The Wealth Destroyer of the Decade

'Unskilled and unaware of it'... Self-inflated assessments... The wealth destroyer of the decade... The urge to up the ante... Traders are ramping up bets... Predicting and preparing...

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Folks are dumber than they think...

There's a feeling investors have right before they lose it all in a bull market... When everyone is hyper bullish, folks simply believe they can't lose. They're the smartest investor in the room.

But the unskilled always overestimate themselves. I (Dan Ferris) have seen it countless times.

This phenomenon is called the Dunning-Kruger effect...

In 1999, social psychologists David Dunning and Justin Kruger wrote a paper called "Unskilled and Unaware of It: How Difficulties in Recognizing One's Own Competence Lead to Inflated Self-Assessments."

The two men compared self-assessment tests to objective performance in humor, grammar, and logic. On average, low-skilled participants rated themselves better than 61% of the group members. But in reality, they wound up only scoring better than 11% of group members. In short, the bottom of the barrel thought they were the top.

Dunning and Kruger concluded:

People tend to hold overly favorable views of their abilities in many social and intellectual domains. [We] suggest that this overestimation occurs, in part, because... Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it.

The Dunning-Kruger effect seems tailor made for describing the behavior of most investors. In fact, you could argue that the financial world discovered the Dunning-Kruger effect first...

John Kenneth Galbraith ended his 1990 classic A Short History of Financial Euphoria by displaying his knowledge of the human condition:

Fools, as it has long been said, are indeed separated, soon or eventually, from their money. So, alas, are those who, responding to a general mood of optimism, are captured by a sense of their own financial acumen. Thus it has been for centuries; thus in the long future it will also be.

Most investors are bad at making money...

But it's not just that... Investors are also bad at admitting just how bad they are at making money in the financial markets.

That's why my friend and fellow value investor Rick Rule of Rule Investment Media often counsels investors not to "confuse brains with a bull market."

Regular Digest readers know that I often consider meme-stock investors, short-term options traders, and technology speculators as "unskilled and unaware of it." But let's skip past them for today.

You see, there's one investor who embodies the Dunning-Kruger effect better than any other. And if you've been reading my Friday Digests for the past couple of years, you already know who I'm talking about...

According to a recent Morningstar report, Cathie Wood's ARK Investment Management is the biggest wealth-destroying fund management company of the past 10 years.

The report names the 15 top wealth-destroying funds of the past decade, which includes ARK's flagship Innovation Fund (ARKK) and its Genomic Revolution Fund (ARKG). ARKK has lost $7.1 billion for investors over the past 10 years, while ARKG has lost $4.2 billion. These funds made up most of ARK's $14.3 billion in firmwide losses during that time.

This is worse than the Dunning-Kruger effect...

It's the 'Cathie Wood effect'...

ARKK lost two-thirds of its value in 2022. Yet, ARK's founder didn't show anything remotely close to regret in her first letter to investors for 2023.

Instead of mentioning the awful bets ARK made on lousy businesses, many of which have never made a penny and likely never will, Wood started the letter by telling investors that she founded ARK in 2014 for two reasons: first, to focus solely on disruptive innovation, and second, to create a transparent research ecosystem.

Notice that Wood didn't say she started ARK to help clients grow their wealth. I find that curious for a wealth management company.

Then Wood did what all Dunning-Kruger losers do and blamed her lack of competence and poor performance on something else – the Federal Reserve's rate hikes. Wood never even directly acknowledged that the fund had been crushed. She merely said, "Innovation companies suffered disproportionately," and she had "never seen markets this dislocated" in all her "45 years on Wall Street and more than 30 years in portfolio management." As if losing gobs of money on the worst money-losing tech garbage is some kind of weird anomaly that rarely happens.

Finally, the letter ran through a laundry list of buzzwords and tech fads, which Wood called "game-changing innovations" that the stock market had ignored – including ChatGPT, connected TV, digital wallets, social commerce, blockchain technology, electric vehicles, autonomous driving, autonomous logistics, 3D printing, space exploration, industrial robots... and a list of health-related innovations.

