Cathie Wood’s Biggest Downfall

When you see a story right now about Cathie Wood, the portfolio manager of the Ark Innovation ETF (NYSE: ARKK), you’ll hear about how the exchange-traded fund (ETF) is down 62.4% this year.

Or how Wood is doubling down on stocks that just keep sinking further.

Or how over the last five years, the S&P 500, which started tracking 500 stocks in 1957 and could be considered a “senior citizen” at 65 years old, has performed better (up 49.7%) than the Ark Innovation ETF (down 5.4%), a fund that focuses on investing in new and disruptive technology.

But what you’re not hearing is why this has happened.

I’m not here to personally pick on Wood. I could talk about her genius side and about how she could probably be doing 98% of things right.

What I want to talk about is the 2% that she has done wrong, because it’s that part of her decision-making process that sent the Ark Innovation ETF price plummeting 75% from $156.58 on February 12, 2021, to an opening price of $37.78 on Monday.

Wood’s problem is that she’s human.

When you’re managing $8.1 billion in assets (just for the Ark Innovation ETF, not her other ETFs), you need to be a machine. Machines are calculated, work within a set framework and have no emotion. They are programmed for one job and execute it. In comparison, humans are risk-averse when we are winning, we sell too early, and we buy too high and then throw in the towel as a stock price sinks.

We can’t manage our emotions, and it leads us to do the exact opposite of what we need to do in the stock market.

Fortunately for us, we have tools at TradeSmith that let us execute like machines, taking the emotion out of investing and finding the best times to buy and sell.

How to Avoid the Mistakes of Cathie Wood

Wood has made one of the most classic investor mistakes: not having an exit strategy.

That comes from not having a fully formed plan that considers what to do when things go south.

Had she just installed a trailing stop, her results could’ve been much different (and, I suspect, far more lucrative).

A trailing stop is a stop price set at a defined percentage below the current market price of the position.

At TradeSmith, we tie our trailing stops to the Volatility Quotient (VQ), our proprietary measure of a stock’s inherent volatility. These smart trailing stops help us take advantage of the natural ebb and flow of price movement to maximize any gains while ensuring we don’t get stopped out too soon.

Looking at the top holdings in the Ark Innovation ETF, I see that the next five biggest positions after Tesla (Nasdaq: TSLA) all hit the Red Zone, or their stop-loss point. However, Wood kept them in the fund, where they continue to lose money to this day.

See for yourself:

• Roku (Nasdaq: ROKU) entered the Red Zone on November 23, 2021, at $226.06 and fell 78.7% to $48.11.
• Teladoc Health (NYSE: TDOC) entered the Red Zone on May 3, 2021, at $163.21 and fell 85.3% to $23.92.
• Block (NYSE: SQ) entered the Red Zone on December 20, 2021, at $158.30 and fell 67.5% to $51.51.
• Zoom Video Communications (Nasdaq: ZM) entered the Red Zone on September 15, 2021, at $279.12 and fell 74.3% to $71.84.
• Shopify Inc. (TSX: SHOP-TO) entered the Red Zone on January 21, 2022, at CA$111.04 and fell 68.1% to CA$35.37.

Note: All loss percentages are for the low hit between the date of Red Zone entry and November 16, 2022.

My guess is that Wood believes they will eventually turn around, as do all investors who are clinging to these stocks and hoping for a rebound.

That’s the human aspect of investing and trading that we want to avoid.

We want to use tools like trailing stops and our risk-based VQ system instead of our emotions.

With that in mind, let’s put the Ark Innovation ETF under the microscope of our system to see how we can use tools and strategies to our advantage.

The Ark Innovation ETF Gets the TradeSmith Treatment

The Ark Innovation ETF triggered an Entry Signal on May 22, 2020, at $61.27. From there, it soared to $155.30 before tumbling past its stop loss of $113.36 to $109.36 on March 8, 2021 – managing a gain of 78.5%.

Currently, the Ark Innovation ETF remains in the Red Zone and in a downtrend (since January 19, 2022), so further losses may be on the way. Our timing algorithms suggest that the Ark Innovation ETF is in peak, confirming a bearish outlook.

With a VQ of 54.58%, it’s a high-risk opportunity, but taking the trend and approaching peak into account, it’s probably not worth any potential reward at this point.

If you’re drawn to this fund because you believe in its mission of bundling innovative, disruptive companies, like Tesla, Zoom and Roku, I’d suggest putting it on a watchlist and waiting for another Entry Signal.

If Wood is nuts for not using a trailing stop, so are you if you don’t either.

Cathie Wood and Ark Invest serve as a cautionary tale that no one, no matter how brilliant, is immune from emotions and how they can lead us to lose money. Staying in stocks with the hopes they’ll turn around is tantamount to throwing darts in the dark. If all you’re relying on is a gut instinct, your probability of success tapers significantly.

You want to know what to buy, when to buy it and, most importantly, when to sell it.

At TradeSmith, we have the tools to help you in each of these three crucial areas.

Have a nice day,

Keith

P.S. Interested in learning more about TradeSmith’s tools?

On Wednesday, December 14, I’ll be sitting down with Chief Investment Strategist Alexander Green and Chief Income Strategist Marc Lichtenfeld to discuss how to use TradeSmith’s proprietary tools to add $50,000 or more to your income over the coming year – without buying any new stocks, bonds or options.

We’re calling it The 2023 $50,000 Income Challenge. It’s completely free to attend.

Simply click here and enter your email address to reserve your spot for the online event.