In the past five years, this fund had an annualized return of 31%.
So, you would think the majority of investors made out like bandits … right?
In fact, most of its investors actually lost money.
The reason is simple: They were performance chasers.
Performance chasers pile into an investment after they see great returns.
And they’re usually the ones who buy at the top. I’ve seen it happen time after time.
Humans are hardwired to want to buy something that’s going up. And the fund that was soaring was Ark Innovation ETF (NYSE: ARKK).
To the Hive
When the fund made big returns, it didn’t manage much money.
The Wall Street Journal reports that ARKK had only $12 million in assets in 2016. But the following year, it took off and rose 87%.
And like bees to honey, money quickly found its way to the fund.
By the end of 2019, it had $2 billion in assets.
Then … the floodgates opened.
ARKK’s small pool of investors grew bigger and bigger as the fund’s performance began attracting attention.
And that’s when performance chasers arrived on the scene.
Skid to Stop
Over the course of five months — March 2020 to July 2020 — ARKK’s assets tripled to $6 billion. At the end of 2020, ARKK was up 566% since its launch.
And between September 2020 and March 2021, an additional $13 billion poured into the fund.
But as 2021 came to an end, ARKK had fallen 23% while the Nasdaq 100 rose 27%.
The fund’s top 5 holdings, Tesla, Zoom Video, Teladoc Health, Roku and Coinbase, dropped more than 55% from their closing highs, on average.
Today, ARKK is down 50% since its peak. And the performance chasers have lost money.
Hit the Ground
Those who jumped into the fray during 2020 came in just before the fund’s peak.
They saw its past performance and assumed its future would be full of sunshine and rainbows. To them, growth was inevitable.
But the bubble of growth stocks that soared over the past two years burst.
And performance chasers got the worst of both worlds: They missed the big gains and got hit with the losses.
Bottom line: Don’t chase performance.
If something is popular and making headlines, be on guard … because the end could be near.
At one point, ARKK was considered the greatest thing since sliced bread. The fund invested in innovative technology that was going to grow at a zillion percent in the future.
I’ve been around investing long enough to know that gravity hasn’t been repealed and trees don’t grow to the sky. Eventually, story stocks come crashing back to earth.
My recommendations at Alpha Investor seemed out of date by comparison. In fact, some of my readers wrote in saying how “boring” they were.
We didn’t have any of ARKK’s new, innovative disruptors.
Instead, we owned companies such as Coca-Cola, Progressive and Fiserv. They might seem boring, but they do one thing that most of ARKK didn’t: earn profits.
The companies I recommended were real businesses that had free cash flow, growing revenue and strong balance sheets. I never was one to get sucked into a story stock.
Because at the end of the day, price is what you pay, value is what you get.
And ARKK investors paid a big price and walked away with empty pockets.
Founder, Alpha Investor