What are the pros and cons of Cathie Wood and ARK investments?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 401.4 million views in recent years.

In the answers below I focused on the following topics and issues:

  • What are the pros and cons of Cathie Wood and ARK investments?
  • Why do companies go bankrupt?
  • How is the Chinese money supply so high without rampant inflation?

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What are the pros and cons of Cathie Wood and ARK investments?

It is a great question as most people didn’t ask this question last year – they merely thought it was a good idea to buy as it was going up in price.

The price has now fallen by an incredible amount, which has resulted in plenty of people panicking.

The problem here isn’t Cathy Woods. Ultimately, tech stocks are volatile. The next generation of tech stocks is likely to be even more volatile.

Therefore, it makes sense to:

  • Hold a large basket in an ETF rather than a few individual’s names
  • Don’t panic during the huge swings
  • Keep allocations down to 5%-10% of a portfolio

What most people did was:

  • Not care about the ETF when it wasn’t doing that well in the early years
  • Only pay attention come 2020 when “everybody else” seemed to be buying it
  • Then panic sells it in 2021 or 2022, rather than just holding it long-term.

As I mentioned here, “doing your own research” can be dangerous.

I am sure the same thing could happen if Tesla, some coins, or various other investments lose 30%+. That 30%+ can become 80%+ if people panic.

We even see people buying index funds and ETFs getting in at a height (1999) and selling at a low (2008) when the advocates of the funds make it clear you should just buy and hold for decades.

I get some people writing to me saying “thanks for suggesting X and Y investment, it has gone up”, and others who complain about the opposite.

The point is, short or even medium-term performance isn’t a reason not to invest in something, or invest into something.

US stock markets were stagnant from 1965 until 1982, and UK housing was from 1900-to 1960. That doesn’t mean somebody who invested for the long-term was stupid.

Likewise, some people invested into a one-stock portfolio and got lucky. That doesn’t mean it is a sensible strategy.

The key thing is just having a sensible, long-term portfolio, based on the available information, and not panicking too much in the middle.

So, to answer your question, the cons are:

  • Mass hysteria towards buying the ETF at the time this question was asked.
  • You have the risk of a fund manager
  • It was always going to be a high-risk, volatile, ETF

The main positive is that it is investing in high growth areas. So, if the stars align, it could still be a great bet within 5-10 years.

Why do companies go bankrupt?

The biggest reasons businesses fail are:

  1. Not enough experience in the industry

It sounds obvious, but it is better to get a job, get good at it for many years, and then start your own thing.

That is because you:

  • Can see what is wrong with your company and industry. Then create a firm that solves those issues
  • Get good at the day job
  • Sometimes take client relationships if it doesn’t go against the NDA.

So many people, because of programs like Dragons Den/Shark Tank, which I support, think business is all about the great, doing things differently, solving a unique problem, etc.

Those things help but the execution is key. A fantastic idea that is executed poorly won’t make money in most situations.

A so-so idea can make loads of money if it is being driven by somebody with experience.

Most successful owners who were first lawyers, recruiters, or whatever else they were, don’t need a special idea to make something work.

So, the following stats shouldn’t surprise anybody:

That doesn’t mean you need to be 40 or 50 to start a business. Merely, 5–10 years of experience g

2. Not preparing for black swan events

Things happen. Look at the last twenty years or so. We have had:

  • 9/11
  • The war in Iraq, Ukraine, and many other places
  • Covid-19 and lockdowns, alongside smaller crisis
  • The global financial crisis

That is just to mention global trends and events. That isn’t to mention the country, industry, or specific events.

Getting money out of China got more difficult, which affected some real estate agents I know in China. People started to care more about health, which has been a headwind for certain smaller fast-food retailers. The list could go on.

Businesses need to pivot when events happen and have a business that isn’t ideally focused on one country. Having a single source of failure is always risky.

Taking loads of risk is very good, especially when you are young enough to fail. Elon Musk and others have pointed this out. Failing in one business also isn’t the end of the world.

Yet if you want a long-standing business that lasts for decades, it is best to take calculated risks and not be vulnerable to one point of failure.

3. Not having residual/recurrent income

Gaining new clients is always more difficult than retaining existing ones, and gaining referrals and other business from them.

What is more, existing clients might give you recurrent revenue. An insurance company doesn’t always need new clients to break even. The operator selling courses with a monthly subscription might not either.

Ultimately, if a business has high revenues, but no recurrent/residual income, it is like building a house on sand and not stone.

We saw that during Covid and the various other events of recent times. Plenty of businesses that made millions, or even tens of millions, went under.

This gets us back to the need to prepare for black swan events.

How is the Chinese money supply so high without rampant inflation?

  1. Increasing the money supply doesn’t automatically increase inflation. QE and 0% interest rates after 2008 showed that. The inflation in the last year has more to do with supply chain disruption from lockdowns than increasing the money supply
  2. As the saying goes, damn lies and statistics. China uses different measures for GDP growth, and for that matter inflation, than most advanced economies use. Therefore, real growth will be higher as those measures underestimate inflation

It is the same story for Covid deaths.

It is common sense. Never trust any government, but trust authoritarian ones even less.

North Korea claimed at one point to have zero Covid cases, but nobody should believe that, like nobody should believe their GDP growth figures.

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Adam is an internationally recognised author on financial matters, with over 417.7 million answers views on Quora.com and a widely sold book on Amazon

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