The Greek myth of Icarus is a classic – it is a cautionary tale reminding us that hubris, complacency, or unawareness of risk can bring down even the most popular high-flyers.
Every bull market has a poster child, a cheerleader, a market seer – someone speaking from their bandwagon to an army of followers and enthusiasts – an iconic analyst or fund manager that embodies the investment Zeitgeist. Some are fundamental investors, others technicians. Some are stark theorists, some have a touch of the esoteric, and some are ‘involuntary oracles’ – unwillingly gaining reputation from single predictions that come true in a big way.
And then, some are just in the right place at the right time.
Markets come in varying shapes and forms, and each may favor different sectors, industries, or strategies and approaches. Be it for a major bull market, a market crash, or else – at some point, all the stars always align for a couple of such individuals.
Their funds make heads turn – via outsized performance, via radical but accurate predictions, via charisma, or all of those. They are adored by the press, and they stand out from the investment community like a sore thumb… for some time.
But inevitably, the music stops. Performance goes pale, predictions stop manifesting, and the reputation of infallibility is lost. Many funds are blown to pieces in a major bear market.
This is not to say that they never perform well again, however a prospective client/investor carelessly forking over their savings should bear (pun intended) in mind historically repeating patterns that I will allude to in this article.
After the markets’ violent declines of the last year are being ridden again with vigor by many of today’s fund managers, it appears prudent to take a step back and realize how this cycle of churning client money tends to repeat again and again.
Diving into three case studies from the last few decades, I want to outline how history can and does rhyme in the world of the market spotlights. Let this be a reminder that old wisdom such as the myth of Icarus can be more relevant to modern times than we would like to think.
The prophet of Black Monday
Let’s start with a story from the 1980’s that older readers will likely remember. Elaine Garzarelli was a portfolio manager and analyst at Shearson Lehman (an investment bank that later merged and spun off multiple times, forming the notorious Lehman Brothers). A week before Black Monday, October 19, 1987, the day the market crashed over 20% and erased over $500 billion of wealth, Garzarelli predicted on business TV with a complicated technical indicator model that the stock market was to collapse imminently. She hedged her fund well, and ended the day with a profit.
Her prediction had made some waves, and people started paying attention to her words. People wanted to hear more from this one-hit wonder, and soon her mere words were attributed with being able to move the market. Whether this is true or not is another question. Garzarelli had become a star prognosticator virtually overnight, however unwillingly so. Initially, she neither wanted to be known as an oracle, nor as a perma-bear. In fact, she suffered from anxiety attacks as a result.
Her new and extraordinary reputation as a Wall Street phenomenon brought in hundreds of millions in new client funds to Shearson Lehman. Garzarelli made Fortune business woman of the year, and was awarded “No. 1 quantitative analyst” for 11 years in a row (which she later admitted to lobbying herself for), and appeared on the covers of Fortune, the Financial Review, Working Woman and many more, as is still shown on her website.
Rising to the role of Managing Director, her wage grew – and with it apparently her taste for publicity. Garzarelli became a fixture of business television, scored interviews with Charlie Rose, and even appeared in a somewhat off-beat pantyhose TV ad to showcase herself as a no-nonsense Wall Street Whiz power woman in business.
Unfortunately, her actual performance did not seem to live up to her media celebrity analyst status. Over the years following 1987, she consistently underperformed the market and finally started eroding client funds – to the point when her fund was closed and she became a victim of a “reduction in [work]force” due to declining profits from the ‘retail investor’ business. However – and I am speculating here – I believe fund managers that consistently bring large returns to the company are not the first ones to go when it comes to layoffs, unless their performance might not live up to par. At least someone at Lehman looked at their bottom line and eventually seemed to think so.
This setback proved temporary, and did not stop Garzarelli from accepting a contract as market newsletter writer with Phillips Publishing, Inc. However, the ‘Garzarelli Outlook’ soon started losing subscribers en masse due to inaccurate predictions, and the Garzarelli-Phillips experiment ended. She instead devoted herself to her own research firm, which she runs to this day and continues to give stock ‘guru‘ advice.
The Internet Fund
Let’s move on to the late 1990s. The dotcom bubble has been analyzed to death, a textbook example of the excesses of human psychology and irrational reasoning (not that I believe much in valuations). It led to a vertical and cartoonish market advance, sporting a 275% increase in the Nasdaq Composite in the last 2 years only, and over 500% from 1995 to the 2000 top.
The Internet was the new big thing, and from the mid-90’s it seemed that any public company whose janitor’s daughter had once heard something positive about the interwebs was bound for eternal glory. A story starkly reminiscent of the last two crypto bubbles.
