To outperform the market over time, an investor must maintain the discipline of saying “no” to bad risks… and then keep on doing that until good risks come along.

It’s not easy.

It’s hard to say “no” to high-flying stocks when everyone else is saying “yes.” It’s like leaving a cocktail party while it’s still going strong.

But you must have the discipline to say “no” to bad risks and the patience to wait for better opportunities.

Bad risks are where the potential upside is much smaller than the potential downside. That’s why they’re often called “asymmetrical risks.”

Here’s an extreme example to illustrate the concept…

Running across all 10 lanes of L.A.’s 405 Freeway in order to win a $20 prize. If everything works out perfectly, you win $20. If not, you might end up on the front grill of a big rig.

This example of asymmetrical risk is so obvious it seems ridiculous, but many asymmetrical risks are less obvious — like jaywalking in broad daylight.

Likely, the jaywalker will cross the street without incident. But if he happens to encounter a driver who’s busily texting a joke to a friend, something very bad might happen.

In the financial markets, many asymmetrical risks seem as benign as jaywalking, which is why so many investors take those kinds of risks every day… and never even know it until harm comes their way.

If they don’t see any oncoming danger, they step out into the street and start crossing. “It’s the smart thing to do,” they say to themselves. “Why just stand here doing nothing, when I could be moving ahead?”

Admittedly, the jaywalker usually arrives earlier at his destination than the non-jaywalker. And the investor who buys high often makes profits cautious investors would have missed…

At least for a while.

But both bets are bad. Not because the risk of a bad outcome is so high, but because the magnitude of the potential bad outcome is so high.

Luke Lango’s 2022 Announcement Floored Us…

These are asymmetric risks, and disciplined investors understand their dangers. That’s why they begin their analysis by asking “What can go wrong?” rather than “What can go right?”

Unfortunately, many investors grow impatient. We justify buying richly valued stocks by comparing them to those that are even more richly valued. Or worse, we chase after “hot stocks” because their stories are so seductive.

But often, stocks like these offer a much larger dose of potential risk than potential reward. That’s a bad risk.

Avoiding bad risks like these is the essential first step toward outperforming the market… and building wealth over time.

Today, I’ll highlight one particular “bad risk” to avoid right now, and later, I’ll explain which “good risks” could be worth it in the New Year.

This Sinking Ship Is Synonymous with “Bad Risk”

Successful investing is not only about which stocks you buy, but it’s also which stocks you sell… or never buy.

Near the top of my list of stocks to sell today — or avoid completely — would be the ARK Innovation ETF (NYSEARCA:ARKK).

This high-octane ETF, run by celebrity fund manager Cathie Wood, purports to invest in disruptive technologies. As such, she eagerly embraces the bubble-like excesses of the current market environment, like loading the ARKK portfolio with stocks that do not yet produce any profits.

As I mentioned last month in Smart Money, if you were to combine the annual earnings from each of the companies that occupy the top 25 spots in the ARKK portfolio, you would discover that their combined GAAP net income from the last 12 months was less than zero.

Therefore, my rationale for selling ARKK is a simple one: The kinds of stocks that populate the ARKK portfolio are “priced for perfection.” Anything less than perfect stock market conditions should cause the ARKK share price to fall, at least relative to broad indices like the S&P 500.

In other words, ARKK offers a poor tradeoff between risk and reward — the asymmetrical risk we discussed earlier.

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Now, these sorts of investments sometimes work out fine, of course — just like eating undercooked chicken sometimes works out fine. But “fine” is not the objective of investing.

In the investment world, “fine” has another name; it’s called “opportunity cost.” This term refers back ruefully to “what could have been,” describing the consequences of making a misguided or suboptimal choice between competing possibilities.

And because bad investments take up “shelf space” in your portfolio, they can inflict serious damage to your financial goals.

ARKK is one such stock… at least that’s my assessment. But that is also a quantitative observation. Over time, richly valued stocks, like the ones that populate the ARKK portfolio, tend to perform poorly relative to their lowly valued counterparts.

Bottom line: I expect ARKK’s struggles to continue, as some of the overhyped sectors of the market come back to earth.

What to Do Before Jan. 1, 2022

Now, over the last few days, I’ve shared a few articles from my colleagues, Louis Navellier and Luke Lango.

Because last week, we came together to hold one of the most important events of our careers: the Early Warning Summit 2022.

During the Summit, we warned viewers about the big moves and major events that will impact the stock market in 2022.

• Get on the right side of these moves, and your portfolio could thrive in 2022.
• But if you get caught off guard or fail to take the appropriate steps, your portfolio could succumb to the opportunity cost of holding merely “fine” investments, when it could have been holding excellent ones.

To prepare you best for any market situation, we revealed the step-by-step playbook you need to follow if you want to make a small fortune in 2022.

We used this same playbook our readers used to beat the Dow by 9X back in 2020 during the fastest bear market crash in history.

When I say that Louis, Luke, and I see events that could rock the markets early next year, I mean it… and we want you to be in the best place possible financially.

The Early Warning Summit 2022 is where you want to be before 2022 kicks off.

You can watch a replay of the Summit here.

Regards,

Eric Fry

P.S. There’s something else we did during the event — Louis, Luke, and I also issued eight urgent buy alerts on our favorite hypergrowth stock recommendations for 2022. We analyzed over 5,000 stocks and this small group of stocks represents the fast-growing companies within the most lucrative opportunities for 2022, and these eight stocks are the best of the best. If you want to learn how to get your hands on them (and the 2022 playbook), then watch this video here.

On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.