur when there is "panic in The Street." The theory goes that investors should take advantage of these sell-offs to buy into stocks at bargain prices.

In my 26 years covering investing for Forbes and in my interviewing of outstanding self-directed investors profiled in The Warren Buffetts Next Door, I can attest to this strategy being effective. It is what billionaire investors like John Paulson, Warren Buffett and David Tepper do when they make big opportunistic bets (think of Buffett's bargain purchase of  Goldman Sachs 10% coupon preferred stock during the financial crisis).

The recent brouhaha over WikiLeaks and its seemingly reckless dissemination of classified and confidential information may be creating such an opportunity for investors who have the stomach to own the stock of "too big to fail"  Bank of America (BAC).  Yesterday the stock was down more than 3% based on a statement WikiLeaks founder gave to ComputerWorld more than a year ago about obtaining a 5gb hard drive allegedly from a BAC executive. Forbes' Halah Touryalai has it right when she says that Wikileaks Can't Wipe Out A Major Bank. Regulators simply won't allow it.

Two of the smartest and most successful investors I know have been big buyers of Bank of America stock recently.

According to SEC filings Bruce Berkowitz, portfolio manager of Fairholme Fund (FAIRX), owns more than 70 million shares at prices as high as $16.93 according to Web site GuruFocus.com. According to Morningstar five-star Fairholme is the number one mutual fund in its category over the last decade with an annual average total return of 11.46% versus less than 1% for the S&P500 over the same time period.

Another outstanding investor who has been a recent buyer of Bank of America's shares is Chris Rees, a self-directed investor who I have profiled on Forbes.com and on this contributor page before. Over the last decade Chris' fund on Marketocracy has logged an average annual return of 23%, nearly double Berkowitz's. Rees is a Warren Buffett Next Door who invests full-time and lives in the Dominican Republic.

You may remember Chris because I have written about his colorful past as a hippie vagabond. He practices deep value investing these days with a focus on finding stocks selling at a deep discount to their intrinsic values. I e-mailed Chris yesterday about BAC and here is what he had to say about the possibility that Bank of America will fall victim to a WikiLeak:

"If it's BAC, which appears likely, it's a public relations disaster for what is already a public relations disaster—how much worse can it get? But like it or not, BAC is at the heart of the U.S. economy. If the U.S. economy is to survive the current mess BAC must survive along with it. The Government knows that. BAC will be around five years from now and it will probably be a more pristine and saintly enterprise than what we have today. Reputation has been squandered at BAC, I doubt they have another spoonful of it to lose. Short term we may see BAC sell off 'on the rumor' if so, in my opinion, it will be a buy this week and when the documents are finally released. In other words, in BAC's case, buy the rumor, buy the news.

My cost basis is around $12 for what is already a sizable position so the current $11 does not represent an overload the truck price for me. But if it takes a bigger haircut, say to $7-9 on panic selling, I'll get a bigger truck.

Bottom line for me is that buying into roach motels during periods of infestation does not mean all the bugs dutifully leave the building the second you commit capital. Sometimes it takes a while for the needed fumigation to work. I expect that to be the case here.

Three to five years from now the investment world will view BAC differently—and you won't be able to buy it at $11"

After note: Chris later added more BAC bringing his cost average down to $9.13. He sold BAC in 2014 for $17.50. A gain of 92%.

A shorter version of this Danny Buckland article featuring Chris Rees was published in Britain’s Sunday Express newspaper on January 6, 2008.

They used to smirk at the kitchen porter who arrived at work with a Wall Street Journal tucked under his arm and colleagues could scarcely believe that he spent his free-time hunched over a computer screen and leafing through financial publications in a local library. As they spent nights off drinking, hard-up Chris Rees continued his monastic lifestyle, spurred on by a tortured childhood and being branded a failure at school. Now the former porter, waiter and odd-job man has an enviable lifestyle with an ocean view apartment on a Caribbean island and the wealth to keep him and his family in a luxury that seemed remote after he trudged out of his secondary school gates as a 16-year-old.

Rees is now a top performing player on the stockmarket whose skills regularly out-strip investment companies crammed with high-flying graduates and business specialists. His investment portfolio has reaped incredible dividends posting an average annual return over five years of 58 per cent which has helped lift him from poverty to paradise.

“I was working with ten other staff at the restaurant and when it came to wages and tips most would go out drinking and be skint the next morning. I’d go home and study and sleep and then go to the library when I could,” says Rees, who now lives on the Dominican Republic, where he owns several properties. “They would make the decision to spend and pee and I’d make the decision to save and invest. Multiply that out by 365 days, throw in a little investment success, and at the end of the year one guy’s got £20,000 in cash and everyone else is still penniless. Multiply and compound that out for ten years, and one guy is home and dry and all the others are going to be waiting tables for the rest of their lives.”

The rhythm of the world markets is now the soundtrack of his life and he rides the corporate convulsions with the skill of a surfer gliding just ahead of booms and crashes.

For once, rags to riches is an understatement.

Written off at school, Rees suffered from debilitating eczema and asthma attacks as a child. Confined to hospital for long periods, he had to be tied down at night to stop himself scratching as the infection cursed his youth. Missing vast chunks of schoolwork gave him no chance and few were surprised when he walked out the gates of his Buckinghamshire school the moment he could…and he just kept walking.

The adventurous teenager left his family in Stony Stratford with a rucksack and some savings with his parents Eric and Irene expecting him to make around six miles before heading home for his supper. But it was the start of a remarkable and heroic journey that has seen him take odd jobs in exotic locations around the world on a meandering road to redemption.

“I was born with asthma in my lungs and eczema all over my body. Between the ages of five and ten, I was tied down spread-eagled to a bed night and day to stop myself scratching at my skin. It was torture for a small boy,” says Rees, the son of a bookmaker.

“My only good memory from the hospital was that there was a thickly treed wood out back. One day a maintenance worker loaded a bunch of us kids into an open roofed Land Rover and took us on a fast ride through the wood. I can remember the rush of crisp air, the speed, the sense of freedom and escape. The memory of that ride has never left me. About a month ago, I got to take a bunch of poor Dominican kids for a ride in the countryside in a borrowed open Jeep. They didn’t want to go back either.

“Not long after I got out of the hospital, I took the 11+ exam. I could barely read or write. I couldn’t answer the questions because I didn’t know what the questions were. I watched the other kids scribbling away while I sat and looked at the clock wondering when I could go home. I failed.”

