Between 2016 and 2021 ARKK climbed 600% with a CAGR of 44%, declining 75% in the following 2 years. Similarly, Bill Hwang’s Archegos Capital Management grew from $200m to $20B in 8 years before exploding in spectacular fashion in 2021. As anyone with a basic understanding of finance knows there is a risk/return correlation that allows you to potentially juice your returns by taking more risk such as speculation, concentration or leverage. In spite of this the finance world regularly uses short term returns as an indicator of credibility and skill. I want to look at why returns can tell a false story using the example of the polarising Hkuppy, then identify how we can separate the Warren Buffet`s from the Cathy Wood’s of the world.
In 2020/21 Kuppy bought into ponzi schemes on the way up and sold near the top, this is both illegal and unethical but it contributed to his very high returns that year. Stanley Druckenmiller does the same but hires younger inexperienced traders for plausible deniability - the outcome of rising prices drawing in speculators to lose everything is the same in either case.
This behaviour is antithetical to honest value investors going back to Ben Graham who seek to caution against rather than exploit speculative behaviour of the public, due to his experience of the terrible 1930s depression.