THIS is How You Lose $10 Billion

This is How You Lose $10 Billion

It’s been a while since we last checked in on the “growth” narrative and its poster child — Cathie Wood.

The Financial Times has an update for us. Before reading, you might want to grab a stiff drink and sit down:

Q4 2022 hedge fund letters, conferences and more

Cathie Wood’s Ark Investment Management has earned more than $300mn in fees on its flagship exchange traded fund since its inception nine years ago, while wiping out almost $10bn of investors’ cash in the same period.

Investors have continued to plough money into the Ark Disruptive Innovation ETF, known by its ticker ARKK, over the past two years even though it has been badly burnt by the downturn in technology stocks.

Ark has earned more than 70 per cent of its $310mn fees since the fund’s valuation plummeted by nearly three quarters from its high in February 2021, according to FactSet data. This year it has brought in an average of roughly $230,000 in fees a day as ARKK’s value recovered slightly, rising by a quarter.

Oy vey! While “crazy Cathie” incinerated $10bn (and pocketed a cool $310m in the process), investors kept giving her more.

But also…

Cathie made the exact same mistakes investors made en-masse during the dot-com bubble. Technology can, will, and has changed society. But it doesn’t change the laws of economics.

This reality is apparent in her returns, but the most perplexing thing about it all is that it looks like her investors didn’t mind getting taken for a ride.

All Things Transitory…

Feels like a lifetime ago, when — back in February 2020 — we started warning that lockdowns will bring about inflation and shortages. Fast forward to today, and this pesky stuff is now part of our daily lives. We recently set up a dedicated inflation channel in our Insider private forum, where members can share their own experiences with all things “transitory”.

Out in the real world, inflationary signs keep stacking up. Labor markets in different corners of the world appear to keep tightening. Member Rose shared this anecdote out of New Zealand:

This afternoon i tried to book a rental car in Dunedin, NZ, online for my husband when he will be flying there in a couple of weeks and working in the area. I always use the same rental car company as it has served us very well over the years. The minimum time i could book it for was 10 days, the online menu said. Hubby rang the company direct and talked to them as he knows them well. The reason it says minimum 10 days hire is that they can’t get staff and so are managing the place with only 2 of them. A minimum hire time of 10 days is how they can manage their workload.

And just as we were writing this, this headline came across our screens:

What a time to be alive!

Buffett’s Secret Sauce

Warren Buffett is out with a new shareholder letter. In it, Buffett talks — among other things — about his proverbial secret sauce:

In 58 years of Berkshire management, most of my capital-allocation decisions have been no better than so-so. In some cases, also, bad moves by me have been rescued by very large doses of luck. (Remember our escapes from near-disasters at USAir and Salomon? I certainly do.) Our satisfactory results have been the product of about a dozen truly good decisions – that would be about one every five years – and a sometimes-forgotten advantage that favors long-term investors such as Berkshire. Let’s take a peek behind the curtain. In August 1994 – yes, 1994 – Berkshire completed its seven-year purchase of the 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire. The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million… American Express is much the same story… The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.

It echoes the approach we favor here at Capitalist Exploits HQ (and in the Insider portfolio). Namely, allocate a tiny fraction of your capital in any position with the aim of achieving at least 300% returns.

Now, does it always work out this way? No. We wish it did. But it ensures winners pay for any losers (and then some). And we go in ready to hold for many months, if not years.