May 3

Cathy Wood - To Catch A Falling Knife

U.S. Treasury Bonds Breach 3% and Warren Buffett

1
 
1.0×
--:--
--:--
Open in playerListen on);
From a vantage point within sight of the Hollywood Sign, seated beneath a palm tree. Tom Levine takes you on a twisted, exploratory tour of popular thought, the upside-down theories of classical economics, politics and other strange things. Tom talks all things Los Angeles, bright new ideas and complex topics of interest to creative thinkers and discerning skeptics. L.A. locals state with pride, "You can surf in the morning and ski in the afternoon". Well, if you get a really early start, it's true. Sometimes. Los Angeles is the City of the Angels and Tom Levine is a Native Angelino.
Episode details
Comments

Cathy Wood is a warrior. Perhaps with the wrong battle plan.

She is a general - intelligent, seasoned, and committed to the cause. 

Yet, a war of attrition only works if the army (in this case, her investors) have the staying power for prolonged battles with an unknown endpoint.

She catches falling knifes, averages down, and counts on her investors having unlimited patience and staying power.

Share

To catch a falling knife is a phrase used to describe buying a stock that is falling dramatically in hopes of picking the bottom. 

It is a risky investment strategy, often akin to gambling. The danger in trying to catch a falling knife is that the stock will continue to drop. 

The phrase is a metaphor - literally, you may get cut and bloodied trying to catch a falling knife. 

If one buys a share of stock at $100 and it falls by 50% to $50, it must go up by 100% to reach the breakeven point. Think through that.

The Ark Invest Management flagship fund, Ark Innovation ETF (symbol: ARKK), is down 51% year to date (YTD) at $47.13 per share. 

For comparison purposes, the NASDAQ Composite Index is down 22% YTD.

Over the trailing 5 year period the NASDAQ is up 100% and ARKK is up 82%.

For her strategy to be successful she must be able to hang on through the lows, purchase additional shares on the way down, and have greater inflows of funds than outflows over the time horizon.

Averaging down is an investment strategy, which in the extreme is known as “catching a falling knife”, that involves a stock owner purchasing additional shares of a previously initiated investment after the price has dropped. 

Assuming the stock turns around, this ensures a lower breakeven point for the stock position and higher gains in dollar terms (compared to the gains if the position was not averaged down).1

Leave a comment

To reiterate the key elements to a successful strategy of averaging down:

  1. The investor has the funds for additional purchases.

  2. The stock eventually turns around and moves higher.

  3. The investment horizon is long enough to wait for the turnaround.

Currently, roughly 50% of S&P 500 stocks are down at least 50% from their highs. Many stocks in the NASDAQ and smaller capitalization indices are down far more.

It is not uncommon for a bottom to occur when 70% of all stocks are down 50% or more. We are not there yet.

From a technical standpoint, the S&P 500 has retested the +/- 4160 level numerous times. Currently, 4132 and facing the headwinds of inflation, rising interest rates, and war in Europe.

Have we seen the bottom, such that the Ark Invest (Cathy Wood) strategy will prove successful? Bear market rallies will occur, but I suspect we have not yet seen the bottom.

It’s possible to win the war, but be prepared for battle weariness and uncertainty.

Cathie Wood buys stocks like someone who just started yesterday, says Jim Cramer

Cramers comments were aired on February 17, 2022 and are worth watching again. He is not shy of hyperbole nor controversy. Yet, this time he outlines clearly a professional money managers required skillset and where Cathy Wood falls short.

Charlie Munger and Warren Buffett describe the current market mania

“People who know nothing about stocks being advised by stockbrokers who know even less”, April 30, 2022.

Mohamed El-Erian updates thoughts on the interest rate environment - April 29, 2022

Today, yields on Treasury Bonds at the 5, 10 and 30 year maturity breached 3%. It is as much a psychological barrier as a practical one given that 30 year mortgage rates are above 5% already.

The probability of recession is increasing. The only real questions left are when will the economy slow significantly, how bad will it be, and for how long will it last.

The Federal Open Market Committee will meet this week and is widely expected to increase interest rates by 1/2% (50 basis points). My instinct puts the probability of a 50bps rise at 60%, 25bps at 20% or 75bps at 20%.


About The Author And Podcast Host

Following a 25 year career in capital markets, Tom Levine founded Zero Hour Group in 2014.

The Los Angeles, California-based firm provides consulting, strategic analysis, and real estate services. 

Services are offered nationwide and across a variety of sectors. The firm's clients range from family offices and high net worth individuals to institutions and professional investors. 

Real Estate related transactions are brokered through our subsidary firms, Native Angelino Real Estate and WEHO Realtor.

Tom Levine is a Native Angelino and graduate of USC Marshall School of Business, the Claremont Colleges, and spent a term at the London School of Economics. Additionally, he is a certified Short Sale Specialist under the National Association of Realtors.

Podcast

The Native Angelino Podcast is underwritten and produced in conjunction with the Zero Hour Group, a consulting and strategy firm, parent to 1929, Native Angelino Real Estate, and associated real estate assets.

Native Angelino description found on iTunes:

“From a vantage point within sight of the Hollywood Sign, seated beneath a palm tree, Tom Levine takes you on a twisted, exploratory tour of popular thought, the upside-down theories of classical economics, politics, and other strange things.

Tom talks all things Los Angeles, bright new ideas, and complex topics of interest to creative thinkers and discerning skeptics.

L.A. locals state with pride, "You can surf in the morning and ski in the afternoon." Well, if you get a really early start, it's true. Sometimes.

Los Angeles is the City of the Angels, and Tom Levine is a Native Angelino.