No Greater Fools

Fools search for even greater fools.

Cathie Wood's ARKK fund, which as of writing was down nearly -50% YTD, has had a bad year. They are not the only major market player with performance issues. Many have seen their last several years of gains all but wiped out, as high-flying and heavily indebted popular names crash back down to Earth.

Much of this can be chalked up to a wanton avoidance of value analysis. For several years, it appeared to be best practice at larger funds to simply ignore valuations when investing in popular names such as AMZN, TDOC, or ZM. In ARKK in particular, there appears to have been an overreliance on pandemic darlings without regard to actual present or future value. This has become particularly apparent as market players have begun to diversify their holdings out of these names to include more value, in addition to rebalancing for inflation and higher rates.

In other words, many market players fell into the "Greater Fool Theory" investing trap. This is a phenomenon which often occurs in bubbly areas of the market, and can be thought of as a sort of self-reinforcing FOMO (Fear of Missing Out). The Greater Fool Theory argues that equity prices go up because investors are able to sell overpriced securities to a "greater fool," whether or not they are greatly overvalued. This works out great for a time, until of course, there are no greater fools left, and the Greater Fool investors are left holding the proverbial bag.

As a contrarian value fund, we do our best to hedge against such traps.