Carnage In High Growth Stocks! How To Act?
My worst investment mistake, which has made my portfolio even more antifragile.
To make a lot of money, that amount that allows you to make a “fu*k you money”, you need three key attitudes:
The deep conviction that it's possible.
An absurdly incendiary internal motivation.
Create an investment system far from the ordinary, which has worked for a few, and make it a way of life.
To achieve this third attitude it is necessary to fall. Today I am going to tell you about my biggest investment mistake, which occurred in a situation similar to the current one, with high-growth companies.
So I hope to help you out and save you a lot of money.
Last February I had a relatively large position (about 20%) in Cathie Wood's famous ETF, ARK Innovation (ARKK). This ETF is characterized by holding innovative companies with high earnings growth, such as Tesla, Square, or Teladoc. (Another very similar and better diversified ETF could be WCLD).
ARKK made from the March 2020 lows to February 2021 by 313% in just under a year (From that point on, there was a 30% drop). You can imagine the FOMO that was around this ETF and the amount of assets under management it increased during this period. The most curious thing is that the biggest inflow in the ETF occurred during the last phase of the cycle (green circle). This is common at the end of the cycle in any asset class and is the main reason why most investors lose money when investing.
The rest of my portfolio was in assets very similar to those currently in the asymmetric portfolio, but very little uncorrelated with ARKK, this meant that while there were losses in my position in this ETF, there was no other asset to offset them in the portfolio. This made me think a lot about how to continue to make my portfolio as anti-fragile as possible in any market situation.
One of the main conclusions I drew was that these fast-growing stocks perform best during periods when there is a lot of money in the markets and with very low-interest rates. Precisely what happened after Covid. This is because investors believe that these companies are going to be able to maintain their level of revenue growth (+100% YoY), as central banks can give them all the money they ask for in order to keep growing at this pace.
What happened is that when Quantitative Easing (QE) is cut or at least rumours about it are heard, the most speculative stocks are the first to fall, followed by the junior growth stocks and finally the indices.
Who has benefited and how much have they benefited from carrying fast-growth stocks?
One of the investors who benefited the most from this rise, and who publicly exposes his portfolio (CAGR 52.29%), was Puru Saxena. For those of you who don't know him, he was a former portfolio manager and is now dedicated to providing a lot of value on social networks for free. His success, in addition to all his years of experience, is due to the fact that he measures the timing of the market very well, and, most importantly, he has pre-established rules of when to buy, or fully cover his portfolio (At the moment, he has his entire portfolio hedged).
Although setting rules and sticking to them seems like a no-brainer, very few are able to follow pre-established rules and that is why very few (if any) beat the index over the long term. For those of you who have never stopped to think about it, the index is the only ‘fund manager’ that follows a pre-established unique rule to the letter, it has an asset allocation by Market Cap. And the results and resilience have not been bad at all.
Puru a few days ago published how the Fed's incentives (announced more QE, green arrow; red arrow, sheet stopped growing/shrunk) affect the markets:
There is no point in trying to analyze companies. It would be much simpler to buy with the Fed's positive stimulus (green arrows) and sell our entire portfolio with the negative ones (red arrows).
In the image above we would be missing a red arrow on the right side of the chart and that is that the FED will gradually cut injections while raising interest rates (scary), if we add to this the market multiples that are in a bubble, we are facing a mix that can lead us to one of the biggest recessions in history.
Bear Trap or Bubble?
If I gave you an answer, I would be lying to you. If someone thinks they have the answer, don't believe them.
The rally we experienced last year makes us think that we are in a bubble and maybe it has a better chance of continuing to fall. In fact, as we have already commented several times, we are very close to what we experienced more than 20 years ago.
My advice is that if you are invested in this type of companies, have an entry and exit plan and stick to it in any possible scenario. It sounds cliché, but if ARKK were to fall 70% tomorrow, would you stick to your plan?.
As Puru would say:
'Just my 2 cents, take it for what it’s worth.'