A Mistake To Avoid!

Episode Summary

Executive Summary: The episode argues that ARK Invest’s rise and fall illustrates a classic behavioral-finance problem: investors chase performance, buy near peaks, and then redeem during drawdowns, leaving them with worse outcomes than the fund itself. It also highlights how inflows, concentrated illiquid holdings, and media hype can amplify both gains and losses, enriching the manager while harming late entrants.

Main Topics: ARK Invest’s performance and investor outcomes (Priority: 5/5): The host reviews ARK’s sharp losses in 2021-2022 and contrasts them with Kathy Wood’s advantageous position as an early investor and asset gatherer. Performance chasing and behavioral finance (Priority: 5/5): Investors tend to buy after strong returns and sell during declines, which often makes their personal returns worse than the fund’s published returns. Fees and asset growth as the real winner (Priority: 4/5): Even when returns deteriorated, massive inflows raised ARK’s assets under management and fee income substantially, benefiting the manager and team. Concentration and liquidity risk in ARK’s strategy (Priority: 4/5): Heavy positions in smaller companies can push prices up on the way in and depress them on the way out, worsening volatility and redemption risk. Historical parallels to past fund manias (Priority: 4/5): The episode compares ARK with the Munder NetNet Fund and other sector/theme funds that surged during bubbles and then collapsed. Social media, retail enthusiasm, and hype (Priority: 3/5): ARK’s popularity was reinforced by Twitter/YouTube attention, bold forecasts, and the broader meme-stock/crypto environment of 2020-2021.

Key Arguments: Most investors in ARK bought after the fund became famous for huge gains, meaning they entered near the top and are now underwater. A fund can have good long-term percentage returns while its investors still lose money because they time entries and exits poorly. ARK’s large inflows increased fee revenue dramatically, so 2021 was arguably better for the manager financially than 2020 despite weak fund performance. Concentrated ownership in small, less liquid companies creates feedback loops: inflows lift prices, but redemptions can crush them. The ARK episode fits a long pattern seen in sector and thematic funds where enthusiasm peaks after strong returns and then reverses. Academic research shows average fund investors underperform the funds they buy because they chase returns and don’t stay invested long enough.

Data Points: ARK Disruptive Innovation ETF return in 2022: lost almost half its value - Used to show the severity of the drawdown for recent investors ARK Disruptive Innovation ETF return in 2021: lost just over 22% - Occurred despite a strong year for tech stocks overall NASDAQ return in 2021: up 27.5% - Illustrates how poor ARK’s relative performance was ARK fund return since inception: positive overall, roughly in line with the S&P 500 - The host notes this is true largely because Kathy Wood invested on day one ARK management fee: 75 basis points - Applied to the ETF’s assets under management ARK assets under management at start of 2020: less than $2 billion - Base used to compare fee generation before inflows surged ARK fee revenue at start of 2020: under $15 million - Estimated from the smaller asset base ARK fee revenue at peak in 2021: over $200 million - Result of massive asset inflows ARK Invest total assets peak: over $60 billion - Company-wide peak in February 2021 across multiple funds ARK employees: less than 40 people - Used to imply a large share of profits likely went to Kathy Wood and a small team Munder NetNet Fund return in 1999: around 175% - Historical example of a thematic fund drawing huge inflows after strong performance Munder NetNet Fund AUM peak: more than $11 billion - Reached in spring 2000 at the top of the dot-com bubble Munder NetNet Fund loss in 2000: 54% - After the dot-com bubble burst Munder NetNet Fund loss in 2001: 48% - Continued collapse after the initial drawdown Munder NetNet Fund AUM late 2001: $1 billion - Shows the effect of performance declines plus redemptions Munder NetNet Fund loss in 2002: 45% - Further deterioration after investor enthusiasm faded Average U.S. stock market return over 20 years (Dahlbar Inc.): just over 6% per year - Compared with actual fund investor outcomes Average equity fund investor return (Dahlbar Inc.): 4.25% - Evidence that investors underperform their funds on average ARK stake in ProtoLabs: 15% - Example of a concentrated position in a small company ProtoLabs market value at start of 2020: less than $3 billion - Before ARK-driven buying pressure ProtoLabs peak market value: almost $7 billion - After heavy buying pressure ProtoLabs decline from peak: 75% - After ARK reduced its weight in the stock Neil Woodford fund suspension: June 2019 - Illustrates redemption risk in illiquid strategies Woodford Equity Income Fund size: $3.7 billion - Fund forced to suspend trading due to redemption pressure and illiquid holdings Woodford illiquid assets share: a fifth of the fund’s assets - UK regulator cited extreme illiquidity as a key problem ARK annualized return prediction: 50% over the next five years - Bold forecast made by Kathy Wood GDP growth prediction: 30-50% a year - Attributed to breakthroughs in artificial intelligence ARK inflows in first half of year: $1.5 billion - Despite the decline, investors were still adding money Short interest in ARK ETF: over $1 billion - Shows growing bearish bets against the fund

Pivotal Quotes: "the time to buy is when there's blood in the streets" — Baron Rothschild: Used to reinforce the contrarian lesson that the best returns often follow periods of fear and weak performance "investors, on average, are so bad at timing their investment entries and exits that most of them end up losing money even when they choose a consistently winning fund to invest in" — Patrick Boyle: Core explanation for why fund-level success does not guarantee investor success "stonks only go up" — Patrick Boyle: A sarcastic reference to the retail mindset that may have delayed selling of ARK despite poor performance

Implications: Listeners should beware performance chasing, especially in hot thematic funds. For the industry, ARK shows how inflows, marketing, and illiquid concentration can magnify boom-bust cycles and hurt late investors while rewarding managers.