Posted January 13, 2023
By Zach Scheidt
Don't Make This Rookie Mistake Like SHE Did!
Fair warning: I’m about to go on a bit of a rant; a letter from a professional investor published this week has me a little ticked off today.
You may be familiar with Cathie Wood, the founder and CEO of ARK Invest. Her flagship fund ARK Innovation ETF (ARKK) was one of the most popular investments during the pandemic bull market.
But since its high in February 2021, the fund has lost 78% of its value. And with that decline, tens of thousands of individual investors have suffered tremendous financial losses.
Up to this point, ARKK's Cathie Wood has been completely unapologetic about her fund's performance. Instead, she blames the Fed and continues to double down on her losing bets.
Today I want to share her letter with you and explain how to avoid meltdowns like the one that has hurt ARKK investors so badly.
Love the Company, Not the Stock
The idea behind Cathie Wood's ARK Innovation ETF was to invest in disruptive technologies that will change the way we live.
And while this sounds like a great idea on paper, ARKK has been a terrible performer, especially when you account for the volatility investors have had to endure.
Let's take a look at some of the stocks that ARKK has been heavily invested in.
First, there’s Zoom Video Communications (ZM), which has certainly disrupted how we live. During the pandemic, Zoom helped businesses host meetings and allowed friends and family to stay in touch.
I've got no problem with Zoom's technology. But the company earned about $3.96 per share in 2022. At its peak near $560 per share, investors were paying nearly $150 for every dollar of future annual profits to own the stock.
Meanwhile, Microsoft Teams, Apple's Facetime, and several other products directly competed with Zoom's platform. It's no wonder shares of ZM lost well over 80% of their value (and are still extremely expensive in my opinion).
Here's another one you're probably familiar with: Roku Inc. (ROKU).
The video streaming service helped keep people entertained during lockdown. And the technology behind ROKU's smart TVs and other devices is impressive.
But the company still isn't profitable. And Roku isn't expected to earn a profit any time in the foreseeable future.
Remember, when you invest in a stock, you're buying a piece of an actual company.
So let me ask you this: Would you buy a company that isn't profitable and isn't expected to be profitable at any time in the foreseeable future?
Hopefully, your answer is no. After all, why buy a company without the prospect of paying you off in the future?
Looking Forward to More of the Same
I'm frustrated reading through Cathie Wood's recent letter to investors. Even though her fund has caused thousands of investors to lose huge sums of money, she's completely unapologetic.
Instead, Wood is basically telling us that she plans to continue down this road that hurt investors so badly. (You can read her letter to investors here.)
Here are some of the areas she's focused on heading into the new year:
Next Generation Internet - Wood discusses how artificial intelligence applications like ChatGPT can change the role of knowledge workers. She also harps on digital wallets, a concept she calls social commerce, and blockchain technology as key areas for investors.
Autonomous Tech & Robotics - In this section, Wood lauds applications like autonomous driving, 3D printing, space exploration, and industrial robots. And while these technologies are certainly important in today's market, I haven't found many profitable companies in this area worth investing in.
Genomic Revolution - Similar to the other technologies, Wood explains gene editing, cell therapy, molecular diagnostic testing, and other medical advances that are exciting to learn about. But at the same time, Wood fails to explain how investors will make any money investing in these areas of innovation.
Here's the thing: In a bull market, you can invest in concepts. Stocks tend to trade higher, and the more exciting the story, the faster investment profits can add up.
But we're not in a bull market right now, and investors don't want concept stocks full of interesting (but unprofitable) technology.
My problem with Cathie Wood is that she doesn't care about the business metrics or investment valuations of the companies she invests in. She puts the money from ARKK into any stock that has a shiny, new tech idea that excites her.
That strategy has hurt way too many investors, people that you and I know and care about. And based on her letter to investors, ARKK is continuing on this path of wealth destruction.
Here's What to Do Instead
In today's bear market, it simply doesn't pay to invest in unprofitable (or high-valuation) tech stocks. There's just too much risk of these stocks continuing to trade lower.
I'd much prefer you invest your savings into real companies that generate real profits and pay you reliable dividends.
Believe it or not, many of these companies do use the technologies that Cathie Wood is so excited about.
For instance, Caterpillar (CAT) and Deere & Co. (DE) manufacture giant construction and farming equipment. Even though you might consider these as legacy industrial stocks, they're using cutting-edge technology.
Autonomous driving, satellite imagery, 3D rendering... These companies use all of this technology (and more) to help project managers and farmers be more efficient and productive.
And these companies give you both safety and income if you buy shares today. That makes a lot more sense to me than waiting for some unprofitable tech company to hopefully find a way to turn a profit years from now.
There are plenty of great investments you can make in today's market, and some are driven by exciting new technology.
Please, as you decide how to invest in 2023, focus on the excitement of profits, not on the concepts that may or may not make money over time.
You'll grow your wealth much more reliably, and you'll also be able to sleep at night without worrying that your wealth is sinking as fast as ARKK has plummeted.