Few teachers took the trouble to help and despite catching up his peers swiftly and developing a keen interest in geography

“I’d often finish first in Geography tests but the teacher was convinced I was cheating by copying from the other kids even when I got the most answers right,” he adds. “I would get sent to the headmaster Jack Reid but he was a wonderful man and one of the few who believed in me. He told my mum that her son ‘was going to be famous one day and will do something with his life’. He died recently and I never got a chance to thank him. I wish I had.”

Rees travelled the world with a fierce independent spirit. He worked as a tailor in Afghanistan, a cook in India, a builder in Switzerland, an eco-tourist guide, a sailing instructor and a charter boat captain in Belize and Guatemala.

“I travelled to more than 30 countries and washed my fair share of dishes along the way,” he says. “I worked as a tailor in Kandahar for about a year. I wore full Afghani clothes and made my own turban every day. There were seven tailors in the town and each night a different tailor would host the other tailors for dinner. Each night we’d get together in a different house. We’d sit on the floor and eat with our fingers.

“The funniest thing about this time was that we all made 100% polyester three piece suits for export to Iran but the law changed so that no imports were allowed but you could cross the border with the clothes you were wearing. Overnight a market developed for really thin guys. We would dress them up with suits of different sizes. Ten pants, ten waistcoats, ten jackets. It was a sight.”

Settling down was never on the agenda and the money he made simply funded the next leg of a never-ending travelling experience that eventually took him to California where, penniless, he got the chance to play in a poker game and swiftly picked up the subtle nuances of human behaviour that make or break a card player.

“I played for about six months getting better all the time until I got involved in a high-pressure game. I was with guys who wore Stetson hats and chomped on cigars and the stakes kept rising,” he adds. “I stayed with them and then it was just two of us and he threw in the keys to a 1965 Cadillac Coupe de Ville. I won without realising it was a classic car worth a lot more than the $700 he used to stake it. What a game.

“I had a car, cash and the next day I was gone on a six month trip to Florida. I was independent and the idea of staying in one place just didn’t really occur to me.”

His next saga was sailing a 33 foot yacht around the Caribbean, cruising past whales, dodging storms and keeping afloat with charters and odd job work

“It was magical. Sailing and being ‘out there’ can be very spiritual. Sometimes you feel very close to God. Other times it’s awful. One time I got caught in a bad storm off the Florida Keys. The boat was taking an awful beating. I was strapped to the wheel and the cockpit with a safety harness. Sometimes a whole breaking wave would come over the stern, flood the cockpit, and roar over the boat. There were moments when I couldn’t even see the boat. It was all under the water. You didn’t have time to be scared though. In bad situations, you’d always work through the problem first. When you got the boat somewhere safe and sound, or when the storm passed, then you could start shaking,” says Rees.

“I loved sailing. It was a wonderful life. But it’s hard work. If you put all the bad things and all the good things that can happen together, it’s probably a lifestyle best suited to those with deep psychological problems. I did it for fourteen years. I can’t swim, so I guess I qualify.”

The Eureka moment came about 15 years ago when his dentist was too busy to deal with his toothache because he was glued to a computer checking his stock dealings. The fuse was lit and Rees headed to the local library to plunge into the first academic phase of his life for almost 30 years.

“I realised immediately it was something I was fascinated by. The dentist got me started on the learning curve,” adds Rees.

He then started a marathon quest to save money and learn the nature of fluctuating stocks and the subtle financial climate changes that drove profit and loss. He crammed during the day and worked at night in restaurants where he would arrive with a copy of the Wall Street Journal under his arm.

He got his confidence by trialling his new found skills on the Marketocracy system which offers investors the chance to play the stock markets on a hypothetical exchange. It gives newcomers the chance to make mistakes without losing fortunes. The company has helped hundreds of people gain the skills to ditch their day jobs and make life-changing money.

“Chris’s story is inspirational and a great example of how learning to invest is available to anyone and can transform their lives. When you are learning it is best not to risk your life savings,” said Mark Taguchi, President of Marketocracy Research.

“Given his beginnings and what the world told Chris as a young man, it is remarkable that he has achieved so much and now performs on the real market with confidence, conviction and a belief that is the envy of professionals. His transformation has been phenomenal.”

Rees has seen 84 per cent of all his investments return a profit – a rate that would have City bosses purring with delight.

“My first recorded investment success was the purchase of two gold mutual funds. I bought U.S. Gold Shares and Invesco Gold. I made 93% on the first one and 42% on the second,” he says.

“Investment success comes with hard work, discipline, patience and study. You also need to be very careful. But you don’t need to go to university. Everything you need is at the local library or online.

“The biggest investment winner was Irish company Elan when its Multiple Sclerosis drug Tysabri got pulled from the market when a few cases of a brain infection were reported and the share price plunged from $30 to $3. But, if you calmly and logically went through the medical reports and histories of the patient cases, you could see that the problem was with the drug being used in combination with others. Shares were trading on emotion, misinformation, poor journalism and faulty Wall Street analysis as well as just plain rumour and scaremongering.”

Rees is currently outperforming the giants of the British markets who have the benefit of working for massive City corporations.

He has gone way beyond the imagination of his former teachers and schoolfriends but a life on the road means he is far from showy and lives a simple existence in the Caribbean trading in his best investment – happiness

“About six months ago, I bought a small apartment overlooking the Atlantic Ocean. My daughter will be four in February. I absolutely love being a dad. I’m content. I’m successful, I have a beautiful wife Isabel and daughter Tina, the sun shines every day, there’s money in the bank, and I can see the ocean from here. What more could I want?

“I don’t have a car or a boat. I don’t have a suit and tie. What I do have is a beaten up, tatty old dirt bike. I bought it second hand for $500 about seven years ago. It’s a great vehicle to have around here. Nobody wants to steal it.”

Rees monitors the markets from an office in his home and his portfolio has outperformed every mutual fund in the US. He could probably have been one of the wealthiest men in the world if his talent had been noticed earlier. He now believes that real world financial dealing should be taught in schools.

“It’s important. It is a major key to getting out of poverty and living a better life so it should be on the curriculum,” he adds. “But everything you need to learn to be a successful investor is available at the library and online. I’ve proved that. You don’t need a university. You don’t even need a teacher.

“I came to this late in life but the lessons are there for everyone. Determination, discipline and hard work are essential ingredients for success. Luck will not work.

“For me, it was the simple expedient ‘I absolutely point blank refuse to not be successful’. In my case, I can’t fail. I won’t allow myself to. I am not going back.

“There is no way in hell I’m going back to washing dishes for a living.”

