The problem with selling … ARK investors do a round-trip … how to avoid the investment trap behind it all … a special live event tomorrow with all the details
“I can calculate the movement of the stars, but not the madness of men.”
So lamented Sir Isaac Newton, formulator of the laws of universal gravitation, co-developer of calculus, creator of the Newtonian reflecting telescope……and horrendous investor. Newton was a speculator in the South Sea Company stock bubble during the period around 1711-1720. For all his brilliance, he wasn’t able to protect himself from losing the present-day equivalent of more than $4M on the trade. What happened? In short, Newton got caught up in the frenzy of excitement surrounding the much-hyped South Sea Company. He rode the stock up to filthy-rich levels… But then didn’t sell when the stock began to turn south. I imagine his mindset as the stock began to crumble was “it’ll come back.” That ill-fated decision led him to hold the stock as it plummeted all the way back down, losing him all of his gains, and more. Newton’s experience points toward a challenge that has plagued investors and destroyed portfolios for centuries… How do you know when to sell?
Famed fund manager Cathie Wood has suffered her own “Newton” moment
For readers less familiar, Wood is the CEO and CIO of Ark Invest.technology stocks including Tesla, Zoom, Roku, Crispr Therapeutics, and Teladoc. This fund exploded in the years leading into the pandemic. As you can see below, from January 1, 2017, through February 12, 2021, Wood’s flagship ETF utterly destroyed the S&P 500. ARKK climbed 733% in those four years, which was nearly 10X the S&P’s 76% return.She’s best known for being the engineer of ARKK, which is her disruptive technology ETF. It holds a basket of top-tier
But then, ARKK began to wobble.Small losses turned into bigger losses – yet Wood held, convinced the bullishness would return. It did not. As you can see below, from that February 2021 highwater mark though late-December of last year, ARKK lost 81% of its value, while the S&P lost only 3.4%.
But more disturbing is the fact that ARKK completed a “round trip” and worse.In other words, had an investor bought on January 1, 2020, and enjoyed the monster gains that ensued – yet didn’t sell – he/she would have lost every single dime of profits, and more. That investor would still be underwater today.
Once again, not knowing when to sell resulted in complete portfolio destruction.
For added perspective, let’s turn to Keith Kaplan
Keith is the CEO of TradeSmith. You might recognize his name as we recently featured an essay from him in the Digest.From Keith:
I’m not here to pick on Wood. I could talk about her genius side and about how she could probably be doing 98% of things right.What I want to talk about is the 2% that she has done wrong, because it’s that part of her decision-making process that sent the Ark Innovation ETF price plummeting. Wood’s problem is that she’s human. When you’re managing $8.1 billion in assets (just for the Ark Innovation ETF, not her other ETFs), you need to be a machine. Machines are calculated, work within a set framework, and have no emotion. They are programmed for one job, and they execute it. In comparison, we humans are risk-averse when we are winning; we sell too early, and we buy too high and then throw in the towel as a stock price sinks. We can’t manage our emotions, and it leads us to do the exact opposite of what we need to do in the stock market.
With this as our introduction, I’m inviting you to attend an event tomorrow with Keith and our own Luke Lango, that focuses on how to avoid this round-trip destruction
Back to Keith to describe Wood’s mistake, which is also the focal point of tomorrow’s event:
Wood has made one of the most classic investor mistakes: not having an exit strategy.That comes from not having a fully formed plan that considers what to do when things go south. Had she just installed a trailing stop, her results could’ve been much different (and, I suspect, far more lucrative). A trailing stop is a stop price set at a defined percentage below the current market price of the position. At TradeSmith, we tie our trailing stops to the Volatility Quotient (VQ), our proprietary measure of a stock’s inherent volatility. These smart trailing stops help us take advantage of the natural ebb and flow of price movement to maximize any gains while ensuring we don’t get stopped out too soon.
So, how would a “smart stop” such as the one Keith is describing have impacted an ARKK investor’s returns?Keith writes that the Ark Innovation ETF triggered an Entry Signal in Tradesmith’s system on May 22, 2020, at $61.27. From there, the ETF soared to $155.30 before falling to its stop loss of $113.36 to $109.36 on March 8, 2021. An investor would have exited the trade with a 78.5% gain – versus Wood, who is still holding, down 30% over the same period.
Let’s look at another real-world application of this stop-loss system
Regular Digest readers know that Luke is our hypergrowth expert. His specialty is finding market-leading tech innovators that are pioneering explosive trends, capable of generating enormous returns for investors over the long-term.One of Luke’s investment services is The Daily 10X. It’s like no other service we offer. Luke doesn’t recommend official “buys,” manage a portfolio, or provide “sell” advice. But every day the market is open, he highlights a small cap stock with the potential to grow 1,000%. This approach can be incredibly lucrative. For example, coming into 2022, over the prior five years, Luke had recommended 17 different stocks that climbed more than 1,000%. But let’s return to a detail of the Daily 10X that we just glossed over…
“Luke doesn’t…provide ‘sell’ advice.”
Racking up huge gains is great. But as we’ve seen today, it’s the “locking them in” part that’s so tough for investors.Take Chinese electric car manufacturer, NIO.
NIO was one of Luke’s earliest 10X winners in The Daily 10X
Here’s Luke from all the way back on May 27, 2020, in The Daily 10X:
Many consider NIO to be the “Tesla of China.” That’s an accurate representation. For all intents and purposes, NIO is today exactly where Tesla was back in late 2015…This is a tiny company ($3.4 billion market cap) in its infancy (the first NIO car was delivered in mid-2018) with a ton of room for market share expansion as the Chinese EV market matures and the premium category flourishes… Indeed, if you assume NIO nabs Tesla-like market share in China, then there is potential for NIO stock to rise to $50 by 2025. That’s represents 1,500%-plus potential upside from here … which is big enough that if you’re looking for an EV stock to deliver Tesla-like returns, you should consider taking a position in NIO stock today.
It’s turns out NIO didn’t need until 2025. A handful of months would be good enough.Between Luke’s NIO profile in The Daily 10X in May 2020 and early-February 2021, NIO soared 1,545%.
But we all know what’s coming…From that peak price, NIO has fallen 83%.
How would using a smart trailing stop tool have impacted a NIO investment?
Well, first, had that investor bought NIO after Luke’s profile of it and held until today, he/she would be sitting on a gain of 184%.Keith and Luke will be sitting down to discuss this TradeSmith tool in more detail.They’ll explain how it can help investors profit in the market as this latest bull surge runs, while simultaneously protecting gains if 2022’s bear makes a resurgence. Before we sign off, one quick note… Cathie Wood’s ARKK fund is off to a hot start to the year. Had an investor timed her entry-price perfectly in late-December, she’d be up 40%. But just a few days ago, this investor was up 50%. Is ARKK rolling over? Should she sell? Is ARKK about to collapse, wiping out that entire 50% return? Using a smart trailing stop service prevents you from worrying about these types of questions. Join Keith and Luke tomorrow to hear more about how it works, how it can make your investing career far more peaceful, and how it can transform your portfolio returns.Click here to sign up for this free event and we’ll see you tomorrow. Have a good evening, Jeff RemsburgThat’s a great return. However, Keith’s trading stop service would have gotten an investor out of NIO at roughly $19, which could have netted a 903% gain on the trade. All because of better exit timing. Tomorrow at 8 PM EST,