How a Billionaire Lost Billions in the Stock Market

Why is billionaire investor Cathie Woods down so much this year? What can we learn from her downtrend in the stock market? Is there a way to profit from her mistakes?

There is no doubt that Cathie Woods is brilliant — if you define brilliance by the traditional way that the establishment considers brilliance. Cathie Woods graduated summa cum laude when she went to the University of Southern California. She worked for AllianceBernstein in the past, where she was criticized for underperforming the market during the 2007–2008 bear market. Her strategy was deemed too risky, so she started her own hedge fund.

What is Cathie Wood’s strategy?

According to her, she invests in the most innovative companies. This would include companies like Tesla, Roku, Zoom, Block, Coinbase, Spotify, Shopify, Draftkings, Robinhood, etc.

The problem with this strategy of investing in innovation:

The problem with investing in “innovative companies” is that oftentimes they are overvalued. For instance, Cathie Woods bought Coinbase stock on the first day it was issued, when it was trading at around $421. Now it is around $180 a share. So one of the big criticisms of Cathie Woods is that instead of focusing on the intrinsic value of a corporation, she tends to focus on whether the company is innovative. That is what influences her most. Now, this can indeed work if we are in an extremely bullish environment, where she can indeed easily outperform the market since people tend not to focus on the underlying value of an individual stock in a bull market. However, in a bear market, or just a tough market, large institutions might be more skeptical of the most innovative companies.

Cathie Woods’s ARK funds slogan is:

“We invest solely in disruptive innovation.”

The problem with disruptive innovation is that sometimes that means profitability will come years into the future. Investing in companies with no road to profitability is oftentimes a losing game.

But investors naturally become impatient and would like an investment with a payoff sooner rather than later. As an example, Cathie Woods invested in Virgin Galactic — even when it has not made any kind of concrete business plan that suggests that it will earn a predictable source of income and become profitable when it was $62 a share. It’s about $9.70 a share now.

Cathie Woods violates a major investment principal by continuing to buy more of a losing stock.

When the market tanks a stock, that does not mean that it is wise to buy more of that particular stock. The market is sending an important signal that it does not believe that this stock is worth as much as it has in the past. By buying more because it is “cheap,” one risks losing more and more money.

2000–2003 bear market would have destroyed Cathie Woods fund.

Many of the hot stocks of the year 2000 went down 90% or more. It would have been quite unwise to continue holding stocks that are tanking so rapidly. Further, buying even more of these stocks going down 90% or more would have really made it difficult for a fund to recover. This is a very fragile strategy!

Check out our new platform 👉

How a Billionaire Lost Billions in the Stock Market was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

Post fetched from this article