In late 2012 and early 2013, we made the fateful decision to invest a large percentage of the Tenstocks.com portfolio in a small-cap biotech company with a promising cancer drug. We wrote four articles about this investment and published them on Interactive Advisors’ Smarter Investing and Seeking Alpha. The investment failed and handed us our biggest ever dollar loss. We think the four articles are a good example of how we work despite the fact we were wrong.

[After note: Tivozanib (trade name Fotivda) was later approved in Europe based on the same data rejected by the FDA as ‘uninterpretable and inconclusive.’ In March 2021 it was approved by the FDA for use in the United States.]

We reproduce the articles here.

1. How Aveo’s cancer drug stacks up against rivals.

2. Tivozanib should win FDA approval.

3. FDA’s flawed call on Aveo’s Tivozanib.

4. Aveo: Anatomy of a trade gone wrong.

How Aveo’s Tivo cancer drug stacks up against rivals.

by Chris Rees, August 15, 2012

There are three legs to getting a new drug approved for renal cell carcinoma (RCC).

1.     Efficacy.

2.     Safety.

3.     Overall survival rate.

For efficacy Tivozanib, or Tivo, from Aveo Pharmaceuticals (AVEO) has racked up the highest progression free survival rate of any drug in RCC with 12.7 months in treatment naïve (first-time) patients. Treatment naïve is important because it offers the cleanest data. Sunitinib, which is marketed as Sutent by Pfizer (PFE) and GlaxoSmithKline’s (GSK) Pazopanib, also known as Votrient, come next at 11.5 and 11.1.

Both these drugs have been approved. For safety Tivo has compelling data. Current RCC meds are a minefield of unwanted side effects. For example, roughly 50% of patients taking current RCC medicines suffer diarrhea versus around 10% for Tivo.

Fatigue is another unwanted adverse event. For Sunitinib it’s around 50%, Pazopanib 20%, Tivo is about 10%. Nausea and vomiting are less with Tivo. Dose reductions and interruptions due to adverse events are lower as well.

Across the board the relative safety profile of Tivo stands out. If you have a drug that’s as good as or better than anything currently on the market with an overall superior safety profile, I think that votes in favor of approval.

For overall survival there is a potential fly in the ointment. The FDA has expressed ‘concern’ over the 77% one-year survival rate of Tivo patients in the phase 3 Tivo-1 trial. The market has suddenly cast doubt on the approvability of Tivo based on this concern. The stock has got hammered. It’s a large position for our TenStocks portfolio and it hurts. The stock has sold off from around $13 to close at $7.97 on August 8th. But is the market reading this right?

First off, the Tivo-1 trial was split into two groups with roughly half getting Tivo and half getting Sorafenib, which is co-marketed as Nexavar by Bayer (BAYRY) and Onyx Pharmaceuticals [Acquired by Amgen].

Upon progression roughly 50% of the Sorafenib arm switched over to Tivo while less than 20% of the Tivo arm switched upon progression. The overall survival rate for the Sorafenib arm was 81%. It could be argued the longer OS in this arm was mainly or totally due to it being a Sorafenib+Tivo arm. But I’m not sure that’s the point.

I’ve looked at data of other RCC meds for one year overall survival. The average comes in at 80%. The best is 81%, and the worst is Tivo at 77%. Pfizer’s Axitinib (trade name: Inlyta) was approved with 79%. There were 260 patients in the Tivo arm. That’s a small sample on a notoriously unreliable data point. The 77% seems well within the margin of error.

It’s difficult to measure drug specific overall survival rate with any accuracy especially where crossover medications have been used. That’s why the FDA has approved RCC drugs on the basis of Progression Free Survival (PFS). It’s a more measurable proxy for overall survival.

I think it’s possible the FDA is signaling it would like to see some positive movement in OS on future RCC drug applications despite the unreliability of the data. The market currently thinks the FDA will not approve Tivozanib. My work suggests something different.

Why Aveo’s Tivozanib should win FDA approval.

by Chris Rees, May 2, 2013

Aveo Pharmaceutical’s (AVEO) Tivozanib, an investigational renal cell carcinoma (RCC) drug, has a date with the FDA’s Oncologic Drug Advisory Committee (ODAC) on May 2, 2013 (morning session). A panel of cancer experts will discuss the efficacy and safety of Tivozanib and then vote for or against approval. In most cases, the FDA follows the recommendation of the ODAC panel.

Aveo’s stock has fallen from a high of around $20 to close to $7.50 as of April 26. The collapse in the stock price began when the FDA expressed ‘concern’ about the overall survival (OS) data. Aveo has since submitted additional OS data to the FDA.

The concern was that in the TIVO-1 Phase 3 study, Sorafenib (Nexavar) posted an OS of 29.3 months versus Tivozanib’s 28.8 months. Close, but maybe no cigar. At first glance, it would appear Tivozanib underperformed the comparator, a second line therapy, already approved for RCC. A deeper dig strongly suggests something else is going on.

Meanwhile, short sellers, sensing blood in the water, have shorted roughly 10% of the outstanding shares in a bet the ODAC will vote against approval. We believe shorts (who borrow and sell shares in hopes of buying them back later at a lower price) are worthy of respect, however, in this case we think they are wrong.

The Tivo-1 study was designed so patients who were on Sorafenib could cross over to Tivozanib at disease progression. For the first 6 months, OS was comparable between the two arms, but then the OS trend line shows a slow separation occurring with Sorafenib outperforming, though not by a statistically significant amount.

But at 6 months, 15% of patients in the Sorafenib arm had already switched to Tivozanib. At 18 months, 53% had switched, and by 26 months 67% were on Tivozanib. So was Sorafenib’s  OS of 29.3 months mostly a result of the efficacy of Sorafenib or Tivozanib?

If Tivozanib reached OS of 28.8 months with minimal crossover compared to the Sorafenib arm, we believe a strong case can be made that Tivozanib contributed the lion’s share of Sorafenib’s TIVO-1 OS result.

In the TARGET study, Sorafenib was compared to placebo. The primary endpoint was overall survival. The final median OS for Sorafenib was 17.8 months. A second survival analysis of TARGET performed in November 2005 pushed Sorafenib’s OS data up to 19.3 months.

So, if Tivozanib reached OS of 28.8 months versus Sorafenib’s 19.3 months, yet they reached overall survival of 29.3 months when combined on crossover, we think we know where the extra months of survival are coming from. We think the ODAC will too.

OS is not even the primary endpoint for FDA approval but we’ll dig deeper.

