Can you be a genius one year and not so smart the next?

A reader asks: Can someone be a genius one year and not so smart the next?

Archer replies: In Shakespeare’s Julius Caesar, Brutus references tides “taken at the flood.” Several centuries later the Beach Boys opined on a similar hydrological theme (“catch a wave …”). There are times when everything is working, everything is falling into place. You’re on top of the world.

But that doesn’t last forever; eventually the tide sweeps back out. That’s true for investors, and investment styles, too. Very few managers beat the averages for any period of time. On the way up they’re geniuses, lionized by the media. Investors throw money at them. They throw something else at them on the way down.

In the money management world, the current poster child for this is Cathie Wood at Ark. Wood was bussin’ it for a while, putting up big numbers in her actively managed ETFs, raking in the cash. In early 2021 she had about $50 billion in assets under management. By last week that number had dwindled to around $14 billion. Wood and her firm invest in “disruptive technologies,” whatever that is.

There are lots of explanations for these changes of fortune. The general cycling of markets. The idea that publicity is a lagging indicator (it is). Hubris. The dog ate my homework (my least favorite). All of the above.

Whatever. This “disruption” in wealth creation for shareholders almost always results in a certain amount of piling on from critics, and that has been the case again with Wood. Here’s a headline from a recent NPR story: “A superstar investor with the Midas touch or just lucky? The puzzle of Cathie Wood.”

But is it really all that puzzling? In trying to predict investment returns or anything else we’re not so much forecasting as extrapolating – taking whatever happened today or yesterday and assuming that it will happen again tomorrow. That can be a good bet for a long time. But one day it isn’t. Things change.

The ARK Innovation Fund (ARKK) is a case in point. ARKK traded at better than $156/share in February 2021. Everybody loved it. Then something happened and, more recently, it was around $39. It had been as low as $30.97. Now where’s the love?

While Wood makes for good copy, this is not so much about her; she’s not the first to experience this boom & bust media cycle and she won’t be the last. And to be fair, it’s unlikely her I.Q. fell along with the price of the ARKK ETF. She built a huge business on the way up, and still has a substantial one at what may, or may not, be the bottom.

But for shareholders the kind of round trip experienced by ARKK can be dispiriting. So how do you avoid it? Markets will always be volatile but that volatility tends to move inversely with portfolio diversification. Owning an individual stock can be fun as long as it goes up. It will be less fun when it doesn’t, and no fun at all if, or when, it tanks.

Investing in sectors – technology, healthcare, outer space, etc. – removes idiosyncratic stock risk, but still leaves you with concentrated exposure to the ups and downs of a particular slice of the economy. Moving further upstream there are the various investment strategies – momentum, trend following, value, growth, and smart beta, for example. These can be applied across a range of sectors or industries but they, too, tend to cycle in and out of favor.

After that, you have the “market,” the S&P 500, the Stoxx 600, or the Hang Seng to name three, which offer broad exposure to their various home economies (the US, Europe, and Hong Kong, respectively) while removing individual manager, sector, and strategy risk. These are less fun but generally more predictable for the obvious reason: when you own the market, you get market returns.

Beyond that, it’s the economic system – capitalism, socialism, and all the other “isms.” These tend to persist for decades or longer and are only periodically a source of worry. Finally, there is civilization itself. But that’s of concern mostly to Elon Musk, and to Cunk on Earth (Netflix).

The market has always thrown out heroes on the way up and bums on the way down. Often it’s the same person. For those looking to bypass the drama, here’s one weird trick that almost always works: beware of anyone bearing “transformational” gifts.

Woof.