It was here that Ryan Jacobs made a splash as portfolio manager running Kinetics AM’s “Kinetics Internet Fund” from 1997-’99, raking in fantastic triple-digit returns. Then in his late twenties, Jacobs was quickly lifted into stardom by his performance, his fund propelled by a frenetic rally in tech equities. He was crowned a whiz-kid prodigy in tech speculation, made magazine covers, and became a TV celebrity regularly seen among the talking heads on CNBC. Jacobs the wunderkind, the “sexiest fund manager”, was by now perceived as somewhat of a personal financial savior by some, and there were stories of mothers advertising their daughters to him after TV appearances.
The Internet fund was focused on high-tech stocks, which were appreciating rapidly in value – much to the joy of KAM’s and Jacobs’ growing client base. With speculations such as in Yahoo (a famous growth story), he turned an initial couple hundred thousand into $600 million – this was helped by a ludicrous inflow of client funds for which Kinetics had to hire extra personnel to cope with. Not bad for a twentysomething.
These profits enabled him to soon launch his own firm and “Jacobs Internet Fund” at Jacobs AM … in December 1999. As many will know, he almost couldn’t have chosen better timing had he wanted to nail the exact top of the Nasdaq internet bubble, then 4 months out in March 2000.
Jacobs had learned the fund management ropes within one of the most unnatural market environments since the inception of public stock exchanges, and had few experience as a fund manager. Apparently, capping growing losses was not something in his rulebook. Soon after the bubble burst in the spring of 2000, his fund religiously bought the dip with a couple of hundred million dollars of client money. But dips did what dips do best.
In the following 3 years, the Internet Fund rode the bear wave down right to the shore of 2003, and with it evaporated a fortune – 96% of value was lost from the top to the bottom, and about 95% from the inception of the fund in late Dec 1999/Jan 2000.
Jacobs did well in the ensuing decades, managing to attract client money again. However the Internet fund took more than 20 years to come back to its old price, and Jacobs’ widespread media reputation as a miracle investor went out the window quickly during the aftermath of the dotcom bubble bursting.
In fact, the internet boom helped many previously unknown managers and analysts to fame, becoming sensations almost overnight with their predictions for internet stocks such as Netscape, eBay or Amazon. Today, their names have returned to obscurity and are unknown to anyone younger than 40, even within the investment community.
In the current 2022 bear market, the still existing flagship Jacobs Internet Fund (JAMFX) has again declined to date by about 70% from its price top. In late 2021, Jacobs was still bullish on Facebook (now Meta), whose shares since have been dumped by institutional money and equally declined about 70% in price since their top. Just my opinion, but I do wonder if lessons were learned here from past experience…
In any case, we may learn – risk management is and remains the foremost quality of consistently profitable speculators.
Fun fact – Garzarelli and Jacobs both received a degree from Drexel University in 1992.
The tech mascot
Through 2020 to 2021 and even deep into 2022, Cathie Wood was unmistakably seen as the thought leader and unicorn investor for anything tech, novel, innovative, disruptive. I’ve met youngsters who had no idea who George Soros was, but whose Robin Hood fractional share portfolios were singing to the tune of Wood’s every word.
Unlike Jacobs, Wood had decades of experience in the financial world by the time she became an icon – having worked as chief economist, portfolio and fund manager at multiple asset management companies and hedge funds. In 2014, she brought her idea of actively managed ETFs married to extreme tech sector concentration to life through founding Ark Invest, soon birthing her famous ARKK and other funds.
2020 and 2021 will probably go into market history as the year the Federal Reserve finally went completely insane and pushed more money into assets every quarter than J. D. Rockefeller’s peak net worth. For a time, it was virtually ‘Fear and loathing in the markets’, an explosive market and especially tech rally that ballooned the price of many of the holdings of Wood’s Ark Invest funds into the stratosphere.
Very quickly, this performance made her a phenomenon in the world of stocks – joining the 2021 Forbes 50 over 50, honored as 2020’s best stock picker by Bloomberg, a superstar doing God’s work. Jim Cramer called her a genius. Wood’s amassed tireless and sometimes seemingly blind followers believed she had Midas’ golden touch, reverently calling her ‘Queen Cathie’, ‘Cathie Bae’ and finally ‘Money tree’. For good or ill, she became almost pseudonymous with buying-the-dip.
Wood was and still is undoubtedly a unique fundamental analyst, if you read any of her early reports on Tesla and the likes. But there are more facets to successful market operations than only stock picking. The attentive observer could slowly see the first cracks starting to appear in her unblemished reputation.
Despite her decades of experience, and much like Jacobs in 2000, Wood did not appear to be a fan of risk management either. This had already surfaced during earlier market draw-downs such as during the 08/09 bear market. History does rhyme.
When the inevitable market turn came (and they always do), and the tide started rolling out in 2022, Ark’s funds did not fare well. It was like watching a freight train crash in slow motion.