Pfizer’s (PFE) Sunitinib (Sutent) and GlaxoSmithKline’s (GSK) Pazopanib (Votrient) are the current standards of care in RCC. In the COMPARZ study, Pazopanib was compared to Sunitinib. OS data came in at 28.4 months for Pazopanib and 29.3 months for Sunitinib.

In a separate phase 3 study Sunitinib reached an OS of 26.4, while Pazopanib, in a different phase 3 study, attained an OS of 22.9 months. These results suggest Tivozanib’s 28.8 is as good as the best when it comes to OS.

But progression free survival (PFS) is the primary endpoint for FDA approval. In the TIVO-1 study, in treatment naïve patients, Tivozanib had the highest PFS ever recorded at 12.7 months (in a subgroup with hypertension—a marker of efficacy— PFS was 18.3 months).

Pazopanib’s best was 11.1 months in a phase 3 study, and 8.4 months in the COMPARZ study. Sunitinib’s best was 11 months in a phase 3 study and 9.5 months in the COMPARZ study. Tivozanib appears to be best in class when it comes to PFS.

That said, in our view, the real superiority of Tivozanib comes not only with its PFS data but with its tolerability and safety. RCC patients on Sunitinib endure a wide range of toxic side effects. In the COMPARZ study, patients reported a preference for Pazopanib over Sunitinib because of a more favorable side effect profile.

In the PISCES study 70% of patients preferred Pazopanib over Sunitinib. Yet, when the ODAC reviewed Pazopanib for approval, the main concern of the panel was for toxicity—specifically liver toxicity. Indeed, the current labeling for Pazopanib contains a box warning regarding episodes of fatal hepatotoxicity.

As the FDA point out in the Pazopanib briefing document “drugs possessing less hepatotoxicity than pazopanib in other settings (non-cancer therapeutic areas) have been withdrawn after being marketed because of fatal hepatic failure.”

In the COMPARZ study, 44% of patients on Pazopanib required dose reductions and 24% dose discontinuations due to adverse events. In the TIVO-1 study 12% of patients on Tivozanib required dose reductions and only 4% required dose discontinuation.

When we look at PFS and OS, RCC patients are now living a longer life than a few years ago. But as survival lengthens, the quality of that additional life becomes more relevant. The treatment related adverse event data suggests Tivozanib may offer the best quality of life yet.

For the investor, global RCC pharmaceutical sales are running around $2 billion a year and climbing. They rose 17% from September 2011 to September 2012. In the US, sales grew 33% over the same period. The sales growth drivers include expanded treatment options, price increases (in the US), general population growth, and an increase in RCC incidence.

According to Pfizer’s 10K filing with the SEC, Sunitinib (Sutent) had sales of over $1 billion in 2012. Decision Resources, a research and advisory firm, forecasts that Pazopanib will reach annual sales of $640 million by 2018 as it takes market share from Sunitinib.

But we have a different view.

In our opinion, the ODAC, after careful and diligent review of the efficacy and safety data (including the OS data), will vote for approval of Tivozanib. Sometime before July 28, 2013, we expect the FDA to approve Tivozanib for RCC.

Once approved and on the market, we believe Aveo’s Tivozanib will become accepted as the new best in class for RCC and over the next five years expect annual sales to ramp to over $500 million as it takes market share from both Sunitinib and Pazopanib. Tivozanib also has potential for use in breast and colon cancer.

Aveo anticipates ending 2013 with around $60 million in cash. That works out to about $1.15 a share. Aveo is also eligible to receive roughly $1.3 billion in potential future milestone payments equal to about $25 a share. $30 million of that (about $.60 a share) is payable upon FDA approval for RCC in the US. Thereafter, up to $780 million in milestone payments are due upon hitting specified sales targets.

A recent article by Adam Feuerstein of The Street.com attempted to lay out a bear case for why Tivozanib will not get a favorable ODAC vote. Meanwhile, ahead of the vote, Aveo and its Tivozanib partner Astellas are busy interviewing sales reps. They will be driving a company supplied Volvo S60.

At a share price near $7, with an extremely close event catalyst, we consider AVEO a bargain. We own AVEO. Our money is firmly where our mouth is.

The FDA’s flawed call on Aveo’s Tivozanib

by Chris Rees, June 7, 2013

When the FDA got together with the Oncologic Drugs Advisory Committee (ODAC) in early May to discuss whether to approve Aveo Pharmaceutical’s (AVEO) Tivozanib for the treatment of renal cell carcinoma (RCC), it would be fair to say the FDA reception was not what AVEO was expecting.

After all, they were so sure of approval they had interviewed and hired sales staff and planned launch details, even down to deciding upon the kind of cars their sales reps would be driving. Instead, the FDA was merciless, ripping apart Aveo, Tivozanib, the phase 3 trial design and data, and just about everything and everyone involved in trying to bring this drug to market. People who witnessed the meeting described it as ‘brutal’ and ‘scathing.’ After a morning of spirit-wilting torture, and just a few minutes before the scheduled lunch break, the ODAC committee was asked to vote on a carefully worded question:

“Has the Applicant demonstrated a favorable benefit-to-risk evaluation for the treatment of renal cell carcinoma in an adequate and well-controlled trial?”

The panel voted 13-1 that the answer to this question was no.

The show was over. The good guys had won. The guardians of our public health had done their job. Those suffering with terminal RCC would be protected from the potential dangers and ineffectiveness of Tivozanib. Maybe the FDA will give Tivozanib another chance if Aveo does a new trial and manages to come up with a better and more acceptable set of benefit-to-risk data. A new trial would likely take at least three years. In this scenario, Tivozanib would not be available until 2017. Between now and then, approximately 56,000 people will die from RCC in the U.S. alone.

To better understand what went wrong, we need to examine the two main components of FDA approval. These are progression-free survival (PFS) and overall survival (OS). For many years, the FDA has insisted PFS is the primary endpoint as it is considered to be more reliable and measurable, while OS is often harder to measure and often confounded by issues of crossover and the use of sequential therapy. For now, let’s take the FDA at their word and explore PFS.

Progression- free survival (PFS) is the length of time a disease does not get worse (progress) while someone is taking, and after they have taken, a drug. Let’s take a look at the following PFS chart.

Source: Tenstocks.com, FDA/ODAC briefing document table 2.

All the drugs in the above chart were approved by the FDA based on the PFS shown. All except Tivozanib. Tivozanib has not been approved. If the primary endpoint for approval was PFS, and the Tivo-1 phase 3 trial was designed to measure PFS, why won’t the FDA approve Tivozanib when they approved all the others? After all, by using the FDA’s own data, Tivozanib appears to be best in its class.

