Editor's note: Don't let this painful market ruin your portfolio... With rampant inflation and heightened geopolitical tensions causing uncertainty to fill up the markets, many investors have fled stocks over the past year. But some desperate folks have continued putting their money to work in hopes of huge profits once the downtrend reverses – even though history shows this strategy can lead to catastrophic losses... That's why Extreme Value editor Dan Ferris believes it's crucial for folks to stick to their investment plans and resist the urge to try and earn a quick fortune as bubbles form in the markets. In today's Masters Series, adapted from the December 9, 2022 Digest, Dan discusses the ongoing controversy surrounding FTX founder Sam Bankman-Fried... details the risks of trying to capitalize on a bubble in the markets... and explains how investors can learn from these incidents to improve their investment tactics...
Burn These Two Disasters Into Your Memory By Dan Ferris, editor, Extreme Value Against all reason, logic, and legal advice... Sam Bankman-Fried is still talking. The founder of bankrupt crypto exchange FTX is like an insecure guy at a party who wants to talk to the prettiest girl in the room. Everything he says lands flat. So he keeps babbling on, nervously trying to explain himself. But as an old saying in politics goes, "If you're explaining, you're losing." Bankman-Fried is doing some serious losing these days. He gave at least two new interviews in late 2022 – in the Financial Times and the Wall Street Journal. Bankman-Fried's comments just don't land with the authenticity and sincerity that he thinks they do... For example, the Journal asked about $5 billion in deposits that FTX customers wired to Alameda Research. That's the affiliated crypto-trading firm of which Bankman-Fried owns 90%. Customers were instructed to wire money there because FTX didn't have a bank account. Now, at least to me, "didn't have a bank account" suggests FTX probably shouldn't have opened its doors to customers in the first place. But OK, sure, we'll go with it for now. The next part is what's really breathtaking. And while I'm certainly not a criminal investigator, I believe what he said could possibly get him arrested. As Bankman-Fried admitted to the Journal... [Those deposits] were wired to Alameda, and... I can only speculate about what happened after that. Dollars are fungible with each other. And so it's not like there's this $1 bill over here that you can trace through from start to finish. What you get is more just omnibus, you know, pots of assets of various forms. Did Bankman-Fried really just say he "can only speculate about what happened" to billions of dollars in customer deposits because all dollar bills look alike? Someone get Bankman-Fried's lawyers on the phone! Where the heck are they?!? Bankman-Fried might think he's saying something more sophisticated. But I don't think so. It's one of the dumbest "my dog ate my homework" excuses of all time... Selfishly, I love that Bankman-Fried didn't listen to his lawyers. And since he is essentially admitting gross negligence and probably a half-dozen other crimes, I can keep writing about him. So as we've learned, he "can only speculate" on the whereabouts of those billions of dollars that FTX customers wired him. And he also "kind of lost track" of basically all the dangers. The pretty girl at the party is now rolling her eyes, noticing her drink glass is empty, and excusing herself. Bankman-Fried should just stop rambling and go home for the night. And you can call me naive if you want. But shouldn't Bankman-Fried know more about the company he founded and ran? It's not like he had retired after years of service. He just founded FTX in 2019. It was still a private company. And he still served as the company's CEO until November 2022. Knowing every aspect of that business should've been his minute-by-minute obsession. Instead, he thinks he can get off the hook by representing FTX as a casual afterthought. Doing an interview with the Financial Times at 3 a.m. from his bed in the Bahamas (where he was eventually arrested) isn't a great look, either. Talk about a lack of self-awareness. Maybe Bankman-Fried's lawyers just aren't trained for this kind of client... Maybe they've never dealt with someone who was caught in this kind of pickle before.
