Here's What Happens When I Ask Hard Questions

Dear Fellow Expat:

For the last two hours, I'd sat with a friend at the Baha Mar cigar bar in the Bahamas.

We'd attended - as media - the FTX SALT Conference, a posh cryptocurrency event that would reinforce the pomp and false truths about Sam Bankman-Fried months before his implosion.

Across the patio, a headline speaker chatted with high-profile money managers. Everyone at nearby tables turned to her, pointing in joy, but too nervous to approach.

But me? I had to ask her a question.

As she stood and departed, I walked toward the same patio door. Before I caught up, another man swooped in and cut me off. He started gushing about how much he admired her fund.

This guy was trying to get a job...

I was not. You see... something bothered me about her strategy.

So, I stood and bounced a few steps away, waiting... five minutes... ten minutes... 15 minutes. It must have lasted 25 minutes.

But when I finally had the chance to shake institutional champion Cathie Wood's hand, I began with this set up.

Wood purchased many tech stocks while the markets pulled back in 2021-22. She called these beaten down names "value stocks."

I'd just written a piece in Luckbox Magazine... exploring her portfolios, and asking one critical question.

If corporate executives (CEOs, CFOS) at those same companies weren't buying their own stocks at the same prices she'd paid...

Why was she buying them in the first place?
ARK Invest, Bill Miller, and the Randomness of 2020

It's nothing personal against Wood.

I'm generally intrigued by the story of certain fund managers who rise and fall with the market tide.

Bill Miller at Legg Mason is a great case study.

Miller beat the S&P 500 for 15 straight years before a historic crash during the 2008 crisis. The Great Financial Crisis (and decisions like his doubling down on Bear Stearns stock) helped fuel 55% and 65% losses in two Legg Mason funds.

The crash begged the question of the media's praise of him for 15 years. Was there an element of market observers being fooled by randomness, Dr. Nassim Taleb's theory that humans overlook chance and misperceive randomness when looking at outcomes.

When I look at Miller's streak and think about "cognitive bias," - I present the idea of a massive global basketball tournament where teams play one round against another opponent every week.

The winners stay in the tournament and play the following week.

The losers go home and are no longer in the tournament.

In a 15-round, single-elimination, knockout tournament, there would be 32,768 basketball teams. Along the way, teams are knocked out. But ONE TEAM - must win the tournament... by the nature of the tournament's design.

The NCAA Men's basketball tournament has only six rounds and plenty of miracles and random events. Now add nine more rounds.

Does winning that tournament really mean the best team won?

Or are chance, luck, and randomness all critical inputs?

Miller would recover - quite well - launching MVP Partners and racking up wins on names like Amazon and early on Bitcoin. Now he's leaving Maryland for the Sunshine State.

Cathie Wood may be following a similar trajectory...

Saint Cathie the Great

In 2020, Wood's firm ARK Invest had five of the top seven performing ETFs in the markets. She's headlined conferences.

She's praised in Bloomberg and gushed over at CNBC.

But - since February 2021, the ARK Innovation Fund (ARKK) has dramatically underperformed. Shares have plunged from just north of $155 to now $39.00. It bottomed at $29.19 last December.

Wood has said that we should all "wait five years" and recently suggested the Fed will soon cut rates, helping her positions.

That's a slight admission that monetary policy is a boon for the strategy, which relies on rising global liquidity chasing risk assets.

We can't say that 2020's market rally or ARK's performance was based on fundamentals after the Fed dropped trillions from the sky... and Congress paid people to stay home and "day trade" on the same names inside various ARK Invest ETF portfolios.

Wood's fund has a thematic approach. That doesn't seem to be very quantifiable (and questionably qualitative). The central argument is that the companies she owns will be disruptive and the best in their industries.

She focuses on AI, 3D printing, and genomics - all bleeding-edge tech. But - the strategy does rely on a preternatural ability to pick the right company from a sea of disruptors... IPOs... and more.

I do credit Wood because she does all of this in the open - using an Exchange Traded Fund (ETF), which trades on the equity markets and displays all buys and sells each day...

This is an active trading strategy - and it's not like a private fund that doesn't have to mark to market each day or a hedge fund that doesn't report its purchases every 90 days.

It's all open, inviting praise and criticism based on market conditions...


Back to my original question.

Thematic Investing Requires Than Buzz Words

Wood isn't using equity momentum or liquidity readings like we do in the Florida Republic. She doesn't hedge much, if at all.

That is what I'm willing to dismiss.