The use of RCC drugs in the first-line setting can offer cleaner data because the patients are treatment naïve. If Tivozanib is indeed the best in class, its supremacy should show up here too. The current accepted standard of care in RCC is Sunitinib—marketed by Pfizer (PFE) as Sutent—and Pazopanib —marketed by GlaxoSmithKline (GSK) as Votrient. They are considered the best available drugs for RCC. A look at treatment-naive data from various previous trials shows the same pattern of Tivozanib out-performance.

Source: Tenstocks.com, Aveo slide 5

There seems little doubt that when it comes to PFS, Tivozanib is the best in class. If the other drugs were approved based on PFS, Tivozanib clearly should be approved as well.

However, the FDA is now saying they have not changed the rules for approval and that PFS is still the primary endpoint, but OS is now the gold standard of endpoints. If you find this slightly confusing, join the club.

So, we move on to OS, the FDA’s gold standard. Take a look at this OS chart:

Source: Tenstocks.com, FDA briefing document table 11.

Here again, we see an indicator of Tivozanib’s supremacy. Again, realize all the drugs in the above chart have been approved based on the data shown—all except Tivozanib. This doesn’t make logical, rational sense, does it? After all, PFS is clearly a predictor of OS, and OS is clearly a predictor of PFS. If a drug outperforms in both endpoints—primary and gold, as the FDA calls them—its performance confirms superiority over all other approved RCC drugs and it also confirms efficacy and safety.

The FDA does not think Tivozanib has demonstrated a favorable benefit-to-risk in an adequate and well-controlled trial. The biggest issue for the FDA was the OS result in Aveo’s phase 3 Tivo-1 trial. The OS for Tivozanib came in at 28.8 months, as shown in the OS chart above. The problem was the Sorafenib comparator arm came in at 29.3 months. Sorafenib—marketed by Bayer (BAYRY) and Onyx Pharmaceuticals (ONXX) as Nexavar— outperformed Tivozanib.

This resulted in a hazard ratio (HR) of 1.25. The FDA has never approved a drug for RCC with an HR greater than 1. The difference between the two arms—28.8 versus 29.3—was not statistically significant, but the FDA decided the HR was. So, at Aveo’s ODAC meeting, the FDA introduced a new endpoint for approval: The HR had to be less than 1.

When looking at the issue of HR in this case, it’s important to note 61% of the patients who started on Sorafenib crossed over to Tivozanib upon progression. This meant the trial involved two active drugs against one. It was Sorafenib/Tivozanib versus Tivozanib alone.

Now, Tivozanib achieved PFS of 11.9 in this trial. Sorafenib reached a PFS of 9.1. However, in the Sorafenib arm, the 61% who crossed over and had sequential therapy on Tivozanib achieved an additional PFS of 8.4 months. If the 61% who crossed over in the comparator arm had a median PFS of 9.1 while on Sorafenib, then they had a total PFS of 17.5 months when combined with Tivozanib. Is it any wonder OS in the comparator arm was higher?

When it comes to approval, The FDA now states an HR of less than 1 favors the investigational drug and an HR greater than 1 does not. Here we have an HR of 1.25. Pazopanib was approved with an HR of .91 but it was compared to placebo and 54% crossed over to Pazopanib. So the comparison was 100% Pazopanib versus 54% Pazopanib. Sorafenib was also approved based on an OS of 17.8 months with an HR of .88 against placebo. Getting an HR of less than 1 is easy when you compare your drug to a placebo or a half dose of the same drug. Tivozanib was compared to an approved and effective drug and to Tivozanib.

Other RCC drugs, including standard of care Sunitinib, were approved based on comparison to IFNa, a minimally effective drug. Again an easy HR bar to clear.

Of all the drugs approved for RCC, only Axitinib—marketed by Pfizer (PFE) as Inlyta— was compared to a really active and approved RCC drug. Again, Sorafenib was used as the comparator. The HR came in at .97 but no crossover was allowed, so the comparison was straight Axitinib versus Sorafenib.

How would OS for Tivozanib versus Sorafenib look with no crossover? Look at this chart:

Source: FDA, Aveo slide OS-14

The OS trend favors Tivozanib.

If Aveo’s RCC drug was negatively impacting OS, it would also show up in serum levels. Analysis of the OS data and serum levels show no indication of a higher incidence of death with higher serum levels of Tivozanib. Indeed, the most likely cause of death due to Tivozanib would likely come from hypertension, which is Tivozanib’s main side effect.

Its incidence is higher with Tivozanib than with all other RCC drugs. But hypertension is also a marker of efficacy in RCC. A subgroup with hypertension in the Tivo-1 trial reached a PFS 18.3 months. This is yet another indicator of Tivozanib being the best-in-class RCC drug.

Essentially and importantly, Tivozanib is the first RCC drug to be compared to not one, but two active drugs, and its use, when combined with Sorafenib, achieved an OS of 29.3 months, the highest ever recorded in an RCC trial, and 28.8 months when used alone. Results such as this would just not be possible if Tivozanib was inferior to the other already approved drugs. In the case of Tivozanib, an HR of 1.25 demonstrates the effectiveness, not inferiority, of Aveo’s cancer drug. Nevertheless, the FDA is insisting on using a comparative benchmark of HR=<1 as if Tivozanib had been compared to a placebo or IFNa.

In my opinion, the error Aveo made in the Tivo-1 trial was not doing a two-way crossover. Patients on both arms should have been able to cross over to the other drug upon progression. This would have balanced out the effects of two drugs versus one and the HR would almost certainly have been below 1.

In RCC, cancer drugs are used in sequence. When one drug ceases to work, patients are switched to another drug until progression and so on. Drug side effects also play a role. All RCC drugs are toxic and cause a wide range of adverse events. Some are better tolerated than others. Dosage often has to be reduced, interrupted or discontinued altogether, depending on the patient’s ability to tolerate a particular drug. This is why having a wide range of options in the treatment of RCC is important. For a patient suffering with RCC, the more options the better.

At Aveo’s FDA ODAC meeting, the single vote for approval of Tivozanib was from a patient advocate. Members of the public were also allowed to address the ODAC panel. One by one they offered heartbreaking testimony to the efficacy of, and need for, Tivozanib. They were doctors and nurses, caregivers and patients. Each had personal experience of RCC and some of them had been taking Tivozanib in trials. Of the nine people who spoke, eight of them pleaded for the approval of Tivozanib (the ninth suggested another trial may be needed).