It's like Wood is trying to use words as a substitute for results. I'm a value investor. Believe me, without patience, I'd have been long gone by now. But after a decade of lighting more money on fire than any of her competitors, Wood can't just keep throwing out buzzwords and confident predictions with terrible results.

In March, Wood told Bloomberg TV that the fund had $2 billion of losses due to selling stocks during the 2022 rout. She was delighted to note that losses could be used to offset taxes for future gains.

Wood never apologizes for being lousy at her job...

She never says anything like, "We have pursued a terrible investment strategy for a decade and have turned in the worst performance in our entire industry – losing more than twice as much capital as the next worst company." Nor does she ever apologize for her awful performance.

As I said in my October 2022 open letter to Cathie Wood:

I keep Googling "Cathie Wood finally apologizes for buying garbage and lighting $21 billion on fire"... and nothing comes up.

Last night, I googled "Cathie Wood apologizes" again and my open letter was the top result. Google should have simply replied, "She still hasn't apologized. She probably never will." As Dunning and Kruger warned us about overconfident fools, Wood's lack of competence has robbed her of "the metacognitive ability to realize it."

You can see this in action from Wood's April 2022 keynote speech at an investment conference in Miami. She reminded the live audience of the 15% annualized returns she projected for her ARKK fund in 2021. In December 2021, she projected 40% annual returns over the next five years and told ARK clients that innovation stocks were not in a bubble and, in fact, were "in deep value territory" because they'd fallen so much.

With ARKK down about 50% over the previous year, Wood leaned into the microphone and, with a straight face, raised her return prediction to 50%.

That's right, Wood predicted 50% annualized returns, an absurdly high rate of return from an industry that fails to even match the S&P 500's average annual returns over any meaningful period of time. The crowd cheered. Dunning and Kruger would have smirked.

Upping the ante is a Cathie Wood signature move. In 2020, she predicted bitcoin would hit $500,000 in 2030, which she reiterated last October. This year, she has raised her 2030 projection to $1.5 million after the Securities and Exchange Commission approved bitcoin exchange-traded funds.

Innovation is usually a terrible investment...

Making a fortune betting on innovative technologies is just a story people tell in bull markets. If you've read Clayton Christensen's 1997 book The Innovator's Dilemma, you'll know what all Americans have known since the 19th century... that pioneers take the arrows and settlers take the land.

In other words, innovators make all the mistakes and use up all the capital they're given figuring out hard problems. They make no money. It's only when the real businessmen come along and use proven technologies to manufacture reliable products people want that profits are made.

But that's the great thing about the future for folks like Wood: It never arrives. If it ever looks like she's wrong, it just means the future hasn't arrived yet.

If you intend to fleece your clients for fees purportedly in exchange for managing their wealth... and you've destroyed more wealth than anybody else in your industry... staying focused on the future is probably the smart move. Wood is like the captain of a sinking ship who keeps her eye on the horizon, hopeful and optimistic, until the sea swallows and silences her forever.

So far, she's still sinking. Yet, as of nearly a year ago, the ARKK fund alone had brought in about $310 million in total fees since its inception in 2014. But this can't last forever.

Wood started ARK after a rift with her old boss at global asset management firm AllianceBernstein. In December 2021, her old boss told the Financial Times that Wood's "biggest blind spot is managing risk and volatility," which I'm sure many of the folks who took a bath in her funds might have liked to know.

One day, I'm sure I'll be reporting to you that ARK is finally out of business. Until then, it's probably best to view Wood as a reliable source of entertainment and not much else.

But Wood isn't the only Dunning-Kruger loser...

Other market bets today seem to reflect a sense of the bettors' own financial acumen, as Galbraith would say.

For example, the whole idea of the Dow Jones Industrial Average and the S&P 500 Index making new highs on the expectation that the Fed will cut rates is highly questionable if not downright stupid. History suggests the Fed starts cutting rates as bad times begin and keeps cutting them through a recession, which is virtually always accompanied by a bear market.

And there's zero precedent for cutting rates with the big market indexes making new all-time highs. So we're in unchartered territory... marching steadily forward into pitch blackness.

