Published On: Wed, Dec 28th, 2022

ARKK: Are Some Investors Finally Losing Faith in Cathie Wood’s ARK?

The story of Cathie Wood and the ARKK fund would present a fascinating study of various types of cognitive bias. Everybody wants a story. It’s kryptonite for humanity. They just don’t stop believin’. She predicted Bitcoin will hit $1,000,000 and Tesla $22,000 a share by 2030 (I believe that prediction was made before TSLA split again so should be adjusted to $110,000)

I think that most people are aware that ARKK is a speculative fund but are willing to take the risk. Cathie Wood claims that her investments are for the long term even if she trades her holdings quite actively. Investors have bailed out of growth stocks and other speculative assets en masse in 2022. Her fund Ark whatever, is hardly a “growth fund”; it is highly speculative to the extreme and would be considered in the “aggressive” asset class. In addition to having a risk profile to handling high percentage of “aggressive” asset mid cap stocks.

Wood’s techniques work best (or perhaps only work) during a Quantitative Easing monetary regime. When the regime shifts into Quantitative Tightening, she’s lost at sea during a monsoon. Not pretty. It’s hard to make money…which is why the vast majority of businesses fail. And turning a money losing company into a profitable one isn’t any easier. A life lesson: when you ride a bubble, you have to know when to get off.

In a rising yield environment in which investors have alternatives for earning decent returns for little risk, many are losing their appetite for money-losing companies promising the chance of returns in the future. Shares of the fund, a pandemic-era favorite largely made up of unprofitable, growth-oriented technology companies, are down 63% this year. While the S&P 500 index has rallied 12% since mid-October to cut its 2022 losses to 16%, Ms. Wood’s flagship fund is hovering near a five-year low.

Interest rates demolish growth stocks, whose values depend on discounting of future returns. Higher rates mean future returns are devalued, so tech stocks tank Tech stocks will continue to tank as long as the Fed raises rates. It will then take time for new ideas to take shape. People who bought at the top of this bubble are paying, as they always do. The time to buy tech is when everyone else sells and valuations fall to earth.

Investors heeding a “buy the dip” rallying cry poured money into the fund in each of the first five months of the 2022 year—a net $1.89 billion—as markets tumbled. Since then, their enthusiasm has waned. They pulled money in three of the next six months, or a net $76.5 million, according to FactSet. On Nov. 30 alone, they yanked $146 million, which was among the largest single-day outflows of the year. Yet her fund still had 1.5 billion net INflows in 2022.

Investors have bailed out of growth stocks and other speculative assets en masse this year. In a rising yield environment in which they suddenly have options for earning returns with little risk, many are losing their appetite for money-losing companies promising the chance of returns in the future.

The marketing strategy Cathy Wood has followed has been to make outrageous predictions. If she gets lucky a few will actually occur and she will seem prescient and investors will throw their money at her. One of her outrageous predictions was a lightning strike, Tesla. She predicted it would go to $5000 when the stock was $100-$200. She got very lucky and her prediction essentially came true. As result, she got enormous amounts of free media time to promote herself and her funds. She began making another outrageous prediction about 2 years ago that we would be having DEFLATION.

The three largest holdings in the fund—which is known by its ticker symbol ARKK—are Zoom Video Communications Inc., Tesla Inc. and Exact Sciences Corp. , companies Ms. Wood has said have the potential to change the world. Shares of Zoom and Tesla have lost about half their value in 2022, while Exact Sciences, an unprofitable provider of cancer screening and diagnostics tools, is down 42% in December 2022. Ms. Wood has also been a proponent of bitcoin, which has fallen about 75% from its November 2021 peak.

Similar bets netted huge rewards in the low-rate environment of 2020 and 2021. ARKK shares more than doubled in 2020 before worries about inflation—and the prospect of higher rates—stalled their advance. “The bet was that free money would last indefinitely, and there doesn’t seem to have been a risk-management game plan,” said Jon Burckett-St. Laurent, senior portfolio manager at Exencial Wealth Advisors.

