ARKK: Are you chasing HOT investments ? - Kuvera

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When I was young, 
I was a terrible investor. 

But after decades of hard work,
I am no longer young.

: Douglas Boneparth

First published on May 21st, 2021. It is still as relevant as ARKK trades below $90 now and has given away almost all of it’s excess returns over NASDAQ.

I took a break from writing the weekly newsletter last month. We all had more important things to attend to. In case you are still undecided on how to help, here is a simple idea

Let me kickstart again and revisit “hot” investments, and how investors end up underperforming the assets they are invested in.

It is something I have written extensively about earlier too, most recently on $GME and $TSLA. Btw, both are trading lower as of the last writing so the investors have either suffered more pain or have bailed out because they couldn’t take it anymore.

Today we will look at some evidence from ARKK ETF. You can learn more about ARKK here, but in a nutshell “Companies in ARKK include those that rely on or benefit from the development of new products or services, technological improvements and advancements in scientific research relating to the following areas: Genomic Revolution, Web x.0, and Industrial Innovation.”

And ARKK has done really well. It is up 85.2% over last year and up 39.7% per year over the past 5 years, handily beating S&P and Nasdaq over those time frames.

This is where, however, it gets interesting.

While ARKK has been racking up impressive returns, ~55% of the funds total lifetime flows have happened after Nov 2020, which means they are currently underwater as of last Friday’s close price. So while the fund manager has delivered on her promise of investing only in cutting edge companies, the average invested dollar has not even beaten the index. The S&P 500 for comparison is up ~16% since Nov 2020.

None of this is a commentary on how ARKK will perform from here. We are just exploring how real investors behave and how hard it is to keep your wits about yourselves when everyone else is losing theirs.

The lesson is the same. Don’t chase performance.

It is easier said than done as we delude ourselves into believing that we bought due to “conviction”. However, the conviction that suddenly materializes after strong return performance is just an excuse for us to publicly and privately say with a straight face that we are not performance chasers.

The conviction gap becomes obvious when the stock moves against us. If it were true conviction you would buy more as you are getting the same stock at a cheaper price. What the data however suggests, is that investors bail at that point. The number I hear most often from market makers is around 7 – 10% i.e investors are most likely to rethink their “conviction” when the trade moves 7 – 10% against them at which point most decide to sell. We have shared the databefore on how much an average investor loses due to this performance chasing behaviour. Do go through it again, especially the data on Peter Lynch’s track record and how much an average investor actually made in his fund!

Happy investing,
Gaurav
CEO | kuvera.in | @rustapharian

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