Meanwhile, as the Wall Street Journal pointed out yesterday in an article appropriately titled, "Investors Are Almost Always Wrong About the Fed," traders in the federal-funds futures market "keep ramping up bets that rate cuts are just months away."

Stansberry Investor Hour co-host Corey McLaughlin and I have discussed how lousy the futures market is at predicting the future path of the fed-funds rate... but how well it reflects the status quo.

You'd think unemployment still hovering just above 54-year lows and zero precedent for rate cuts at new all-time highs in the stock market would leave traders cautious, not confident.

The flip side of the Dunning-Kruger effect...

While low-skilled folks tend to overestimate their abilities, highly competent folks tend to underestimate their abilities. Since I started hosting the Stansberry Investor Hour in 2018, I've interviewed hundreds of successful traders and investors. They've all been confident but humble... They never pretend to know exactly how the future will play out. And they always use effective risk controls like trailing stop losses and strict guidelines around position sizing. Tightly controlling risk is not the act of an overconfident fool. It's what you do when you're aware that you don't know everything.

As for me, I remain cautious today as stocks continue to trade at mega-bubble valuations and traders act like rate cuts are right around the corner. And as I explain in my new presentation here, an upcoming overhaul to the U.S. dollar could also shake the markets.

That's why I'm focusing on helping investors prepare for a wide variety of outcomes, which involves never basing your investment strategy solely on your ability to make predictions. You can learn more about my "prepare, don't predict" strategy here. (And Ferris Report subscribers and Stansberry Alliance members can read my latest research here.)

Folks who have too much confidence about the future of financial markets are guaranteed to be proven wrong... and they'll likely blame their failure on everyone but themselves.

So keep in mind that nobody knows the future and maintain a diversified portfolio with a core of great businesses, plenty of cash, T-bills, and precious metals. That way, you'll be ready for good times and bad.

New 52-week highs (as of 2/8/24): Autodesk (ADSK), ASML (ASML), Broadcom (AVGO), American Express (AXP), Brown & Brown (BRO), Costco Wholesale (COST), Salesforce (CRM), CyberArk Software (CYBR), Disney (DIS), Expedia (EXPE), Comfort Systems USA (FIX), GEO Group (GEO), Home Depot (HD), Intercontinental Exchange (ICE), Jack Henry & Associates (JKHY), Eli Lilly (LLY), Microsoft (MSFT), Neuberger Berman Next Generation Connectivity Fund (NBXG), NVR (NVR), Palo Alto Networks (PANW), Parker-Hannifin (PH), ProShares Ultra QQQ (QLD), Repligen (RGEN), Construction Partners (ROAD), Invesco S&P 500 Equal Weight Technology Fund (RSPT), SentinelOne (S), VanEck Semiconductor Fund (SMH), ProShares Ultra S&P 500 (SSO), Stellantis (STLA), TFI International (TFII), ProShares Ultra Semiconductors (USD), Vanguard S&P 500 Fund (VOO), and Advanced Drainage Systems (WMS).

In today's mailbag, feedback on Part II of our annual Report Card, which we published yesterday. Also, we received a few notes asking about certain grades on publications that weren't included. If you didn't see the grade for the publication you were looking for yesterday, be sure to check out Part I, published last week... And as always, keep your thoughts, questions, and concerns coming to feedback@stansberryresearch.com.

"Stansberry Team, Words cannot express how satisfied I have been with your whole team's talent to communicate with clarity and super impressed that you are all on the same page... politically, financially, long term, and empowering your membership.

"I joined Stansberry 22 years ago after reviewing many, many [company's philosophies] but yours stood out with Porter's exceptional open concept of bringing the average investor into the process and educating them.

"I am not a millionaire, but [would] love to be before I die. I just turned 81 and although I do not do options, I have done well enough myself that my financial planner handles the bonds, etc., but I handle my own stocks using your portfolios as a guide. He keeps saying how well I am doing and to keep doing it. Thank you.

"Grading yourself each year and the results are reflected in your yearly meetings, which I pay to watch each year. Good Job." – Subscriber Kathleen S.

Good investing,

Dan Ferris
Eagle Point, Oregon
February 9, 2024