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As entertaining as the Bankman-Fried saga is for me, I realize it doesn't resonate with everyone... After all, I bet a lot of Digest readers have never owned cryptos – and never will. You're far more likely to have owned a crappy tech stock or two in your investing lifetime. I know I have. So now, let's look at an example that might hit closer to home... I'm talking about ARK Investment Management founder Cathie Wood. The troubles of Wood and her company are well documented in these pages... ARK Investment Management's flagship ARK Innovation Fund (ARKK) is down roughly 75% since its February 12, 2021 peak. As bad as the Nasdaq Composite Index has performed over the past 24 months, it hasn't been that bad. It's only down around 19% in that span. In other words, Wood isn't doing her job very well. So now, she's doing what any responsible "Bull Club" member would do... Wood is now lobbying for the Federal Reserve to save her bacon. She took to Twitter in early December 2022 to coolly assess the situation... The bond market seems to be signaling that the Fed is making a serious mistake. At -80 basis points (as measured by the 10 year vs 2 year Treasury yields), the yield curve is more inverted now than at any time since the early '80s when double-digit inflation was entrenched. There is a problem with Wood's attempt to divert the public's attention... We already pointed it out in our October 14 Digest. That was when Wood wrote an open letter to the Fed, criticizing it for hiking interest rates. As I said at the time... To me, Wood's letter isn't really about the Fed at all. Rather, it's a thinly veiled attempt to blame her company's miserable performance over the past 20 months on someone else. My colleague Dr. David "Doc" Eifrig piled on and got a big laugh at our Stansberry Conference later that month. He noted that writing an open letter to the Fed is like writing a letter to Santa Claus. Now, Wood wants us to nod along with another cursory analysis of interest-rate spreads... And she says this setup indicates "that the Fed is making a serious mistake." Wood and the investors in her company's exchange-traded funds ("ETFs") would be better served if she learned to recognize her own mistakes and move on. At some point, she needs to stop holding on to a portfolio full of melting ice cubes in the biggest heat wave in decades. That was my point in October. And it's still valid for Wood's latest dig at the Fed. You might think the guy who created this Bull Club list of folks like Bankman-Fried and Wood would eventually lose his ability to be astounded by anything they say. After all, this is the same person who said in an interview published February 3, 2021, "Are we in a bubble? I do not believe so," even though ARKK had just risen nearly 300% in roughly 11 months. Look at ARKK's chart since its inception. Try to spot the bubble Wood says wasn't there... I mean... if an ETF full of money-losing garbage tech stocks flying nearly 300% higher in about 11 months isn't a massive sign of a bubble, then there's no such thing as a bubble. And of course, ARKK peaked nine days later. Once the mega-bubble pops, I guess I shouldn't be surprised if Wood campaigns for the Fed to bail her out instead of admitting she was wrong. That's a classic Bull Club strategy. But Wood's lack of self-awareness and apparent finger-pointing at the Fed still surprises me. So let me go the other way... Instead of merely criticizing Wood, I'll try to walk a mile in her moccasins... I want to see if I can understand her a little better. (And no, I'm not anywhere near there with Bankman-Fried yet. He's still just a target for rotten tomatoes at this point.) Wood launched ARK Investment Management in January 2014. And nine years later, she's still an unapologetic tech-stock booster and proud of it. Her mind travels at one speed and in one direction. It never slows down or veers off course. ARK Investment Management's ETFs buy "disruptive innovation" stocks. And they do absolutely nothing else. Wood will probably stick to her guns until the day she dies. Here's the biggest concession I'll make to Wood... When the assets you've devoted your life to owning and promoting soar to massive bubble-like valuations, it's probably impossible to see it as a bubble. It's just too much to ask of any human mind. Almost nobody would admit, "I'm not smart. I'm just lucky, so I'd better sell it all now." That just doesn't happen. It would be like asking Warren Buffett to tell you the best time to short Berkshire Hathaway (BRK-B)... No matter how the company's share price performs, the idea of shorting his own life's creation simply doesn't exist in the 92-year-old investing legend's mind. It's the same thing with Wood. She was born a raging tech bull. And she'll die a raging tech bull. It's too much to ask someone to take the risk of building a new asset-management company from scratch... devote themselves entirely to one asset class... and also be vigilant when that asset class becomes the