According to an article in the Wall Street Journal, the FDA’s cancer czar is Dr. Richard Pazdur. In the article, the co-founder of a group that wants patients to have wider access to cancer drugs calls Dr. Pazdur “a lethal disaster for cancer patients.” Indeed, it was Dr. Pazdur who led the blistering attack on Aveo and Tivozanib at the FDA’s ODAC meeting. He is quoted by the Wall Street Journal in a related interview as saying, “the major issues with the oncology drugs as mentioned before are efficacy, demonstration of efficacy, kind of like in the real-estate industry the mantra being location, location, location, in oncology it’s efficacy, efficacy, efficacy.”

He went on to say that “the reason why oncology drugs don’t get approved is basically because they fail to demonstrate efficacy… A lot of the misconceptions people have revolve around their own misunderstanding of the field of statistics and whether or not a trial meets its primary endpoint and why that is important.”

Okay. We’re back to the primary endpoint. That’s what is important. Tivozanib met its primary endpoint. So it should be approved, right? Dr. Pazdur again: “one does not want to see a potentially active drug not be available to the American public.”

Neither do cancer patients, or their families and friends. But if the FDA doesn’t approve Tivozanib, isn’t that exactly what’s happening here?

At Aveo’s ODAC meeting, Dr. Pazdur, expressing his concern about Tivozanib said, “obviously overall survival is a much more important clinical endpoint than progression-free survival.”

Yet, while at the ODAC meeting to discuss Axitinib, which was approved, he said “to say that we have to demonstrate an overall survival advantage from the last approved drug for any other new drug to be approved is a very high bar here and really is a comparative efficacy standard, which we do not have the legal authority to impose.”

And then he said, “we have to be consistent with other sponsors, and we have a track record here that has ranged of six drugs that have been approved and six companies given advice with a PFS endpoint, so we can’t hold one sponsor up to a higher standard than another sponsor; that’s for sure.”

So we go round and round on the FDA merry-go-round about what the approvable endpoint is and what it isn’t. Meanwhile, there will be about 65,000 new cases of RCC this year in the US alone. About 14,000 Americans will die of RCC this year. In the Tivo-1 trial, after Sorafenib stopped working, Tivozanib halted disease progression for 8.4 months.

When the FDA is making life and death decisions for cancer patients, it’s not the FDA or Dr. Pazdur that does the dying. If the FDA is so concerned about the Tivozanib OS data, a pragmatic, logical, sane and compassionate solution for all sides would be to approve Tivozanib for patients suffering with RCC and order post-approval monitoring of OS.

Tivozanib is also being studied for efficacy in liver, breast, colorectal and other cancers. Those in the cancer community who want to see this effective drug approved need to speak up now. When it comes to cancer, the dead don’t talk. For cancer patients, that’s the real endpoint.

Aveo: Anatomy of a trade gone wrong.

by Chris Rees, August 13, 2013

Riding on the back of a strong market, the TenStocks portfolio racked up decent year-to-date gains coming into late April. As qualifying investments became harder to find, we found ourselves over-weighting the few investments we thought still had good risk/reward characteristics.

Putting fewer eggs into a single basket increases the potential for both profits and losses. Unfortunately, we managed to find more of the latter. Our ill-fated investment in Aveo (AVEO) was sized so that in the worst case— an FDA rejection— our estimated loss would be limited to approximately our year-to-date gain.

I have been working on the Aveo story for over a year. I was convinced the FDA would interpret the data results the same way I did and draw the same conclusions. They did not. I have no problem admitting that  I was shocked and stunned at the result. We still are.

In early June, I was contacted by Mr. Robert Weisman of the Boston Globe. He’d read my articles on the Aveo story and wanted to dig deeper. I told him that I felt as though I was missing something; there was something I didn’t understand or didn’t know that would explain, or help to explain, why Tivozanib is now probably the best cancer drug the FDA won’t let cancer patients have.

The atmosphere at ODAC was so toxic from the FDA, I don’t understand how Aveo could have been so confident of approval. They even arranged Volvos for the sales reps! It looked as though the FDA went into the ODAC meeting thinking we’re going to crucify these guys, and Aveo went in thinking they’re going to give us hugs and kisses.

There was an obvious mismatch in expectation. If there were communication with the FDA prior to Tivozanib’s rejection, Aveo must have been tone deaf and must have drunk even more Kool-Aid than I did to miss the negative signals. It just seemed to me that a piece of the Aveo jigsaw puzzle was missing.

In early June, Aveo held a conference call to discuss the FDA’s rejection of Tivozanib. Some of the statements made during this call were shocking. Mr. William Slichenmyer, CMO of Aveo, stated the FDA had informed Aveo in May of 2012 that the overall survival data ‘will be a review issue that could affect approvability.’

In my view, this was material information that should have been fully disclosed to investors. Instead, Aveo announced the FDA had only expressed ‘concern’ about the overall survival (OS) data. Mr. Slichenmyer went on to say “we also discussed with the FDA about various designs for an additional trial.”

And David Johnson, Aveo’s CFO said “we have, for a period of months, starting from the pre-NDA meeting up until the ODAC meeting, had intermittent communications with the agency about study design.” And then, “the agency provided feedback to us with suggestions for different designs and we have subsequently gone back and forth with them on a couple of different alternatives, and not yet reached an agreement on what that study might be.” Mr. Slichenmyer continued, “some of the advice that we got along the way was that if there’s an ongoing next study, it makes it easy for the panel members to vote to simply wait for more data.”

Were Aveo deliberately foot-dragging to get to ODAC without doing the FDA-recommended additional OS trial? Why did they never disclose to shareholders that the FDA had informed them the OS data issue ‘could affect approvability’? Why did Aveo not disclose that they were in ‘intermittent communications’ with the FDA about the design and format of an additional OS trial right up to the May 2013 ODAC meeting?

It appears Aveo knew the OS data was a bigger issue for the FDA than what shareholders were told. It also appears Aveo knew the possibility (or probability) of the FDA requiring a new OS trial was greater than they led shareholders to believe.

If the information disclosed (for the first time) in this June conference call had been made public prior to Aveo’s fateful ODAC meeting, investors who lost money in Aveo may have decided to reduce or limit the size of their investment, or, they may have decided not to invest in Aveo at all.

In any event, in my view, there are questions about who knew what when, and about Aveo’s public disclosure obligations.

In early July 2013, the United States Securities and Exchange Commission (SEC) also began to take an interest in the Aveo story.

They sent Aveo a subpoena requesting documents and information concerning Tivozanib and related communications between Aveo, the FDA, investors and others. Meanwhile, of course, veritable busloads of lawyers piled on with class action lawsuits.