Not rocket science to see that the era of cheap/free money is over. Capital will now follow profit, as it always should. It hasn’t gotten much press, but the days of artificially low rates led to inefficient capitalism, and contributed (along with many other factors) to this latest bout of high inflation. Inflation will go down but probably level off higher than the Cathie Wood’s of this world think and therefore rates should remain higher, if the Fed learned any lessons (ha, ha, maybe not). I’m morbidly interested to see how these zombie companies deal with their debt loads in years ahead. Growth at all cost is over.

Tesla has already changed the world. As a result competing EV’s are flooding the markets. Woods seems to think the other auto companies will stand around saying “Gee. Golly” and leave the market to Tesla . Not so. Zoom makes video conferencing software, and so do dozens of other companies including Google, MSFT, ORCL, just to name a few, and many give it away for free. And most people don’t want to be cooped up in their houses forever. They don’t want to be that part of their worlds changed. Witness recent events in China. Her investments in ROKU and TDOC are equally dubious. And crypto?? Really??!!!

I’ve come to think of Cathie as sort of the anti-Lynch. Remember he said, water your flowers and pull your weeds? She pulls her flowers and waters her weeds. To me the big flaw with her strategy is having too few stocks. She can certainly pick winners, but then she has to cull them because they get too much weight. She takes that profit and doubles, triples, quadruples down on her losers. Then out of the blue she liquidates, sometimes the next day like Zillow last fall.

For her part, Ms. Wood continues to shrug off the critics and stand by her investments. She tweeted recently that companies in her fund are “sacrificing short-term profitability for exponential and highly profitable long term growth.” During a Bloomberg Television interview in November, she predicted the price of bitcoin will hit $1 million by 2030, a roughly 6,000% increase from current levels.

Ms. Wood has called for Zoom, ARKK’s largest holding, to approach $1,500 a share in 2026, based in part on expectations of a worker backlash against returning to offices. Her bear case was for shares to trade at $700. They closed Monday at $73.69. Through a spokeswoman, Ms. Wood declined to comment. While many on Wall Street are cutting risk and bracing for a recession, Ms. Wood has been adding to riskier positions in recent weeks, buying more shares of cryptocurrency exchange Coinbase Global Inc. and a bitcoin futures ETF.

ARKK added 931,000 shares of Coinbase worth roughly $43 million in November, according to FactSet. ARKK is the second-largest holder of Coinbase shares, which are down 83% year-to-date. Another of Ms. Wood’s funds, the ARK Next Generation Internet ETF, ARKW -0.64% increased its exposure to bitcoin with the purchase of 608,000 shares of the Grayscale Bitcoin Trust, worth $6 million. GBTC trust shares are down 76% this year.

Stubborn fund managers who double down when their picks are down significantly…instead of re-evaluating their initial thesis….are probably the most dangerous kind for their investors! I avoid them always…and would immediately pull my money if I find one out later. No sympathy for anyone who decides to keep, or add!!, money with such managers. I also think there are a lot of other “tech/innovation” funds-of-funds who invest in ARKK…. have you checked all your funds as to whether they hold ARKK in their portfolio? If so, you should question your fund managers’ investment approach as well!

I’ve seen so many Cathie Woods in my lifetime. They put on one trade that works extremely well, usually with a ton of risk. Everyone (suckers) believes she is a genius, flocks into the fund at the top, only to lick their wounds later. Why do people still write about ARKK and Cathie Wood as a serious investment vehicle and investor? If anything in future, ARKK should be used to teach the broader public about the dangers of speculative bubbles. And the worst thing? The WORST thing? She’s been shilling for the companies she’s invested in, including as a keynote for Coinbase for three years running. A massive conflict of interest. Sadly, people have a short term memory on Wall Street and this will happen again.

Cathie Wood is not a loser. She made hundreds of millions in fees from her funds (and will continue to make them for years to come). Oh, and the management fee for ARKK is a whopping 0.75%. The losers are those who bought the dips in ARKK. Having said that I suspect she’s not that wealthy, that she probably has much or maybe even all (just about) of her personal worth somehow tied up in sophisticated leverage, all at risk, maybe quite dire risk. Doesn’t feel like its going to end well. I’m old enough to remember Abby Joseph Cohen. She was correct once, and became a superstar, and was never right again.

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About the Author

- Robert is a private trader with over 15 years experience trading the financial markets.