Okay folks. so I've been a big fan of Kathy Wood and Arkhanvest for some time. I watch nearly all of her webinars. I track her daily trades that they post.

I really appreciate her perspective on a lot of stocks and industries and future growth sector projections. And obviously she's been in a very, very deep bear market for several quarters. Because of the high growth sector focus, we are in an environment where relentlessly everything growth and growth oriented is getting clapped. Her strategy is not to care about the clapping, but rather to double down on the stocks that are getting clap the worst, exploiting fear and profiting off it.

And growth sectors are cyclical and very, very violently cyclical. So fair enough. But the problem that I have with Arc is the way that they actually trade and manage their Etfs. If you want the Tl Dr, there are really two problems that we're going to discuss.

Number one: Arc employs a buy the Dip strategy. We know this: always buying dips when their favorite stocks have become beaten down beaten down like rabid dogs Arcs, they're going and buying as fast as possible, which is great. But remember the structure that Arks funds are in. You see, if an individual like you or I was to buy a stock that's been beaten down that we love, we could just go and take some of our available capital and go buy the Dip.

As we earn income, we have more cash available to us to go and plow into stocks that we like. But Etfs if they want to free up capital, they have to sell out shares of other stocks in order to free up said capital. And with Ark's strategy of buying losers and selling winners, what do they do to free up this capital? Well, they have to in effect constantly sell out some of their best performing positions in order to buy up some of their worst performing positions. Oftentimes at very, very sub-optimal prices.

Just because a stock is a huge, it doesn't necessarily mean that it's fulfilled its entire potential. Yet with this structure, if you want to buy the dip on something else that's in a deeper value territory, you have to go and sell out of that stock at a price that's sub-optimal in order to do so, at which case, missing out on the full realized gains, which could very very well come very quickly. if you're in a momentum cycle and rotating that into a stock that's in a downward momentum cycle where it's more likely to lose gains. Now again, buying the dip in High Conviction plays, and selling stocks when they're overvalued is a whole different story.

But think about what happens when you get into an environment where you don't really have any winners, like for example, a 11 month growth crash where most of your stocks are near 52 week lows. If you don't have winners to sell to buy the dip on more and more losers that are now available, what do you do? Well, you have to sell stocks that are less losers. To buy stocks that are more losers, you're getting to the point where you're dip buying stocks that are down 50 and then having to jump out of that to dip buy something that's down 70 because, oh, that's a better value. In order to free up capital, you have to start dumping stock that you really shouldn't be dumping at really bad panic periods.

The second problem is that Arc has an inherent inflow and outflow problem. Arc is the biggest holder in a lot of its stocks, but Arc always has a impact on the bottom line when it starts dumping tons of shares because of the massive size of it and notoriety that it brings with it. And when Arc's Etf itself starts seeing outflows, usually because Arc is losing value in terms of the stocks that it holds. all of a sudden, in order to pay for those outflows, it has to start automatically selling off some of the assets under management of shares of companies that are already going down, which causes what to happen, well, them to go down even faster, creating a bigger draw down in Arc, and creating a bigger drawdown in the overall share price of the stocks that Arc still holds in that, and for companies that are colds that are very, very illiquid and aren't easy to sell, what happens, Well, if you decide to go and start dumping shares on an equal basis, when people sell out of your fund, well, a lot of those shares are going to be disproportionately destroyed because there's no liquidity and you're dumping so many shares onto a market where there's no liquidity, so you have to sell them at really, really bad prices.

Or you could try to allocate some of those outflows to some of your more actively traded stock. But still, you're getting into that situation where you're allocating outflows of optimal for the strategy. When you create an Etf, you put tons of shares of stock in a trust, and then you sell units of said trust. The more people that buy units of the Etf, the more the Etf can go out and buy more shares of underlying companies to match the total assets under management that is being allocated to them via people buying the Etf.

So aka more people buying the Etf means more capital to go out and buy your favorite stocks. So let's say that there's a rush to buy some shares in Ark's flagship fund as the growth sector heads into a strong bull market. The bull market of growth stocks creates this environment where all of Arks holdings appreciate in value, creating more value for the Etf holders and inducing more people to buy in and invest in set Etf. And then as people buy the Etf, what happens? Well, Arc has more capital to go out and buy its favorite growth stocks by buying its favorite stocks What happens? Well, it further accelerates how fast those favorite stocks go up and how fast the stocks already in their Etf are appreciating in value.

And the faster those appreciate in value, the faster that Arcs overall fund appreciates in value. Well, the more that people go out and buy Arc funds, creating a self-fulfilling prophecy that causes the stocks and the fun to go up dramatically. And that's pretty much what we saw with Arc in 2020 and the first month or two of 2021. But then on the flip side, when that trend inevitably turns around, you get the complete opposite problem.