I could fill a hundred pages with what went wrong with Aveo. The bottom line is I was convinced the FDA would approve Tivozanib and I was wrong. The ODAC vote was 13-1 against. It wasn’t even close.

Here’s a simple chart:

Source: FDA/ODAC briefing document (Table 2)

PFS is the primary endpoint for approval; OS is the secondary endpoint. All the renal cell cancer drugs in the above chart were approved by the FDA based on the PFS/OS statistics shown. Aveo’s Tivozanib was not approved based on the above statistics because, in the comparator arm of Tivozanib’s phase 3 Tivo-1 study, over 60% of those who took Sorafenib (the comparator) also took Tivozanib.

The FDA argued the hypothesis that Tivozanib contributed to superior OS performance (29.3 months versus 28.8 months) in the Sorafenib arm was not proven, and that the data, in their view, was ‘uninterpretable and inconclusive’, and they want another trial.

I’ve done an enormous amount of work on this failed investment and that includes a rigorous post-damage autopsy. Going through all the data, and seeing all the FDA’s concerns and documentation, I just can’t find a way to understand, and agree with, the FDA’s stance.

In my opinion, Tivozanib is clearly superior to Sorafenib, an already approved drug, in both PFS and OS. Even a cursory examination of Sorafenib’s previous OS and PFS trial results would confirm that. However, it appears the FDA chose not to do that.

It’s my opinion the FDA reached their decision to reject Tivozanib without taking into consideration all available trial data. Even worse, the FDA may have used incorrect data to make their case against Tivozanib. In Aveo’s briefing document submitted to the FDA, on page 60, in Table 11, Tivozanib’s MSKCC prognostic groupings are shown as: Tivozanib: Favorable 26.9%, Intermediate 66.5%, Poor 6.5%

And in Aveo’s presentation for ODAC, on C-27, MSKCC prognostic groupings are the same but with rounded numbers. However, in the FDA’s ODAC presentation, on slide 12, the MSKCC groupings had changed to something very different: Tivozanib: Favorable 54%, Intermediate 45%, Poor 0.8%.

The FDA was telling the ODAC panel Tivozanib’s performance was suspect because the patients on the drug were not very sick. On page 7 of the FDA’s briefing document, the ODAC panel were told, “Note that a substantial number of patients had a MSKCC favorable prognosis.”

And then, as recorded on page 73, of the FDA/ODAC official transcript, Jonathon Jared, the FDA presenter at ODAC, while displaying slide 12 for the panel, said, “I show this information just to emphasize that the vast majority of the patients in this trial had favorable prognostic characteristics, and this impacts comparison of the results of this trial to that of others performed in the past.” Is this why the FDA did not take into consideration evidence of Tivozanib’s efficacy relative to other approved kidney cancer drugs as indicated in the chart above? Was it because they used incorrect data? Was this the prime source, or one of the prime sources, of the FDA’s negativity toward Tivozanib?

And perhaps a more important question, if the FDA did indeed use inaccurate data as part of its rejection of Tivozanib, is did Tivozanib get a fair trial?

The FDA’s job as public servants is not only to stop unsafe and ineffective drugs from getting to patients, but also to make sure the FDA themselves do not prevent a safe and effective drug from getting to patients. This is especially the case when it comes to cancer. Did Aveo run a perfect trial, cross all the T’s, jump flawlessly through all the FDA hoops in the required fashion?

Obviously not, but condemning a good drug to the trash heap by not considering all available data, by the possible misuse of incorrect data, and because of issues unrelated to the drug’s efficacy and safety does not serve anyone well.

For us, the FDA’s decision defies logic. It’s a complicated issue and we can’t lay it all out here, but we think the FDA has made a mistake. That may seem a presumptuous call for us to make, and maybe it is—after all, a truckload of FDA analysts and a panel of top cancer specialists emphatically disagreed with us. But there are a few kidney cancer specialists who seem to agree with us. One of them is Dr. Thomas Hutson of Baylor Charles A. Sammons Cancer Center in Dallas. Here’s a recent video of him talking about the FDA’s decision.

Another is Dr. Robert Motzer of Memorial Sloan-Kettering Cancer Center in New York. Here’s a video of him talking about the Tivozanib OS data, and here is another where he talks about the efficacy and safety of Tivozanib. We should point out that both these kidney cancer experts have been financially compensated by Aveo (which is more than we can say).

Anyway, the damage to the portfolio is done. I will take the hit and move on. So what do I do with Aveo now, and where do I go from here?

While Aveo has recently said it will not run another OS trial for kidney cancer, Tivozanib trials are still on-going for breast and colon cancer. It’s a good drug; I think it’s the best drug in renal cell cancer based on the data, and it still has value.

I think Aveo’s best options now are to sell the company to a bigger pharmaceutical company, or to sell Tivozanib to a bigger pharmaceutical company that can finance the needed trials and are better equipped to bring the drug through the regulatory process. I think a buyout or restructure deal should come sooner, rather than later. Aveo is burning cash and needs to move fast.

Pharmaceutical companies almost never visit my website at tenstocks.com. Most of my visitors are individual investors, hedge funds and investment banks. Interestingly, and make of it what you will, in the last six weeks, we’ve had visitors from Merck, Sanofi-Aventis and Baxter Healthcare.

Aveo shares currently sell for around the value of its cash-on-hand at about $2.50. Throw in something for a good cancer drug they can’t sell, add a bit more for the pipeline, which includes the RON receptor antibodies deal with Centocor, now a part of Johnson and Johnson (Aveo is eligible to receive up to $540 million in milestone payments), toss in a few pennies for Aveo’s Human Response Platform, and in a buyout scenario right now, I think Aveo could be worth $5 to $6 a share. If there’s no deal, current Aveo shareholders face a long, hard road as cash depletes.

One irony for me with the Aveo/Tivozanib saga is that one of the reasons I decided to write and publish our Aveo articles on Covestor [now Interactive Advisors] and, for the first time, on Seeking Alpha, was to let those interested in my work see how deep I dig to maximize the probability I will get our investment decisions right. I never expected that perhaps the best example of my work would be an investment we got wrong.

[After note: Tivozanib (trade name Fotivda) was later approved in Europe based on the same data rejected by the FDA as ‘uninterpretable and inconclusive.’ In March 2021 it was approved by the FDA for use in the United States.]

In November 2017 Canada's Globe and Mail published an article by Larry MacDonald featuring Chris Rees of Rees Capital Management (formerly Tenstocks.com). Here's the text of the article:

Insights from a self-taught investor with an astonishing track record.

