Space Cowboys
May 9, 2024
“There are old investors and bold investors, but there are no old bold investors.” Howard Marks
Since I left Wall Street, my blog has fallen silent. The truth is, while I have had more time to write, I haven’t felt particularly inspired. After revisiting some of my old posts, a trend emerged. My best work skewered Wall Street’s absurdities.
Then a realization smacked me like a dumb trader’s margin call. I had given up an endless supply of comedic material now that I no longer sit on a trading desk. Free of that chaos and nauseating investment committee meetings, I have found myself more selective in the information I consume. No longer force-fed analyst BS and investment banker drivel, I went looking for new comedy in the pages of the Wall Street Journal.
It didn’t take long, an article about the hottest Wall Street Firm ARK has drawn my ire.
When “Disruptive Innovation” becomes “Delusional Investment"
The Ark Innovation ETF has been one of the fastest growing funds over the past few years and was propelled to envious heights during the pandemic on the back of bold bets on “disruptive innovators” aka speculative tech stocks. With sky high returns and adoration in the media, the fund received more than $20 billion in asset flows in 2020 alone.
ARK rode the wave of a speculative market frenzy, shamelessly touting its performance to fleece retail investors flush with stimulus cash. These performance chasers, piled into ARK at the absolute peak. Instead of acting as responsible stewards, ARK used this new cash to further inflate the very bubble they were exploiting. Predictably, the house of cards came crashing down the moment the Federal Reserve raised interest rates.
According to Morningstar, they now hold the dubious honor of having destroyed more shareholder wealth than any other asset manager over the past decade. Meanwhile the investors who bought the hype have been left holding the bag. At least ARK was able to profit handsomely collecting fees on a staggering $40+ billion in assets during this fiasco.
“Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.” Warren Buffett
ARK was back in the news recently with a bold prediction that Tesla would be worth $2,000 a share. That works out to about $7 trillion dollars. Just think, for that price tag we could buy 100% of the US farmland, all the real estate in Manhattan and have enough left over to own both Amazon and Walmart outright. Which would you rather own?
This outrageous prediction is just another shameless attempt by ARK to grab headlines and sell their funds. How did they come up with this valuation? ARK assumed Tesla will perfect its self-driving technology and launch a global robo-taxi empire that generates $10 trillion of revenue by 2030! They assumed by the end of the decade Tesla’s robo-taxi opportunity would account for about 10% of the current GLOBAL economy. Yes, Tesla is innovative, but the assumption of a complete transformation of the transportation sector in a few years is rubbish.
Valuation tools are supposed to be grounded in reality and used as a sanity check, not to fuel a wild imagination. ARK seems to be operating from a space station orbiting their own hype machine. Which is unsurprising, considering they have an entire investment fund (ARKX) dedicated to the profiting in the cosmos.
This is the dark comedy of Wall Street: outrageous predictions will get you on TV and in the media drawing in naïve investors. The money flows for the likes of ARK, while the poor investor who buys the hype, ends up just that – poor. So, the next time ARK or someone else throws out a fantastical valuation remember it is likely more about filling their coffers than helping your portfolio.
I do not want to give the impression that investing is easy or that I always get it right. I spend a lot of time thinking about risk and return because it is the key to building a successful portfolio. What I want to express is that hype often overshadows risk. Every investment publication including this one ends with the standard safe-harbor statement “past performance is not an indication of future results. Wherever there is potential for profit there is also the possibility of loss.” I think proclaiming Tesla is worth 10x its current price is misleading to the average person. With investing you don’t have to do exceptional things to get exceptional results. With enough time the magic of compounding will work wonders. To benefit you need to invest for the long haul. That is why a margin of safety is crucial. Which means carefully assessing an investment to ensure the potential return outweighs the risk. I believe the average person is much better off with the following guidelines.
· Buy great businesses at a reasonable price (not Tesla at $2,000).
· If you don’t know how to identify a great business or reasonable valuation, buy the S&P 500.
· Keep expenses to a minimum (don’t pay for hype).
· have a clearly defined plan and stick to it. If you don’t have one, I can help you.
Cautious Investing,
Eric
This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. Park River Advisors has no duty or obligation to update the information contained herein. Further, Park River Advisors makes no representation, and it should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for profit there is also the possibility of loss.
This memorandum is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to by any securities or related financial instruments in any jurisdiction. Certain information provided by independent third-party sources. Park River Advisors believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.
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