She might not believe in technical analysis and might be more focused on the Fed than our focus on global liquidity (which is all central bank activity, private credit, and cross-border capital flow defined by Cross Border Capital and Solomon Brothers).

What I can't dismiss or comprehend is very rational to me.

There's a complete avoidance of following the most important and strongest financial anomaly: Insider buying activity.

As I've asked: If the CEO or CFO isn't buying stock at the levels Wood's buying after a pullback, why is she buying?

No one knows the balance sheet better than the CFO...

No one knows the company's next 12 months better than the CEO.

Even activist hedge funds who are buying stock are having long strategy meetings with the executive team and board.

So, what does she know that these executives do not?

My original question delivered this analysis in Luckbox.

As I noted, ARKK shares peaked at $159.70 in February 2021.

Executives at the Top 10 companies held by the ARK Innovation Fund sold nearly $28 billion in shares from February 2021 to February 2022, while the ETF cratered, according to SEC forms.

Outside of the largest holding (Tesla), the remaining nine represented about $11 billion in executive selling.

Now... here comes the punchline.

Over the next 12 months, how much insider buying happened at the top 10 companies while their stocks fell... Here are your options.

  1. Zero.
  2. Zilch.
  3. Nothing
  4. All over the Above.

Any of these answers will do.

Déjà Vu All Over Again

I hadn't thought much about this research until this morning.

I came across a headline on Yahoo! Finance via TipRanks, a platform that tracks Wall Street analyst forecasts.

It read:

'Too Cheap to Ignore': Cathie Wood Snaps Up These 2 Stocks Under $5

The writers don't interview Wood.

But they offer a recent quote of her pushing the narrative that her stocks will do quite well when the Fed starts cutting rates (but that timetable keeps getting pushed out months and months).

"I do think that what's happening this year is that the market is starting to look over the Fed's moves... into falling interest rates," Wood recently said. "I think we're on the other side of that massive interest rate increase, which did destroy a lot of performance. That's the most important thing. And we are ready for prime time."

Well... Let's look at these names that Yahoo! Finance suggests.

The first stock in the story is Velo3D (VLD), an additive manufacturing company in the metal 3D printing industry.

The second stock is Ginkgo Bioworks (DNA). This company "specializes in synthetic biology and genetic engineering, designing and producing custom microorganisms for a wide range of applications," according to the article.

Now, keep in mind that the headline says the stocks are "cheap."

But just because they are under $5.00 doesn't make them cheap.

Fundamentals analysis can tell us if a stock is or isn't cheap.

And if the company's unprofitable... or has a high price-to-sales ratio of over 10, or its EV-EBIT is over 20, it's not cheap.

Velo3D (VLD) is unprofitable. It has a 15% short float. It lost more than $100 million last year, and it's still trading well above its book value and cash-per-share value. There's nothing attractive about it unless you're a speculator in "producing custom microorganisms." [Whatever that means?]

Meanwhile, Ginkgo Bioworks (DNA) is also unprofitable....

It lost $1.25 billion last year... and trades at ten times sales, meaning it would have to pay investors ten years of REVENUE (every dollar in the door) - not profits - to justify its valuation.

Once again, $5.00 doesn't make something "cheap" in our world.

But let's look at something more substantial.

Are the Insiders Buying DNA or VLD?

Do Ginkgo Bioworks or Velo3D (VLD) think their stock is cheap?

And if so, are the executives buying their stock?

The answer is overwhelmingly no.

They've been selling all year. This is a breakdown of insider buying and selling activity at Velo3D (VLD) over the last five years. Blue is buying..., and red is selling.

There are no blue lines and recent selling over the summer.

And Ginkgo Bioworks? Get ready.

Woof. Look at all the sales over the last year.

There has only been one purchase - and the selling-to-buying ratio is a stunning 160-to-1.

Now, I will acknowledge that many executives are paid in stock and take money out of the market.

But if the stock gets cheap in their eyes, I assure you that they'll buy it... or they could at least hold onto their shares.

So, it begs the question... if they're not buying... why would you?

Again... in negative momentum... with no insider buying... always ask - if the executives aren't buying a stock - WHY WOULD I?

If you answer that you read a Yahoo! Finance article or saw it on CNBC, run - don't walk - from that investment.

We'll continue to showcase the value of momentum, liquidity, insider buying, and other anomalies in this market and help you make the right decisions with your money.

We ask tough questions... and we're never fooled by randomness.

Stay positive,

Garrett Baldwin

Secretary of Finance