What followed were the recent fantastic top-to-bottom declines in Wood’s disruptive technology and related ETFs: At the time of this writing, ARKK is down 79% from the 2021 Highs, ARKW 79%, ARKG 76%, and ARKF 78% – almost all of which are now hovering near or below the price levels they have been before their gigantic 2020/21 rally.
Large amounts of amateur speculator money flocking into epic climax runs of stocks and indices is a classic sign of markets close to a ceiling. Since the biggest inflows into ARKK during 2020/21 happened around January to March 2021, a window approximately equal to the time where ARKK and Wood’s other growth ETFs topped out in their advance, I would assume the majority of her overzealous clients and followers are now heavily under water. This is magnified due to the extreme sector concentration and significant overlay in Ark’s popular ETF products.
Merely looking from the general market top on Nov 22 2021, ARKK has to date under-performed even the tech-heavy Nasdaq Composite – which has been leading the decline among the more popular indices — by almost a factor of 2.
Ark recently bought up swaths of stock in Robin Hood (HOOD), Zoom Communications (ZM), Twilio (TWLO), Roblox (RBLX), UiPath (PATH) and others, all now trading on average 70% or more down, as measured off their respective 2021/22 price Highs. Even Tesla, which had still been holding up relatively better than other growth stocks, and ARKK’s second biggest holding to date, just made a two-year Low in price.
It is unclear how long – if at all – it will take for Ark’s funds to revive their old glory, however history teaches us that overhead supply can be a poo on a stick for decades to come.
For the end, two fun facts:
One – Jacobs Asset Management last year started their own Wood-esque tech-heavy growth ETF, ‘JFWD’ Jacobs Forward Fund. The July 2021 launch date, in a manner reminiscent of 2000, was only 4 months away from the market top. JFWD’s price is currently down 65% from the Highs, its value about slashed in half from launch.
Two – Contrary to Jacobs and others trying to emulate Wood’s ETF strategy, there is now an ‘anti-ARK’ ETF, shorting Ark’s purchases – up about 100% since its launch.
Learning from mistakes
Oh, how the mighty have fallen. Where does all this leave us? What is the moral of the story? There are many points, but I think the main ones could be summarized as:
Don't follow someone because they are 'in' - only fads are ‘in’, and as is well known, fads are temporary.
That doesn’t mean that ‘in’ managers and analysts are wrong, in fact they may give you many great ideas. But there is always a trend somewhere, there is always a sector in favor, a strategy outperforming. Odds are, as soon as the next bear market or money rotation comes around, they will be ‘out’ very quickly. The best speculators make money consistently, control risk, and thereby avoid the boom and bust phenomenon that brings down many celebrity managers. Find these speculators and emulate them instead … and neither the mainstream media outlets nor Reddit will be the place to search for them
Heed overconfidence.
A memento mori is something which reminds us that despite our successes we are mortal. Stoicism tells the story of victorious military commanders instructing their slaves to whisper in their ear “Remember – you are mere mortal, human, fallible.” Some fund managers that have been bathing in adoration and admiration for some time could use such a memento mori at their heights.
Of course, not all are guilty of this, and they are not the only ones that succumb to hubris. Many private speculators can fall victim to overconfidence. Just remember, when you think that you can’t be wrong anymore after a long time of good performance, when people start calling you ‘Money tree’ or total strangers offer you the hands of their daughters, know that you may well be walking toward a cliff.
Perhaps most importantly, you need to grasp how crucial risk management really is – even for the most gifted stock pickers.
Getting in is worth silver, but getting out at the right time is worth gold. Losses need to be capped, and exposure to hostile markets avoided – especially when one concentrates capital heavily.
This has to do with being open to the idea that you could have been wrong, but also with knowing (from history!) that markets can very well go down very deep.
I believe many of today’s younger fund managers, not to mention young ‘retail investors’, have only been in the markets for a few years or much less, and have not studied historical market cycles. Many simply never experienced with their own money how low ‘Low’ really can go. Others, even if they had more experience than that coming into 2022, had been conditioned into ignoring risk management tenets from a decade or more of almost incessant Fed liquidity.
Buying the dip will work against you in bad environments more than it can work for you in good ones. Fund management fees do make an income, yes – but why not protect the clients money better via loss capping as well?
I don’t pay a lot of attention to Warren Buffett’s activities, but his quote rings true: “A rising tide floats all boats, but only when the tide goes out do you discover who’s been swimming naked.” Many meanings have been attributed to this, from over-leveraged funds to debt-laden companies, but I believe it can also stand for risk control.
Anybody will make some degree of profits in a bull market – the tide lifts all boats. And, of course, having a reputation for making outsized profits is the holy mecca of finance … but the chaff is separated from the wheat looking at those who can keep the profits when the tide rolls out again.