Christopher Rees has an incredible track record at making buy and sell calls. Right now, he’s looking to raise cash.

When Christopher Rees left home in 1966 at the age of 16, his parents thought he would be back in time for dinner. But he ended up wandering the world for several decades, working at jobs in difference places, including as a tailor in Afghanistan, a cook in India, a carpenter in Switzerland and a charter-boat captain in the Caribbean.

The thrifty Mr. Rees is also a self-taught investor who has invested his savings well enough to establish a track record better than his hero, Warren Buffett.

He has made the right buy or sell call an astonishing 80-per-cent of the time for his “10STX” portfolio, registered since 2000 on Marketocracy.com. The return on his personal portfolio averaged 21 per cent a year over the past 25 years, as recorded on Tenstocks.com.

 Mr. Rees has appeared in publications such as Forbes, SmartMoney, The Times of London and The Globe and Mail – and was featured in Matthew Schifrin’s 2010 book, The Warren Buffetts Next Door: The World’s Greatest Investors You’ve Never Heard Of.

The Globe recently caught up with Mr. Rees to get an update on how things have been going since we interviewed him in 2008.

Q: Is your investing approach still the same?

I haven’t changed anything. My focus is still on trying to find companies selling at a discount to tangible book value and/or special situation investments, while running a concentrated portfolio of around 10 stocks.

I am often investing in companies that 97 per cent of investors would not touch with a barge-pole. Sometimes my portfolio can look like an undesirable collection of rotting fish heads and dumpster debris. When I am buying, almost nobody agrees with me. I like it like that.

Q: What are you investing in these days?

Currently, my portfolio is focused on energy- and commodity-related investments. I think it’s the only part of the market where there is still some value to be found. It’s very unusual for me to be so concentrated in a single sector.

Usually, I diversify across sectors, currencies and geographies. This concentration introduces a great deal of price volatility in the portfolio. I’m used to a lot of price volatility, but this current sector concentration amplifies it even more.

In the face of extreme price volatility, I focus more on the value of the underlying investments rather than day-to-day price gyrations. Those who invest alongside me don’t always enjoy the ride. A strong stomach is required.

Q: What are your top holdings?

The top five are Obsidian Energy, Vale SA, Chesapeake Energy preferred D shares, Suncor Energy and Capital Product Partners. My biggest position is Obsidian Energy (OBE-TSX, OBE-NYSE), formally known as Penn West Petroleum. I’ve owned OBE several times over the years, including selling a chunk as high as $34 (U.S.) a share in 2008. Since then, I’ve been to hell and back multiple times.

But OBE is now a smaller, more compact company and I’m bullish on the long-term price of oil. Demand is increasing and I think the supposed production threat from U.S. shale is way overblown.

John Brydson, a director and board member, has been accumulating OBE stock for some time, his most recent, a purchase of 250,000 shares, was at $1.60 back in April. Mr. Brydson spent close to 15 years managing a $2-billion portfolio at Credit Suisse. He knows his stuff and he’s on the inside.

David French, the CEO, has also begun nibbling at OBE shares, with several buys in August and September at around a $1 a share. Obsidian Energy is my best idea.

Q: What’s your take on the stock market these days?

I am basically in a holding pattern, waiting for higher oil and commodity prices to sell stocks and raise cash.

I really don’t like this market. In my opinion, risk is way too high and reward is way too little. I’m currently 7-per-cent cash, but would like to see it rise to the 40-per-cent range sooner rather than later. This market is toppy, overvalued and high risk. I want no part of it.

I suspect in the next crisis of overconfidence there may be no place to hide. People will likely be forced to sell what they can, not what they want. The best place to be may be sitting on a lot of cash to be a buyer when some fear returns to the market.

Q: You were in the Dominican Republic when we spoke in 2008. Where are you now?

I have relocated to a small beach town in Thailand. My 13-year-old daughter is fluent in Spanish, English and Thai – and is currently learning Mandarin and Japanese. One reason I moved to Thailand was because I was intrigued by [billionaire investor] Jim Rogers moving with his family to Singapore. His reasons for doing so made a lot of sense to me [in interviews with journalists, Mr. Rogers has said that he wants his heirs to grow up and live in Asia because he believes that’s where the best opportunities will be over the next century].

Projection Point, a purveyor of ‘risk intelligence solutions’, say risk intelligence is the ability to estimate probabilities accurately and that people with high risk intelligence tend to make better predictions than those with a low Risk Quotient (RQ). Ever the curious soul, especially when it comes to the study and practice of risk management, I took PP’s free RQ test. I figured free would reduce the risk of not getting value out of it.

I responded to fifty statements based on how sure I was they were true or false. If I was certain a fact was true I could give it 100%. If I knew it was false I could give 0%. Any indecision about the veracity of a statement I could assign anywhere from 10%-90% depending on the degree of confidence I had of knowing the answer.

The statements were thought provoking.

Zinedine Yazid Zidane played on the French national team for over 5 years.
I knew the answer to this one, but if I didn’t there were lots of ways to be wrong. This isn’t a typical French name. It does not specify a sport. Maybe he played for 4.9 years? In investing, risk is not in what you know, it’s in what you don’t know.

The United States Declaration of Independence starts with ‘We the people’.
It doesn’t. It starts with ‘When in the course of human events’. Many making a snap decision could well get this one wrong. Slow down. Take your time. Think twice. Investing success never comes with haste.

How about this one?

Mount Vesuvius is a valcano.
Was this a trick question? Was the incorrect spelling deliberate? I gave this a zero chance of being right. Projection Point told me I was 100% wrong. As in investing, you will sometimes be wrong even when you are right – and sometimes you will just be wrong. That’s why position sizing and diversification in a portfolio is important. Balance risk. Control it. Pay attention to small details.

What I did in this test was simple. Anything I wasn’t sure about I gave 50%. When I was absolutely certain I knew the statement was true or false I gave 100% or 0%.

In investing, this is what Mr. Warren Buffett calls waiting for the fat pitch. You don’t need to strike at every ball, nor should you. Wait until you are sure.

I scored 85 out of a 100 on risk intelligence. According to Projection Point, this places me in the top 4.6% of the roughly 60,000 people who have taken the test. The average test taker score is 62.

I was feeling pretty good, but it didn’t last. On the results page, Projection Point dropped the hammer on me with the following paragraph:

By now you may have realized there is an easy way to game this test. If you always select the 50% category unless you are pretty certain that a statement is true or false – and if the test contains equal numbers of true and false statements – you will score highly, perhaps near 100.

Unless, of course, you don’t believe Mount Vesuvius is a valcano.