biggest losing proposition since a certain serpent offered Eve a piece of fruit and she told Adam to take a bite. The fact that Wood went from a little-known, up-and-coming money manager to the most famous one in the world in a year or so likely made it harder for her to make good decisions. None of what I've said changes the business that Wood chose, though... Wood manages the ETFs' portfolios for her company's investors. So ultimately, she's responsible for their performance. And of course, all of ARK Investment Management's ETFs have been obliterated. Since February 8, 2021 (around when they all peaked), they're all down between 51% and 78%... It was all a toxic soup from the beginning... A true believer touts tech stocks and stumbles into a massive bubble... which briefly makes her look like a genius... then loses all the big gains as their prices fall back to Earth. Unfortunately, far too many folks will take the wrong lesson away from the mega-bubble's blowup... They'll see what happened with ARKK, bitcoin, and other assets over the past year or two. And they'll say something like, "But, but, but... if you can figure out how to get into a bubble early and get out near the top, you can make a quick fortune." There are two things wrong with that view... First, people who try to make a quick fortune in stocks usually lose a ton of money. The market is better than casinos at attracting suckers and getting their hard-earned capital. At least we all know that the odds of casino games favor the casino owners. We have no excuse for not going in through the bright lights and glass doors with our eyes wide open. But in the stock market, nobody tells you how often people who take up "day trading" get totally wiped out... Successful short-term traders aren't that way because they make a lot of money quickly. They're successful because they use a strategy that probably took them years to create. And then they do it with an ironclad discipline over a period of (usually) decades. If you don't want to do that, don't trade. Just put good stocks in your 401(k) and get a life. The other thing that's wrong with the idea of getting into a trend early and getting out near the top is that you won't recognize the top until it's long gone. Folks look at historical price charts, see where the big gains and losses occurred, and believe that they'll be able to recognize the trends developing in real time. But it's a trick of the mind. They won't really recognize the top as it comes and goes. And they'll give back most of what they made – if not all of it – by the time they see it clearly. OK, so what's the real lesson then? Why do I keep going over these sagas of wealth destruction, incompetence, and possible fraud? Two reasons... First, I'm curious to see if your jaw hits the floor with the same loud thud that mine does when you read this stuff. (Yes, I did hear it happen earlier.) If someone had written all this as a fictional book or screenplay, I would've said it was too unrealistic. I would say nobody in Bankman-Fried's position would make such dumb mistakes, talk to the media this much, or sound so stupid if he did. And yet, here we are! Second, I keep talking about this stuff for a practical reason... I hope this lodges the FTX saga firmly into your memory. I want you to remember what everything looked like, how it felt, and how much money got vaporized. This hope is based on a familiar idea for regular Friday Digest readers... I'm talking about "via negativa," which is Latin for the "negative way." It's the belief that the learning of life is about what to avoid. And I promise you... It's not sexy at all, but avoiding bad investments is more important than finding good ones. Finding a bunch of good investments isn't worth much if you fail to avoid the really bad ones. Over the long term, you'll feel a lot better if you preserve your capital well and earn even a mediocre return than if you watch too many bad bets erode any of your big gains. If I don't do anything else in my entire career except help people learn every kind of investment situation to avoid... smell possible frauds and disasters from a mile away... and learn from history to see the biggest mega-bubble of all time right in front of them... I'll consider myself more successful than I ever could have dreamed. But my mission isn't even half accomplished yet... I still need to help investors interpret the big events as the mega-bubble keeps bursting. I need to guide you and help you learn the right lessons so you can avoid future disasters. So with that in mind... I'll talk to you all again real soon. Good investing, Dan Ferris
Editor's note: Dan believes a once-in-a-lifetime market event is about to happen – one that could earn you massive profits if you start preparing right now. That's why he recently teamed up with an investing legend to discuss how folks can prepare for what's coming and position themselves to take advantage of this market shift. Click here to watch the full replay... | 
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