Is it time to abandon the ARKK before the ark sinks?
Today, I’m continuing my series about why sticking to a thesis without confirming evidence is a sure recipe for losing money when investing (to read the other articles of this series, subscribe here for free). This is not a critique of analysts that have been wrong, because every analyst in the world, if they’ve given enough predictions, has been wrong in the past. This is a critique of analysts/money managers that manage their way into disaster because of their multiple violations of investment rules that should never be violated, including
(1) preservation of capital;
(2) refusal to consider opposition viewpoints due to ego and commitment to winning one’s argument;
(3) refusal to investigate events that oppose your beliefs to understand them; and
(4) insistence of how things should be versus how they really are.
Let’s see how many of the inviolable rules of investing Ark’s Cathie Wood has violated within just the past year. To begin, given that her ARKK ETF has collapsed by nearly 50% in share price in less than a year’s time, it is self-evident that she did not focus on preservation of capital as her top rule to guide her behavior versus an insistence on riding her investment thesis all the way down to a catastrophic near 50% loss in less than a year. Last year, given my exact buying and selling prices for a group of nine stocks, my skwealthacademy patrons earned, on average 113% returns on each of nine stocks. When this group of nine stocks all collapsed in share price by 30%, 40% or more after we sold, given that the case for owning remained as solid (more on this topic later in this article) as during our first round of ownership, I provided buying prices and guidance to repurchase all nine stocks recently.
However, even though I expressed confidence that repurchasing this same grouping of stocks would provide another opportunity to rack up 100% gains per stock again, and even though my confidence was high enough in this matter that I even suggested that my patrons dump their original allocation plus all profits back into this group of nine stocks, meaning that they would be risking twice as much capital in our second go at these stocks, just to protect against the possibility that I could be wrong in my thesis of re-purchasing these stocks, I provided selling guidance of 5% less than our original purchase prices, with the maximum loss for about half of these stocks limited to a little less than 10%. The key is to always preserve capital, so, if it turns out I’m wrong that repurchasing this group of stocks a second time will yield equivalent profits to my first guidance, we will still have most of our capital to re-invest in another opportunity, given that my track record of success in discussing investing opportunities on my patreon platform has been extremely high.
This is a basic fundamental rule of building wealth through investing that, likely due to people following emotion and ego rather than reason, people, including prominent portfolio managers like Cathie Wood, violate all the time. I’m not arguing against having the courage of your convictions in your investment theses. You don’t want to follow a portfolio manager that turns over his or her portfolio 100% or more a year. I’m arguing for the wisdom to understand when your convictions need a healthy dose of introspection to determine if they perhaps may be wrong, so you can change your thesis to avoid dragging everyone down with you due to a conviction in a wrong thesis. Secondly, in response to many US automotive stocks that received a significant bump higher to start 2022, Cathie Wood stated, “I look at the performance of stocks like [General Motors] and Ford they soared on those electric-vehicle announcements. That’s ridiculous.” This statement is obviously based on her belief that from a fundamental basis, none of these stocks should have soared. But who cares if Cathie Wood thinks it’s “ridiculous”? The stock market hasn’t operated on fundamentals for a few decades now, so the only thing a portfolio manager should concern herself or himself with is the “why” of the equation to understand the “why”. Was Cathie Wood’s explanation for calling such moves “ridiculous” logical and with merit? Absolutely. But we don’t live in a world in which stock prices are driven by value, merit, and fundamentals. Sorry, but that ship sailed in the 1980s. If stock prices were based on fundamentals, then half the stocks that soared in share price over the last decade would have crashed and vice versa.
To issue comments about share price movements being “ridiculous” is stating the self-evident and illustrates a fundamental lack of understanding about what drives the share prices of stocks. Did anyone care that the massive rebound in prices of finance/banking stocks after the 2008 crisis were ridiculous because bankers never fixed their policies that encouraged bank employees to operate their giant firms like hedge funds, and instead, only worked diligently to falsely manipulate perception of their current financial viability to artificially manufacture their massive share price rebound? Does anyone care that Tesla soared to a share price north of $1,200 based on fundamentals that were ridiculous as well? When it comes to investing, ridiculous share price movements happen all the time, especially in a world in which computerized HFT algos control and move share price
Consequently, the important point to understand is “why” ridiculous share price movements happened and to then leverage that knowledge in one’s own strategy versus to merely level accusations of ridicule that will never change the reality of a world of manipulated share prices. The fact is, this is no longer your grandfather’s buy and hold stock market anymore, and it hasn’t been one for more than two decades. Thus, if a stock surges 30% simply due to HFT program manipulation, but one still profited 30% by identifying manipulative factors that drove the stock price higher, even if the stock price move was irrational, since irrational price movements dominate stock markets these days, it is better to accept this fact and learn how to utilize it rather than fight it, as stock “regulators” will never fix this problem. Even if the stock price of this hypothetical stock collapses back to its original valuation or even moves below it, if one locked in a 30% profit, a 30% profit is still a 30% profit. In fact, almost everyone ignored the opportunity of the nine stocks my patrons purchased before selling at an average profit of 113% in mid-2020, but just because nearly everyone believed the opportunity would not materialize yet did not prevent it from materializing.
