Asset Classes

Free investment financial education

Language

Multilingual content from IBKR

Close Navigation
Learn more about IBKR accounts
Ark of Schadenfreude

Ark of Schadenfreude

Posted February 26, 2021 at 12:28 pm

Steve Sosnick
Interactive Brokers

German can be a difficult language to learn, and can confound non-speakers with its long, conjoined words.  That said, there are certain German words that convey a complex situation more precisely than a set of English counterparts.  “Schadenfreude” is one of them.

The definition of schadenfreude is “pleasure derived from another person’s misfortune.”  See what I mean?  It took six words to explain that one German term.  But since I know that you don’t read these pieces for linguistics lessons, it is time that I tie the word of the day to a financial topic.  I believe that a large segment of the market is trying to experience schadenfreude for Ark Investment Management.

Anyone following markets, whether in financial media or strictly on the internet, has likely heard of Ark Investments and its CEO Cathie Wood.  Let me state for the record that I have a neutral opinion about the company and its products.  I neither own any Ark funds, nor have I met anyone who works for the company.  Yet like so many others, I find their influence to be inescapable.  New technology focused and momentum driven, the funds (particularly the flagship Ark Innovation ETF (ARKK)) have captured investors’ imaginations and have come to encapsulate the current investment zeitgeist (another great German word, by the way). 

Along the way, the funds’ stellar performance has attracted billions of dollars.  That has to make competitors jealous.  Furthermore, many of the funds’ top holdings are stocks like Tesla (TSLA) that have attracted an evangelical class of investors, and their fervor has spread into their Ark holdings.  Most market participants don’t enjoy being preached to.  With the recent market pullback, we are seeing some inevitable outflows from Ark funds along with various others.  Yet the Ark funds’ outflows seem to garner extra media coverage.  The media focus that greeted them on the way up, works both ways.

Another thing that works both ways is momentum.  Momentum works wonderfully for investors and traders in a trending market, which has been a key to Ark’s success along with so many others.  But momentum becomes nasty when it turns against you.  Any investor with a high concentration in momentum stocks can experience wild swings when the trend turns against them.  Worse for Ark, I have seen online chatter that there are traders who are attempting to game the funds’ outflows, trying to sell out of, or even sell short, the more vulnerable of the funds’ holdings.  Their gamble is that the same momentum that built the funds’ performance will work against them in a down trend.  If that isn’t schadenfreude, what is?

A key takeaway for readers is that this motif is not unique amidst bull markets.  Those of us who have been involved in investing for a long time remember other examples of funds that similarly captured the public’s imagination.  They could seemingly do no wrong, posting stellar performance and making stars out of their managers before ultimately flaming out.  The example from the late ‘90’s bull market was the Janus 20 Fund, which was known for having a significant number of winners amidst its limited set of holdings.  At some point the winning became self-fulfilling.  As the fund attracted more money and more attention, other investors would follow them.  That created a positive feedback loop which worked spectacularly until the market peaked.  At that point, the fund’s concentration became a curse, with traders gaming the outflows in the manner described above.   During that fund’s run, I learned about the Manhattan Fund’s experience in the 1960’s.  It was started by Gerry Tsai, a star Fidelity fund manager in 1965, grew spectacularly through 1968, when Mr. Tsai sold his interest in the fund complex, only to collapse by 90% in the following year. 

While I wouldn’t dare wish a collapse on Ark’s funds or investors, I relate these tales as a cautionary.  We have seen superstar fund managers before, but not all of them retire at the top of their game like Peter Lynch at Fidelity.  For those managers whose success depends upon a healthy dose of momentum, there is a real chance that the same momentum that made them stars can turn against them in a nasty way for their investors.  Schadenfreude was not my reason for writing this piece, just a desire for readers to bear in mind the relevant historical precedents.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Interactive Brokers, its affiliates, or its employees.

Disclosure: Margin Trading

Trading on margin is only for experienced investors with high risk tolerance. You may lose more than your initial investment. For additional information regarding margin loan rates, see ibkr.com/interest

IBKR Campus Newsletters

This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.