For example, when Ark's funds go down dramatically and you see periods of outflow, What happens: while it has to sell shares in companies it holds that are already struggling under the growth crash, Arc selling of shares to fulfill outflows creates even more negative performance for Arcs already held, still held shares on the old balance sheet. Of course, Arc does like to buy the dip on their fastest dropping positions, but when you get actual outflows, Arc loses the ability to do that so they have the option of hey, maybe I'm going to go ahead and sell more of my biggest winners that aren't dropping so that I have funds to buy the dip. Or I'm going to sell some of my losers that I'm still very, very deep red on so that I can buy even my deeper losers because of the structure. If you were today to go and buy all of the stocks that Arc fund holds at the current prices and just never touch it, you probably outperform her if you looked at this two three years from now.

But she has this issue in terms of allocation where she always has to be moving things around in order to manage these inflows and outflows, but also to manage the strategy of buying the dip and selling the rip. I'm all about buying stocks you believe in when they get beat down far below fair value and then selling when they're above that fair value. But the problem with Arc is often times they can't even give it a chance to reach fair value because they have to go and sell out of that position in order to rotate into something else that is getting beat down a lot faster so they can give the deeper value. For example, you look at Orcs holdings of Tesla from August to January Arc dramatically cut their shares of Tesla.

You could see the trajectory of the trend in purple from just under 5 million shares held to now just under 2 million. That's a dramatic dump, and based on their strategy, this is probably them trimming euphoria. chopping gains off with a sledgehammer because it's gone up so quickly, but at the same time with them chopping off the majority of their shares at the same time, they have routinely stated that they believe Tesla's worth much, much more. And I don't have a problem with them trimming Tesla off after an unprecedented run.

But what are they actually doing with that capital? In the meantime? Why are they freeing this capital up? Well, a lot of freed up capital found its way into Teledoc. From February 2021, Teledoc went from almost 300 a share to 88 a share today. During that period of time, Ark bought the dip with a Vegens, bought it so quickly you wouldn't have thought that it would ever be a fallen knife. To an extent that Teledog is down number two in their overall holdings, and they've almost doubled their share count.

They did the same thing with Zoom, Roku, Robinhood, a number of others. Now again, I'm not saying they shouldn't buy dips in their highest conviction plays, but if you look at a lot of their winners over the last five years, you'll notice that a lot of them are sold out way way way before they realize their full potential. And it's usually to buy stocks that are just in the beginning of their down cycles. But the problem that I have is that if you are an individual investor buying the dips on new stocks, you wouldn't have to sell out of stocks that are already winning for you and are already realizing their potential, but still have a lot farther to go.

Arc has no choice. they have to go, and sell shares of tons of other stocks in order to buy and we'll fund the buy the dips on all these others. And now when you're in the situation where you're getting very close to everything being near 52-week lows, you get into this problem where our cast now go and sell a lot of stocks at bad values because they need to free up room to buy deeper value stocks. Arc strategy has switched from selling winners and rotating into losers to selling losers and rotating into even bigger losers.

In their mind, they are rotating from value to deeper value, but a lot of these are done at the worst possible time, and very few of them are ever given the actual ability or the time span to really realize their full potential. For example, I would personally rather buy Tesla at 800 and sell Teledoc at 150. Then I would do the opposite. and at the end of the day, I have no doubt that she's going to have a second coming.

and when the growth sector comes back, a lot of these stocks are probably going to pay off very, very well for her. But as an individual and why I have a big problem with this is very simple: If you're an individual investor, you simply don't have to sell out of your winners before they're done winning. In order to buy an imminent loser in the Ctf, they have to, because that's literally the mission statement of the strategy. And they have to free up capital from somewhere in order to do that.

and without insane inflows, they have to get that from. well, winners or losers that just aren't losing as much as the deeper losers. But as an individual, you have the ability to research companies yourself, find a price target that makes the most sense for you, and then buy them when they're very, very deep below fair value territory. And then as you build up capital in your account, you can then go and buy stocks that appear that are deeper in fair value territory.

You don't have to go and sell out of the other one before it's even realized it's gain in order to free up capital to do so. Now look at the end of the day. Arc strategy is about five year plus time horizon, but she rotates in and out of the stock so much that you wouldn't know that it's a five year time horizon. Now, I understand that she rarely closes out of a full position, but if you look at the level at which she's been selling some of these biggest winners in order to rotate into losers, creating this image that if you are an individual, it makes a lot more sense just to have capital and flow it into stocks that you believe in at good prices instead of having to sell stocks just simply because you need money to rotate into stocks that are down more.

Anyways, folks that caps off this video let me know what you think down below. This video is sponsored by the lovely gentleman over at Ziptraderu. Our Goodbye 2021 coupon code and sale will be expiring on Friday. so if you do want to get 28 off before checkout and lock in lifetime access to our private chat, our daily morning briefings, our full price target list, as well as of course, our step-by-step lessons, well make sure to check out the link below before Friday.

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