Thirdly, in what seems like a past lifetime for me because it was so long ago, when I used to work in the Private Wealth Management division of a Wall Street firm, it was nearly impossible to find a money manager that actually had enough confidence in his or her own portfolio management skills to invest a substantial portion of their own money alongside their clients’ money in their own portfolios (versus just living off of the annual 1.5% to 2% asset management fees they reaped from clients while risking none of their own capital). I’ve heard many laud Cathie Wood for risking her own money alongside her clients’ money in her ARKK ETF, a fact she recently confirmed by stating that she’s personally invested more than half of her own retirement funds in her own funds and that ARK funds constitute what she described as a “significant” portion of her net worth. This is admirable for someone that doesn’t violate the four inviolable investing rules I’ve stated above, but not so much if one is violating all four rules. So, is Cathie Wood violating my last two inviolable rules stated above? Regarding rule #3, though I can’t be sure, but some of her comments seem to indicate she is in violation of this rule.
For example, to defend her current portfolio composition, she stated, “Where are the crazy valuations? Are they in our stocks, now that Zoom is down to 33 or 35 times this year’s earnings? Or is it in an auto stock where there might be losses?” And while certainly ZM appears to be a grand buy at the current time since dropping 70% in price over the last 15 months, perhaps the 70% higher price was a ridiculous price, and ZM should not even be at its current share price of 33 to 35 times earnings. In my opinion, comparing one company’s ridiculous share price against another company’s ridiculous share price, and justifying owning shares in one ridiculously priced company because other companies exist that possess even more ridiculous share prices is not a viable methodology of choosing winning stocks.
Stock analysis should always be executed on a stand-alone basis and not in comparison to other sectors as a reason for ownership. If comparative basis was the reason for owning investment assets, then because the US dollar has comparatively been the strongest of the world’s developed and emerging market fiat currencies, everyone should be encouraged to dump whatever fiat currencies they hold to buy and hold the US dollar. Only we know that such advice would be granted only by people that understand nothing about purchasing power, as the purchasing power of the US dollar has been miserably and rapidly deteriorating for the entirety of the lifetime of anyone reading this sentence. ZOOM stock may indeed climb significantly from its current share price. I haven’t done any research whatsoever on ZM to have a valid opinion either way. However, I know that I would never make a decision to keep holding a stock simply based upon the fact that I am aware of other industries in which I believe stock prices are more overpriced and overvalued.
For example, I warned my patrons not to keep holding million coin (MM) just a few weeks after its ICO, when its price was $76 as I predicted it would crash to $1 (it has since crashed 84.1% to $12.08 as of 10 Jan 2022). However, I did not suggest that BTC owners should continue to HODL BTC at $66,000 last November just because it was a less fraudulent cryptocurrency than MM. Even though BTC is far superior to MM, it will still face numerous obstacles as an ongoing viable currency in the future, so I suggested that my patrons never should HODL BTC, but to only trade BTC if they want to invest in BTC, and that $66,000 was a fine price at which to sell (and as of 10 January 2022, I have not suggested repurchasing BTC on my patreon platform since I suggested divesting of it, because the set up to repurchase has not arrived yet).
Finally, in regard to if Cathie Wood violates my rule #4, an insistence to stay committed to one’s view because one view is based upon how things should be versus how they are, since stock prices haven’t been how they should be in decades (based on fundamentals, sustainable growth potential of earnings, real profitability versus accounting-manufactured profitability, etc.), I sure hope that Ms. Wood is not violating rule #4 as well. In conclusion, if you’re still on board the ARKK, is it time to abandon the ARKK? I can’t tell you either way what to do, but hopefully I’ve provided you a framework that will enable you to decide which portfolio managers you can trust to manage your money.
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