Morgan Housel recently posted what he considers the four most dangerous financial traits:
A theme I’m trying to drill home here is that your behavior is by far the dominant element in investing. See here, here, and here.
Now this is easier said than done.
J.P Morgan has been credited with saying, “nothing so undermines your financial judgement as the sight of your neighbor getting rich.”
In 2020 and 2021, we saw a lot of FOMO, impatience, and gullibility.
Let’s first look at Cathie Wood and her beloved ARK funds.
She was the talk of the investing world during 2020 as her ARK Innovation fund ($ARKK) generated a 153% return that year.
Not too shabby.
But boy oh boy have times changed. A recent WSJ article pointed out the harsh truth:
By the end of last year, ARK funds had destroyed more wealth than any other asset manager over the previous decade, losing investors a collective $14.3 billion, according to Morningstar. ARK’s biggest inflows came in the months surrounding the innovation fund’s February 2021 peak, unfortunate timing for many investors.
Remember the CGM Focus Fund I mentioned a few weeks ago?
“History never repeats itself, but it does often rhyme”
Her funds took in $20 billion in 2020, amidst the chaos. Again, investors chasing performance, “Queen Cathie” can do no wrong…
Now her followers are growing impatient:
Investors have pulled a net $2.2 billion from the six actively managed exchange-traded funds at her ARK Investment Management this year, a withdrawal that dwarfs the outflows in all of 2023. Total assets in those funds have dropped 30% in less than four months to $11.1 billion—after peaking at $59 billion in early 2021, when ARK was the world’s largest active ETF manager.
Investors who chased the hype surrounding ARK's funds experienced significant losses. They had FOMO once they saw everyone making money in 2020 and now are impatient as they find themselves underperforming.
We see this a lot with individual stocks as well.
Cannabis:
Fitness:
Solar:
EVs/Charging Stations:
I’m not dunking on these companies. I’ve personally invested in some of them at one point.
Hopefully you are seeing how brutal it can be investing in individual stocks. Yes, I’m cherry picking and there have been plenty of big winners over the years.
But I like to think in terms of probabilities:
So if there has historically been a 66% chance that my individual stock underperformed the index or I lost money all together, that’s not compelling to me.
Why then do so many investors still play this game?
Many people fixate on outperforming the market or their friends.
Met a guy in his 30’s over the weekend. I didn’t ask, but he told me he thinks he made the most money out of any trader in the US in 2020 in oil and gas companies.
Besides being completely false - I just wanted to say to him, “Who gives a shit buddy.”
Stop trying to optimize every single aspect of your life. It’s exhausting.
Who are you trying to impress?
If you can’t give me one solid fundamental reason as to why you want to buy a certain stock, then you have no business buying it.
Don’t let FOMO or impulsive decisions lead your investment decisions.
Want to destroy your wealth? That’s easy - panic and then chase performance.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
All investing includes risks, including fluctuating prices and loss of principal.