Ignore Cathie Wood: ARK investors aren't earning anywhere near those who follow this simple plan

Every year since 1983, a boutique investment bank held a weeklong conference for the biggest names in finance in Sun Valley, Idaho.

It included extravagant parties, river rafting, mountain biking, fly-fishing, horseback riding and fleets of babysitters for the guests’ children...

Warren Buffett attended every year, enjoying the chance to meet up with old friends.

In 1999, he gave the keynote address on the final day.

The conference hadn’t changed much, but there were dozens of new faces that year.

They included CEOs of high-flying technology firms and the venture capitalists who fed them cash.

Based on company stock valuations, the new kids on the block were extraordinarily rich.

But here’s the kicker: in most cases, the companies they derived their wealth from didn’t make money.

Warren Buffett’s speech splashed water on the intoxicated fun.

He said the technology firms whose stocks had stratospherically risen would eventually crash if those businesses didn’t soon earn massive business profits.

With such stocks at nosebleed heights, Wall Street partied with Cinderella.

And when the invisible clock struck twelve, there would be pumpkins and mice galore.

One year later, that’s exactly what happened.

Between March 2000 and October 2002, the tech-heavy Nasdaq Composite Index (NDX) plunged 78 percent.

Most of the hottest stocks that weren’t earning business profits don’t exist today.

They folded.

Fast-forward to 2020.

It wasn’t exactly a re-run of 1999, but as the American writer, Mark Twain once said,

“History doesn’t repeat itself, but it rhymes.”

In 2020, share prices in several technology stocks went through the roof.

They grabbed our attention for their rocket-like growth.

One fund manager (fairly obscure at the time) managed several actively managed ETFs filled with high-tech stocks that, in most cases, didn’t earn business profits.

Her name is Cathie Wood.

She managed five ARK Innovation funds:

1. In 2020, Ark’s Next Generation Internet ETF (ARKW) gained 157.46 percent.
2. ARK’s Fintech Innovation ETF (ARKF) soared 152.82 percent.
3. The firm’s Genomic Revolution ETF (ARKG) ballooned 180.56 percent.
4. The ARK Innovation ETF (ARKK) gained 152.52 percent and the firm’s Autonomous Technology & Robotics ETF (ARKQ) rose 107.22 percent.

For the first few months of 2021, each fund continued to earn double-digit gains.

This attracted new investors like lemmings to a cliff.

Her ARK funds were (and still are) mostly stuffed with stocks of companies that don’t make money.

Near the peak of their popularity I wrote, Investors’ Great Expectations for Disruptive Technologies.

It was January 2021.

Sometimes the share price of a stock that doesn’t make money will rise on speculation.

But unless that company earns business profits, which rise as much as the stock price did, that stock will plunge.

Warren Buffett’s mentor, Benjamin Graham, often said, “Short-term, the stock market is a popularity contest. Long-term, it’s a weighing machine.”

Cathie Wood and her funds were certainly popular.

She also encouraged her own fame, publically cheerleading the stocks she purchased.

Unfortunately for Cathie Wood’s investors, the market’s weighing machine took a hammer to her stocks.

Her ETFs, which were the world’s best performers in 2020, have been among the worst performers since.

Sadly, as is often the case, most of the investors in these funds didn’t buy them before their prices began to soar.

They bought them near their peak.

In May 2021, I referenced a cash-flow study on the ARK ETFs.

From the ARK funds’ 2014 inception date to May 2021, investors in Cathie Wood’s funds only averaged about 5.24 percent per year.

That’s because most investors were seduced by the funds’ gains in 2020.

They piled money into those funds, but then the funds began to drop.

In other words, they paid a far higher than average price.

And since that May 2021 article, ARK funds have fallen further.

For example, from May 1st, 2021 to June 30, 2022, a $100,000 investment in the ARK Next Generation Internet ETF (ARKW) would have plunged to $33,900.

Below, you can see the performance of every ARK fund.

This 14-month period was a terrible time for stocks and bonds.

But for reference, I compared Cathie Wood’s funds to a passive portfolio with 70 percent global stocks and 30 percent global bonds.

By comparison, the passive look stellar.

The ARK Ships Sink
May 1, 2021 - June 30, 2022

Source: portfoliovisualizer.com

It’s important to remember that before this poor 14-month performance, the average investor in ARK’s funds only averaged about 5.24 percent per year from the funds’ 2014 inception date to May 2021.

Now tag on the 14-month performances (as shown above).

The average investor in Cathie Wood’s ARK funds has likely not made a profit since the funds’ 2014 debut.

You will continue to see headlines showcasing what Cathie Wood is buying.

She will likely continue to cheerlead for the stocks she owns.

But ignore those headlines.

Don’t fall into the trap of chasing what’s hot one year and disastrously cold the next.

Instead, maintain a globally diversified, passive portfolio of low-cost index funds or ETFs.

Add money when you have it.

Ignore all predictions.

Over your lifetime, you will thump the performances of those who chase their own tails.

Andrew Hallam is the best-selling author of Millionaire Expat (3rd edition), Balance, and Millionaire Teacher.